Trelleborg AB

STO:TREL B

Earnings Call Transcript 2017-Q4

[Christofer Sjögren, Vice President of Investor Relations]

Good day, everyone, and welcome for today's financial hearing with Trelleborg. And I also like to welcome everyone participating via the webcast and telephone conference. Moderator today is Johan Sjöberg from Danske Bank Markets. He will be back later and lead the Q&A session. But I now hand over to the CEO of Trelleborg, Mr. Peter Nilsson.

[Peter Nilsson]

Thank you. Thanks a lot. Yes, welcome to all of you to the presentation of our year-end report, which of course also is focusing especially on the Q4 of last year. So we do as usual. I am kicking off giving some overall takeaways from us. Then also some individual comments on our business areas then supported by Ulf Berghult our CFO who will guide you through the financials more in detail and then we finishing off, Ulf and myself together, to -- on the Q&A session.Starting then, as usual, agenda; some general highlights, business areas, financials then supported by Ulf, some summary and some comments on the outlook for the running quarter and then finishing off with a Q&A. So if you take, let's say, more focusing down, go back and then comment especially on Q4, Q4 for us was a strong quarter. Organic sales in total of 7%. And this excluding, as you know, where we usually give you 2 organic growth figures, one in total and also excluding the project deliveries since they are more bumpy, excluding the project deliveries we were actually up to 9% which is very, very high in historical references for us, very happy for that. Basically good volumes more or less all over the place.EBIT up by 10%, slightly higher than the growth then giving us a margin in the quarter of 12%, which is also in line with kind of the best quarters [ called Q4s ] we have. Also, EBIT in total is also the best Q4 ever for Trelleborg. We have a little bit more, let's say, messy quarter, both positives and negatives in this, what we call, items affecting comparability which is a total ending up at minus SEK 314 million. Then containing restructuring cost, which is the major part of that, as already been communicated related to towards the changes we did in Q4 on our Offshore & Construction, get back and comment on that later. And then also where we have a major positive also in these items affecting comparability in the quarter that we now go to, say, final kind of what we call additional consideration from the sales of Vibracoustic in 2016, where we had some kind of earn-out arrangements for the 2 years following the sale which then turned out substantially better than one we believed, better than expectation. So we don't recognize also a profit here of SEK 467 million in this, but -- while the cash from this will come also here at the end of Q1 or beginning of Q2 this year. But nevertheless, so we take -- we should also to mention this has caused the tax [ free ] gain, so we go – the full drop through down to the equity.Cash flow at high levels also, at SEK 1.2 billion. Of course, a decrease year-on-year. But that is driving also -- the sales growth is so strong of course rebuilding on working capital. And on top of that, we also have fairly high CapEx levels, which we also have guided for in the quarter. CapEx is on a high level since we are investing all over in order to continue to build a platform for a better Trelleborg and for a better -- both in terms of efficiency, but of course also to make sure that we're building a structure which will keep the growth on high levels going forward. But even though cash flow down a little bit in the quarter, it's still running on the cash conversion at 90%. Of course, very good for us, which means also that we've been able to continue to pay down our debt. And Ulf will share a little bit more about that later. I'm lastly down to leverage now which is lower actually than before. We made acquisition of CGS some 18 months ago.Proposing -- the board is proposing an increase in the dividend up to SEK 4.50, which is SEK 0.25 up compared to last year. Of course to be confirmed by the AGM here coming up in April. So this I guess is the highlights.Looking more specifically on the growth, where it's coming from. This is the slide we usually use presenting down the organic growth. Excluding project related businesses, this is bumpy across geographies. But as you see here it's actually good growth everywhere. We are running -- especially we'll note, of course, that North America is on a slightly higher, but once again we are hovering here in, let's say, high single digits all over the place. Of course, some bumpiness here in some areas like, say, Asia and other markets might be down compared to other. But we don't see that as any kind of major thing. It's simply a small -- a small degradation compared to before. And we still, as I see, see going forward that Asia and other markets will continue to perform very well as they have been doing for us now for several years. But once again, good growth all over the place, which also reflects basically good growth in most segments -- most market segments as well.Individual comments on the business areas. Starting with Coated Systems. The business maybe the only disappointment we have actually in the quarter. Organic growth is down here by 7% and we have a little bit weaker demand in transport and also some aerospace delivery. Space -- basically faced the bottlenecks in the aerospace. Not really -- we are not really losing any business and overall demand is still good. But we have had some bottleneck issues, not with us, but with other suppliers into the aerospace industry. And the same transports here relate to railway where there was some change in the legislation which has been impacting the suppliers. So this is a specific business segment where we are fairly strong which we call gangways for railways. But we also have that -- we feel, it's well under control. We believe it's going to be bouncing back here in this running quarter.Printing blankets, a little bit slow as well. Also this is some destocking in certain areas, but nothing really major, but it's not really supporting the lower sales in coated fabrics. In this area, of course also we have several ongoing initiatives to improve profitability. We are still shifting volumes, especially in North America. And we are also looking at a setup in Europe in certain areas in order to move this up. We are still confident that we are going get this up to 15% plus in EBIT. Of course, we are some distance away from that, but are still very confident that this -- we've good actions going and it's going to be moving in the right direction.Also note here, actually yesterday we announced a very interesting add-on acquisition here where we're buying a coated fabrics supplier, and not as big SEK 135 million on annual running sales, but nevertheless focused on a very interesting segment which is kind of the medical and health segments which is supplementing the technologies we have before. So this is Coated Systems.Looking at Industrial Solutions, very strong all over Industrial Solutions. As you know this is a very mixed business, but [ want to say ] organic sales up by 8%. Improved markets in general, or actually good order intake all over the place and good performance, more or less all over the place, which relate both the market segment geographies. So it's also a very positive quarter and also with some confidence also going forward. Also here it's still our early phases on some of the kind of acquisitions we've been doing. There is still a lot of production shifts ongoing related to this acquisition we did in Germany and Netherlands a year ago in antivibration solutions and also in the hose activity, which is big here. We also have some changes here also happening at the moment, which are going to create an even better foundation going forward.Good EBIT development and generally a very good year for Industrial Solutions, which is performing best year ever for them and moving in the right direction, once again, in most areas. So all in all, very strong performance and we're happy for that. We believe it's also looking promising going forward.Offshore & Construction, down -- organic sales down, a little bit less than a few quarters ago, but there also a mixed picture here where we see kind of the pure oil and gas related activities is down by far more than this. And we still are working hard to adapt to the continued challenging markets in offshore oil and gas. Even though we are starting to see the light in the tunnel now, I'd say that we are tracking what we call then pending projects or pipeline, which is basically we are working -- we're quoting. There is a big quoting activity going on for all projects. And we can quote them in multiple ways to the same projects. But then what we track when this project is actually being awarded to a contractor and we know that is, let's say, order to be placed, that tunnel is increasing heavily at the moment. So that is substantially better than only 3 months ago, it's substantially better than a year ago. But with that said and done, done from this, let's say, orders to be placed into actual invoicing is actually 12 to 18 months. But nevertheless, we see it's turning now, we see the activity level is actually getting better. Even though don't read in that this is going to see an improvement in the next 6 months. But we are now -- we are getting more confident that we are going to see an improvement by the, let's say, later part of this year in the oil and gas activity.Other, let's say, project is more infrastructure related. Continue to have very good demand, especially for the, let's say, harbor development activity or marine activity here and that's also looking promising. So hopefully here moving in the right direction. We also had a major -- as I already referred to, a major restructuring ongoing here where we're consolidating the 2 manufacturers within the subsea buoyancy activities where we have decided to phase out or close an activity in Houston and then moving that combining it within a similar activity that we have in U.K. in order to create a better foundation for the future.We're also looking at simplified business area structure. Myself running this, also the business area. Management in this area has left, so I am running this myself at the moment in order to consolidate, in order to get to a more focused activity because honestly now as the business is down, we need also to adapt [ every ] cost and that is a part of that.Also from this, this is an activity where I have been working myself previously. So it's kind of getting back to what I did some 10 years ago -- 10, 15 years ago, time flies.Sealing Solutions, also very strong growth, organic sales 9% up, very strong quarter. Most geographies and markets developing favorably here. I mean, aero is good, auto is good, industrials is very good. So all areas good, and then we see also North America, Europe, Asia, it's good all over the place. But we should point out something is probably North America which is a little bit stronger than the rest, but all of them performing on a good level.EBIT is improving on higher sales. You could potentially expect some higher drop-through in this. But I think we've been guiding quite -- at least we tried to say that we -- our interest here is really to grow EBIT more than to grow the margin that we would like to get to higher growth and we would like to have a sustainable higher organic growth here going forward. So of course, it comes in with a lot of investments in marketing, new activity, new product development and new everything. So we know that we are spending more money than we kind of need for this individual quarter. But we do that in order to make sure that we create the foundation for more long-term growth. And I mean at the end of the day, we are not living on margin, we're living on EBIT. And EBIT is kind of growing at a good level here. They're growing more than sales. And as long as the EBIT is growing more than sales, we are going to be happy and we're keeping the margin on this level.And also here noting, of course, we say Sealing Solutions as a full year is performing at its best ever. So it's the best ever margin they ever had in Sealing Solutions. We're continuing this step-by-step growth in Sealing Solutions we had now for the last 7, 8 years in a very stable growth and growing year-on-year.Also the margin, I mean I don't [ want to ] excuse that's an all-time high margin. But nevertheless, we also see that in this margin, of course, we have also been pushed down a little bit by acquisitions. Now we have not been doing any acquisitions in the last few quarters. But still we did quite a lot of acquisitions in the 2 years back and we still have a negative. Even though they are slowly improving, slowly getting, let's say, close to what we have in the rest of Sealing Solutions, putting it like that, but nevertheless, there is, let's say, a little bit margin push from these acquisitions.We did a very interesting smallish acquisition, but for us interesting how to make the demand dynamics, which is actually moving it into new technology, which is a natural add-on to what we have. It's a specialized, composite company, which is a very supplementary to our business, especially related to aerospace, some defense-related activity, but also in general this is providing opportunities for us to develop even more advanced total sealing solutions adding on to what we already have and thereby becoming a better support for our customers. So all in all, a very good quarter for Sealing Solutions and also confident going forward that this is going to remain on a very good level.Wheel Systems, extraordinary organic growth, 17%, some price in this, as you understand, it's not pure volume. And we see that the volume is coming especially from agri OE customers. But I mean, with that said and done they are of course even higher than '17, but also all the other activities is also on a good level. We have on the margin side here, we have let's say, a slim, let's say, mix -- negative mix change because the drop -- the absolute gross profit levels on the OE side is lower than the aftermarket. So we have a change here which is pushing down the mix a little bit, but we believe that's going to change eventually. We're going to get better aftermarket sales and then we're going to have a more positive mix during 2018.Industrial and construction tires, I mean we're not talking a lot about that, but we also have a very good -- and this is, of course, one of the bigger synergies that we expect also from the CGS acquisition that -- the Mitas of CGS, the Mitas brand within CGS, which is now our tire brand for this, they were having a much wider range than Trelleborg had before, especially on construction. And now we're starting to leverage on the Trelleborg more global presence. So this is also an area where we'll see substantial sales synergies and also an area probably where -- to be open to you, also where we have some bottlenecks at the moment because sales is actually growing in that area more than we have. We are preparing for that and we are investing to conquer that in -- both in Serbia and Czech Republic. But we have not really been able to invest at the pace the sales is growing. So that is kind of a little bit of a challenge at the moment, but a positive challenge in that respect.EBIT is up. We are, of course, selling more. We are being adjusted also for the price impact we had had previously. As I said, raw material price increases but then impacting the profitability earlier in 2017. We're now gaining that back and that's of course a benefit. And then also to remind you also we have this kind of slight negative channel mix here in the quarter, but also confident here. Even though -- I mean, we need to be a little bit balanced, we had a very strong growth here, but we still have low core prices, even though the demand is looking reasonably good, going forward also for the OE part of the market picking up. But -- so it's good momentum in the industry in general and generally positive notes, but we also have to be a little bit, I would prefer, the core prices or the commodity prices is still relatively low. But that said, also we have steel production levels at all-time high level. So that is also balancing the need for new equipment. So that's something that we're watching.Integration which we don't have, let's say, as a specific bullet here, but also integration progressing well. We've been -- of course been focusing mainly on the sales integration. We feel very successful now with the positioning of Mitas compared to Trelleborg, landed well in the market. Now also we have the consolidation of sales activities, consolidation of purchasing, all of that is well underway. And the next kind of round of synergies is now related more to move around production volumes and all of that. But that is coming a little bit later because that's also linked to some CapEx levels, which you have seen also been high. But of course, we need to invest before we can actually start the manufacturing in the new factories. But once again, generally a very positive view on Wheel Systems, moving in the right direction, feel very confident on the integration of Mitas into Trelleborg running very well in general.Rubena Savatech, which is kind of its last quarter that we will be reporting this separately. Organic sales, 3%. As I said before being integrated into, I'll get back on the next slide here to show you the percentages here, but being integrated into other business areas. EBIT is a little bit down here, but honestly, we'd be focused more on preparing for the integration. Of course, running it as good as we can. But nevertheless, the focus has been to prepare for the integration and then make sure that's been integrated in the best possible way. And here also several investments going, which has been kind of in certain areas probably distorted the pure operational focus. But generally happy with the development and now we're looking forward to this next, how to integrate this.So the guidance here, if you look at 2017, so 59% of the sales will go into Industrial Solutions, 42% to Coated Systems and then we have some group eliminations as well. So this is simply a guidance for all of you tracking us and try to get it right in this running quarter.Financials, Ulf, guide us through that.

[Ulf Berghult, Chief Financial Officer]

Thank you. So my first slide is then to a summary of the sales. As you can see it, quarter to date we had an organic totally of 7%. And if I exclude the project-based business we have the 9%. And if you look at on a year-to-date, we didn't have any structural save or structure changes in the quarter, but for the full year, we ended up with 12% mainly then that we have the full consolidation of the CGS.If I look at the currency we had the first half year a positive translation difference. But then in the second half, we had a negative. So for the full year, we ended up on flat on currency.Next slide is then the organic growth development for the quarter. And as you can see then or I can -- I calculated that we have had 7 quarters of positive growth. And the full year and the calendar year for 2017, we ended up with a 16% growth of which 4% is organic and then again if I exclude the project-based business, we have done 7%. Worth to mention is then that for the full year then we have had a good growth in TSS Sealing Solutions with 8%, Wheel Systems had a growth of 12% and then also Industrial Solutions they had a good growth of 5%. The next slide is here showing the sales development on a rolling 12 months basis.Turning then over then to the EBIT. This is then -- as Peter said, this is the highest EBIT for a fourth quarter in absolute amounts. And also then what is we -- on the growth side, we grew the EBIT in the month -- in the quarter with 10% to SEK 90 million. And for the full year, we grew the EBIT with 17% to SEK 600 million. And again, also from a translation point of view, if you look on currency the first half was positive, small numbers now with SEK 60 million plus. And then the second half was then minus SEK 54 million. So totally we -- that was a flattish development from a translation point of view. But in the quarter, the last quarter here we had a negative impact of SEK 34 million.If I look then on the development, you can see then that we have 19 consecutive quarters with improved numbers, improved EBIT. We ended up for the full year down on return on sales with 13% and again worth to mention here is that TSS and TIS they ended up with the highest ever return of sales. So Sealing Solution, they had 22.4% and Industrial Solutions they ended up with 11.3%. And also worth to mention, I think, it's Wheel Systems that they managed then to deliver 11.4%, in spite of having quite turbulent year with the spike in raw materials in the first half and handling that and then coming back in the second half and also then with the full integration of CGS. So I think it's extraordinarily done, well done.Then we have the slide here. As Peter mentioned, we have had many positive or negative one-offs during the quarter. If I then focus then on items affected comparability we had then the restructuring cost then that burdened the quarter with SEK 781 million, which then mainly consist of the announcement that we did earlier on the -- of the consolidation of 2 sites within offshore and that accounts for SEK 561 million. And out of that SEK 409 million that is of that impairment of assets and the restructuring cost of SEK 152 million.We've also then -- we got the last payment from the Vibracoustic joint venture, which then in total was SEK 689 million, out of which then we had a book value of SEK 222 million, so we have the capital gain of SEK 467 million in the quarter and we will receive the SEK 689 million in the beginning of quarter 2.And then on the tax line, we have had -- we have reported the impact from the new U.S. tax legislation. And it basically consist 2 things. One is then that we have a mandatory tax on undistributed foreign earnings. We have subsidiaries in U.S., which in their turn own foreign subsidiaries. And we need them to -- that is mandatory tax. And that was on the negative side. And then on the positive side then we have of course due to the lower tax rate we also have a revaluation of U.S. deferred tax liabilities. Those 2 put together, meaning that we had a negative impact on the tax line in the quarter with the minus SEK 129 million. If I then take that away and also take away the restructuring and look on what is the underlying tax rate, then in the quarter we had 27% and on year-to-date for the full year, then we have 25%.If I then turn over to the earnings per share. Then we -- of course, then we also have then on the -- we'll concentrate and continue operations excluding items affecting comparability. And in this slide, we have also then, in this key [ range ] we also then excluded the impact from the U.S. tax of around SEK 129 million. Then we have an increase of earnings per share with 4%. And then those of you that noted it, we had an EBIT increase of 10%. And the difference between the 10% and the 4% basically is that in 2016 we had some favorable tax movements in the quarter.Cash flow is steady. It's impacted by then higher CapEx. The full year, we ended up with SEK 1.4 billion, which was slightly lower than the guidance. We had a guidance of SEK 1.5 billion to SEK 1.7 billion. So that entails that we would have some overruns into 2018 and I will come back to the guidance for 2018. But again, looking -- seeing that overall we have a very strong cash flow considering then the large CapEx but also then that we have a growth in the business.And then looking at the cash development. You can see that we are steady on a good cash conversion, which is then in this quarter -- full year 90%, but we have been in the last quarter, say on a very high level. And that I think it's a strong message even though that we have had a high CapEx earned and growth in the business.Then looking into the leverage and gearing. We have reduced net debt by SEK 2.5 billion or 20% in 2017. So we have a debt now of SEK 9.6 billion and that is also favorably impacted by currency movement of SEK 400 million in 2017. But that means that we are back on very strong levels or good levels of 1.7 on leverage. And we have a strong balance sheet and with a solid finance structure, which will then last up to end of 2020. So we are ready to look into new adventures.And then you have then -- the leverage then. If I then concentrate then on the underlying business, it would take away all the one-offs, all the items impacting comparability, we are then on 1.8 on leverage.This is then the return on equity. We have slide -- we had ended -- 2016 is then impacted by the capital gain from our joint venture with Vibracoustic and then [indiscernible] we are then on the level of 11.2%, slightly below our target of 12%.And then finally, the guidance for 2018, as I said then as we ended up slightly low in 2017 we are guiding then -- we have many interesting projects. And -- so we are guiding up to SEK 1.8 billion to SEK 2 billion for the 2018. We are back on restructuring cost of close to SEK 250 million. We had a peak now in 2017. The tax rate is about 26%. And then also for you as we have done many acquisitions, amortization of intangible assets that is, on an annual basis, about SEK 300 million. So Peter?

[Peter Nilsson]

Thank you. Finishing off then with a summary, very good quarter for us, in general, good growth. Total growth of 4% but then organic 7% in terms of negative, so from currency, which is ending up in a 4% growth. EBIT up by 10%, margin of 12% in the quarter. Messy quarter, I shouldn't say, but some kind of messy quarter on items affecting comparability, some positives, and some negatives. Restructuring costs high in the quarter, but the cash impact from this is limited. As Ulf guided about majority of that is write-down related to our offshore activity, which is then being consolidated -- 2 factories being consolidated into 1. And then also positive kind of the final additional consideration for Vibracoustic then coming in in the quarter, creating, let's say, a profit of almost SEK 0.5 billion extra in the quarter tax-free. Cash flow on good levels, even though year-on-year slightly down. But then, of course, impacted by this high sales growth, but also by high CapEx in the quarter leading to a cash conversion of 90%, which we are happy with. And we continue to pay down our debt and then creating, let's say, some freedom to act more going forward. Dividend proposed up to SEK 4.50 up by SEK 0.25.Going forward, and of course, I mean we have basically the same priorities as we said before, continue to work. I mean we have -- continue to have [ actually ] extraordinary, but very high activity level all across. And standing here I'm very happy for the foundation now being, good integration of CGS, good integration of these very strategically important acquisitions within Industrial Solutions, many interesting investments ongoing which is going to improve the business further and create the foundation for the future. So I feel very confident. Good order intake also. We don't usually comment that much on order intake. But we can say that we have had also -- even though Ulf showed you the organic sales, it has been good here for the last few quarters, but actually order intake has been even better. So we'd be going into the year here with a very high order book and it goes wide across the businesses.Of course, there are some mix changes that we discussed about, Wheel Systems and all of that impacting us. But nevertheless, we continue to improve our positions and we continue to feel that we are getting better and better in the multiple of areas.Integration of CGS, maybe a few comments on that. We didn't really talk that much about that before, progressing well. As I commented on Wheel Systems, very happy with the positioning in the market because at the end of the day in integration, like in acquisitions, the most important thing is to take care of the customers and to make sure that we keep the sales and we get it positioned the right way. It has landed well. I mean, we are well received by the OEs and also well received in the aftermarket. And now kind of the second round of the integration is coming when we start to more attack out of the structural cost and out of the kind of long-term optimization. But the short-term integration has been very, very good. Now also we have this verticals, Rubena and Savatech businesses being integrated into Industrial Solutions and Coated Systems. We've been in the making for that for quite some time and now we're moving into kind of more operational mode.Finally, what maybe not in this slide either also but is noted in the report, this of course, we have also -- during this year also changed 3 out of 5 Business Area Presidents with internal recruitment and all of these when Paolo Pompei then replacing Maurizio Vischi on Wheel Systems, very good running, Paolo doing a very good job. Jean-Paul Mindermann replacing Mikael Fryklund who left to become the CEO of Hexpol also been very well received and we have a good track on that. And now also we have from the beginning of this year, we have Peter Hahn, then replacing, Claus Barsøe as Head of Sealing Solutions. All of those recruitment has been internal, well prepared and well managed and I'm very happy to stand here and say that landed very well. So I feel confident that we get some new views on certain things while maintaining the steady development we have had for several years in those areas.So this is going into '18, we feel confident and we feel that we are definitely on the right track in -- not in all activities, we shouldn't be on the right track on all activities, there should always be something to do. But the vast majority of what we're doing is definitely moving in the right direction.Demand, we say the demand is kind of the same as is it and of course we debated a little bit here ourselves internally what to say. But we will be running from a quarter where we have organic sales here depending on what level, 7% to 9% is a very high organic growth. We have a high demand, so we have a good order book, but it's kind of bullish to say that this is going to be even better in this quarter compared to a quarter where we had this kind of high sales growth. Of course, there will always be some mix, there will always be some changes, but generally, we feel that this demand situation as we have here in -- very good demand situation as we had in this, let's say, finishing quarter in '17 is going to continue here into '18. So this is not to be seen as kind of a downgrade. It was more an upgrade from Q3 to Q4 and now we see it's continuing at a very high level going into Q1.So with that one ending and then opening up for Q&A and ask Johan to join us and guide us through this session.

[Johan Sjöberg, Analyst]

My name is you Johan Sjöberg from Danske Bank. I would like to continue with the last slide that you showed on the outlook here. You gave a good answer to your reasoning for the group. But could you be a little bit more specific upon the different business area, where do you see like a potential pickup in demand in Q1 underlying and also vice versa?

[Peter Nilsson]

We see it's kind of similar. I mean we see kind of the general industrial demand is still on high levels. We have good order books. It's kind of difficult now, I mean we see the delivery times getting a little bit longer, we see some bottlenecks. So we didn't put too much reading into growing order book. It could also be that customers is placing orders a little bit earlier to make sure that they get products on time. But nevertheless, we feel that this is kind of generally a very good movement. We see also in some of these areas like agriculture continuing, I mean extraordinary demand especially in OE. But we have not been seeing the same growth in the aftermarket, but usually when OE is up then aftermarket comes after that. So we also feel confident that we continue in high level on that one. The more project-related areas which we then call aerospace, mining, infrastructure, construction, oil, and gas, we also see the continued high level of activity. Of course, it's always going to be a little bit bumpy, but generally, it's moving in the right direction. I said also oil and gas. Now once again careful for me to say, but it's not really going to be a boost in sales area in the next quarters, but we definitely see a higher activity now finally, of course from very low levels. But basically it's the first time since 2 years or something, more than 2 years probably, that we see this [ with weak ] tracking pipeline and awarded projects to be awarded to us. We see this pipeline is actually growing for the first time in 2 years even though this pipeline is normally going to turn into sales in the next 12 or 18 months. But we see -- so basically all across, we see continued improvements. I mean, we don't see it's getting much better than it was in Q4, but we see continued movements in the right areas. So that is -- I don't know Ulf if you want to add.

[Johan Sjöberg, Analyst]

[ I want to be controller for ] Offshore & Construction, so I need to slow him down. No, that's true, but it's again -- in Offshore & Construction it looks same but again it's a longer-term business.

[Peter Nilsson]

If I look at one area which might be a little bit weaker is probably automotive then where we see -- but automotive for us is now down to 10% of sales or something, where we see some slowing down. I don't see there is any kind of dramatic changes, but nevertheless, overall demand in Europe and North America is probably softening but is not really going down, while Asia has still continued to perform well. India looks very promising for automotive and China continues good, but then we have Europe. So that is probably the only area if I should find some where I don't see a continued improvement. But once again it's difficult -- I have been wrong in that before because it's really picking up more than -- it's been holding up longer than we expected in automotive.

[Johan Sjöberg, Analyst]

Since we have the full management team here in Offshore & Construction here now, you've in past years been very helpful in guiding us for organic growth for '17 and also for '16. We are kind of fumbling in the dark here, to be honest even more, even more than usual. [ When you're talking ] about '18?

[Peter Nilsson]

Now we're going to continue down, I should say. But of course, it is going to be less down than this year. Of course, what I should say, the foundation is getting smaller. So of course, I mean it is also looking at -- and so it's going to be less figures, let us say, less millions of falling down. And then there is also going to be less and less impact and Trelleborg is getting a smaller and smaller part of Trelleborg. But percentage-wise, it is also going to go down. We expect once again -- we sitting here -- standing here today and I think we're going to see a continued fairly dramatic drop-down also in the first half of the year and then a slight improvement probably second part of the year. It's a best guess because it could still change, but that is really the way I look at it at the moment. And we also see in the oil and gas there are some one-off projects coming now and the one-off projects are going to have a more impact on the sales than it had before. So that's probably the best guidance we can give. Otherwise, I think Christofer Sjögren, our Investor Relations could probably guide you more in that in detail if you want.

[Johan Sjöberg, Analyst]

Yes. Coming to Wheel Systems, a dramatic pickup in organic growth in the fourth quarter driven by agri. Going in now into the Q1 it's a seasonal most strongest quarter for Wheel Systems. Could you say something about the raw material costs for OE in terms of pricing or versus raw material costs? Has the strong trends in Q4 continued into Q1? How should we view?

[Peter Nilsson]

No, I mean, we'll continue -- I think in the -- we were suffering probably, especially the first 2 quarters of last year, on raw materials. I think we are now well in balance and we're not really suffering in any way in Q4 on raw material costs. We have been price compensating for that. Demand wise, I'd say, once again, agri is driving agri OE, but I think all across it's a good growth. I mean I think that you know -- of course we -- the benchmark figures get very high. So it's really -- but also in all of the areas it's good, also we shouldn't neglect material handling, we are a global market leader in material handling tires also before we were in construction tires where we are smaller in a way in a global context is also performing very well. And that is of course -- the majority of the sales synergy is coming from the CGS acquisition we expected in the construction segment. And that is actually happening. So we have very, very strong growth in construction and that is also where we -- earlier, we were selling more than we anticipated. So we are, say, touching some bottleneck interest here before we actually expected it to happen. So all across, I will have to reflect, all across Wheel Systems it's actually doing good. And once again we continued good demand here going into this quarter and we don't really see any dramatic change. Of course, we noted as well that Ulf reading that also that there is some kind of more carefulness coming from those 3 big ones, as you know, with CNH and John Deere and AGCO and all of them a little more careful. But also in that one, of course, we have been investing -- those of you who have been following, we've been investing quite a lot into North American market. And you have to be aware also that with this growth North America has still been some subdued, here at this one that we expect North America to improve in '18, while Europe is probably going to maintain on a very high level. So we are looking positive into this. But once again, as I commented before underlying demand is good, but we still have to recognize that the core price -- the commodity price is still on a low level. So this is more kind of a demand that has to come because they are using the tires and using the tractors more and more.

[Johan Sjöberg, Analyst]

And typically when you have this upturn and especially you have this low [ bounce ] rather, what does history tell you about how long this upturn cycle should be, assuming if look at the history?

[Peter Nilsson]

Now of course, the last cycle has been more down years than usually. I mean if you look at the previous cycle this has been 5 good years and 2 bad years. So that has been the cycle. But what is a normal cycle, nobody knows. But definitely we are more than 2 years into a down cycle and now of course up if you say, where we're having a first strong growth here in, let's say, Q4. So let's see, but it's looking promising at least.

[Johan Sjöberg, Analyst]

Okay. Yes, we have a couple of questions from the audience.

[Hampus Engellau, Automotive Analyst]

Hampus Engellau. Two questions from me. Continuing on the Wheel Systems, your ag mix is 60% OE and 40% aftermarket while the market is more 75% -- 75% ag and 25% is your mix, while the market is different then. And I was wondering how you aim to change that in this type of the cycle going in from [ world ] market. Second question is more on the CapEx, the step-up in CapEx, SEK 1.82 billion. I would like to hear a little bit more where you are investing in this type of cycle.

[Peter Nilsson]

Aftermarket versus OE on the ag side, we are a little bit -- we have been growing more in the OE than at the moment. But we don't really want to change. I mean, I think 60%-40% is where we want to be. I mean we have premium position in general -- as a premium position tire supplier, we're always going to have more OE than the overall market. So we are not really going to change. But at the moment running in Q4, I don't know that actually -- I don't know exactly the percentage in the quarter isolated on OE and aftermarket, but definitely not 60%-40%. There is some -- so they are closer to each other.

[Hampus Engellau, Automotive Analyst]

50-50?

[Peter Nilsson]

They are more or less 50-50. But for the total business area, that was about 50-50. It should be 60-40. So that of course, I think by doing that we will have a gross profit improvement or short-term that is kind of the marginal impact, it' negative on the margin, but 60-40 is the long-term target and I don't know whether that emphasis…

[Hampus Engellau, Automotive Analyst]

Yes, and also on North America since very competitive market on ag tires, is there a bigger opportunity there for Mitas and Maximo, Cultor brands or…

[Peter Nilsson]

I don't see the difference. It might be that for the wheels, it's the same. Might be that the aftermarket in U.S. is more dependent on distributors, while in Europe, we have more direct sales, which means that you can manage, let's say, the branding a bit more. But our intention in U.S. also is slightly to change that. So we are going more for specialized dealers, we're not going for this kind of special, let's say, general dealers in U.S. So we expect the market in U.S. to move into a more kind of brand-specified market than it is at the moment. So we don't really see the difference in our gross profit sales, gross profit on the sales in U.S. compared to Europe. We don't expect to be selling at less -- at the lower margins in North America than we do in Europe and we're not doing this at the moment either. I mean the reason for the profitability from U.S. is a bit lower is it basically not on gross profit leverage, more that of fixed cost, is a little bit too high at the moment because we have geared up the fixed cost in order to capture much bigger sales. But we're growing into that, into that setup at the moment. So we are also turning the corner in U.S. during '18 now. I mean we know we are running in losses in U.S. for quite a few years, but we're going to turn the corner. And that's of course if that is happening, if the OE is picking up in U.S., it might be a quicker turnaround than we kind of anticipate at the moment. Then it's a little bit slower than -- we'll grow facilities slower, but we're definitely moving in the right direction. We are growing in U.S. We are growing our market share in U.S. So we are positive on that. And that is also on the margin side, total on Wheel Systems, this, of course, is going to also quite a big benefit. As you know we're running where our aim is to go to [ 15 ] on return on sales in Wheel Systems. I'm confident they are going to get there. But that requires a little bit growth in North America. It requires, of course, continued same position in Europe as we have at the moment, continued good growth also in Asia. But the CapEx, I don't know [ if we need ] some CapEx as well.

[Hampus Engellau, Automotive Analyst]

[ And then you need ] some CapEx to capture the synergy.

[Ulf Berghult, Chief Financial Officer]

But basically the increase in CapEx, the majority goes into Wheel Systems, Sealing Solutions and also Industrial Solutions. Wheel Systems, that is basically going to increase the capacity or as Peter mentioned construction tires and also then -- so basically then utilizing the attractive footprint that we received from CGS. And also then we have within Sealing Solutions, we are doing some -- we are making what we call a new head office in [indiscernible]. We're building a new factor outside in Denmark and we also then need to take the next step into a new European system. And then within the Industrial Solutions, we are also now preparing the CGS site, so the Rubena and Savatech because they will be receivers. So they need to be upgraded. So it's actually based into those 3 business areas that are performing well. The only thing we have now that is within Offshore & Construction, in order to do this consolidation we also need to do some investments into better casting facilities up in Skelmersdale, U.K.

[Peter Nilsson]

And then to add on to that Ulf, then, of course, we have continued to invest in China. Now we have also Chinese -- we are upgrading our capacity for Wheel Systems in Asia, we are building new factories, actually we're outgrowing some of -- I mean we have to -- also in China, we have organic growth for several years, 20% for several years. So we're outgrowing some of the capacity on this early investment there. So that is kind of the second round of investment in China that's coming up. We're also upgrading the Sealing Solutions facility in India, also because there's also a lack of capacity and also having very skilled people there actually transferring some new R&D projects into India in order to create global headquarters for certain segments, so for Sealing Solutions in that one. So that's the investment --

[Ulf Berghult, Chief Financial Officer]

Yes, and then don't forget that we had -- we underspent in 2017 and that will have a rollover into 2018.

[Peter Nilsson]

But we are confident. We have a good cash flow. We like really to spend CapEx in order create a better growth going forward or kind of efficiency. Because we are not afraid of spending a few extra hundred millions in a year like this where we are growing to the make sure, I think that is clever investment in a way for the long term than to be a little bit more careful at the moment, at least. And of course, the future might be different. But at the moment, we feel this is really the right time to do it.

[Hampus Engellau, Automotive Analyst]

On the U.S. tax reform, are there any footprint move in production that you might move back and how should --

[Ulf Berghult, Chief Financial Officer]

[indiscernible] historical decision which is difficult to change. So we are sitting in the structure that we have. So [ the only ] favorable we will have going forward, that it's a lower tax rate and also not taking whole money from -- through U.S. back to Sweden so that would be more favorable. But then again also then don't whereas we guide now on the tax going forward because we are not being in a tax position in U.S. So basically in U.S. we will not change that much, but of course, the lower tax rate will have the benefit.

[Peter Nilsson]

And then from an operational point of view if I understood that, we are still -- we are very global. I mean -- so we are -- most of what we sell in U.S. is already made in U.S. So we don't really see any footprint -- immediate footprint changes linked to this at the moment. I mean, maybe I believe, actually in certain areas, we get a better competitive position in U.S. because, in certain areas, we manufacture locally, we fight with imports. So that might be a positive. But not really footprint changes, we don't see anything major happening there.

[Johan Sjöberg, Analyst]

We have the next question from Agnieszka please.

[Agnieszka Vilela, Research Analyst]

Agnieszka Vilela, Nordea. I would like to touch upon 2 areas, if I may. Firstly, Peter, you mentioned bottlenecks a couple of times, especially in your high growth areas such as wheels and coated. I would like to just double check with you if you see such bottlenecks in Sealing Solutions as well?

[Peter Nilsson]

I mean, there is always -- when you have this kind of growing demand not only with us, but there is some of course longer supply, longer delivery times, of course, but we have been in a -- I don't think, it's -- it's not abnormal in anyway. But simply we've been out of that for several years because we have a very low demand, but we are now entering into this kind of situations. But we are not concerned about it, but we need to watch it in certain areas, but once again don't exaggerate that. It's a specific -- aerospace is a specific problem for one of the -- these escape slides, the manufacturers which has a problem with one of their suppliers. Honestly, I don't know if it is pure bottleneck or something. They simply say that they didn't want any more products because they didn't have enough products to make it which is then a problem for Coated Systems. This is one of the biggest segments for them specifically. For Wheel Systems I mean that this more created by ourselves honestly to have a very good sales growth and that was better sales growth than we expected. So that's not kind of a negative. For Sealing Solutions there is some raw materials and all of that, but we are big in this. So we're getting raw materials, might be that the pricing go up, that said, of course, price goes up, but then we had the asset in pricing. So it's not really a concern for us. But nevertheless, we need to watch it. I mean, we simply say we need to put it on the agenda, we need to be open for it, but it's not kind of a major -- on the total group level it's not really any major impact.

[Agnieszka Vilela, Research Analyst]

Okay. And then my second question is on Sealing Solutions, if you could just elaborate on the leverage for this division and also given the fact that you're investing more in growth, so to say, do you see change of the mix in the division?

[Peter Nilsson]

Not really. I mean, if you look at the gross profit, pure gross profit, I mean, they are varying a little bit. I mean, it could be that the only, let's say, gross profit impact we have, we are selling more, we're bundling more now, selling more service, getting closer to the customers. And some of that sales, limited, is a little bit slightly lower gross profit, but it's not adding any capital employed. So of course, these are extraordinary good returns on that one. And if we can get that kind of sales we will of course capture it immediately. So some of that are growing more to kind of the solution provider. But overall the guidance that we give internally to Sealing Solutions is focused on growth and maintain the margin. I mean, that is really the overall guidance we have there in order to do that. Then of course, we allow them in a way to spend a little bit more money on marketing and R&D projects as well. I mean we have some exciting R&D projects that are also being launched in Sealing Solutions now with some new -- but then we're getting very technical. But there's some new working on lower friction levels, the higher efficiency, all of that, so that is -- several of these kind of projects also running in that. So it's investment not only in marketing, of course, it's investment in R&D. We are spending more and more money on this digital services and the way we advance deliveries as we call it, our online presence. All of that is being -- but that's, of course, an investment for the future to be able to grow the growth. So on gross profit levels I mean, if we wouldn't have done that then of course the drop-through would have been better. So -- but once again, we are more focused on EBIT growth, stable long-term EBIT growth than actually to push the margin half a percentage point up.

[Johan Sjöberg, Analyst]

I think we have quite a few questions also on the telephone conference. Please, operator.

[Operator]

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

[Klas Henrik Bergelind, Director]

This is Klas from Citi. The first one is on coated. You feel confident that this will reach 15% margin, but by which year, is quite a big step-up from 10.5%, the production issues you had in North America I guess, they should soon be resolved. It's been nearly a year now. But can you touch on what you can do on the operational side versus volume? I mean, volumes, the changes in the aero, transport, you can't really control but you can control cost and execution. What exactly you should carry that's 500 basis points of margin expansion?

[Peter Nilsson]

We have some volume, we some negative mix changes. We have lost -- a loss I shouldn't say that, there's some slow activity on certain segments that we have not been selling this year, which we expect to go back in the next few years. We know this is long-term projects. We know that are happening, we know that they're coming. And on top of that, as you said, we have had some issues in U.S. and that has been costing us a few percentage points on the margin. We expect that to be solved. We expect that to get back on track. And we have also some other changes, let's say, in the operational setup, where we also feel that we are moving into a better territory. I mean we're running at fairly high gross profit in certain areas, and we have to get this business back, to be honest. And that is where we have been losing, I should say, more than we believe let's say, 1.5, 2 years ago, but we see though that is coming back. So this is the mix of operational improvements and also sales improvement that's going to bring us that. And I mean, we -- okay, it's correct that you say it's 5 percentage points but it's really not that much money because also when we talk about Coated Systems, it is not the biggest business area of Trelleborg, it's actually a bit smaller in absolute numbers, smaller than the others.

[Klas Henrik Bergelind, Director]

No, totally, it remains the issue within the group. So I just want to get some clarity on when we can get back to that kind of margin. My second one is on Wheel Systems. Can you help us with the growth here? If volumes were up low double-digit, i.e. X price. how much was ag up relative to industrial tires? And within ag how much was ag Europe up versus North America?

[Peter Nilsson]

Now you are down to details, Klas. Of course, we have all of those figures, but we don't really want to share. I can it share it with you, but I don't really want to share it with our competitors. So that is something which unfortunately we can't guide. But as a general guidance, I can say that ag was up more than the material handling and construct -- some construction segments is actually on the similar level. But it is not that major difference honestly because we had good growth -- we had good growth all over the place. Europe, was also -- in volume, of course, Europe is bigger. So that does have a bigger impact, but also North America is performing well. As you say in agriculture, there we've actually been outgrowing. If you say to compare to the total market we've probably been outgrowing the market more in North America than we have had in Europe and also Asia is doing good. I mean, we have -- it's basically all across. Also the southern hemisphere has been extraordinary good, if you look at Australia, and Brazil has also been good. So it's difficult to really pinpoint. But if you say the best one has been, as you say, ag OE and probably Europe has been slightly higher, but once again, it's good all across. We cannot really find anything which is bad.

[Klas Henrik Bergelind, Director]

But the reason we're asking is because obviously, I mean you're outgrowing the market in North America, that's very clear because you're growing from a much lower levels with Spartanburg, et cetera. But could you give us a feeling for the percentage of ag, how much is North American now, what was in beginning of the year and is the margin now in black or still red at Spartanburg or, where are we in that transformation?

[Peter Nilsson]

No, now but -- I don't -- sorry, Klas, I mean, I know you're interested in, but I don't really want to share the kind of detail level. But to comment on that, Spartanburg is still in red. But then, of course, we have the Mitas operation in U.S. also which we acquired, which is now already turning into black figures. So [ the result is that ] we are quickly going in that direction. So that -- and I think, during the year you have to be patient, but we're now running the Capital Market -- we've not set the date yet but during the year, we run the Capital Market Day and then, of course, we will focus on shedding some more light on that, but we don't want to do this in a call like this, we want to do it in a coordinated way.

[Klas Henrik Bergelind, Director]

Sure. My final one is coming back to Sealing Solutions and the impact on margin. We know that the fourth quarter can be weak. But could you help us with the impact from dilution from M&A from the launch of Seals-Shop, the investment you make? And when do you think these effects will annualize? Of course, you will have investments in growth?

[Peter Nilsson]

What we talk about -- but it's not to say that -- but of course, we're running at these very high levels, 22% or it was at 22.4% I think in detail for full year and of course, even if we have a business here which is performing at 14%, 15% it's dilutive. So that is really -- so it's not like the acquisitions are bad performing, it's simply that they are not really performing at the 22-plus percent. But all in all, since we have been -- [ gone through ] structural growth the last 2 years, I am not looking at Christofer, but you talk about [indiscernible] Sealing Solutions, probably a very, very -- slightly more on that one. So it's not really a big impact on terms of sales, but it's definitely pushing down the margin.

[Klas Henrik Bergelind, Director]

But the ambition must on acquisitions and lifting those margins to Sealing Solutions level and how long [indiscernible]?

[Peter Nilsson]

I don't know, this is a 2-year ride or something, but I'm not sure that all of them will get back. Once again, I mean margin is important. We're going to keep the margin on this level, but then our focus is really to grow the EBIT here to make sure that the EBIT is growing at a good pace.

[Johan Sjöberg, Analyst]

So I'm afraid this is actually -- we are running very short on time. Okay, but thankfully, we have Christofer Sjögren, Trelleborg's excellent IR. So anyone who has any more further questions please address to him. Otherwise, I would like to thank Trelleborg management and -- for this very good presentation. Thank you.

[Peter Nilsson]

Thank you.