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Trelleborg AB
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From me, welcome all of you to the presentation of our Q3 results for 2018. As usual, I'll start by myself, giving you some overall takeaways from our side and then go through our individual business areas in a similar way and then give you from our main takeaways per business area. And then Ulf Berghult, our CFO, will guide you through more the figure part of the report and then we will finish off with some comments from me as well and of course also then opening up for a Q&A session following our presentation.Agenda for today, as usual, same agenda as we have when we present our quarterly reports the last few years, actually, highlights starting with some general highlights, comments on individual business areas, financials by Ulf and then a summary and finishing off with a Q&A. So starting, we have a headline, say a solid quarter. The quarter basically developed in the same way as we had for earlier in the year, of course, impacted by the seasonality here. As you know, we have a major part of our business in Europe, which is then impacted by the holiday season and also with some seasonality in the individual businesses, so usual. But all in all, ending up with the record-high figures in all aspects for Trelleborg, sales up at SEK 8.3 billion, an increase by 14%, of course driven both by organic growth similar to earlier in the year, some positive structural effects coming from some acquisitions made and then of course also assisted with the currency as we report in Swedish krona but mainly sell in other currencies.EBIT up also record high for Q3 for us, SEK 1.1 billion, an increase by 23%, which of course is showing good leverage in relation to the sales growth and also then giving us a margin in the quarter of 13.6%, which is also the highest EBIT margin we ever had in quarter 3. We'll get back and comment on the EBIT later on for the individual BIs. But you see its growth all over with exception of Offshore & Construction. Items affecting comparability a bit low in the quarter and Ulf will give you later, we'll actually guide down these items affecting comparability for the full year, but Ulf will get back on that. But I mean basically in line with our plans, nothing strange in that.Cash flow slightly lower compared to a year ago, driven by a higher CapEx, but we also guided before that we are investing more in order to improve our structure, of course, also we're going to get some structural savings by moving some of the operations and also then some focused investments, so more than usually for us in growing in specific segments. Also with satisfaction, we continue to make acquisitions, 3 bolt-on acquisitions signed in the quarter. Two of them closed and then 1 pending here. We expect the Sil-Pro acquisition in TSS which will be closed let's say at the beginning of next year. But the other 2 are already in the books. Looking at the sales. It's basically the same development that we've seen. This is excluding our product-related businesses, since that is a little bit bumpy and not really dependent on the underlying markets. Basically the same growth, strong growth in Western Europe, strong growth in North America, other Europe a little bit depressed but still small numbers, Asia and other markets still growing. China continues to for us organically to grow in excess of 10%. And then we have extraordinarily high growth figures in South and Central America, but I mean that is a very small part of the group. So the figures is a little bit strange to be honest, nevertheless very strong growth. But it's not really impacting the overall figures.But basically development same as earlier in the year and already now I can comment also we foresee a similar development here going into Q4. Getting back then to the business areas, Coated Systems we see organic sales unchanged, but structural growth is strong supported by 2 acquisitions done in the year. Also here as earlier, alignment we are changing the mixing as a focus on a mixing operation within the business area, which means that we're leaving some external sales and that is impacting organic growth by roughly 1% and that will continue to be a negative drag for this business area at least for the next 2 quarters as well in a similar level. So that's going to push down the organic growth in Q4 and Q1 by a percent, which is then, let's say, long term going to create more efficiency for us. That of course is why we do it.Coating, about this know this is 2 operations here, coated fabrics and printing blankets. We have a similar development in both of them. Coated fabrics doing good, aerospace doing very good, general industry and automotive also continuing good in this area and we are still a little bit subdued what's called in the transport segments. We are big then in one specific segment here, which is gangways for rails, where they've changed kind of the -- how shall I say-- the law has changed and we are still fine-tuning here in order to comply fully with the new regulations. We are through that and it's going to be an improvement going forward. Printing blankets solid in the quarter, a little bit weaker in Europe, but supplemented by good growth in Americas and Asia. All in all, nevertheless ending up on a flattish sales development. EBIT growing by similar as sales, as you see, supported by the acquisitions and also with the general good cost control. And then notice also in the quarter this acquisition of Lamcotech, which is an American factory which is then supplementing our offering within a specific segment related to polyurethane, which is going to be beneficial for us, especially targeting medical applications and aerospace applications going forward, a nice supplementary acquisition which has been in the making for some time and therefore happy to be able to sign it.Industrial Solutions, as I say very strong organic sales development in this, 9% up, especially driven then by general industry and basically in all geographical regions it is improving. If we should highlight something going down, building related segment is down a little bit. But honestly, that is a little bit up to our own decision. We went in with some pricing, price increases linked to some raw materials, specific raw materials linked to these segments and we expect that to improve going forward. But in the quarter, we've been hit by this action initiated by ourselves. Also note here we have some inflationary pressure in part of this business and also some extra cost related, we call bottlenecks, qualified operators especially related to some countries in Middle Europe, where it's actually getting tricky to find qualified labor, which is then creating a turnover, higher turnover than would like it to be, which is then creating extra cost. And on top of that, also we expect an extra inflationary pressure in those areas linked to the salaries and that has also been somewhat hitting, not any big figures here. Don't overestimate it, but nevertheless there is a negative impact coming from this in the quarter. And all in all, a solid improvement in profit here as well, margin as I said, somewhat impacted by this extra cost related to the labor issues, but nevertheless under good cost control and good leverage in all. Also here we can also note that we have opened a plant in Mexico related to some building-related products and also related to some automotive niches. So that is also basically spreading our footprint from U.S. into Mexico and thereby we will be able better cover some existing customers in this part of the world.Moving on to Offshore and Construction, a continued strong negative organic growth. We have been downsizing this a lot. But I mean this has been a negative organic growth, substantial negative organic growth for quite some time now. And this is of course creating a hit on the profitability here also. And here also we have to note that we were expecting some big projects to be delivered in this quarter and in Q4. But some of these big projects, specifically one big project for Australia that has been pushed into Q1 or Q2 next year -- we will have to wait and see -- especially linked to our customer did not get fully the governmental permits in place to conclude a project this year. So that's in the order book or almost in the order book, put it like that. There's always some insecurity when these things happen. But this is kind of the reason for this more downturn in this area than we kind of expected only a few months ago. However, with satisfaction we will see now the order book is growing fast and we have, let's say, the oil and gas related businesses. We have the best order intake in the quarter for more than 2 years. And we also are within the running quarter, we are also quite positive on the order intake for this running quarter. However, we have to note also this growing order intake, substantially growing order intake, is not going to benefit us for the next few quarters. So that is why we guide also that we see this improvement coming in '19, early '19. But I mean the substantial part of this is going to come only in the latter part of 2019. Valid also for the infrastructure segments, of course, somewhat supported by the push of projects in the second part of the year into next year, also supporting the infrastructure part of it also where we see we have a good order intake, both in the marine operations and also with the tunnel segments also where we have gotten and will get some nice orders, especially for China in that segment. But we want to be firm on our guidance here. I mean this is a little bit changed compared to what we said before, linked to this push of projects. We expect Q4 still to be in the red. And as we see it today, we expect a slight profit then going into beginning of next year with an uptick on the later part of next year. So that is the way we see it at the moment. So then the challenge is of course that the organic sales will continue to be negative, but activity level is very high. So this is something that we have to balance and have to make sure that we focus on long term and not really on the short term here.Moving on to Sealing Solutions, also very strong organic sales, 8% up, and basically coming from all over the place, all geographies and basically all market segments, including automotive I should say, because we got some questions on that. But also automotive is growing in the quarter, although not with 8%, but it's still a solid growth also in automotive-related segments. We of course see a slight downturn there, but it's nothing really dramatic and we continue to gain market share in the areas where we are focusing. And I highlight also Asia. Of course we are focusing a lot on Asia here and Asia is then growing even more than the 8%. EBIT margin up solid and as you see, with good cost control and reasonable leverage. But we also have to say how we continue to invest in order to support the growth going forward. So we are not really allowing all the leverage to drop through. We also continue to invest and to grow into segments, like the medical segment you see here also we signed an acquisition for Sil-Pro in Minnesota, very happy for us, which is then kind of creating a completely new platform for us in healthcare and medical. And of course linked to that is also some marketing and sales efforts in order to utilize this new platform in the best possible way. Also in satisfaction, we also inaugurated in the quarter a new innovation center in Germany, decided to put them in Stuttgart, because we believe Stuttgart is a good location for these kind of activities. And we have a completely new setup here which is going to offer us a much better platform in order to approach our customers in an even more professional way. But all in all, as you see, a satisfactory development of Sealing Solutions. Wheel Systems also growing 3%, although some mixed. I mean we continue to grow a solid growth in what we say agri sales in North America, growing more flattish in Europe, somewhat weaker in Asia. Agri tire, very well, original equipment continued very well. But we still have a little bit small subdued demand for aftermarket overall and we are linking that a little bit to the weather situation, which has been kind of pushing down the aftermarket a little bit. But we still feel there is an underlying demand, but we will need some assistance in order to really trigger the expected growth in the aftermarket.Other segments, as you know agri is some 60% of the sales, and the other segments within this which is related to industrial and construction, all are doing well. Here we're adding capacity. We are now also gearing up. For those of you who have been following us for some time, know that we've been investing in Serbia and the footprint in Serbia is now getting ready, and thereby we will be able also to continue to capture markets, especially in the construction-related segments. So I'm very happy for that development. And all in all, of course we have continued margin expansion. We are 1 percentage point up compared to a year ago, and you see also there is a good leverage from the sales. But looking at that, you also need to be aware, which we don't really comment on here, but the comment on the report is also that synergies is kicking in and synergies is assisting us, as expected, in the quarter. And also here we continue also to make supplementary acquisitions, acquired the market leader in off-road tires, TRS in New Zealand, which means now that we clearly can say that we are the market leader for special agricultural tires in both New Zealand and Australia, which is an interesting -- it may not be the biggest market globally -- but nevertheless an interesting market for agriculture which we now also are using this platform also to push into material handling and construction in Oceana. So that is all in all a satisfactory development of Wheel Systems as well.Moving on, handing over to Ulf then, on the financials. So please?
Good morning. I will then guide you through then the consolidated group and then my first slide is then the sales. You can see here there whereas we have then organic growth of 4%. And if I then, as Peter said, also then exclude project-based business which is then lumpy between the quarters, then we have an underlying of 6% organic growth. And then to highlight, even though you've seen the numbers, but [ to create ] the good numbers, within Industrial Solution having a growth of 9%. You have Sealing Solutions with 8% and then Wheels not in the same magnitude, but although with 3%. As Peter also mentioned, we have signed then 5 acquisitions in 2018, of which 4 we have closed and then Sil-Pro will then be closed in the beginning of 2019. Next slide that is then the historical development of sales. And then you can see then we have 10 quarters of growth, where we have 7 quarters of positive organic growth. And the guideline we have is then we have the sales growth of between 5% and 8% over the business cycle.The next slide is then the rolling 12-months development. I know you can also then see then quarter-by-quarter development and the third quarter now in 2018 that is the highest quarter so far in Trelleborg. The next slide is then our EBIT. That is also then the best third quarter so far in both absolute terms in EBIT and also in margin. We have an EBIT increase of 23%. Then we are impacted by translation of SEK 6 million. That is the translating impact. That is not transactional. It's a translation impact of SEK 6 million. We can also say that as seen, there's been some issues or questions about the central cost and then we have guidings on the central cost, which is then between SEK 40 million and SEK 70 million per quarter. And then that means that we should be about SEK 55 million. And in this quarter we have an exceptional low cost. That is due to that we have -- normally than we have also then we assess provisions, accruals. We also have FX items impacting, also M&A activities. And in particular this quarter now, we had a very positive one-off accruals or provision assessments.That said, I also want to highlight then that we have if we look in individual business areas, we have Coated Systems, which is 19% up on profit. Industrial Solutions is up 19%. Sealing Solution is up 21%. And Wheels is up 25%. So it's a very strong underlying performance from the business areas. And then if we then assess the year-to-date that is the best so far in the group and also in absolute terms and margins for 9 months.If you then look on the next one that is the rolling 12-months development. And you can see then that we have 22 consecutive improved EBIT quarters. We have an EBIT margin then on the rolling 12-months basis on 13.9% and that is also the best ever for the group. This is then the P&L statement for the group. We have then low restructuring items in the quarter and also then if we look on the full year-to-date, we're also then considerably below previous years' numbers. And we have a guidance of SEK 250 million. We will then, as we see it now, we will be between SEK 150 million and SEK 200 million, more close to the SEK 150 million than the SEK 200 million. And that is then for 2018. The financial net as 2.6% versus then last year of 2.4% and it's basically impacted by a higher base rate, and particular on the U.S. dollar. The tax rate is 24% in the quarter versus last year's 22%, but then the underlying guidance is still 26% for the group. If I take then the next slide, which is then earnings per share, we have then if I adjust it by items affecting comparability and then looking at underlying, we have an increase of 21%, up to SEK 2.98. Next slide is then the cash flow, operation cash flow for the quarter. That is as you can see, a good solid operation from EBITDA improvement. We also have an impact in the quarter by higher CapEx activity and that is particularly then within Industrial Solutions and Sealing Solutions. And also we have somewhat higher working capital, which has come from high activity and then mainly from Sealing Solutions. Next one is then the rolling 12-months development on cash flow. And then that is of course also then impacted by our higher CapEx activity. And the guideline for this year, as we previously said, is between SEK 1.8 billion and SEK 2 billion. As we see it now, it will be more closer to SEK 2 billion than the SEK 1.8 billion. And then the next slide is then our leverage, year-on-year performance, which is then going down for the group. And then also then I was wanting to mention that we have an FX impact of course, which is then about SEK 800 million negative so far year-to-date on the net debt. And the next one is then you can see then the historical development, where you can see that we have come down to very good levels. The next one is then return on equity, where we have a long-term target of 12%. If we are coerced to explain the numbers that is then the rolling 12-months 2017 that was impacted by the capital gain of a mixing unit that we sold in quarter 1 2017, which is still then in the rolling 12-months of 2017. And then an opposite in the rolling 12-months 2018 that is then impacted by the higher restructuring charges that we then took in quarter 4 2017. Based on that, we close then one unit within the business area of Offshore & Construction.And then coming to my last slide and it's then the financial guidelines. And as I said, we have had a guiding on SEK 1.8 billion to SEK 2 billion on CapEx. We will then be more close to the SEK 2 billion. The restructuring charges will then be about SEK 150 million to SEK 200 million, previously SEK 250 million. Our underlying tax rate that is 26%, and then you asked for information on the intangible asset amortization that is about SEK 300 million. So Peter?
Thank you. You can stay here. So getting back, I mean we had a solid quarter. Sales is up by 14%. Profit is up by 23%. Organic sales continuing as earlier in the year, also with a record high EBIT for Q3 and also with a record high margin for Q3 for Trelleborg. And also then operating cash flow, somewhat lower than a year ago, but that is basically based on decisions by ourselves to invest more than before in kind of focus-oriented investments. So that is something we actually believe is good. And also satisfactory also that we continue make bolt-on acquisitions, because we believe that is highly value-accretive long term for us that we continue to build our positions and continue to reinforce our already leading positions in selected segments.Then looking overall as our focus, same as before, basically manage our market conditions. I mean I'll get back to that, but we don't really see any changes in that one. We see it continue as is, and we're going to Q4 with a stronger order book than we went into Q3. So we see don't really see any downturn in that -- we see some downturn, but overall the mix is the same. We see some upturn in some segments and we see some slight downturn in others. But overall the guidance remains exactly the same. Manage sales and margin, as we say, market positioning. That is of course we continue to work on creating our leading positions and doing that in various ways. Continued portfolio management to improve, I didn't comment before for instance on this move -- [ manner of ] move from Houston to Skelmersdale. That's of course important for Offshore & Construction that we're getting that into a better and more lean setup and also in satisfaction I can mention there as well. We have already received our first orders for manufacturing in Skelmersdale. So that's also going to be off to a good start early next year when these operations are up and running.Some constraints in the supply chain, I think it's nothing changed compared to a quarter ago. I mean we still have some tight availability of some raw materials, tight availability for qualified labor in certain areas, but nothing really deteriorating. It's the same situation or similar situation as we had a quarter ago, managing in a good way. I mean I'm not really concerned about it, but nevertheless we need to recognize there is some challenges, good challenges I should say. Because they're based on that you have a little bit higher demand than you were prepared for. Continued focus on innovation, smart use of technology; of course, we continue to invest quite a lot as we said, in innovation center within Sealing Solutions and also continue to launch new kind of business models and new products based on new technology. Also integration of recent acquisitions. I said that I mean the biggest acquisition which is still benefiting us is of course the acquisition of CGS a year and a half ago. We're now moving into a situation with this. It's the investments that we've been doing in the manufacturing setup is of course taking some time, following the acquisition. But we continue to see the benefits from this and we are fully aligned with the synergy extractions, as we commented on the Capital Market Day earlier this year. So no changes there and it's moving in the right area.The outlook in total is the same as we had previous quarter. We see it's moving on par with the other one. Of course we will note, like all of you, there is a slight downturn in automotive in certain geographies. But overall it's not really a major thing for us and we continue to grow our market share in those automotive segments, which was are focusing on. So we feel that is a kind of a reasonably good development, but of course not really with a good underlying.And then we'll note in other areas, like in oil and gas and some infrastructure construction-related areas that the demand is actually going up, which is more late cyclical areas. So all in all, we will see this is balancing each other in a good way. And I said before, order book going into Q4 is actually stronger than it was going into Q3. So that is kind of with some confidence that we're making this guidance for the running quarter. So I guess that's it. Opening up then for Q&A and inviting Olof up to the stage as well to join us and guide us through this Q&A session.
Thank you, Peter. I'm Olof Larshammar and I'm working at DNB markets as an analyst and I can kick off with 2 questions. And firstly, a quite positive outlook for Q4, but we're soon approaching '19 as well. And it would be very interesting to hear your thoughts about what you're seeing in different segments for '19 as of now.
No, I mean you say positive, but I don't see it as a positive. We see it continuing in the same way. We don't see really any changes. I mean I said there is some changes within the individual market segments. But as a totality, we see general industry continuing as before. Automotive slight downturn, but compensated by growth in other areas. We still feel that kind of the agricultural market is somewhat subdued. Of course we saw that OEs has been growing in a nice way. But we still have some push in the aftermarket, which we are expecting to turn up eventually. Because we know the tractors are being used and we know the farmers are using the equipment. So eventually they have to buy new tires as well. We still feel that this market is a little bit depressed. But we have to wait and see. I mean we are not overly concerned about that, as we are using this to move into a new, more efficient structure and then continue to invest in order to be better positioned to capture this growth. But nevertheless, so there is a potential positive coming, but not really confirmed yet. So don't misunderstand me there. It's not really confirmed in the figures, so it's not going to happen in this quarter. But nevertheless, if you go into '19, we have some wishes that it might turn there. But overall, we cannot really see talking to the customer, looking into our order book, we cannot really see any changes. But then of course, we note on the same way where we are not living in our own world, we see also that there is some political movements globally which might impact this and we might have an impact on the kind of global demand. So of course, this stated with some extra uncertainty, but of course who knows if the U.S. will make a deal with China or something. Suddenly it's being positive or so now it's Brexit -- who knows what happens? But nevertheless, we need to look at that and we need to say there is some uncertainty in the markets which we cannot influence. But overall, everything continues as earlier in the year and we don't see really any changes, but some mix is used in between some individual segments.
And in Wheel Systems you were mentioning that you're ramping up production in Serbia and I guess also in North America. And we're seeing quite good demand, especially from the construction segment. Would it be possible to quantify it in any way how much more capacity you will have in…
I don't really want to-- I mean the construction, we are very-- I mean we are big globally. We are probably #2 globally in ag tires. We are #1 in material handling tires globally. But we are maybe a top 10 for construction tires. Construction tires is kind of the smaller segment for us, and of course with the strongest growth opportunities. But also we need to note that also in the construction segment as a total that there is quite a lot of commodities. So we are not really targeting the full construction tire market. We are targeting, let's say, the high-end applications, the demanding applications. So even though the construction segments is a lot bigger probably than the ag tire segments, but the interesting segments in the construction segments is less than in the ag tire segment. So we are working on it and we are launching kind of a product family. By product family we see good growth opportunities, but it's not going to happen immediately. That is something that we're going to launch step by step. But we know it with satisfaction there is quite a high kind of demand, especially from OEs. But we also want to make sure that we have a balance in the aftermarket and OE exposure in that segment. So that is something we're working on in order to get. I said we're adding capacity, but we're also at the same time investments in Serbia. We're investing in Czech Republic, investing in China, investing in the U.S. So that is also part of the reason for the high CapEx levels in the quarter and we definitely feel that we're moving into a better overall structure within Wheel systems fully aligned with our plans that we had a few years ago. So it's nothing really, at least internally no surprises. So this is kind of moving and we feel that we have a solid -- creating a solid platform then to continue to grow in Asia, continue to grow in North America, continue to grow into the construction segment; while we are more kind of well established, if I may say, in the agri segment and the material handling segment. So this is a little bit portfolio management that we're working on that in that area, fully aligned with our expectations, but maybe with somewhat subdued amount, especially in the agri aftermarket where we kind of expected better growth. But that is supplemented with probably a better growth than expected in the agri OE and continued good growth in the material handling and construction segments.
Do we have any question from -- Agnieszka, please?
Yes, Agnieszka Vilela, Nordea. I have a couple of questions. The outlook, firstly you say that your order book today is higher than what it was when you entered Q3. And I wonder if you exclude or include the oil and gas segment orders in that.
Include everything.
Include everything? So if you would exclude them, can you tell us about kind of visibility of them?
Similar, I don't really -- I don't know exactly the figures. But I think there is no dramatic change. I mean it's the same. It's the same. But I believe we have growth in certain industries, in general industry segment as well. So it's not really only related to that, but also a little bit down in some other areas. So Agnieszka, I want to clarify that. Okay, I said growth in order book, yes. But as we said, the underlying demand is basically the same. We don't see any change in the underlying demand.
And no concerns from the automotive segment either from your side?
Of course we have concerns. We're looking at it and of course we note externally, but looking at the numbers it's a little bit lower growth rates. But it's still growth.
And then also can you just remind us about your visibility for the businesses apart from oil and gas?
We have generally good visibility for the next 60 to 90 days. Beyond that is a little bit more guesswork.
Yes, and then just a question on Wheels segment, I appreciate the fact that you're quite satisfied with the development. But when I look at the EBIT change and consider the organic growth, FX, and acquisitions, I think that the leverage on the organic growth was quite subdued in the quarter, especially if you think that you got the synergy…
But there is some improvement possibilities in this, as always. So of course not all stars are aligned. There is always some stars which is misaligned. So we are of course working on that. There is a little bit higher inflationary pressure in certain areas, Czech Republic which we need to compensate. So we're implementing pricing. For those of you following the market, I mean we have been implementing price increases on that to compensate for that. We have some hit in the quarter for some extra inflation which is not fully captured. There is also some price rollover situations also. I mean not really raw material impacted, but more that we have kind of a formula with some of our OEs which is then impacting it also. So we have a slight negative from that as well. So there is always some -- so I mean in an optimum situation we would have had higher profit. But overall, it's always a little bit ups and downs. So of course, I mean you are correct in that. If you have 100% full drop-through with nothing else, then probably it should have been better. But that is something we cannot -- we cannot pre-act on some things. So we're working on that, of course, to correct it going forward. So that's what I said, our overall satisfaction, but we can of course always find some issues that I think could have been managed better, I shouldn't say, but where we would have wished for a slightly different development.
And how much synergies are left for that business and what's the run rate today?
Well, I don't know. I mean can't remember. Ulf, I don't know if you have the figures.
We're not commenting on each quarter. But if you can go back to the Capital Market Day, we had specified the synergies to be achieved in 2018 and in '19. I don't have it on the top of my head. But we don't comment on individual quarters.
Olof Cederholm, ABG, just a couple of questions. The restructuring costs were lower than expected and you're guiding something lower as well. Does this reflect less activity or is it simply delay of activity that we should now --
No, I think it's more than -- it's last year we had much, much higher. That was due to that we also then closed Houston and then moved up to Skelmersdale. And this is just slightly lower. But it's also then partly driven by acquisitions. And then it also depends what kind of acquisition you do and if it's larger or smaller ones. But next year we will then come back next year to guide you when we release the fourth quarter…
But it's not -- I mean overall of course it's good. I think it was a little bit up and down. It's linked to acquisition, linked to activities. And some of the actions is due to some acquisitions and due to some changes pushed forward a little bit. But we still have plenty of possibilities to improve. It's simply that we happen to have a slight downturn here in the second part of the year.
Okay, and then I have question about the group costs that were fantastic in the quarter.
We would like to keep it like that there every quarter.
Should we put SEK 12 million for 2019?
No, but what you need to do is that we will have one-offs, let's say, when we do. Because we do assessments on provisions, accruals. We have all M&A costs centrally, also M&A accruals and M&A provisions centrally. So we need to assess those and then it happened to be that many items then turned kind of a positive in quarter 3. It's not a big thing, but you need to regard it as kind of a one-off. So the underlying is the guidance between SEK 40 million and SEK 70 million, in the middle of SEK 55 million. And that's where you need to do. And then if we pick up something more significant going forward, if it's not major significance, then we guide you. But you need to count on SEK 55 million.
And if you look at the year-to-date, we are on the lower end of the guidance. So this is really the way we look at it. I mean we are on the lower end of the guidance for, let's say, 9-months guidance, if you put it like that. So this happens. And of course we're happy that they are positive this quarter. But it could be slightly negative next quarter. It's depending on what is happening.
Okay, and one last one from me. In Wheels, we hear a few tire manufacturers talking about high raw material cost going into next year, et cetera. What's your view on that?
It's a little bit difficult to say, to be honest. I mean we still see it depending on individual raw materials. But in general, we are not really expecting any push upwards, as you say. There is some challenges in some raw materials, like carbon black and that where we're depending on the Russia relation with the rest of the world and how to do that. Iran is there as well. So there is a few of those which have changed kind of the supply chains in the industry. We have no general concerns about it. We think we're managing in a good way. And if it happens, it's not really a big thing. Then of course we need to change the pricing. So we are not really concerned about it. I think we are compared to the -- now I should say that they have to comment themselves, Michelin and Bridgestone and the others. But I mean they of course are more exposed to consumer markets. We are exposed more to specialty tires. I shouldn't say it's easier for us to adapt pricing, but somewhat easier probably, because we are more focused on individual segments and we feel confident that if the raw material pricing goes up, we will be able to adjust. Of course we will do it with some delay, but not really talking about any major things here. So at the moment, Olof, we cannot see that. It's not on the top of our agenda, to put it like that.
Yes, just a quick question on the Offshore & Construction business, I mean you have this transfer of the operation from the U.S. to the U.K. which you have said previously, should sort of give you benefits around SEK 100 million per year. Where are we with regards to those savings in terms of -- I mean how much did you get into in Q3 and what can we expect in Q4 and…
It's ticking in. But of course, the major of the savings is only going to kick in when we actually start the manufacturing in the new structure. And that is, as I said before, we have got in the first orders and that's going to be -- we don't know exactly the delivery time on that. But we're going to start to make this in the U.K. instead of U.S. here at the beginning of next year. But part of that saving has already come with the cost cut down. But some benefits will come also when we start to manufacture. So that is kind of a going run rate. So it's difficult to say exactly how much is kicking in at the moment. We see the benefit. We see, of course, the cost is going down, the use and cost is disappearing. But we don't really see the benefits yet of manufacturing in a more kind of more competitive setup, which we will have then when we move everything to U.K. Sorry, I don't really want to give -- because it's also project dependent and this SEK 100 million is plus-minus a little bit as well, depending on the orders we get.
Erik Golrang, SEB, 3 questions. You touched upon some inflationary pressures on the raw materials side. But if you look at the net in the third quarter and also the outlook for the fourth quarter, do you full compensate yourself for both raw material cost inflation and other inflationary factors?
If I take overall, I think it's slightly negative in Q3. But we're talking about a few individual millions of euros on the totality. It's really negligible. And we expect it to be -- I don't know. Q4, I don't know…
But coming into Q4, we will have partly compensated that. But we will not have it fully impacted, because that also again…
We're going to let's say, auto -- but then we also have to speculate what's happening. But we think hovering, let's say plus-minus a few million euros; that is something we need to accept if you look at the total group.
And then on the second question, if you could say anything about what kind of magnitude in the oil and gas recovery that the second quarter or the third quarter order intake reflects. You said the highest in 2 years. But I don't recall orders being that high 2 years ago either. So are we looking at sort of a mid-single digit return to growth next year or will it be significantly into the teens?
I really want to wait until I'll see the order intake here for Q4 and Q1 next year. But we see there is a strong uptick and of course with the current order intake -- and then of course if you look at the full Offshore & Construction, you need to be aware also oil and gas is one thing and infrastructure is the other thing. But for oil and gas, we will need more orders in the oil and gas related businesses than we got in Q3 in order to go into solid profitability. But at least it's moving in the right direction. So it's not sufficient to bring us up to solid profitability. We need more, but we see movement and we expect growth in order intake also in Q4, of course dependent on when we exactly get the order. But we see the activity level is locked up. And then we say activity level is up, then we're looking at drilling is still very red. It's still very red. So that is of course, we don't see any light in the tunnel and that is why we did this kind of restructuring moving from Houston to Skelmersdale in the U.K. We're cutting down capacity because we don't expect that market to go back and we don't really see -- some increased activity, but not in all dimensions to compensate what we lost. While on the other areas, we see more subsea, which is then for us we can distribute [ the border and some more bend ] restrict subsea insulation. There is very high activity level. So there is the expectations that that's going to continue to grow. So there it is something we're just getting back. And we have seen the first. We go to first big order. Of course that we're talking about orders also between EUR 5 million and sometimes up to EUR 20 million. And these kind of orders we have not been getting at all for the last 2 years. We got one order in this quarter. But it's the first big order for 2 years, and we still have a few of these big orders in the pipeline. But when exactly they will come in, we don't really know. So I have to wait before I can give you even better guidance for 2019, we need to look at the order book here for Q4 and Q1. The only thing I want to guide for is the activity level is high, order book strongly increasing and we believe we have the expectations that we continue to grow the order book here into Q1 and Q4. And that is why we say that it's still going to be somewhat challenging for the first 6 months of next year. But with the current trend, we feel comfortable that the second part of next year is going to be much, much better than it is today.
And then the final question, going into this year you said that it would be an investment-intense year. Is that still the case? Should we still expect CapEx to hold materially into '19?
Yes, we expect it to continue to be on a high CapEx level and also we're going to give better guidance here in the next Q4 report. But it's going to continue to be on a higher CapEx level than it should be in Trelleborg in the long term.
'18 on…
'19 as well. '18 and '19. '19 will be high as well in compared to historical averages.
Do we have any questions from the phone?
[Operator Instructions] Our first question comes from the line of Erik Paulsson of Pareto Securities.
Regarding automotive, you touched upon it earlier here in the outlook and Sealing Solutions and also Agnieszka touched upon it. What is your current exposure within automotive? I think it was 11% for 2017. How does it look like now on the rolling 12-month basis?
Similar, I don't know exactly the figure, between 11% and 12%. I'm looking here at Christofer who knows the figure. So I think it's very similar. So slight -- 11% is probably a good reference point.
Okay, and the second one on acquisition multiples, what you see here now? Are they still a bit high or have they come down in recent market turmoil here?
No, as you know, there's been turmoil in the last few weeks or months here. And we still have to wait and see. I mean there's still activity level. There's still a lot of companies for sale. And of course we need to watch carefully what the multiples are. Of course this turmoil has not been good for the multiples and of course we try to use this in our discussions when we are buying something and when we're selling, we tend to try to forget about it. So this is of course a discussion point ongoing and we basically have to wait and see exactly what's happening. But yes, it's difficult really. I mean I trust you understand that this is a little bit up in the air at the moment and it's a discussion point on the valuations.
Our next question comes from the line of Klas Bergelind of Citi.
It's Klas from Citi. I have a couple of questions, please. First on Offshore & Construction, yes, we understand the moving parts. You saw the labor slippages. But you say that the savings are coming through. But then I want to understand the margin impact. Organic sales is down 19%, which was in line with expectations, but the margin was quite a bit lower. And out of the backlog, are we looking at what is a weak price quarter, was it mix? And on the new orders that you're taking now which gives you visibility into the second half, next year is pricing higher on those orders than what is leaving the backlog right now or is the cost and volume effect mainly that will lift the profitability in 2019?
I think that the profitability is more a fixed cost. There is an under-absorption. We did not -- I mean standing here 3 months ago, we did expect to sell a little bit more in this quarter. So we expected the cost absorption to be higher. And that is also the challenge here looking into the '19 figures is actually what kind of volume we get. I mean we look at the direct margin as we call it, with kind of where we absorb the projects with the margin, excluding the fixed costs. I mean they're on an okay level. They could be better, but they're on an okay level. So really the dependent here is actually how much orders we will get. How much orders will we get? How much direct margin will we get to cover the fixed costs? And that is the big, big question mark for us and that is something that we need to work on and make sure that we manage in a good way. But we feel that we have been cutting costs a lot in this area and we are on a level where basically we don't feel that we should be cutting the fixed costs any more. Then it's better to wait until the orders come in. Otherwise we start to really destroy the overall business and that is something we don't feel is justified at all at the moment.
Okay, then I wanted to come back to automotive. You say 11%. But if you break out the brake fins, which is more aftermarket, more recurring and the other business that is more stable versus pure production, what is the pure car production exposure within Trelleborg right now?
Yes, probably I mean 60-40 or something like that, maybe 60 OE and 40 aftermarket. But it varies a little bit. But I don't say we should be what we call OE. There is also some kind of aftermarket-related business in that in the fuel injection seals or something. I mean I should say we have very, very limited sales directly to the OEs. I mean we're selling to sub-suppliers and really with this tier 2 or tier 3 suppliers, some of their business also goes into the aftermarket. So maybe if you group everything else, let's say our best guess is probably 50-50, 50% OE and 50% aftermarket. But honestly it's really difficult to give better figures than that.
Okay, my final one is to come back there on Industrial Solutions and the cost pressures. You said that you had [ growth ] on one side and then said that costs were increasing there on labor shortages, wages are up. How should we think about this impact into the fourth quarter? Will it get worse or to what extent can you offset this through pricing?
Our ambition of course is it's not going to get worse that it's going to get better. But I mean we know that we need to watch it more careful and we do expect some higher inflationary pressure overall going forward. But that is something we're working on constantly of course with price adjustments and with other kind of ways of compensating. So we, okay we note that there is inflationary pressure, but we're honestly not overly concerned, at least at the moment.
Our next question comes from the line of Malte Schulz of Commerzbank.
Thank you for taking my questions, 2 are left. First of all, to the procurement issues; did they particularly impact the organic growth in Sealing Solutions like we have seen it in the last quarter and can you quantify them? I mean last quarter we had approximate you said 2 percentage point growth impact. What would we have seen if it would have been as you would have liked it? And second question is on the items affecting comparability. How should look at it going forward? Do you still regard the SEK 250 million as good guidance or would you also go there for a little bit lower figure?
On the last question here, I would say that if you need something today for 2019, you should guide for SEK 250 million.
What was the first question, sorry.
The first one was then the impact on Sealing Solutions on organic growth.
Yes, and [ arrears ] has been falling basically on the same level. But I mean I don't know. 2% you said, I think that's a little bit high to be honest. I mean we talk about fairly small figures and we will always have some arrears. It's not that it's going to be 0. So I don't know, half of 1% maybe or something like that. But then it's not really a major, major thing for us. And once again, I mean I know you're focusing on that. But the arrears will always be there. So it's not really -- if we supplied all arrears, then probably we would have another percentage point plus. But it is not realistic to say that you have no arrears. So it might be if you have full capacity, a lot of availability, we will sell another 1/2 to 1%. But that is not really realistic to end up in that. The important thing for us that we don't feel that we're losing any sales. It's simply that there is a slight delay in deliveries in certain areas due to limitations of supply. And as I said, it's not only our bottlenecks. There's also some bottlenecks in suppliers of some raw materials and all of that. So it's not really only caused by us. It's also caused by supply chain and other aspects.
Our next question comes from the line of Hampus Engeliau of Handelsbanken.
I have 3 questions. Starting off with Sealing Solutions, this business area I think continues to surprise on the margin improvements even though you have downplayed that for some time, especially on the second half. Could you maybe discuss a little bit about the 90 basis point margin improvement? I mean how much is price realization cost and of course we saw the volume growth during the quarter. That's my first question.
If I understand you right, the growth in TSS is very wide. I mean we cannot identify -- aerospace doing very good. We have some industrial segments doing also very good. We continue to benefit from kind of construction equipment part of it. So it's really widespread. I mean cannot really highlight the specific segments. It's not a specific segment explaining it. So it's really growth all over the place. We continue to work on what we call on advanced delivery services, adding more services to our supply. We might be sorting small assembly packaging, clever packaging, some RFID solutions, some automatic feeding into the production lines. So it's a wide variety of activities that don't -- and you must not forget that we have a kind of within Sealing Solutions, we have close to half a million active articles every year. So of course none of those products, which is really driving the overall sales. It's really widely spread among a lot of different small -- I mean a big order within Sealing Solutions is EUR 1 million. So I mean that isn't a very big order. Most of the orders in this area is a few hundred thousand euros on annual supply. And then if you compare that to the total figures, you see it's not really any major impact from any individual sales.
And on the margin improvement, is that mostly volume or is it price during the quarter?
No, I think it's more volume-oriented. And honestly Hampus, we continue to invest. We continue to grow, as I said. We continue to invest in our innovation center. We continue to grow our presence in the aerospace area. We continue. We have been investing quite a lot now into medical, which we don't really see the benefits of. So I think the actual drop-through, I mean I trust you see the figures and you know that we're working with fairly high gross profit levels. So I mean if we were interested in simply seeing the full drop-through, you will see more than this. So on top of this that you see this drop-through, that there is also quite a lot in investments in selling expenses and R&D.
And if I move on to Wheel Systems and maybe going back to the U.S. operations, where are you now? Could you maybe talk a little bit about volumes, et cetera, how you're breaking into that market?
Yes, we are still not where we wanted to be. Let's put it like that. We are quite far away. We would like to grow more. I should say, it's been good in certain aspects, but not that good in other aspects. So overall we are still I should say a little bit behind plan to be honest. We would, if you looked at the plan we had 2 years ago, we should have been a little bit longer. But we're moving in the right direction and we feel certain that we're going to get there. And eventually we're going to get this market share gains that we are aiming for. But it's also a little bit -- I should say the competitive situation in U.S. is a little bit tricky at the moment due to these import duties and tariffs and all of that that we need to be aware that we underprice and we don't overprice. So it's a little bit turbulent in that aspect. But overall as I say, there is more to do than what has been done. So we still see that as kind of an uptick. But once again, it's a little bit turbulent at the moment due to this import tariffs and in certain tire segments there is quite a lot of imports from Asia, which has been hit by these tariffs. We are not exposed to that. But then of course we are also partly exposed to it, I should say. But we were working through that. But the majority of our sales in U.S. is not impacted by that. And then we need to make sure that we position ourselves in the correct way. So it's a little bit both challenging and showing quite good opportunities to improve it there as well. But that's something we're working on and Ulf and myself were there only a week ago. So this is something we decided at the end that we're going there today as well and part of that is also leading to this situation.
Unfortunately we're running out of time. So any closing remarks?
No, only to send the message again, a solid quarter for us. We're growing sales. We are growing profit more than sales. We're showing the highest sales ever for Trelleborg, highest profit ever for a Q3, highest margin ever for Q3. Cash flow is slightly down, but that is leading to kind of decisions by us to do CapEx and to growing into a better structure. So we are confident but with some, of course, humbleness that we need to identify that the markets are a little bit more unstable at the moment and there is also some happenings outside of the actual market which might influence the business. So we need to stay on our toes and we need to make sure that we continuously adapt and continuously change where we would like to change and where we can change. So that is really the message. So thanks to all of you and looking forward to talking to you again.