Trelleborg AB

STO:TREL B

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the Trelleborg audiocast for teleconference Q3 2021. Today, I'm pleased to present Peter Nilsson, CEO; and Fredrik Nilsson, CFO. [Operator Instructions] Afterwards, there will be a question-and-answer session. Speakers, please begin.

[Peter Nilsson, President, CEO & Director]

Thank you. Welcome all of you to this presentation of the Trelleborg Q3 results for 2021. As already said, it's going to be myself, Peter Nilsson presenting and then supplemented later on by Fredrik Nilsson who is going to guide us through the more -- let's say figure related parts of our report but -- and as usual, using the slides, which has been on our homepage for some time now. So guiding you through this and moving to Page 2 in this deck, the agenda slide, as usual, starting with some general highlights and then giving some comments on our business areas. Financials then by Fredrik and then finishing off with a summary and some comments on the outlook for the running quarter. And then also as usual, ending with the Q&A session.So moving to Page 3. Strong quarter for us. Sales increasing by 15% with a strong organic sales of 16%, some minor negative FX. I mean, growth basically in all market segments and all geographies, I'll get back to comment on that. So very broad growth in more or less all areas of the company. EBIT, good drop through on the extra sales. EBIT's increased by 25% and a little bit north of SEK 1.2 billion, corresponding to a margin of 14.6% in the quarter. And this is actually the best third quarterly sales and EBIT and margin to date for Trelleborg. Items affecting coverability ending up at minus 32, which then this time comprises of base SEK 65 million restructuring charges but also positive capital gain on a real estate sale that we have done in the U.S., which are ending up at minus 32 as said. Cash flow is still very strong, even though CapEx spending slowly increasing from these depressed levels from 2020 and also, of course, impacted also by growth in working capital related to the increased sales but also working capital here in relation to sales is maintained at a very good level. This means that rolling 12 months cash conversion still remains above 100%, and thereby also good cash inflow and then strengthening the balance sheet as well. So this is a good quarter for us, a good quarter in more or less all aspects. Also not commenting here on the slide but in the report also, on top of this also, let's say, generally good order intake, order intake ahead of sales in the quarter still.Page 4, showing, which I already commented, a very broad growth in all geographies, It's actually quite similar if you look for these 5 regions, we are looking at. Asia is still doing good. We are still growing good in China. We have good order intake in China as well although we see some segments, of course, being a little bit more challenged but for us, we don't see it as much as we have seen others commenting on.Europe, strong. North America slightly better as expected, which we already guided last quarter. We saw North America growing slightly more and then South America growing substantially, but that's also a very low share of our sales, so we shouldn't put too much emphasis on that, but nevertheless, a good growth in South America as well.Then moving to Page 5. Back to the agenda slide, business areas. Quickly moving to Page 6, commenting on Industrial Solutions. Also here, organic sales good, plus 9% and growing in more or less all areas, especially construction and industry, very strong. We also noted satisfaction in some of these more depressed segments like aerospace and train railway is also growing now with both good order intake and also growing sales in the quarter. And we, as everybody else is, of course, impacted by these automotive customers' production stocks, which is impacting a minor part but as most of you know, I mean, our automotive sales is fairly limited but nevertheless, it's developing in a negative direction in the quarter. And this, in total, means that we have, let's say, a growth both in margin and EBIT, continued to be supported by the higher volumes, but also we maintain good cost control coming from earlier actions.Turning to Page 7 on Sealing Solutions. Also here, very high-growth in basically all segments and regions. It's quite uniform actually, which is quite unique in a way where we see all geographies and basically all segments growing at the same time but with this, of course, we are struggling as some others, as already commented on in this period. There is some shortages on components, especially for automotive sales, but also indirectly also impacting other segments. Of course, we could have sold more if we would have not seen this and also, of course, this is also impacting our output in a way. Aerospace is also now back in growth mode and with a solid double-digit growth, which we also foresee going into '22. Now good order intake, and also with great satisfaction and those of you who are following us for some time know that we have been creating a platform within Sealing Solutions for Healthcare and Medical and the selling processes for this kind of sales is quite long, but we now see, let's say, from this growth or this platform creation a few years ago, we now see also a solid growth both in order intake and actual sales in the quarter for Healthcare and Medical, which, of course, is creating more stability long term. All in all, a very good quarter, which just then delivering a margin above 23% and based, of course, here also on good drop-through on the extra sales, but also with a good underlying cost control behind this great figures.Wheel Systems. Also here, we see a growth in all areas. Agri and material handling and Construction tire is growing very well and we also see with satisfaction that basically all geographical areas performing well and maybe you should note there, especially Americas is in a good growth mode for us, even though it's a smaller part of our total sales but those of you who have been following us also for some time know that we have been building a platform in North America and been waiting a little bit for the -- for this kicking into sales but what we see now in this quarter that we are going into a solid growth mode in North America as well, which is then, of course, supporting the development there long term. Also, on top of this, we continue -- that there is -- I mean, as you say, there is generally a shortage of tires in some areas, and we have been continuing to put priority on regional equipment manufacturers since we see this is more long-term beneficial for us if we sell into and we know that we get a solid replacement eventually with then a good pull pricing on that. So that is something we are -- continue to put priority on, even though short term, of course, we could have made a little bit more money by putting more emphasis on the aftermarket but that has been on the negative than against every customer. So this is kind of part of our overall strategy.Also here, of course, this has been impacting also, there are other areas like raw materials, freight and energy prices is going up, as all of you is aware. And this was pushing down the EBIT margin in this quarter. We have no concerns that we're going to get, let's say, compensated for this, but it's only that is happening with some delay in this area since it's kind of a slightly different sales model than our other businesses and some of this is sold both to distributors, which is then kind of have a longer price up and also, we are also working with formula, say raw material formulas towards ROE. So once again, we have, let's say, a very solid story going forward, where the margin for Wheel Systems will, let's say, continue to increase -- will increase as this price adjustment is kicking in, of course, with the assumption that we will not see raw material continuing upwards because this price increases will then, of course, be pushed forward as well. But overall, we are very satisfied with development in the Wheel System, even though the EBIT margin is somewhat lower than last year but overall, the development in Wheel System is very satisfactory for us, and we feel confident on the way forward.Back to the agenda and leaving financials for Fredrik, then quickly moving to Page 10.

[Fredrik Nilsson, Chief Financial Officer]

Thank you, Peter. Starting with organic sales, which was up 16% in the quarter with good growth in all 3 business areas. If we then compare with 2019, the sales were up 7% for continuing operations with organic growth for all business areas. Reported net sales increased by 15%. We still have some minor negative translation effects in the quarter. Looking at year-to-date, organic growth of 17%.Moving to Page 11, showing historical organic growth. The third quarter was a strong quarter in historical context. Moving to next page, Page 12. Just showing the quarter sales overall in 12 months and as you can see, the trend upwards continues.Moving to Page 13. We have a record high EBIT for the third quarter, as Peter said. We increased the EBIT by 25% to SEK 1,203,000,000. In the result, we also have a negative minor FX impact of SEK 12 million compared to the corresponding quarter last year. EBIT margin improved from 13.5% to 14.6% due to the higher volumes in all business areas and continued good cost control.Going to Page 14. Looking at EBIT and EBIT margin and the positive trend continued during the quarter and as I said, was a record high for the third quarter.Moving to Page 15, the profit and loss. We have items affecting comparability for the quarter of minus SEK 32 million, comprising of a restructuring cost of SEK 65 million, which was partly offset of capital gain related to sale of real estate in the U.S. of SEK 33 million. Financial net declined from $66 million to $43 million in the quarter and the lower financial expenses was linked to the reduced net debt. Tax rate for the quarter was 24%, which was slightly favorable due to limited withholding tax on internal dividends.Moving to Page 16. We have a strong improvement in earnings per share, up 47% to 3.25, excluding items affecting comparability.Moving on to Page 17. The cash flow, we have an operating cash flow in the quarter of SEK 1,117,000,000. Positive impact from increased earnings generation. You can see EBITDA up SEK 232 million in the quarter. Working capital increased, driven by the higher sales and also a little bit higher inventory to ensure stable supply to our customers. CapEx was higher than in the preceding year, which was unusual low in 2020.Moving to Page 18, cash flow conversion. As Peter mentioned, continued good cash conversion at 102% despite the high activity level.Moving to Page 19, gearing and leverage continue to improve. So we have a debt-to-equity ratio of 29% due to the strong operational cash flow and net debt over EBITDA continued further down to SEK 1.3 million.Moving to Page 20, financial guidelines. CapEx of SEK 1.4 billion. We expect a higher activity level we saw during the third quarter to continue into the fourth quarter. Restructuring costs, still guiding of SEK 400 million. Underlying tax rate, 25%. This will most likely be slightly lower but please have in mind that Q4, we normally have a little bit of a higher tax rate due to seasonality. And then finally, amortization of intangible assets, SEK 400 million.By that, I would like to hand back the microphone to Peter.

[Peter Nilsson, President, CEO & Director]

Thank you, Fredrik. Going back to the summary and also some comments on the outlook for the running quarter before opening up for the Q&A. Our quarter, Page 22, a solid quarter in more or less all aspects. Strong organic sales increase in all business areas. Good drop-through. EBIT is up by 25% and then a margin of 14.6% in the quarter, which means that we are delivering the best quarterly results, let's say, quarter 3 results so far. Items, if I can compare it on a relatively low level, were restructuring still continuing, but we also have a capital gain, which is impacting us positively in the quarter. Cash flow still on a good level and the cash conversion for the last 12 months above SEK 102 million. So solid quarter in more or less all aspects.Going forward, of course, there is logistic challenges and inflation kicking in. We feel that our positions in the markets are good. We are good in compensating for this inflation and we are good in managing the supply chain challenges. But of course, it creates in some extra pressure in several aspects, but we feel confident we will be able to manage this. COVID-19 is still around. It seems like in some comments, it's not around anymore, but we have some countries and some operations still exposed to this with limitations, and we cannot let's say, take for granted that is not going to impacting us. So that's of course, something we're watching. Even though we are also in these aspects not overly concerned, we believe that we will be able to manage it in a good way even if it should be impacting us in a major ways again.Operationally, of course, we are focusing -- continue to focus on the portfolio management, both in aspects of focusing on the right customer, the right market segments and the right geographies and also making sure that we continue to improve our portfolio in order to continue to improve our operational margin and operational leverage in -- when extra sales is kicking in. Also, continue to work on operational excellence and looking for ways to improve our overall structure, always high on the agenda. And of course, we also continue to increase the value for our customers by staying close to them and also being good in integrating with their operations and making sure that they are -- they continue to appreciate our offers and our solutions.We continue to scout for acquisitions, but I like to say that in this area, that's maybe one of the areas where we would have liked to do it more, but we're also a little bit cautious. We think in certain areas that the valuations at the moment is a little bit on the high side and we are involved in a lot of discussions at the moment. But once again, we are a little bit cautious on the valuation here in order to make sure that this is -- if we buy something, it should be a good deal for Trelleborg and our shareholders. So that's an area where we do expect activity going forward. Once again, we are involved in quite a lot of processes but it's kind of difficult to really give a guidance whether this will end up in a favorable way for us or if we continue to be a little bit cautious on these valuation levels as we see at the moment but still once again, high on the agenda for us.If you're looking at the running quarter, we expect the overall demand to be on par, basically with the running quarter. Of course, we do expect like a lot of other companies that automotive will be somewhat more depressed in this running quarter. That will be impacted by these shortages of components but we have also some other areas, which is going to continue to improve like aerospace and rail and certain industrial segments, health and medical. So overall, we believe that this good development in several segments will, let's say, on the totality compensate for this negative that we see on automotive. Maybe also comment on automotive areas especially in Sealing Solutions. I didn't mention that before but maybe it's worthwhile to see it as well, that I mean quite substantial sale of automotive, for instance, in Sealing Solutions is exposed to the aftermarket for automotive, which is not at all impacted by these challenges that we see on the OE side. So we -- once again, we feel confident that this is going to continue in the same way in the running quarter as we have seen in the third quarter. But then, of course, we still keep -- we actually discussed it, we should keep this note or not on the pandemic impact, but we do see that in certain geographies, it might get back as an issue and we need to add this to keep this comment for some time. It could potentially impact us in certain areas, not that we have any specifics to highlight at the moment, but things can change and it's still impacting in several geographies. So this is really what we want to comment about the running quarter.With this, I think we move to Page 22 agenda, Q&A and then quickly to Page 26 and opening up for some questions. So please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Klas Bergelind from Citi. Yes.

[Klas Henrik Bergelind, Director]

So my first one is on the margin in Wheels. So last time, Peter, you said that underlying margin in Wheels was 17% in the second quarter, should you have compensated fully from the cost pressures through pricing. What was the margin on that basis in the third quarter? I'm interested to get that net negative impact on EBIT again, which I think was SEK 100 million to get to the 17% in the second quarter. And so yes, I'll start there.

[Fredrik Nilsson, Chief Financial Officer]

The margin is slightly lower as overall running but I mean the impact in the quarter is actually slightly north of EUR10 million in this quarter. So it's more than SEK 10 million. So if you, let's say, put this together and run at the year-to-date number, we are touching, I don't know, the EUR25 million plus or something for the full year as an impact from raw materials, which we're going to get back eventually because that is more a matter of a formula. I mean, we are, year-to-date it's somewhat difficult to calculate because it's depending on mix and all of that. But I mean in the ballpark figure, we are probably, let's say, having price increases already in the formula so you know pricing formulas which is going to kick in, in the range of EUR25 million and probably a little bit give or take, half of that is probably impacting us in this quarter.

[Klas Henrik Bergelind, Director]

Okay. No, very good. And then a follow-up on that, I'm just thinking near terms on the cost pressures. You say that the margin in Wheels could recover already sequentially into the fourth quarter at the same cost level. Could you let us know how you see your raw materials basket currently? And how you look at your likely logistics and [net] cost into the fourth quarter? Obviously, there's some moving items but if the cost levels continue up, it could be tricky. We can see the raw mat energy cost freight data, but I'm interested to hear Trelleborg Wheel System service.

[Fredrik Nilsson, Chief Financial Officer]

Yes. It's continuing slightly upwards, but I mean not at all on the levels that we see in, let's say, for the first quarters of the year. And of course, we are let's say, cautious now. As we see the automotive going down, even though our automotive exposure is not that high but I mean, we still know that automotive is a big consumer of a lot of our raw materials. So we are cautious about this, but we don't really see any downward and it's still tight on raw materials. It's still tight on containers in certain areas. So we continue to -- we do not expect any major changes actually in Q4. So we expect it to remain on the level it is. And then we have some individual raw materials we pushed up, maybe not impacting, let's say, Wheel Systems that much, but we have some very specific materials for sealing, but that is much easier to get, let's say, quick price compensation for those specific. So overall, the basket will continue upwards. But once again, we don't see this, I'd say, margin -- we have not really seen on Industrial Solutions and Sealing where we've been compensating very quickly, but we don't see kind of an increased pressure on Wheel, and we expect it, once again, to continue on the same level, while at the same time, better pricing kicking in. So it's not really the improved margin, in a way, will not come from lower input prices, but more from better pricing.

[Klas Henrik Bergelind, Director]

Okay. Very, very quick final one from me on capital allocation. You still say that the M&A targets out there are expensive and you have half the gearing since 2016, looking at net debt to EBITDA. Last time you did major M&A. And your stock is -- obviously, is a fact, it's lagging the industrial index looking at valuation. So maybe a question for the Board, perhaps. But how would you look at buybacks in light of this? Are you [stubbing] to get the growth through M&A eventually or would you consider buybacks?

[Peter Nilsson, President, CEO & Director]

I mean it's a question, of course. I mean we don't need long term. We don't need this strong balance sheet that we have at the moment. We have a very solid cash generation, and we are confident that we can manage and even a slightly more leveraged balance sheet. And of course, we're going to get there eventually, and that's when we go through acquisitions or other means, we have to wait and see. But I mean, for sure, long term, we don't need to have this kind of balance sheet. And also, we will continue to deliver good cash flow. So I mean, we will need to, yes, create a more efficient balance sheet one way or the other.

[Operator]

The next question comes from the line of Hampus Engellau from Handelsbanken.

[Hampus Engellau, Automotive Analyst]

Three questions from me. First question, would it possible for you to kind of quantify the impact on the group level for the discussed component shortage and also higher logistic costs, just to try to understand the magnitude of this. Second question is more related to the comments you made on order intake. And I guess that they all notice that general industries are trending higher in Q3 than pre-pandemic levels. And again, what are your observations here? Do you see the risk in doubling double orders and also inventory buildup at customers, given the risk in component shortages, et cetera. And also, maybe if you could add some flavor on the lead times.

[Fredrik Nilsson, Chief Financial Officer]

I'll start with those 2 questions, and I'll come back because otherwise, I believe...

[Peter Nilsson, President, CEO & Director]

Even for freight cost -- I mean, for freight cost, I mean, we have a very solid, let's say, very strong cost increases, basically both for raw mats, for freight and for energy. I mean to start to discuss numbers there. I mean, it's not really of interest, to be honest. I mean, we are increasing pricing and we are adjusting, and we are not really looking at this in the way you're looking for. And we feel that we are getting to get fully compensated for this. We don't have any concerns for that, and we don't really want to discuss numbers in that way. I mean we are mentioning it in Wheel Systems because there is a delay due to the pricing formulas and the way the business is. I mean also, just to explain that maybe to fully grasp that, I mean, we are selling more or less directly into the market, our tires. I mean, we present in Europe, we are present in North America, but several of our competitors is more distributors, wholesalers, and they are buying from others. So they are somewhat kind of 2 months or something behind on the cost increase. So that is also why we are first in line. We are increasing the prices first, but it takes some time before most of our competitors is being impacted. I mean, we don't have a problem if we mention names here. We don't have a problem. Michelin is as quick as we are because they're also selling into the market directly but some of the other brands is selling in a different way, and they are somewhat slower in the increase in pricing. And at the same time, of course, today, we -- I mean, if they sell a tractor, they need to have a fixed price when they sell a tractor, but they are compensating us for that, let's say, quarter-by-quarter. So that is why we're mentioning it on Wheel Systems, but we don't see a need to kind of comment on this in industrial solutions or in the sealing because there we see a direct compensation. I don't know whether you're happy with that reply Hampus, but that is the way it is.

[Hampus Engellau, Automotive Analyst]

That's fair enough. And maybe also on the order side.

[Peter Nilsson, President, CEO & Director]

On the order intake, I mean, we are, I should say, surprised, but we have a very solid order intake basically all over, but in automotive. And I mean maybe for Trelleborg, it might be somewhat different. We also have a kind of a little bit light cyclical. We have record orders here for some construction. We also see oil and gas coming even though it's getting small in Trelleborg, but we have a few, let's say, construction -- big construction orders for fender projects. We have a few, let's say, also bigger contracts actually for oil and gas exploration. Once again, even though it's substantially smaller here since the divestment, but it's still impacting us. So we see a good industrial general, as you highlighted, good general industrial order intake but on top of that, we also see this more late cyclical, if I may say, impacting also kicking in. So we have good construction orders for infrastructure construction. Good marine orders for [harbors]. We have good oil and gas orders. So overall, that is building a very solid order book for us. And we have a record high order book at the moment. And then, of course, we are struggling a little bit because if we really would use the old KPI or old matrix for how this order book will turn into sales, then we will not be able to deliver, honestly. So of course, we recognize that in this order book, there's probably some extra orders linked to kind of some safety measures from customers preordering or all of that. So that is, of course, something why we are cautious. But we feel confident that it's going in on a very high level. And we still feel also from most of our industrial companies. I mean, the signals they're sending at the moment is that they are actually quite low in inventory. So that is also creating some comfort in this area. But once again, so we can only comment but in a normal environment with this order book then we will probably -- I don't see anything on the table, but more or less, because it's really on good levels. But once again, we are looking this at a very, let's say, cautious way because we know there are some preordering and there have been some shortages of raw materials and all of that. The same as us. Of course, we're also putting orders to our suppliers really to make sure that we get the products. But overall, it looks very good. And then, of course, the downside is automotive. The downside is automotive, where we expect, let's say, yes, 2-digits, let's say negative growth here in Q4. But once again, we need to remember, it's only -- yes, 10-ish percent of Trelleborg. And I mean, also part of this or maybe give or take 1/3rd of this is aftermarket, which is not impacted. So I mean, our direct exposure to this automotive shrinking is very limited, and it's well compensated with the growth in the industrial and the more kind of infrastructure construction and oil and gas-related order intake.

[Hampus Engellau, Automotive Analyst]

Maybe then the last question on sealing. Very good margin during the quarter and still there were some impact on the autos. And you're always playing down Q3, Q4 margin in sealing. But despite some headwind in autos, you're still reporting 23 plus EBIT margin, which is a very good operating leverage also even though you had a significant volume growth. My question is more or less is this structural measures that we're seeing coming through there, which means that we maybe shouldn't expect that big seasonality going forward in sealing when it comes to second half?

[Peter Nilsson, President, CEO & Director]

I mean the major impact in Q4 for sealing is caused in the industrial segment but on that also, we are growing in the medical healthcare, which is not that seasonal. I mean, also, even though it's small, of course, we have also this supply into the semiconductor industry, which is growing a lot. So there are some segments which is acting slightly better than normal, if I may say like that. And then we have also in sealing the small segments, oil and gas and that which is also impacting. So this normal seasonality should move into becoming less in the future but we still -- the major, let's say, exposure here is still industrial, where there is some seasonality but it should get better, but I don't really want to comment on the details. But I mean the overall mix in sealing is slowly improving in terms of kind of seasonal exposure.

[Operator]

The next question comes from the line of Agnieszka Vilela from Nordea.

[Agnieszka Vilela, Research Analyst]

I will actually follow-up on the Sealing Solutions margin. And I want to ask you about your expectations on the profitability for this division in a bit longer term. We've seen that sealing has been running at 22%, 23% EBIT margin. Now obviously, you restructured a lot in aerospace, and this volumes are coming back. So the question really is should we expect this operational leverage of above 40% to continue and the vision to reach even higher margins in a bit longer future.

[Fredrik Nilsson, Chief Financial Officer]

I mean, honestly, our focus on sealing is more to grow it, maybe not to push the margin up. We can -- yes, of course, push the margin up if we want to. But I mean, we are -- leverage is there, operational leverage is there, but we want to spend more in making sure that we have a good underlying growth. So that is not the kind of -- and vision is, of course, always to do as good as possible but we are happy with this 22%, 23%. And then we will be more happy if we can, let's say, use this extra money that's getting into the extra sales, if you can use that to create a few percentage points higher growth. So that is still the ambition going forward. So we are investing in our sales force. We are investing in innovation. We are investing in, let's say, upgrading, testing, upgrading, upkeeping in order to be better in supporting our customers and get better sales. So that is the priority ahead of trying to push the margin to 25% or whatever. So that is what we like to create better kind of organic profile. And once again, that is -- is a lot of small steps, but I mean we are maybe especially satisfied in the quarters. We've seen medical healthcare growing. We didn't comment that much on the semiconductor, but that's also an area where we are pushing -- we still continue to see the kind of all this electrification benefiting us. And in all of these areas, we also say, let's say, there is some interesting areas on this, let's say, high end showerheads and stuff, which is also an area which is a little bit strange, but people are prepared to spend. We see high end buy cycle. So it's a lot of the small segment, which is growing. And I mean, we would like to grow in all these attractive segments, and that is where we really would like to use the money.

[Agnieszka Vilela, Research Analyst]

Okay. I understand. I appreciate the comment. And then I wanted to ask you about the momentum for your demand or sales growth during the quarter, also in -- how it looked like in September and October, if you look whether demand accelerated or decelerated? And if you could strip out the automotive exposure?

[Peter Nilsson, President, CEO & Director]

To generalize, we see good demand everywhere. We don't see really any downturn and -- looking at Fredrik. We cannot begin to highlight any changed direction in September besides automotive. I mean -- and then, of course, there's an individual impacts that we had some of the tractor OEs closing also for semiconductor shortages and stuff like that, but that is not really linked to the demand. We have certain areas where there is a lack of labor, but I mean that is normal in this kind of environment. So -- but the overall demand we only see a negative development in automotive, to be honest. And we see let's say more positive than in the rail, for instance, rail is going up. Once again, although small, oil and gas and exploration and drilling and LNG and all of that is also improving although this order will take a bit longer term. We're not going to see sales for that in the next 1 or 2 quarters but nevertheless, we see good impact from that one. So Agnieszka, sorry. I mean, I don't want to sound overly positive but I mean, automotive is facing the only red flag we see. Then, of course, it could be individual actions, individual customers having some operational issues, some lack of raw materials, but that is not really linked to the underlying demand.

[Agnieszka Vilela, Research Analyst]

Yes. And then as per your official outlook for flat demand sequentially in Q4 and given the kind of supply chain challenges that everybody struggles with, do we calculate correctly that you could achieve based on this outlook, about say, 9%,10% organic growth in Q4 or what do you think about that assumption?

[Peter Nilsson, President, CEO & Director]

I don't want to comment on individual figures. We see automotive is down, but that is being supported by others. But I mean, it's going to be a solid growth, let's put it like that. But I don't really want to guide you in details on the individual percentage points.

[Agnieszka Vilela, Research Analyst]

Great. And then last one for me, if I may, on cash flows, I've seen that you've built since the beginning of the year, almost SEK 1 billion in inventories. And also, we've seen outflow from receivables of SEK 1.3 billion year-to-date. What do you plan for your kind of working capital management and changes when we look into Q4 and even 2022, what will happen with working capital for you?

[Fredrik Nilsson, Chief Financial Officer]

No. I mean, we came from a year with lower sales. So that receivables went up, it's quite natural with the strong sales growth that we have had in 2021 versus 2020. The same thing with inventory. That was also pushed down during the pandemic in 2020. And also now with a little bit longer lead time, we have increased inventory to secure supply. I don't expect that we will continue the inventory further up and as always, we also expect to have a good cash conversion here during the fourth quarter. So, I think focus on the debt working capital days, we expect it to be more flattish going forward.

[Peter Nilsson, President, CEO & Director]

I mean, we don't have any kind of extra days on receivables. We don't have any extra overdues. I mean, it's moving our way. I mean, as Fredrik said, we have made a decision to push up the inventory a little bit because we are being a little bit lower than that but that is in order to create extra sales. But once again, like Fredrik said, it's not going to be -- we don't see any changes in this going forward, and we feel quite satisfied with the way it's managed at the moment.

[Operator]

The next question comes from the line of Robert Davies from Morgan Stanley.

[Robert John Davies, Equity Analyst]

My first one was just on the Wheel Systems. Can you just remind what is sort of underpinning your view in terms of taking that margin over 15% over the medium to longer term? I guess, what's been the sort of biggest impediment to getting there in the last couple of years? And I guess, where did the conviction level in terms of maybe in the first half of the year given all the disruptions in supply chain issues and everything else that's going on that you can get that margin north of SEK 15 million in the first half of the year? And then the second one was just on the broader industrial environment. I guess, looking at the sort of more difficult growth profiles in terms of comparators going through or coming through in the back half of this year, is it fair to assume that, that Industrial Solutions growth continues to taper in the first half of '22 or are we sort of seeing a more normalized environment? Where do you feel that business is going to run in '22 relative to 2019?

[Peter Nilsson, President, CEO & Director]

I will start with Wheel System. We feel confident, they're far better structured here. I mean, as you're aware, we made a major announce -- it's going back a few years, but it takes time to do the structure. We have changed, let's say, substantially the setup within Industrial Solutions with investments in one, let's say, very efficient factory in Czech Republic, let's say, strong upgrade in the Serbian factory, reallocating manufacturing of rims, for instance, from Sweden to Lithuania. So we have a much better -- Latvia, sorry. We have a much better set up. And we also feel that the branding and the positioning is good. So we feel overall that the business model is a lot better and the operations is more successful. And so we are -- of course struggling this year with raw materials. It's unfortunate. I mean, our guys -- our colleagues in Wheel Systems is very -- if I may say sad, in a way that they're not able to deliver this 15% plus already this year. But now as it looks today, if the raw materials flattening out and we're going to get these price increases kicking in, we're going to have a very -- yes, we're going to have the best ever first 6 months next year. So that is really where we're going to see the impact. I mean that is the way we see it at the moment. And we see kind of a very strong uptick on the margin from this level as the price increases kicking in. And on top of that, we also have been losing money or running with very low profitability in U.S. We have been investing in getting into the U.S. markets. And now we start to see the benefits from this, and we see very strong volume growth in that. So we see most, if not all parameters in Wheel Systems actually moving in the right direction, but that we have this, let's say, unbalanced or delay in getting, let's say, compensated for the price increases. Then, of course, there are uncertainties in the market, and we know that the farmers is impacted by this increased better pricing and all of that. But on top of that, I mean, of course, they also have a good commodity pricing at the moment. So it's really we feel the environment is still good. And on top of that, we always talk a lot about agriculture for Wheel System, but it's also material handling, which is also improving at the moment, where we see this increased general activity in Industrial and e-shopping and all of that, that is benefiting material handling. So we have good momentum in all areas, but for the raw materials. But we are confident that we're going to get compensated raw materials, but it takes a little bit longer to get this compensation in Wheel System compared to others. So we are, once again, let's say, confident on that. With regards to Industrial Solutions, it is, I mean, as you're aware, it's I believe a mixed bag with some automotive exposure, some industrial exposure, some construction exposure, some infrastructure construction exposure. So it's a mixed bag but we feel confident also that this will continue to do in a very good way. We have been working to be also open about that, I mean, on the overall portfolio within Industrial Solutions and making sure that we can increase the margin. So still, let's say, an activity in industrial Solutions in order to push the margin higher. So it could be that with the difference for Sealing Solutions and Wheel Systems, we are still working on kind of getting a structurally higher margin in Industrial Solutions, while -- in Wheel Systems and Sealing, we feel that we have kind of the structure fully in place and with simply to deliver with the sales getting into the systems, while in Industrial Solutions, once again, we still have some finetuning to be done in order to push the margin slightly higher. I mean we know that we are running at 12%, which is our kind of earlier, at least communicate the let's say, target but that could potentially be more ambitious.

[Robert John Davies, Equity Analyst]

And then just my final question was just on the -- I guess, the remaining operations that you had lined up for sale. Just in terms of sort of timeline there. What are you thinking in terms of your sort of discontinued operations, et cetera. Is that all due to be gone this year, next year? What are you thinking?

[Peter Nilsson, President, CEO & Director]

No, no. I mean, we have commented before that we are in active discussions on that one. We feel confident that, that's going to be concluded. And there might be that actual closing will be later, but we feel confident that the deals and these activities ongoing that will be finished within this year. So that's the same as before.

[Operator]

We have one final question from the line of Carl Holmquist from [ABG].

[Carl Holmquist, Analyst]

My first question relates to Industry Solutions there, just following up on what you say there about structural possibilities of raising the margins further. First, just a more short-term oriented question, how you feel industrial Solutions has managed with the headwinds that you're facing and the possibility of seasonally wise, I think we would see an uptick in the margin in Q4 for Industrial, but I would just like to hear your thoughts on this in relation to the potentially increasing cost headwinds and pricing support and so on. And then for the longer-term question, it's more like what kind of areas in Industrial do you feel could provide this support for structurally higher margins?

[Peter Nilsson, President, CEO & Director]

No. I mean, first of all, I mean, Industrial Solutions is fairly spread. And I mean, also, I heard you comment on Q4 but I mean, don't really do a comparison with Q4 last year because that was exceptionally highly linked to a few project orders and a few specific deals. So it's not really going to be -- please do not compare with that, compare instead with what you have seen in the last few quarters. So it's still a 12-ish level, which is the kind of the level we're targeting but while -- and then on the structural questions, while restructuring and more focusing industrial solutions, being more focused on a few areas, we have identified very good management, I should say, also good management of my colleagues in Industrial Solutions, and they have identified further improvement potential. So that is not really linked to any specific area. It's more an overall better efficiency and overall better focus on interesting profiles -- interesting -- let's say interesting market segments and product segments. So it's a lot of small things but overall, we feel that we have a very good plan going forward how to improve in, I should say, more or less all areas of Industrial Solutions. So this is not really any specific areas that we want to highlight. It's more the overall performance of this business area, overall management, overall structure of this has improved, and then we see continued possibilities to improve going forward. So I think I need to say on that more general comment, it is more -- I mean, otherwise, we get down to a lot of details. And once again, it's not linked to any specific actions, but to manage small actions.

[Carl Holmquist, Analyst]

Alright. And just -- you mentioned a comment there on certain markets that you saw improving, for example, marine. And I think that's an area where you have been investing a bit in new applications in recent years. Is -- in terms of the total Trelleborg, how large is marine today? Is it just 1% or 2% or how meaningful could it be?

[Peter Nilsson, President, CEO & Director]

Looking at Christofer for a moment, there was [usually] guiding on that.

[Christofer Sjögren, Vice President of Investor Relations]

Marine, it's around 20% of the industrial, I would say.

[Peter Nilsson, President, CEO & Director]

Yes, 15 -- let's say 15% to 20% of Industrial, depending a little bit how you calculate it. It's not a major part of Trelleborg but once again, that's one of the portfolios in Industrial Solutions where we have been getting better positioning. We're doing a portfolio change there going more way from kind of dominating this. I mean they are sending strong signals that they expect very strong growth in the next few years, actually, but that is solely on the single aisle aircrafts, the 320s and the 737. So that is kind of the areas where we see growth. And that is -- we need to trust the customers to have a good order intake and they start to get orders again, and they start -- they have still a very good order book. It's more whether they are delivering from that order book or not. So that is an area and we still see military. We still see the aftermarket flight kilometers going up. So we see a strong growth in more or less all areas of the aerospace segment, of course, coming from very low levels. Margin in that area is on par or slightly better with Sealing Solutions, but -- and that honestly -- we have been good in managing that. So we've not really been kind of suffering from this downturn. We've been able to compensate ourselves. So we don't see any impact really on the overall margin for Sealing Solutions due to the fact that aerospace is going up. So that's going to be kind of an average. So let's say average plus margin on the overall impact for Sealing Solutions. And then on the healthcare, and also, I mean, of course, you have to highlight that in aerospace, we're still talking about it. I don't know it's going to end up this year somewhere in, I guess, 12% or 13% of Sealing Solutions is aerospace. So it's not really a major impact on the totality, although it's growing by 15% or 20% or whatever. On the healthcare medical, I mean, our focus here, I mean, there's 2 ways, I mean, on healthcare and medical. There's a lot of contract manufacturers simply manufacturing what are told to manufacture and then there are solution providers. And we are, at the moment, somewhere in between. If you're a pure contract manufacturer, then generally the margin is slightly lower but of course, our ambition in that area is to move from a component manufacturing to the solution provider. And that is also supported by the customers, but that will take time. So at the moment, I should say that healthcare and medical overall is slightly lower margin than the average of Sealing Solutions. But our ambition going forward is, as we move from more of a component manufacturer into a solution provider, we do expect the margin to increase. But at the moment, overall, healthcare and medical is slightly lower and this journey from a component supplier to a solution provider, I mean, that has been the story for long on Sealing Solutions. I mean, as you know, in Sealing Solutions, several of our, let's say, competitors on the, if you may say, on the manufacturing side, several of them is today component providers. And while we are a solution provider, and that is why we are able to run at kind of the double margin compared to most of our competitors in that area. And of course, our ambition in healthcare and medical is the same. I mean, the health care and medical for sealing and precision components is still very low -- very low consolidation in that area, and we see possibilities for several years to grow that area and to make it kind of a major part of Sealing Solutions. And then once again, as we move from a component supplier into solution provider, we do expect also the margin in this area to get up to at least be on par of average in Sealing Solutions and maybe longer term, even better than that. So that is -- I mean, a little bit longer explanation on that, but just to share a little bit our view on that segment.

[Carl Holmquist, Analyst]

Okay. My final was just in Wheels. If it will be possible to get a bit of insight into how the Trelleborg brand performed compared to Mitas.

[Peter Nilsson, President, CEO & Director]

Both brands is doing great. I mean we have been, as a work -- we have been working on getting the positioning right, and we have that, and we are talking Trelleborg brand being kind of, what I call a specified brand, which means that the customers needs to ask for it while the Mitas brand is more a wholesale brand, distributor brand. This positioning is great. So they have their strength, and they have their kind of space in the market differently, and we feel that both brands is developing well. We don't see any difference. They're using slightly different kind of sales channels and different way of selling but we feel now it's been, of course, a journey since we got Mitas to get the positioning right. But at the moment, we feel that the positioning is right in the agriculture. And then we say on the material handling, there's still some way to go and where we are at the moment. I mean, I don't expect several of you to buy, let's say, forklift tires. But if you do, then, of course, you also note in that the area that there is kind of brand repositioning ongoing for Trelleborg. I mean we are number #1 or #2 in that market globally and at the moment, we're working quite a lot with our product range in order to get that right as well and also to get it aligned. As you know, we're working with this called Interfit concept, which is now approaching, let's say, 10% of sales of Wheel Systems in that channel, we have the possibility there also to do a different kind of brand positioning. And that is ongoing at the moment in material handling on a global scale. And that is also where we do expect some benefits in maybe lower inventory and of course, also better pricing eventually. So brand is always on the agenda here and making sure that you are pushing it in the right channels will be Interfit. We also launched now, for instance, in Amazon and all of that, and they also start to sell there, even though that's very, very small, but you need to have, let's say, a clear brand positioning in order to manage these different channels available to go into the market. And then we feel that we are good in doing that, and we have a very good brand management and brand positioning. Okay, if that's all, I mean, then I'm going to leave you now. And I mean, this is a very strong quarter for Trelleborg. I mean, we have 16% organic growth, the best sales ever in the Q3, best EBIT in Q3, and that's also the best margin in the Q3 for Trelleborg. Outlook, same demand as in this quarter, and we're basing this on, although we recognize that automotive is going down, but we see other segments as they're well compensated for that. So overall, we feel confident moving forward. Of course, we're going to continue to watch these component shortages and some overall cost inflation. But once again, we feel confident we will be able to compensate for the impact from this in a good way. So I guess with that, thanks to all of you. And of course, Christofer is around to support any potential follow-up questions, and of course, so am I and Fredrik as well. So please get back to us if you have any further queries, and we'll be happy to continue to support you. Thanks again, and thanks for showing interest in Trelleborg. Thank you.

[Operator]

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.