Trelleborg AB

STO:TREL B

Earnings Call Transcript 2018-Q4

[Operator]

Okay. Good day, everyone, and welcome for today's financial hearing with Trelleborg. I also like to welcome everyone participating via the webcast and telephone conference. Moderator today is Hampus Engellau from Handelsbanken. He will back later and lead the Q&A session, but I now hand over to the CEO of Trelleborg, Mr. Peter Nilsson. Please go ahead.

[Peter Nilsson, President, CEO & Director]

Thank you. Welcome all of you to this presentation of our year-end results, more focusing than on the Q4 performance. I'm going to start the presentation, give you our overall takeaways and introduce the business areas and tell you about performance for the business areas -- various business areas we have in Trelleborg. And then I will be assisted here on stage by Ulf Berghult, our CFO, who will then you -- guide you through the financials, and then finishing up with the summary from me and also some comments on the outlook for the running quarter and then as usual, also finishing off with the Q&A session. So running agenda, as usual, nothing new, in Trelleborg starting semiannual highlights, business areas, Ulf doing the financials and then Ulf and me jointly doing the summary and running quarter outlook, and then also Ulf and myself jointly on the Q&A.Starting on the overall headlights for the quarter, I mean, we came in solid overall sales growth of 8%. Organic sales then split on 2% up. And excluding the projects, as we usually do since the project is little bit up and down, increase was 3%. And then of course, the difference in between then currency and also some structural growth, continue to make acquisitions and we continue to add also structural growth on top of the organic sales. EBIT came in at SEK 977 million, which is the highest ever for Trelleborg in a quarter. And we have now -- as Ulf will guide you through, we have now more than 5 years of every single quarter increasing the profit, but Ulf will show that a little bit later. Margin come in a little bit slim compared to last year, 11.7%. Also, with some -- we had a heading here, despite challenges, also, I didn't comment on that. There is a few individual units where some special situations that I'm going to tell you about that as well, which is then pushing down the EBIT somewhat in the quarter. Items affecting comparability, SEK 98 million, Ulf will also guide you through that, but we're running as usual high activity in order to continue to improve our structure, as we have been doing for many years now. Operating cash flow, a little bit lower than last year and also a bit lower if you look at rolling 12, and that is driven by very high CapEx for Trelleborg in historic perspective. Continue to invest a lot, we continue to build for the future. Ulf will also comment on that and show the CapEx levels, but it's, I mean, already here, maybe worthwhile mentioning that this high CapEx is not kind of an overall higher CapEx. It is actually driven with a high CapEx by some individual projects that we're running at the moment, which is not kind of recurring projects. It's simply a coincident that a lot of big projects is coming at the same time.Also, in the quarter, important step for us in 1 niche that we have within Wheel Systems is 2-wheeler business, where we then are kind of running out of capacity, running at full capacity on existing plants. And we needed to add capacity, and we decided together with partner in India, which we have known for many years, to -- we start kind of a manufacturing joint venture in India then in order to continue to grow this niche within what we call a 2-wheeler business, where the majority of the sales is actually in Europe. But also with this coming on stream, we will also be able to push this sales into North America and parts of Asia. So let's say, an interesting step even though it's going take a few years before we see the full benefits of this.Looking at the sales in various geographies. We can say it's basically good all over, but in other Europe, in other Europe for us, it means Central and Eastern Europe, where we are down, while all the others is doing good. North America continuing on a very good path. South America continuing for us on a very good path. Asia also in general doing very well, while then we we're down in Western Europe compared to last year, which is also then linking a little bit back to our overall comment on the outlook we are going to [ give later ]. Other Europe, we see more as an individual quarter with dramatic drop linked to some special events. But basically, overall, good sales development in quarter and generally, good activity level all over the world still.Talking about the business areas, starting with coated fabrics. Organic sales up in the quarter and even stronger structural growth, driven then by some acquisitions which have been kicking in during the year. As you know, we have 2 operations here, coated fabrics and printing blankets, good all over in a way in general. We know it as many others a little bit weakening in automotive segment for coated fabrics, but overall, still growth in that segment. And printing blankets also slim increase now, especially driven by good performance in Europe. And all of this is then dropping down to a good drop through, driven by, of course, the higher sales, but also on higher productivity and also benefiting from the acquisitions. So good performance for Coated Systems and a solid profit growth compared to last year. Industrial Solutions, basically, also, overall good development. Organic sales strong, 7% up. Most markets, most geographies developing well. If we should highlight something, some builder-related segments related mainly to Northern Europe, which is little bit weaker. And also in certain segments in North America also a little bit weaker in these segments, but nothing really noteworthy, but nevertheless, slightly weaker. As I said before, all geographies doing fine here. We are widening our business in majority of the European-focused business, but we're also growing our presence in North America and Asia, especially in Asia from relatively low levels. But nevertheless, very strong growth generally in Asia and also North America in general developing nicely. We have 1 issue here in this business area, which has been kind of escalated during this quarter, it's an issue that we have had for some time. We have been struggling with one of our factories in Czech Republic to get workers, and to keep the workers, and this bottleneck has been basically a fact for quite some time. But in this quarter, these problems continued, and I mean, we created inefficiency. We say, in the quarter, we have a hit from this in the range of SEK 25 million, SEK 30 million, which is not really -- we are addressing it. We have been addressing it for some time, and we are very sure that it's going to improve. We are investing in this factory to create better worker's condition, also higher optimization and better process flow. So this issue will be solved. I mean, the good thing is that we have the sales. So the sales is there, but it's more to make sure that we are addressing this sales in a good way. But we must say also admit, that little bit taken by surprise that we had this issues here. So this is now being heavily addressed, and we are adding more resources in order to solve this as quick as possible even though, I mean, it's never really any quick fixes on this. But nevertheless, it's going to get better, and we're going to improve going forward. But if you take that back, this SEK 25 million, SEK 30 million extras, then you add that back, then you see we have actually good a drop through in all the remainder of the business within Industrial Solutions. Also, a very small, but also here, as I said, we're growing in Asia, and we actually created a joint venture with the biggest hose manufacturer in Southeast Asia and creating a joint venture focusing on specific niche called composite hoses, very high-end application for industrial hoses, very aggressive chemicals and very, let's say, demanding environment. So this is -- which is not -- currently, not being produced in this -- in Southeast Asia. So we are starting now to create a local presence within those areas. So this was Industrial Solutions.Looking Offshore & Construction, continued very strong organic decline of sales. But we also comment that basically coming both from offshore and more periodically, as you say, on infrastructure construction, it's not really an underlying problem in that respect in infrastructure construction. It's more an individual quarter here pushing down the sales due to some projects being pushed forward. And of course, this is then impacting us that we have an under-absorption. And on top of that, we also have some issues here related to a few bigger projects, where we have actually allocated too much hours to those, and we need to do a write-down and take away some cost also in this. Then we have an individual hit related to this, which is kind of nonoperational issue, which is then costing us also some SEK 25 million to SEK 30 million in this quarter. So that is kind of the dimension of that. But we note as well, if you look more long term, and of course, we're always focusing on long term, we continue to have strong growth in the order book, both related to the infrastructure construction and to the oil and gas activity here. I mean, 1 project to mention, we got in the quarter. We got actually our biggest ever tunnel order, for instance, for China, fortunate, I shouldn't say, but of course, this is not deliver until end of this year, even going into 2020. But I mean, even this, we're filling up the order book, and we see also on the tunneling project now that that is also picking up from a few very weak years. And on top of that, we have a plenty of good vendor projects coming in, and also we see basically all over the offshore oil and gas area that is also discontinuation of growth and demand or growth in projects is growing. I mean, we're tracking this, what we call, orders to be placed, which is basically where we know that our customers has gotten the orders, but have not yet placed order to the supplier for the projects. And we see this growth in orders to be placed is continuing, especially, related to the oil and gas activities. So we continue to believe that we are on a very down of this cycle now. And we firmly believe that we're going to see a strong improvement throughout 2019 with, let's say, the bulk of this improvement coming to the later parts of '19 and going into '20. So we believe that we have turned a corner here, and we believe once again that we're going to see a substantial improvement, especially here going from second part of this year and then continuing into 2020.Sealing Solutions, which of course, the key profit contributor in Trelleborg and the key kind of value driver for us. Continued to deliver very well. Organic sales up 6%. All geographical areas continue to develop very well here. We say also general industry continue -- aerospace very good. We have on the last few years in aerospace kind of widen our target segments, if you put it like that, and that is paying off now, getting very good order intake in aerospace, which is going to then create, let's say, big benefits. I mean, this is long-term orders, of course, in the aerospace. If you get into an aircraft, you know you're going to be delivering to that for several years, and then following that is aftermarket. And that efforts is paying off very well here within sealing, which is creating a more solid foundation for future. Then it's slightly weaker in automotive for us is actually North America, which is a little bit maybe not exactly like everybody else. But that is where we see continued good demand in Europe, continued good demand in Asia. While we have been suffering somewhat, I mean, we shouldn't highlight, it's not really a big figure, but if we should point out something, it's actually suffering for us in automotive in North America [ we leave ] it odd and it's related to individual platforms and individual customers. So it's not really linked to the overall demand, in a way. EBIT and margin slightly up, drop through is not maybe that high compared to the sales and going down to EBIT, but as we commented before, we are investing in this area. We continue to grow in order to keep a sustainable growth in this. And we might not -- even though, of course, we always balance short term, long term, but especially in this area, we would like to really create a foundation for the future and make sure that we continue to grow. And it's also in this area where we have, let's say, we say, before it was high CapEx, and this is also the area which is kind of getting the highest share of our CapEx, where we're then building new factories. We're expanding actually, factory in Sweden here in Kalmar, and we're also developing a factory in Denmark. And we also, as you know, during the year, also invested a lot in our innovation center in Stuttgart. And we're also now also attacking what we call the logistical setup also plays in an organization, where we're also going to invest in order to make sure that we can support the growing sales and also continue our path to add more service to our products. So this is kind of an area where we're focusing a lot, and we also continue, of course, to scout for bolt-on.And that is why we're also happy here to say Sil-Pro, which is now going to be changed into, of course, a Trelleborg name. But we were -- that was a deal we signed a few months ago, but it was now fully completed hereby beginning of January, as expected. And now that is bringing a strong growth for us, especially what we call cleanroom manufacturing, which is then primarily taken for cleanroom manufacturing medical and health care, but there's also other applications for this. We're growing in this very interesting niche and then supplementing our presence, which is already very good in Europe, but now also we have kind of following a few acquisitions into this segment in North America. We are now establishing a firm leading position within this niche within sealing. So that is a very strategic, important acquisition for us, which is opening up new avenues for growth and income go forward. So happy to have that concluded.Finishing off then with Wheel System. Organic sales, a little bit down actually, minus 1%, driven especially by agri sales in Europe and Asia. While we continue to grow in North America, where you know -- for those of you who have following for some time know that in North America, we have a much weaker market share than we have in Europe. So in North America, we're growing on the back of growing market share. While in Europe, we are well established. And in Asia, it's a little bit turbulent sometimes. And in Asia, maybe if we should highlight something, where we have been suffering a little bit from this new trade war, since [ Russia ] has to move of manufacturing of tractors from China into North America, and that is kind of benefiting us North America, and we're losing a little bit in Asia, but no big deal actually for us. I mean, we are more global than most of our competitors, and we are able to swing this around in a way that others might not be able to do. Then to supplement this weaker agri sales, I mean, we continue to have a solid growth both in industrial and construction tires. Industrial, as you know, we have a good global market share. We continue to grow with the growth of global trade, if you put it like that. While in the construction segment, we are fairly small, and that is an area also where we investing into in order to grow our capacity in order to be able to grow the construction segment. But overall, Wheel Systems developing very nicely for us. I should say, in the quarter, there's a slight EBIT improvement, could have been more. But also in the quarter, we continued to have this little bit of negative mix that we sell more to the OE than aftermarket, which is short term pushing down the margin a little bit. So here, I should say, even though, overall, very satisfied with the development, with the execution of the synergies following the CGS acquisition continuously deliver, but we still have these kind of negative mix. Of course, we hope now going into '19 that we will see a better aftermarket and thereby also turning from a negative mix into positive mix. Let's see if it happens. I mean, we know that it's weather-dependent, little bit about the farmers' income and all of that. But nevertheless, we have had -- we have been suffering from this throughout 2018, while still, as you know, have been growing the profit a lot. So of course, if you get this positive mix as well going forward, we will see an improvement also in that respect. But nevertheless, result based on the sales should have been better in the quarter, but once again negative impacted by this negative mix. Also, here I wanted to comment on joint venture in India. I mean, we're working here with niches, and this is kind of creating a foundation also to start to focus with more in this 2-wheeler business, which is very niche-y business, of course. We are -- globally, very strange niche, but we are off-road motorcycles, we are #1 in the world. And this is something really that we want to focus on and then from that position, also try to grow a little bit more on the road with specific niches. So that is kind of our ambition here, not to create kind of a global leading market share in total of that business, but be very niche-y in this extreme niche, if you may say.So that is little bit about the business areas. So I then ask Ulf to comment on the figures before I'm back to supplemental from the stage.

[Ulf Berghult, Chief Financial Officer]

Thank you, Peter. I will then go through the consolidated numbers then that. So this is a slide show and then the overall development then in the quarter and then year-to-date. As Peter mentioned, we had then a growth of -- organic growth in 2%. If I then exclude the project-related business, we have 3%. One needn't -- I need to remind you that also then quarter 4 is one of the weaker quarters, that we are stronger in Q1, Q2, first half, and then slightly weaker and then in the second half. As Peter mentioned then, as he remind you that we had a good growth in Industrial Solutions with 7%, also then followed up by the Sealing Solutions with a 6%. And then -- also then on which we haven't had long time, which has been impacted by that we have moved some volumes on mixing in Coated System. So they actually also reported 2% organic growth in quarter. However, this is offset then by then Offshore & Construction with minus 17%, and then we also had wheels, as Peter just mentioned, minus 1%. And the structural growth in the quarter that is coming from Coated Systems and Wheel -- and Trelleborg Wheel Systems.The Next slide is then showing the development over the last quarter sales. So we have 11 quarters of positive sales development, and it's then impacted both by structural and organic growth. On the bottom side of the slide -- bottom part of the slide, you will see then the organic growth, and then of course, that has been impacted by the project-based business over the last quarters here.Next slide is then the quarterly development and the rolling 12 months development, and we can then say that the quarter 4, that is the highest quarter so far for quarter 4.Moving over then to EBIT. This is in absolute terms. In absolute amount, the highest quarter we have had in a quarter 4. We -- for the full year, this is the best year we have had in the Trelleborg Group in both in absolute terms and in margins. So we ended up then with a 13.8% for the full year. And if I then just comment on the currency impact, we have a slight currency impact here in the quarter. We have a translation impact of SEK 40 million. And the year-to-date, we have SEK 134 million on translation.Moving over then to the quarterly development. As Peter mentioned then, we have had -- this is the 23rd consecutive quarter of improved profits and with EBIT growth. And then we'll touch base, this is then the consolidated profit and loss statement of the group. And that -- what I would like to comment then is on the restructuring. We guided in the beginning of the year, SEK 250 million. We ended up then on restructuring then on SEK 180 million. But then compared with 2017, which was more of a one-off year, then we had comparability items or we had a restructuring items of SEK 781 million, which we then closed our facility in Houston with Offshore & Construction. And at the same time also, we got then a deferred payment on our divestment of TrelleborgVibracoustic of SEK 467 million. So that is then the reason for then 2017. Now the other comment I would like to do is then also the tax situation, where we have had -- they've changed the tax in U.S., both in '17 and '18, and now we have the final -- we hope that it's the final outcome. So we also have a hit in the quarter of SEK 51 million. And last year, we had a hit of SEK 129 million due to this U.S. tax reform. The underlying tax is 23% in the quarter. And our guidance, which I will come back to, but that is still 26% going forward.Next slide is then earnings per share, which then we -- I will concentrate then on continuous operation, excluding items affecting comparability, because that's the underlying performance. So that is up 10% year-on-year -- or quarter-by-quarter.Moving over then to cash flow. As the headline says there, it's impacted by higher CapEx activity, and I will come back to the guidance for 2019. But you can also see in there we have a year-on-year improvement, and we are kind of releasing more cash on the working capital in the quarter. But also then to be honest, and if you look on the closing balance, we have a slightly higher working capital end of the year versus end of 2017, which is mainly coming from slightly higher inventory, but that was all in the right places, because that is within Industrial Solutions, Sealing Solutions and Wheel Systems.Then moving over then to the quarterly development and the rolling 12 months. Then you can see then it has been then sliding, and that is due to a higher CapEx activity in the last '18 -- in 2018 and end of '17.The leverage, it's stable. We are then on 1.7, that is slightly down then on -- if I take away the items affecting comparability. Last year, we had 1.8. Now, we're in 1.7. And moving over to -- then to the slide of which we show both gearing and leverage, you can see that we are on a healthy levels, and the gearing is on 33%, and then the leverage is on 1.7. I want also to mention that the net debt as such has been impacted by the currency negatively by almost SEK 800 million for the full year or the closing balance end of '18.Return on capital employed -- equity, we are then aiming to reach -- try to then to get up to 12%. We have a slight improvement in both -- this target is for the group total. So we are moving from the 11.0% up to 11.1%. It's not much. But -- and then if I take away those items affecting comparability, slightly better then up to 11.7%, but the target is on the total group.And then moving to the guidance for 2019. We are then guiding for the CapEx of SEK 1.8 billion to SEK 2 billion. And then coming back to Peter's comment earlier that the bulk of the increased CapEx that is basically that we are taking a move into strengthening our logistical setup in -- within Sealing Solution. And then in Germany, we also have 2 core sites, or key sites, that we are improving, both Helsingør site, as Peter mentioned, also then our site in Sweden, in Kalmar. We're also then doing investments in Wheel Systems in Czech Republic in order to increase the capacity. And also we have a slight investments in Industrial Solution also in Czech Republic, slightly then related to the issues that we have had in this with this bottleneck on labor.And then going forward, in restructuring, we are then guiding SEK 250 million for the full year. The underlying tax rate that is 26% and then just for kind of information, the amortization of intangible asset, that is about SEK 300 million.So moving over then to...

[Peter Nilsson, President, CEO & Director]

Thank you, Ulf. So a comment on -- please stay here. So as we said before, record earnings for us. I mean, we had solid growth in the quarter sales growth, not the full drop through in this quarter linked to specific issues and especially related, as said, these bottlenecks in Czech Republic, which we are addressing, both reinvestments and adding extra resources in order to solve this. And on top of that, also some write-downs in the offshore, let's say, operational write-downs, if you put it like that, within the offshore area, which is then pushing down a little bit. But overall, besides that, very stable development in Industrial Solutions. Stable development, good development in Sealing Solutions. Also good development within Wheel Systems, especially then related to the -- we still have this somewhat negative price mix here, which is pushing down the margin a little bit. And also, satisfactory development within Coated Systems in the quarter. Maybe within coated, we have not really mentioned, but during the year, of course, we had also made some interesting acquisitions there, which is actually moving us towards medical and health care. We're now investing into that area and also growing our footprint related to aerospace. Within Coated Systems, so we're getting better kind of end-market exposure in that market slowly. And we're now addressing the structure in order to create even more efficiency. EBIT ended up, let's say, a little bit shy of SEK 1 billion, which is the highest ever. As Ulf said now, we have had 23 quarters of growing profit, if you calculate rolling 12. And also, if you look in even more, [ cause ] look at the last 10 years of Trelleborg, we have been growing sales by a CAGR of 7%, which is, of course, good, which is in line with our target. But more importantly, we've been growing profit during the same time, with a CAGR of almost 16%, 17%. So of course, that has been a solid development now over -- over 10 years for us. And we're going to continue, of course, on the same path. Cash flow is a little bit down. But as Ulf and myself have commented, this is driven by CapEx, which we believe is very clever CapEx for us, which is then especially reinforcing the strong position with our Sealing Solution and on top of that, also addressing some potential bottlenecks within Wheel Systems. As we are growing Wheel Systems, we expect possibility to grow into both new geographical areas and new applications. So we need to invest into that. And these investments, of course, also, let's say, creating some cost synergies and some operational synergies related to CGS acquisition. So we firmly believe that these investments makes a lot of sense and creating a good foundation for continued development of Trelleborg. So this is really the takeaway. And if you look at Trelleborg in total, I mean, we continue to work in the same way. I mean, we know that the company is addressing a lot of different niches, a lot of different applications, but we continue to manage all those activities individually and continue to push market position, operational excellence and customer integration in all those areas. We're going to continue with this what we call portfolio management. We're going to continue to see us doing smaller bolt-on acquisitions in order to strengthen these positions and then, let's say, organically exiting a few areas if we don't find interesting long term. And we still see in some areas that we have constraints in the supply chain. I mean, even though a little bit slower organic growth in this quarter, but we're still running at a very high capacity utilization. It's always a balancing act whether to grow capacity or whether to try to squeeze a little bit more out of the existing supply chain. So that is something, of course, that we are addressing. And also, innovation is a key thing for us. Of course, also since we are on the forefront in most of the positions we have. Of course, we want to want to be not only the market leader, but also be seen clearly as the innovation leader. So this is also an area we're investing a lot. And then also to make sure that we integrate, continue to make acquisitions. We have been doing acquisitions throughout '18, and we expect also '19 to be a year of acquisitions even though you can never exactly plan when those acquisitions will happen, but we will continue to address it and making sure that we integrate it in the best possible way. So this is the focus of Trelleborg, continue the same journey as we have had the last 10 years and make sure that we work in a similar way, continuously improving sales, but more -- growing profit even more than sales. I mean, that is really the ambition here that we have long term.Looking at outlook for the coming quarter. I have to say that we debated a little bit internally on what to say. Ended up with this conclusion and saying that we are going into this quarter with a little bit less confidence, if put like that, than we were going into Q4. But I mean, it's really on the brink of being we might be that we are wrong with this estimate and might be that we end up at 2% again or similar to 2%, but it might also be that we are slightly lower. So this is really our take on this. So we feel that underlying demand is still good. We continue to, let's say, grow order book, and we continue to believe that this outlook might have to be changed upwards again when we go into Q2. But as we see it today, it might be 2%, it might be a little bit shy of 2%. But then we don't see really any drama in this guidance as I saw already here on some comments that put some guidance -- to some drama into this, but we don't really see it. It's more try to be, continue to be fully transparent on the way we look at the business. So for this -- I expect some questions on this. So I think I end there and then I'm inviting Hampus to join me on the stage to guide us through the Q&A session.

[Hampus Engellau, Automotive Analyst]

Thank you very much, Peter. Why don't I start then? I mean, somewhat lower, that is, of course, something that one has to react to. And is there other areas? Or is it still like Europe auto or in Asia? How should we think about that?

[Peter Nilsson, President, CEO & Director]

No. I mean, I don't think we are -- we're looking at overall demand. I mean, the only segment really that we can see is little bit tougher, if I say, is automotive. I mean, all, I can say, all industrial segments is performing well. Might be in certain areas, some inventory adjustments and all of that, but we don't see down the line demand. We don't really see the number of projects being less. It's always a balance. Also, we see continued growth in demand, for instance, for offshore oil and gas and for the infrastructure. And we should say, also oil and gas is, of course, even though we talk Offshore & Construction, we'll go to that. But of course, we have some hints of that also in Sealing Solutions. We have some hints of that also in Industrial Solutions, where we still see continued higher activity even though usually this with -- it's slightly longer before you get into sales. So I don't know, Ulf, if you want to supplement. Where is the weak areas, if you say?

[Ulf Berghult, Chief Financial Officer]

No. But as you said, within some -- we see within automotive. [ Also ] fair to say that the -- take the wheel business, that we had a good growth in the OE side in 2018. Might be then that if you look at outlook of our customers, they are more kind of a flattish. We have a growth in North America.

[Peter Nilsson, President, CEO & Director]

And maybe it's also correct. There's a tough comps in OE for agri, especially as well, but that is not really "not that bad." But nevertheless, it's going to be tough. So once again, I mean, this is a team. I mean, what do you say? Do you say, keep it same or you keep it slightly lower? I mean, it's really a balance. And we will understand that if anything we believe is going to be slightly lower instead of slightly higher, I mean, that is really our take on this. But we also -- start of the year has been relatively good. So it's not really any major direction change in this guidance.

[Hampus Engellau, Automotive Analyst]

And on the fourth quarter, if we would adjust for the project business, where would be on organic growth? That's number that you previously talked about.

[Ulf Berghult, Chief Financial Officer]

3%, if you take away that, 3%.

[Peter Nilsson, President, CEO & Director]

Because also, we should say, Offshore & Construction is getting smaller and smaller. So even though it's high numbers on the minus 17%, but the impact from that on the total group is becoming less.

[Hampus Engellau, Automotive Analyst]

Do we have any questions from the audience?

[Douglas Lindahl, Analyst]

Can you -- Douglas Lindahl, Kepler Cheuvreux. So a few questions from my side. Starting off by looking at wheels. Can you give us an update on your ag growth in the U.S. market? Where are you in terms of maybe capacity and then -- yes.

[Peter Nilsson, President, CEO & Director]

I mean, we still have capacity, but I mean, we are, I mean, also, we are starting to discuss adding on new capacity in order to support the growth. But it's not going to happen in this quarter, probably not next either. But we are on doubt, let me say, 2 factories now in the U.S., and one of them is becoming quite full, while the other is still having some capacity. I mean, if we compare our capacity with the total volume potential, it's not sufficient. So we need to, of course, stay ahead of the curve a little bit here. So we are looking into now about adding capacity. They still have capacity to grow. But if we are successful with our plans, we're going to be able -- we're going to start to run out capacity, let's say, end of this year or beginning of 2020. So of course, we need to start to prepare for that.

[Douglas Lindahl, Analyst]

And you wanted to have more aftermarket sales. Is there any sort of -- do you have a strategy for targeting that sales specifically or...

[Peter Nilsson, President, CEO & Director]

In U.S. you mean?

[Douglas Lindahl, Analyst]

Yes, in the U.S. specifically.

[Peter Nilsson, President, CEO & Director]

Yes. I mean, we are the same -- there is different strategies on how to go into the aftermarket. So either you push out the sales, you push it to distributor, you push it out by discount programs, and all of that, in order to make it more attractive for the distributor to sell our tires than to sell others. We are not selecting that one. So we are little bit slower. So we are supporting their original equipment, and our focus at the moment is to support original equipment in order to more create the pull effect in the aftermarket. It takes a little bit longer, but you're coming in with a much better price positioning and with a better kind of underlying long-term demand. So that is our strategy, basically. So we are not chasing short-term gains, volumes. We are making sure that we're ending up in the right long-term positioning and with the right distributor. So that is kind of the overall framework which we're working towards.

[Douglas Lindahl, Analyst]

Okay. And switching to Industrial Solutions. You mentioned your issues in the Czech Republic. When -- can you give us some sort of time frame on when you expect to solve these issues?

[Peter Nilsson, President, CEO & Director]

Yes. It has been, let's say, an issue that we have had for some time. It's not a new problem. We have been addressing it. We have been investing throughout the year. We are in the middle of an investment program. And I mean, little bit surprise of the dimension of the problems in this quarter. We expect it to get better and better, but we don't expect a big swing, so to say. But I mean, individual quarters, we will talk, because if you say you're negative with SEK 25 million , SEK 30 million, then of course, the improvement potential is even more than that, because of course, we are not only aiming to get up to 0. We like to be well above 0 there. So this is something which we are addressing at the moment. And it's difficult really to give exact details on when they're going to bounce back, but we are going to see improvements step-by-step throughout the year.

[Ulf Berghult, Chief Financial Officer]

Yes, throughout the year.

[Hampus Engellau, Automotive Analyst]

Olof?

[Olof Cederholm, Research Analyst]

Yes. Olof Cederholm, ABG. Following on a little bit on the -- sorry, for that problem areas, Offshore & Construction, there was some extra cost in Q4. And you guide for return to profit in the second half. How should we phase the improvement going forward? Will the extra cost be 0 in Q1? Or how should we see this?

[Ulf Berghult, Chief Financial Officer]

We will not have an extra cost. So look, we have a good base now within Offshore & Construction, within the business unit offshore and also within the infrastructure construction. So what we're saying is that we will have -- Q1 will be in the same, Olof -- we will have gradually a step-up. So Q1 will not be good. Hopefully, we will have -- Q2 will be better. Q3, slightly breakeven. And then hopefully, we will have that positive in -- well, we're estimating we'll [ have that ] opening

[Peter Nilsson, President, CEO & Director]

That is -- I mean, that is our -- we're giving you a fair and open our estimate. And then of course, we don't know exactly how it's going to be, I mean, if it's going to be like this. But that is the way, fully transparent how we look at it today, because the support areas that we continue, and that is something maybe more important for us at least who is not -- okay, we're targeting every single quarter, but more important than that, we grow the business and move it in right direction. Order intake is very strong. And we see also the take-on margins, which is important, is also improving. But of course, the benefits on this is going to be somewhat delayed. So standing here, we are very certain that we're going to see an improvement, but we cannot really give you extremely clear guidance whether that's going to be Q2 or Q3 or Q4. But we firmly see now that we have turned the corner, order intake is improving, take-on margin is improving, and that's going to rollout into, let's say, improved performance of the business.

[Olof Cederholm, Research Analyst]

And on that, the order intake, is it possible to give us an indication of book-to-bill or how much the order book is up year-over-year or something like that?

[Peter Nilsson, President, CEO & Director]

Well above 100%, let's put it like that. So it's not individual percentage points above 100%. It's more than individual percentage points. But there's also -- because [ the very stock ] is also sliding a little bit throughout the quarters, but it's well above 100%.

[Olof Cederholm, Research Analyst]

And then -- perfect. Then I have 1 follow-up on Sealing Solutions as well. We're seeing a margin drop through which has been not as great as in the past because you're investing, that's great. Now growth is slowing in 2019. How should we think about the margin then? Will you still be able to grow the margin in sealing? Or will these investments eat margin?

[Peter Nilsson, President, CEO & Director]

We are focusing on growing sales more than margin. But of course, with that said, we don't want to lower the margin. So that's, of course, something we continue to manage and continue to address. But I mean, our ambition is more to create EBIT growth with this relatively high margin than really to push the margin a few percentage points up.

[Erik Paulsson, Analyst]

So this is Erik Paulsson, Pareto Securities. Most of my questions have been asked, but I have 1 additional, Offshore & Construction. Can we expect some more or additional write-downs in terms of projects in Offshore & Construction?

[Ulf Berghult, Chief Financial Officer]

Not as we see right now, no.

[Peter Nilsson, President, CEO & Director]

That's a mistake. It should have been happened before. So that is -- honestly, it's a fair and open mistake in some project management in certain areas. It shouldn't happen. And we are addressing it with various new -- not to end up with the same kind of issues, we are addressing it with various, let's say, changed procedures in certain areas.

[Erik Paulsson, Analyst]

And you said it was something -- SEK 35-something million?

[Peter Nilsson, President, CEO & Director]

30 -- let's say, SEK 25 million, SEK 30 million is probably a fair estimate. So kind of half the loss of Offshore & Construction in the quarter related to this. So the underlying -- which is still very poor, the underlying performance was, I think, SEK 60 million was -- SEK 30-ish million on the underlying performance of this in the quarter.

[Hampus Engellau, Automotive Analyst]

Operator, do we have any questions from the telephone conference?

[Operator]

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

[Klas Henrik Bergelind, Director]

Yes. It's Klas from Citi. So a couple of questions from me. The first one is coming back at your guidance. There seems to be some confusion in the market of what you mean. My interpretation is that flat to somewhat lower if adjusted for seasonality, meaning that the first quarter can still be up in absolute terms versus the fourth. And on that basis, organic growth year-over-year can perhaps be around 1% to 2%. So is my interpretation correct that first quarter can be up versus the fourth on seasonality? And it means 1% to 2%. So we're getting incoming from investors wanting a clarification on the guide, please.

[Peter Nilsson, President, CEO & Director]

Okay. I mean, the guidance is seasonal-adjusted. So it's correct, as you say, it's not referring to the sales in Q4 related to, say, K1 -- that is Q1 compared to last year Q1. Let's say, seasonal-adjusted, let's put it like that, and seasonal-adjusted, as you have interpreted, it's right. And then whether it's 1% or 2%, I don't really want to comment, but I mean, that is really probably the -- yes, that is, I mean, you're not far away from what we mean.

[Klas Henrik Bergelind, Director]

And my second one is on Industrial Solutions. So it doesn't really seem to be a growth problem obviously. Growth in some areas are actually accelerating. You did 7% organic growth against a pretty tough comps. So it's a cost problem and it's on staff. Can you talk more about the investments, investing yourself out of this, adding capacity? Or can you utilize capacity in other parts of the business? Or it's stuck within Czech Republic, with the [ official]? I'm just trying to understand how long this can last for, because bottlenecks, unless there is a slowdown in the market, they could last quite for some time there. So if you could help us there.

[Peter Nilsson, President, CEO & Director]

Yes. I mean, we are investing in this. We're investing in new machines, we're investing in new processes. So we are kind of doing more optimization, and we are kind of investing ourself away from some of the, I should say, the labor efficiency, -- less labor basically to get more products out. So it's really not bottleneck in terms of overall capacity. It's more a bottleneck of being able to process the sales in an efficient way. So the bottlenecks is one problem, but the bottlenecks is also creating, let's say, higher labor turnover, more scrap, more inefficiencies. So this is really by creating a more stable process with several investments ongoing and several changes in the process flow. And I mean, what I want to address, also, Klas, this is nothing that we started this quarter. I mean, we are not unaware of this issue. It's simply that in the quarter, the cost for these issues escalated compared to before. So it's not really any news for us. I mean, we started this investment program in this unit already in 2017. So this is something, which is kind of ongoing for quite some time. It's simple that we have this quarter where the problems became a little bigger than they were before.

[Klas Henrik Bergelind, Director]

No. I understand that. So my final one is a couple of quick ones on offshore. First, a bit on orders. Last quarter, you said that you had the best order intake in 2 years. Did orders improve further sequentially versus the third? And was it a big step-up again? And what regions did you see an improvement? And finally, if the Houston capacity take-up fully on track, as we should start to see savings year-over-year now kicking in here in the first half?

[Peter Nilsson, President, CEO & Director]

Order intake was slightly lower in Q4 than Q3. On an opposite, there was better take-on margins. So that is always a mix in the project business, what kind of margins and volumes. So -- but still, on a high level and still kind of on a level which is bringing us into -- yes, into profitability actually. If we get that orders processed through into -- executed in a good way and processed into sales, that's going to bring us in the profit. So the order intake in Q4 wasn't that level and also, maybe be less. We have not been speaking that much about that. But also in the infrastructure construction area, which is the kind of the other, more than 50% of Offshore & Construction was also very solid order intake. So this is something which is -- once again, we don't want to give you exactly the figures on that one, but you need to trust us that the order intake in this area has been very solid in Q4 and continue to look very promising also for the running quarter. But there is a process time before you get into sales, and that is why, once again, that we're commenting here that we feel confident in our beliefs that we're going to see a substantial improvement in this business area throughout the year.

[Operator]

Our next question comes from the line of Erik Golrang of SEB.

[Erik Pettersson-Golrang]

I have 3 questions. Could you give us a sense for the balance between raw material cost? And your selling prices, where are we in the quarter, you were a bit negative there? And in the third quarter, has that improved in Q4?

[Peter Nilsson, President, CEO & Director]

Yes. On the raw materials, I mean, you see, most of them has been kind of flattish, but on a lower level than before, but it takes time before it rolls in. And we have, I will say -- Ulf, I mean, do you remember the figures overall? I don't think there was a major...

[Ulf Berghult, Chief Financial Officer]

Overall, we don't have any issue. But then we have in specific business areas where we have [indiscernible]

[Peter Nilsson, President, CEO & Director]

Yes. It varies a little bit in between the business areas overall. Overall, it's not really a big deal. We are going into 2019 with slightly lower raw materials overall than we had in going into '18, but it's not really a major thing for us at the moment.

[Erik Pettersson-Golrang]

There's no need to sort of push to additional price increases to compensate for raw material cost? Rather the opposite that there could be a bit of a [ take... ]

[Peter Nilsson, President, CEO & Director]

Yes. And of course -- but then of course, we have the other, we're not only raw materials. We also have some concerns, I should say, on the overall inflationary pressure in Europe, as you know, the salary increase is on a higher level, and all of that. So nevertheless, even though raw materials, we are at the moment pushing to price increases.

[Erik Pettersson-Golrang]

And now the second question. You mentioned that the aggressive market for aerospace within Sealing Solutions had increased following some investments recently. Could you put some numbers on that?

[Peter Nilsson, President, CEO & Director]

I don't want to do that at the moment. We might get back to you on that later. But at the moment, we don't really want to give you any numbers. But I mean, we're not talking major anyway. We talk about individual percentages of the total sales of Sealing Solutions, but we have very strong growth. I mean, the aerospace -- give me some hints. I'm looking at Christofer. 15% or something of...

[Christofer Sjögren, Vice President of Investor Relations]

Yes, it's more than double digit.

[Peter Nilsson, President, CEO & Director]

Yes. But it is 15% of total sealing. And this 15% is more than double -- well above double-digit growth. So of course, you're going to -- but it's not going to be a dramatic change. But this 15% is going to grow in share of Sealing Solutions, but we're not talking about doubling it, of course. It's organically driven as well, primarily organically driven.

[Erik Pettersson-Golrang]

Yes. And then the final question on the investments on the 2-wheeler side. I mean, previously or historically, you've been quite eager to stress that you don't -- you're not in the consumer tire business, rather the opposite. Now you're investing there. What's changed?

[Peter Nilsson, President, CEO & Director]

No. It's simply we saw an opportunity in this niche as well. And that's when you say the consumer, [ talk consumer ] but we're aiming really at the high end. And we are niche-y in this. You might say that off-road motorcycle is not the biggest segment within the tire, but it's still an interesting segment. That is really the core. And when we have this, we also can touch on some on-the-road tires. And some of that it then also fairly close in terms of sales to the farm and agri part of it, because a lot of these sales is actually going into the farmer community as well. So that is why we see a link in that. And currently, we're running out of capacity in that area. And we saw this as a very cost-efficient way of growing capacity without really investing too much or without really taking too big financial risk in kind of making it possible for us to address a segment where we already have all the needed kind of access points.

[Erik Pettersson-Golrang]

And then a follow-up there. I mean, you're doing this through a JV structure, where you will hold 24%, I think, so you're not really in control. Is that the right way or the only option? There's no way for you to do it in your own fully controlled setup?

[Peter Nilsson, President, CEO & Director]

No. I mean, we're going to own the brand, and we're going to own the sales channels fully. So this is a pure kind of manufacturing set up. I mean, we're giving away to joint venture partners to sell these tires in India. But basically, for more or less all of the rest of the world, we're going to have exclusive sales rights. So that is we don't see that we're letting go of control. And we should say also -- this also creates a flexibility that we are not 100% promising that we will buy everything from him.

[Operator]

Our next question comes from the line of Malte Schulz of Commerzbank.

[Malte Christoph Schulz, Equity Analyst of Industrials]

Just 2 questions. First, I mean -- first of all, the oil price is still relatively low end. Is it something which has pushed some clients to delay orders? Or did you feel that there's also a heads-up in some of [ lines on ] some of the orders we have seen in Q3, have they been pushed out -- further out? I mean, also, when I incrementally look at your guidance, that sounds like you pushed it a little bit out by at least a quarter compared to a quarter ago. And so how satisfied are you -- or how confident are you that we will really see this uptick in -- at least in Q4? And the second question is, can you give us an update on your footprint realignment progress? By when do you have moved all the production? So partly [indiscernible], from when is it all finished and is it setup as you would have liked to have it.

[Peter Nilsson, President, CEO & Director]

Malte, it's difficult to hear you a little bit. But if I interpret you right, I mean, how confident are we that we're going to get the sales growth in Offshore & Construction, is that what you're asking?

[Malte Christoph Schulz, Equity Analyst of Industrials]

Yes, on the first one. I mean, you had to delay [indiscernible]

[Peter Nilsson, President, CEO & Director]

Yes. But then I mean, there were always a risk of delay. But I mean, we -- as we get orders on board, okay, we would like to supply as soon as we can, but whether that is really being pushed 1 quarter, Q4 or Q3, we would like it in Q3 instead of Q4, but we don't really care, to be honest. So that is more something that it will happen, and we will make sure that we supply as quick as we can and the current kind of orders is asking us. And when we say that we have a firm uptick in Q3, that is really what we see from the orders and when the customers at the moment is asking for delivery. And we are confident that we will be able to supply according to their kind of desired delivery date. But whether then it will change in the future, because we know also, I don't know if you're -- some of you are definitely aware. But in oil and gas area at the moment, there's actually talk about bottlenecks -- huge bottlenecks in the engineering side. A lot of these big engineering companies. So they are really struggling to execute the projects, because as we see the same growth in our order intake, they also see a big growth in their order intake and actually struggling to get the supply. I don't know, talk about in Norway, there is more than 3,000 redundancies at the moment within the oil and gas activities for engineers. So this is, of course, a concern for us, but we can only believe what the customer tells us. And if they're asking for delivery in Q3, then we, of course, are preparing for delivery in Q3. But whether then later on, they came back to us and they don't want it in -- until in Q4, we cannot do anything about that. So with the current estimate, with some cautiousness is that, that it will be, let's say, a tick up in Q3 and then, let's say, further increase in Q4 and going into 2020. That is what we see about orders at the moment. I don't know whether that is sufficient for you, Malte.

[Malte Christoph Schulz, Equity Analyst of Industrials]

Yes. So you don't see risk that we will lose volume overall, I mean, also out of Q3. What was -- my concern was more or less that it's kind of we see continuous pushing out of orders. So...

[Peter Nilsson, President, CEO & Director]

Impossible to say, honestly. I mean, we don't know that. And then on -- about the footprint alignment, I mean, we are working on that, and we are well according to our plan. And we feel that -- I mean, hopefully, it will never end. We will always get some kind of activities in order to improve the footprint and improve our efficiency. But I mean, the plans related to CGS integration, that is progressing according to plan. We will have -- as you said, we will have some upgrades in Czech Republic this year. We have completed our first round of investments now in Belgrade. We were down there last week -- 2 weeks ago to, let's say, confirm this. So we have been addressing that, and this is coming step-by-step. We cannot do all investments at the same time. We need to do it step-by-step. We need to make sure that we allocate competent resources to execute to those investments. So that is ongoing full year according to plan. Sorry, Malte, it was kind of difficult to hear your questions, and I hope I addressed it in the right way.

[Malte Christoph Schulz, Equity Analyst of Industrials]

Yes. Just 1 clarification. I mean, is there a particular point where you think that most of the footprint plan from CGS has finished? Is it something like Q2 or...

[Peter Nilsson, President, CEO & Director]

If you look, let's say, solely on that, so then Q2, I don't know, around -- probably it's going to run into a little bit, but the majority of the investments will be done this year, put it like that. And going into 2020, we will have probably some limited investments related to that. But the majority of all kind of footprint investments related to CGS acquisition will be done in 2019.

[Operator]

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

[Agnieszka Vilela, Research Analyst]

I have just one question on the -- on your income statement on the other operating income expenses line. It was SEK 183 million positive this quarter, quite above last year's SEK 71 million. And also, when I look at the full year, it's also quite positive. Can you just remind us what's in that line? And why is it swinging so much?

[Ulf Berghult, Chief Financial Officer]

That is mainly -- the main item that is currency on hedge contracts. We don't put that on gross margin. So swings on that could be plus or minus within -- in that line. That is the main. And then we also -- then we have other provisions plus and minus, which I can't comment individually, but that also swing -- could be a swing.

[Hampus Engellau, Automotive Analyst]

All right. I think we need to end there.

[Peter Nilsson, President, CEO & Director]

Unless you have a finishing question or...

[Hampus Engellau, Automotive Analyst]

I'll keep that.

[Peter Nilsson, President, CEO & Director]

Okay. Thanks a lot. And of course, we do follow up. Christofer is available for further, let's say, follow up and of course, Ulf and myself as well. And some we will meet here in a roadshow in the next few days. Otherwise, see you soon. Thanks a lot.

[Hampus Engellau, Automotive Analyst]

Thank you.