Trelleborg AB (publ) (TRELB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Trelleborg Conference Call. Today, I am pleased to present Peter Nilsson, CEO; Ulf Berghult, CFO; and Christofer Sjögren, Vice President, Investor Relations. [Operator Instructions] Christofer Sjögren, please begin your meeting.

Yes, good afternoon, everyone, and welcome to this brief update on the coronavirus' impact on Trelleborg during the first quarter of 2020. With me today, I have CEO Peter Nilsson and CFO, Ulf Berghult. I trust that you all have had the opportunity to read our press release, which was published today at 11 CET, which also includes a Q&A attachment. Before we start, let me just give some information on today's call. The purpose of this call is to shed some light on the current situation as well as looking back on the development in the first quarter. We will limit this update to the first quarter, i.e., we will not release any financial guidance on the second quarter and onwards. It is also our ambition to include the guidance for the second quarter in our upcoming quarterly report, which is due out on the 23rd of April. In this dynamic situation, Trelleborg will not give any more updates on the performance in the first quarter, besides this update call until we release our Q1 report. Now following CEO Peter Nilsson's remarks, there will be an opportunity to pose some questions to both Peter and Ulf, and we kindly ask you to refrain from asking forward-looking financial guidance questions. With that said, I welcome Peter to adjust the development in the current quarter. Peter?

Thank you, Christofer. Thanks all of you for joining this call, which we decided to do simply to try to be transparent and open about the situation, which we are currently in. Trust all of you is well aware of these turbulent times that we have had here over the last month or so. And of course, the situation is changing daily. Of course, we have been continuously tracking the development and continuously also following the Trelleborg, very decentralized model. Of course, we have the managers on all levels adjusting and changing their setups. And we have, of course, implemented measures all across all our units in order to address this new situation. And we are extensively using all kind of measures like layoffs, shortened working hours, temporary close of some facilities, either due to governmental laws or instructions and also, of course, in some circumstances -- some situations, we have also closed factories due to -- that our customers have been closing their factories. We have, of course, also in this kind of turbulent time, of course, increased our focus on cash flow and thereby, of course, working heavily on the working capital and also been addressing all CapEx as being discussed. I mean, this is something also unique situation for all the parts of Trelleborg. So a lot of actions ongoing. Having daily calls, every morning, update calls on what is going on, both country wise and also, let's say, organizational structural wise to our business areas. So this is kind of a very active period for us, but nevertheless we decided to give you this call and give you an opportunity to ask questions. And we should, of course, as usual, try to be as open and frank about our questions as we potentially can. But as Christofer mentioned, we're living in a quite volatile environment, and it's difficult really to give any guidance ahead. And that's why we don't really want to give any guidance ahead at the moment since we are simply changing our view here daily and implementing actions in accordance with our daily updates. Also in this -- since we have received a lot of questions, we are also clarifying our financial situation in terms of what kind of financing we have in place and what the overall covenants are for this financing, happy to discuss this further and explain a little bit more. I mean, this shouldn't really be news. It's been in our annual report, but nevertheless, happy to clarify any kind of outstanding questions in relation to this. So this is really -- I think I end here and then opening up for Q&A. So please go ahead and shoot questions.

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

It's Klas from Citi. First of all, thanks for the transparency and the call. It's good to see. The first question on Industrial Solutions versus Sealing. You talked about a significant downturn in Industrial Solutions towards the end of the quarter versus Sealing Solutions, negatively impacted by weaker demand towards the end of the quarter. So that, to me, feels like Industrial Solutions is much worse than Sealing so far at least. Yes, that's an indication, and this is not forward-looking, this is towards end of the quarter. And if we reflect back to the financial crisis, to me, that is made for Industrial Solutions, down 30-plus, maybe 40% in March. And maybe down 5% to 10% for Sealing. So just to get a feeling, Peter, for what's going on at the quarter exit?

Yes, let me then explain it because difference in business, and that is maybe also some general guidance for all of you. I mean, the businesses, which is more exposed to kind of distributors, dealers, is the one that we, let's say, hit the most here at the end of the quarter. And since we have some businesses within Sealing -- sorry, within Industrial Solutions, which is exposed to deals like rubber sheeting, like industrial houses and some other areas, I mean, they have been hard hit on the dealers and distributors being much more careful, while we have more line feed in a way where we kind of feed straight on to the assembly lines like that Sealing Solutions, that is, let's say, less hit by this. But I mean, I don't really want to -- it's difficult at the moment, Klas. I understand that you're looking for guidance. But I don't really want to give any further kind of figure guidance than we give here simply that Industrial Solutions is a little bit further down than what we see in Sealing Solutions. With all that said and done, also like everybody else has been stated, the order books actually look quite good, but we don't really believe in order books. That is the challenge for us at the moment.

Yes. No, that's very clear. Obviously, Sealing can of course, weaken ahead. My second one is, okay, I'm not going to ask like guidance, but I still want to hear your comment on automotive, Peter, and aerospace, 2 end markets that will really nosedive. You have the brake shims business, which is more like aftermarket in the automotive business. So what is your total autos exposure that is purely linked to car production right now? Or do you see the aftermarket type business taking hit as well on less utilization of the fleet? And then aerospace during the fourth quarter, you were still pretty optimistic versus the 737 MAX shutdowns, obviously, it's a very, very different picture now. Have you seen any impact in aero as well? I mean, just through the quarter, no guidance through the quarter.

No. The challenge here, I mean, also in order to be fully transparent, the order book still looks good for aerospace, if you like that. And the order book still looks relatively okay for the automotive. As you know, the general automotive is that you're working with this 8-week schedules. And the 8-week schedule is kind of legal commitment, if you may say, from the automotive suppliers. So we are, of course, discussing individually with them in order to what to deliver and not to deliver. So I mean, the major drop, it's not like it's a full stop when this has happened. But of course, we expect it to go down dramatically here if we look for the full Q2. But the major drop here at the end of the quarter is substantial, but it's not like it's a full stop for the automotive. And with that said and done, I mean, our automotive exposure directly to OE is slightly less than 10%. But I don't really -- 8% or something like that of our total sales. But that is not a full stop. So don't catapult that because there are still these 8-week commitments. And then, of course, individual discussions whether to supply it or keep it. And the difference always is acting in a different way in this respect, to be honest. And that is where we have individual discussions with each of them. As for aerospace, it's also kind of a slower stop also there. So we expect kind of not any major impact for that in Q1, but the major impact we will also hear happen in Q2. So there, it's not really that -- the guidance is that you're relatively okay. In Q1, even though we have seen the last year March, where there is some downturn. But with that said and done, on our aerospace, I think if you go back to last year, we had some kind of extraordinary growth in that. So of course, year-on-year, it's going to be down. But the run rate compared to, let's say, last quarter, it's not really that much down.

Yes. My third and final one is on staff and the situation. Could you say anything about how many employees are now on the short-term working, how many temps have left the group? I appreciate it's difficult to talk about layoffs, but from other company -- yes?

I mean, let's put like thousands -- thousands of people is on short-term week, and we have given notice and we have salary cuts. I mean, that's happening all over the place. I mean, we have cut our salaries at the head office and we have -- so all of that is already happening. And -- but to give numbers, it's like thousands of people is impacted by this and already been impacted for a few weeks. So that is not kind of something we have been waiting and doing. That is kind of with the weekly updates. And in Sweden, of course, you have official figures. And I think we -- as of yesterday, it was some 600 people -- 600, 700 people in Sweden. Was in our, let's say, among our employees, who was given the say, notice on short working weeks. So that is thousands of people impacted across the group. But I mean, once again, it's daily and also depending because the legislation and the systems are different in different areas. In some areas, you can apply for short working weeks, but then you cannot give notice. In other areas, you can go short working weeks and notice. In certain legislations, you don't have to give notice, you simply ask people go home. So that is a little bit -- a lot difference on the various countries. So we are running a daily update country-by-country and also then in parallel thereby kind of the operational organization and business areas. So daily, we run through the action plan on business area level, and we also run it through on country level. Because on country level, you need coordination in accordance with the local legislation and rules. So it's kind of a matrix that we're running in that respect.

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

I have 2 questions. You write in the Q&A material that the earnings trend has been relatively stable. And the question is for what period and stable compared to what? Is it an absolute number compared to year ago last quarter -- margin compared to year ago last quarter?

We are mainly -- I mean, January, February, as we said, was in line, both in terms of margin and absolute earnings, if you may say. But then, of course, we've been dropping a little bit in March. So -- but March is also sales down. So we expect kind of a margin drop year-on-year, but it's now trending relatively stable, and that is what we're seeing. It's not kind of a drama, but when we refer to it, of course, I mean, the reference is previous year.

Okay. And then the second [ quarter ] is on the strike that you've seen in Industrial, what did it concern? And how much of an issue was that in terms of earnings and sales?

In Turkey, it was about salary. High inflation in Turkey and it was really a salary discussion. While in France, it was more a general strike that created some problems. So there are kind of independent reasons for those. It was simply that this was hitting one of the areas hard since we couldn't really ship or sell for a week or so.

Okay. Then the last question, similar organic decline in Wheel, as you saw in Q4. Was there much less so that we realize the production announcement from the OEs had come very late in the quarter, but we didn't see sort of an impact on the aftermarket and so on towards the last part of Q1 there?

Limited, very limited. So there was simply the last 2 weeks or something of that where we saw the OE impact. But -- and then also to notice compared quarter-on-quarter, of course, in this quarter, as we indicated after the full year call, I mean, we are being manufacturing basically in line with the sales. So I mean, we don't have under production in this quarter.

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

I have a couple of questions. Starting with your current production capacity. Can you tell us how much it is closed as of today?

I don't know. I've not checked the last hour, I say, but this is kind of a daily activity. But I mean in total, I should say, vast majority of our factories is up and running, where we have some factories with a high absenteeism and some high -- a lot of people being away on sick leave and all of that. But in total, I mean, we have not been -- with the very, very few exceptions, we have been able to supply what the customer is asking for. So our concern is not really the kind of production capacity at the moment, it is more to support our customers. And for the time being, we are supporting. But that is daily. I mean, we had a regulation in Italy a week ago, where we were allowed to keep open. But now in Italy, the unions are pushing for a closure. And so that is being discussed on how to solve it. And these kind of discussions we have in -- I think in total, I think we have, at the moment, something between 5 or 10 factories closed, where a few of them is actually our own decision and a few of them is by authorities. So -- and it's changing daily and yes. I mean, it's really difficult to see because it's also the -- challenge is not only the legislations, we have also in several countries also know what unions is pushing. And I mean, in most places, we have implemented very good measures, and we are kind of well ahead of the kind of asked-for measures and asked-for incentives to protect our workers. And so we have very strong support from our local unions, but sometimes the central unions is kind of pushing in a different direction, and that is kind of a negotiation that we are managing in a lot of locations at the moment.

Understand. Have you seen any supply chain issues for your guys?

Not really. In and out, I mean, we have -- I cannot really -- we don't really have any incoming material problems anywhere. We have had for a few days in Italy before it was sorted out, when it was actually closing a border and all of that, which was needed in terms of documentation. But that was not really a big issue. And outgoing has also been fine, outgoing -- the freight expenses have been going up, but we have never really missed kind of delivery due to the fact that we couldn't find trucks or we couldn't find any ways of moving products. So of course, it's happening. But I mean, in most cases, when it's actually a problem, we have been able to find mutually acceptable solutions with our customers. With that said and done, we can expect -- because now we've been running only for a few weeks of problems and kind of we expect that to be a problem going forward. But at the moment, we don't really see it coming anywhere, to be honest. We have a few cases in Sri Lanka, where the port was closed for a few days, and -- but that is -- we have in Italy now coming up a little bit potential problems. But I mean, once again, it's not really been unsolvable problems up until now at least.

Perfect. And then some questions on the balance sheet. You have some loans that are maturing in 2020 and 2021 of about SEK 4 billion according to your annual report. What is your assessment of the credit markets for you right now? And would you consider drawing down on the RCF that you have just to roll the launch?

Basically, is that we have -- the RCF is a backup on the short -- short money, so I'd say. And if we will have a problem with the short-term money, then we will of course, then utilize RCF. But so far, we have not utilized the big RCF, and we have increased the liquidity. So we have good liquidity and we have the strategy in place, so I'd say, that we have long-term facilities that will have backing up the short-term facilities.

And otherwise, on the cash flow, obviously, you have now postponed part of the dividend. But you also mentioned that you could consider some CapEx cuts now in the current situation. Can you just elaborate on that?

I don't know what you referred to. I mean, we are cutting CapEx and -- but the dividend is a decision for the AGM. So that is something the proposal is as it is.

But of course, from the CapEx point of view, we are very strict on CapEx going forward. So we only allow more or less critical CapExes going through the system.

At the moment though.

At the moment.

And what's the kind of maintenance CapEx...

I don't know what you referred to Agnieszka.

Yes. Yes. But what's the maintenance CapEx that you have, if you could remind us about that?

Now what we normally say is that we have the underlying base that is about SEK 1.1 billion in depreciation, which they normally would be allowed to spend. On top of that, then we individually, we approve strategic CapExes. But even that SEK 1.1 billion is then cut. So we only do -- right now, we only do what is necessary for not harming the business on short term and yes...

I mean, I think, Agnieszka, we cannot give -- I mean, we are in the middle of -- we've been working on this now for a few weeks, and we have given instructions to minimize the CapEx, and we are not really, to full scope at the moment, able to give you a new guidance for the full year CapEx. Simply that is going to be substantially lower than the previous guidance, but we cannot see exactly how much at the moment.

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

Two questions for me. We've seen a lot of announced production stocks as of around 25 March among OEMs and many of your customers. With -- I'm sure you have gone through this by company and by customer. Would it possible for you to maybe shed some light on what proportion of your customer base that have actually announced production stocks ranging from 2 to 40 weeks, coming into second quarter? Second question is on the oil and gas, of course, given that the major drop was in the oil price. How has that changed -- how you operate your business on the development? I speak, of course, of the offshore business.

Yes, I mean, obviously, production stock is fairly small size production stocks, which has been decided at the moment. Of course, we have the automotive, but less than 10%. We have a recent announcement by several of the ordering equipment for agriculture and then, of course, following down the line. We are -- but at the moment, we are not impacted by that, and we are watching it daily. But as you say, it's basically only the second part of March, where this has been an impact for us and difficult samples to give any kind of guidance of how much it is at the moment. It is once again a daily change and you agree on the various special arrangements to do it. So I don't -- I cannot really give you a percentage of that. I mean the only thing which is kind of heavily impacting us at the moment is automotive. And then going forward, also agri OE that is probably the biggest 2 areas. But beyond that, we have not seen a lot of impact for kind of smaller factories in France or smaller customers in Spain or Italy, which I think is the 3 countries, which is mostly affected kind of outside of automotive. And the second question, oil and gas. Oil and gas, we still, as we say, we have a good order book and we have not yet at least seen any kind of major -- not any major -- not any kind of stopping on this running project. I mean, as you know, we're moving into this quarter with a fairly sizable kind of organic growth compared to a year ago. And we are not -- the only thing, of course, where we have been is site jobs, I mean, some part of our offshore activities, site installations and all of that, that's being stopped. And we are once again watching. There's still a lot of pending projects in the market, and we have not really seen a stop of that yet. But of course, we're expecting that, and we are kind of adjusting our cost base and then looking into what to do to adjust. But I mean, for what you can see at the moment, it is not going to be a major impact at least for the next 1 or 2 quarters. So that is kind of beyond that, that we're going to see from oil and gas. And I mean overall plan for this business under development is still the same. Of course, we are -- it is not improving the situation for oil and gas, what is happening now. But I mean, our plan was still to wait until we will have a little bit better order book in days, which might not be happening now. So of course, we're looking now into more wintering. While, as you say, also the other big part of business development, printing solutions is probably the one business which has been least impacted actually with this corona since you're printing more newspapers and you're printing more and it's been deemed as a kind of a critical business by most governments. So they are still supported and they are actually doing very well, all considered.

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

Just a few ones. So one for you, Ulf, on net working capital. How should we think about this in a downturn? Do you feel that you were overstocked going into this in certain segments? Inventories and sales have come down the last 2 years, but I still want to ask. And then on receivables, some companies in the space use factoring, which can create some unusual year-end swings. To what extent do you outsource the collection?

We don't have any -- on accounts receivable, we don't have any factoring. And we have -- as we also had mentioned in Q4 on Wheels, we then -- one of the hits on the P&L, was with that, we took down the stock. So overall, we still have some trimming to do on the inventory, but it's not a major one. So the major one was then to trip down Wheels in quarter four. And part of the actions that we do, that we have a special focus on, not building stock or kind of creating a future problem. And also then, we have a special view on overdue receivables, so we don't want to end up with future problems. And people understand all the business areas, the 3 business areas and also the budget. They have clearly understood the message that cash is king. And so they have a high focus on working capital.

As in general, Klas, I can only comment, I mean, this is high on the agenda -- it's been high on the agenda for some time. And we feel we have good control of the working capital. I mean, overdues is on a relatively low level in all comparisons. And of course, we expect that we need to watch it a bit further than usual, but we have been watching it quite good, and we have been managing it quite good. So we have a fairly limited problems in the account receivables at the moment. Of course, we expect it to increase, and we need to watch it going forward and also like Ulf commented on inventory levels, we have been working on inventory for quite some time, and we don't feel that we have any kind of excessive inventory. Then, of course, it's always a challenge if the business goes down, we need to also underproduce. But that is something also that we are prepared to do. We don't really want to save the EBIT by overproducing. We're going to adjust our production levels in accordance with the demand we see in the market. So -- and we feel that going into this quarter and -- we are, let's say, running at a good level with good control.

Yes, of course. No, I know you will underproduce in a downturn. I was more thinking outside of Wheels. You've done a really good job on Wheels, but it seems to be okay outside as well. On just oil and gas, can you give us a feeling for how much -- because it's difficult for us to break it out completely. How much have we recovered from the trough, Peter? I guess, that's our starting point, thinking about how much we call back to. Okay. Guidance again. I'm not saying that. But are we at 30% to 40% from the trough or?

Yes, I would say, even more, I guess, from the trough. If you -- so we are. I don't really -- I don't have the figure. I don't know. Christofer is on the line as well. I don't know, Christofer, if you want to comment on that, you might have a better...

Well, it's a very tough question to answer because, as you know, our structural -- structure of that unit has changed a lot, also we have downsized. So I would say we are away from the trough and away from -- somewhere in the middle of between trough and the peak, I would say.

Next question comes from the line of Malte Schulz from Commerzbank.

First of all maybe on your hedgings and, also, do you have -- because you now require a lot less input material as well I assume if you downsize your production, do you incur some hedging losses on some commodities, which have formed, but you don't regain these advantages as by cheaper procurement? And the second question would be a little bit you touched already on your transport cost, but can you quantify maybe a little bit over the past 2 weeks by how much your transport costs have on average maybe increased? And do you also face any late delivery payments? And my final question, but if you might be able to shed some more light on your current liquidity, you said it's quite strong, but can you also provide us with a number, how much liquidity you had available as of yesterday?

On the raw material hedging, we don't -- generally, we don't do raw material hedging, and we don't really have any long-term commitments on that one. So we feel we are very flexible, and we feel that we are in a good position now to -- as I trust all of you know, oil prices are going down at the same time, demand going down. So we have a very, let's say, volatile development along the raw materials. And I think we are in a good position to benefit from this. Of course, the problem is that we will manufacture less, but that is something that we are working on. So we don't feel any problems. But on the transport cost, it is kind of neglectable. I think that the crisis here on the transport because it was more actually in the first 1 or 2 weeks of this, but there's been naturalized in the last few -- in the last week or so, the transport cost is actually going down again. So that is where new setup is being arranged. And also in the beginning, it was a lot about import, export on disclosed borders, how to manage it, what papers do you need, what is the routine to go through a closed border all of that. And most of that has now been settled and established kind of a structure around that. So this, I see, okay, we're probably going to pay a little bit more for the transport, but it's not really a noticeable cost for us at the moment. Sea freight is getting actually cheaper. So there is a benefit in that. So there is a little bit balance, but not any major thing. What was that? Liquidity, I mean, we don't really want to give a bigger...

I want to comment that. That's more -- we feel that it's...

We have sufficient...

We have sufficience.

To -- yes, for now and for the future, we don't see a liquidity problem approaching unless the default bank system falls into pieces, but I mean, that, of course, is something else. So we don't really see us, from a balance sheet perspective, having any kind of liquidity problems. We are ready for tough scenarios in that respect. Malte, what was the final -- maybe I missed the question.

Yes, but maybe if you allow one more. Have you been already approached by some clients to delay payments or to -- or by some suppliers that you help them a little bit over the -- your more stronger financial company that you help them a little bit with either paying earlier or receiving payments later? Nothing like that at the moment. It might come, and then we need to have, let's say, a pragmatic discussion and decide whether we want to support or not. But at the moment, it's really not on the table. And we have not seen any kind of slide on overdues or anything so far. We are monitoring it closely, of course, but we have not been given any indication basically from anywhere that there is kind of a major shift. Of course, always customer has difficulty paying, but it's not really any more problems at the moment than it was 6 months ago. So we don't really see any change in that at the moment. But because we are prepared for it, and we are watching it much closer than we -- we have been watching it close, but it's getting even closer watched now and now at the moment. But once again, so far, no issues identified.

Next question is a follow-up question from Agnieszka Vilela from Nordea.

Just a follow-up on Erik's question about the earnings trend that you see. You said that you referred to year-on-year kind of thinking here. Looking sequentially Q1 margin is usually, let's say, 2 to 3 percentage points stronger than in Q4. And Q4 this year or last year was affected by the weakness in Wheel to a large extent. So do you still expect basically that the margin will improve from Q4 in Q1 and quite substantially despite the things that are happening right now?

Now you're trying, Agnieszka, [indiscernible]. So it's really a -- no, no, I mean, we are -- I understand it's challenging for you, but it's also a trust you need also to respect it's also not that easy for us. So this is what we can guide you, and we don't really want to give you any further guidance on that. I'm sorry.

Okay, but stable earnings, you mean quite stable then year-on-year?

Quite stable in terms of margin compared to a year ago. I mean, that is really -- of course, it's getting a little bit hit, but it's not really a major hit that you could in worst case scenarios.

There are no further questions registered. I'll hand back to Christofer Sjögren for any closing comments.

Okay. Thank you very much. Let me wrap up this call by thank you all for calling in. We at Trelleborg, wish you all to stay safe, and let me remind you once again, that we are now entering our silent period. So Trelleborg will not do any more updates on the performance in the first quarter until we release our Q1 report on the 23rd of April, and we'll talk to you then in a few weeks' time. Thank you very much.

Bye.