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Earnings Transcript for TREL-B.ST - Q2 Fiscal Year 2023

Peter Nilsson: Hello, everybody. And welcome to this Half Year Report of Trelleborg and we will focus on our Quarter Two Performance of 2023. As usual, in these calls, I, Peter Nilsson is starting the call and also ending it. And in between, also, I will have Fredrik Nilsson, our CFO, assisting with the financials and also in the room here, we have also Christofer Sjogren, Head of Investor Relations. If there is any questions that might be directed to him as well. So you notice, he might join as well. But kicking off, and as usual, using the presentation that is on our webpage as a guidance throughout this call. Turning to page two in this deck, agenda, starting off with the highlights, then some individual comments on our business areas, and then, Fredrik, will guide you through the financials before I do the summary and also some comments on the running quarter, and then, as usual, also finishing off with a Q&A session. Turning to page three. Heading for our quarter, another strong quarter and we are performing good and we are generally satisfied with the development throughout the quarter. Sales came in with SEK8.7 billion, which is a strong increase compared to last year, an increase of 18%, which is then split on organic sales some 3%, M&A 9% and currency 6%. EBITA up by 14% to SEK1,563 million, which is then corresponding to 7.9% -- 17.9%. And maybe there a comment, I saw somewhat early flashes here that we are ending up at 18.0% and this is a rounding error in our calculation is actually ending up in 17.94%, but then when you calculate it with full millions is actually coming up at 18.0%. So that is the discrepancy here, which might be noted by some of you and this is the highest quarterly EBITA to-date for us. Items affecting comparability coming up at minus SEK194 million and we are also increasing the guidance on items effecting comparatively. Fredrik will get back and comment on that in his part of the presentation. Very strong cash flow in the quarter, which is, of course, very satisfactory as well that we see that we are managing inventory and managing accountable and managing our purchasing in a good way, which is basically a doubling of the cash flow compared to two years ago with a very strong cash conversion now also in the last 12 months, but also that Fredrik will come back and comment more focused on that. Also a very kind of -- very or should I say, a quarter with a dramatically changed Trelleborg in a way that we now finally, we might say, we concluded in the quarter, we concluded the divestments of our tire business and as well our printing blanket operations, which then, let’s say, is leaving this -- finally leaving this behind us and now we can focus on the remaining Trelleborg fully. And following this, we also had a Capital Market Day in the quarter where we then increased both our financial, as well as our sustainability targets, which I trust all of you or, hopefully, most of you already noticed. We will not comment a lot about that in this call, but those of you who want more of that, you can come back and read on the press release from this Capital Market Day and also, of course, mentioned also in the quarterly report. So a very, let’s say, a quarter for us with a lot of things happening and with a strong focus on the future of Trelleborg, I can comment on that now that we are building a new Trelleborg and with a strong focus on what Trelleborg is to be. But meanwhile, also delivering, we feel strong figures in the quarter. Moving to page four and more comments on the organic sales. And here also rounding, just to be also clear on that, our exact organic growth is actually 3.4%, so a little bit closer to 4% than maybe some of you noted in your comments, at least the sell-side analysts noted in the comments, but the total is 3.4%, which is then basically evenly split where we have 3% in Europe, 4% North and South America and 4% in Asia and rest of the world. So very evenly split organic sales in the geographical regions that we are following across the world. Page five then, agenda again, business areas and then quickly moving to page six, which a comment on Industrial Solutions. We’re heading here a solid quarter in all aspects. Organic sales plus 6%, which is somewhat, let’s say, mixed performance throughout the different segments. But nevertheless, let’s say, a solid plus 6% in the quarter, very strong sales, especially for LNG-related businesses and also for Marine Solutions and port and marine operations. We also see healthy growth in aerospace also automotive. We -- kicking back and also we have some nice railway projects being delivered in the quarter, somewhat weaker sales, which is, I guess, well-known, residential construction is down with fairly sizable figures and so certain Industrial segments with less so down. But nevertheless, we continue to note that the sales that we have into kind of wholesale or distributor networks was weak for us in the quarter. Overall, EBITA improved on sales growth and we’re keeping a very strong margin from last year, which was kind of a record high margin a year ago, but we are happy to deliver a margin very well in line with this very strong quarter a year ago. And also satisfactory, we can say that inflation, which is, of course, hitting us both in raw material, even though raw material is flattening out, but we will see this kind of labor inflation and general inflation, of course, still hurting the business, but we feel satisfied with the fact that we have been fully been able to compensate for this. So a very solid quarter for Industrial Solutions, happy with the performance and well managed in most aspects. Look at Sealing, also well managed. But here, the demand picture is somewhat more mixed. Organic sales up about 1%, but of course, M&A kicking up with 16% up, which then is -- and then some currency on top of that, which means there is a very strong growth of 23% in sales in the quarter in Swedish kronas. Sales growing in Americas, flattish in Europe and weaker in Asia, while we have a little bit slower sales development in China, especially for us where other market is somewhat compensated -- compensating, but China is the biggest market for us in Asia and we have had the fairly weak sales in China in the quarter. Also overall in the business areas, we will note that sales to aerospace and healthcare and medical increased considerably we say. We are investing into these segments, which is also partly an expansion on the lower margin that we are kind of adding resources in order to create even better growth platforms and make sure that we create solid growth in this aerospace and healthcare medical and also in some other segments that we have deemed to be our, what we call a speedboat proceeding solutions. We are investing in this and we are not really focusing on this individual quarter. We are very focused on creating a platform for the future. Sales to automotive increased slightly. There also some mixed performance there between OE and aftermarket, where OE was strong, while aftermarket a little bit surprisingly was a bit lower in the quarter, but we see that bouncing back. Also Industrial demand is mixed. If you look at the different geographies and we look at the different segments, we note that some of the segments like the more construction-related segments or more construction equipment-related segments are a little bit lower, while other Industrial segments are better. Here, we are -- our view on it is that we also see some inventory reduction among some of our customers in these segments and that is something, of course, we’re watching carefully and where we are a little bit, let’s say, flexible in the way we ought to manage this. EBITA improved in the quarter on the higher sales and the integration of M&A, while M&A the EBITA margin was somewhat down, well known that the initial lower margin that we get from this acquired growth here and we also -- also which I only commented, we are also investing. So we have some sizable number of new headcounts here in order to create better growth for the future. But overall, moving forward in the right direction within Sealing Solutions, we are building a new platform. We are integrating Minnesota Rubber in a good way and we are refocusing the business a little bit to make sure that we are creating a better long-term growth platform for Sealing Solutions. Turning then to page eight, which is the Sustainability KPI. We are improving, as you see, especially intensity, but we also note here that the incoming Minnesota is not as good as the rest of Trelleborg and we see future improvement possibilities there. But nevertheless, overall, still an improvement in terms of CO2, and we are feeling more and more confident that we will be able to deliver on our long-term targets here which relates to CO2 emissions and CO2 intensity. Moving then to page nine, where we especially track to other areas of sustainability and renewable energy. But also here, we see even though it’s a 1 percentage point up, but also here, we note that Minnesota is coming on with almost zero renewable energy. So if we exclude Minnesota, we’ll have a better improvement here. I think we’re going, if I remember it correctly from 46% up to 53%, and now, of course, we also start to work with Minnesota and we do see great opportunities to improve in this. So we feel confident -- comfortable also in this aspect that we will continue to improve considerably in the next quarters. Also tracking and also monitoring externally is our lost work cases in this one, also we see even though it’s a small number in total, we are not overly concerned on this, but we notice satisfaction also here that this is kind of getting better and this is also an area we will continue to invest and we will continue to improve. Turning to page 10, agenda, financials and then leaving to Fredrik to guide you through starting at page 11. Fredrik, please go ahead.
Fredrik Nilsson: Thank you, Peter. Looking at the sales development. Organic sales increased by 3% in the quarter, with organic growth in both business areas. Reported net sales up 18% in the quarter. We had 9% impact from acquisitions and currency added another 6%. Moving on to page 12, showing the historical organic growth. The second quarter was another quarter above our sales growth target. And as you also can see in the graph, we have now nine quarters in a row that has been above 8%. Moving on to page 13, showing the quarterly sales of rolling 12 months for continuing operations, the SEK869 billion in sales were the highest for our second quarter and if we look at rolling 12 months, the sales reached SEK33.1 billion. Moving on to page 14. We had a record high EBITA for a quarter and it reached SEK1,563 million and that was an increase with 14% compared to corresponding quarter with profit growth, as Peter mentioned, for both Industrial Solutions and Sealing Solutions. In the result, there was also a positive FX translation impact of SEK63 million in the quarter. The EBITA margin, 17.9% in the quarter, which was initially impacted by acquisitions with lower margin. Moving on to page 15 and looking at EBITA and EBITA margin on rolling 12 months. The positive trend on EBITA continued during the quarter, while the margin declined as earlier mentioned. Looking at rolling 12, the EBITA amounted to almost SEK5.8 billion and with a margin of 17.4%. Moving on to page 16, going into some further details in the profit and loss. We have items affecting comparability in the quarter of SEK194 million and we have taken some initiatives to adjust our cost base. That’s the reason why you’re seeing a higher amount during the second quarter compared to the first quarter and I will come back with the guidance for the full year a little bit later. If we continue further down in the income statement, we have a financial net, which was positive in the quarter of SEK140 million as it was impacted by a non-recurring income of SEK218 million before tax. This was related that we closed some interest rate hedges in connection with repayment of loan when we divested the real business. Looking at tax, tax rate was high in the quarter of 35%, compared to 24% last year, but it was impacted by a non-recurring tax expense of SEK150 million in the quarter. This was due to that we made some changes in the Group’s legal structure after the wheels’ divestments. So if we exclude for that one-off charge to the tax line, the underlying tax cost for the quarter was 25%. Net profit for discontinued operations includes the capital gain for the tire business and printing blanket business, and the total capital gain amounts to SEK6,189 million before tax and SEK6,052 million after tax. Moving on to page 17, earnings per share. If we look at items excluding affecting comparability, up nicely with 30% to 4.71%. And if we’re then looking at the total Group, then of course, it was up quite significantly due to that we have the one-off gain linked to the wheels and the printing blanket business and then it amounted to SEK27.67 per share. Moving on to page 18, looking at the cash flow, which was really strong in the quarter, amounted to SEK1,585 million, compared to SEK798 million a year ago. Good EBITDA improvement, but even more encouraging a strong working capital improvement compared to last year. Then as earlier communicated, CapEx slightly higher compared to last year. Moving on to cash conversion, and as Peter also mentioned, we have a good cash conversion. You can also see the trend is going in the right direction since a couple of quarters back. Moving on to page 20, gearing and leverage development, and here, I would like to highlight that we now are in a net cash position. So all KPIs here will look negative, but that is due to that we are in a net cash position. So if you look at the reported debt ratio, that becomes negative with minus 4% and net cash in relation to EBITDA is 0.1% in the quarter. We have also continued to buy back share -- owned shares during the quarter and that’s amounted to SEK957 million during the second quarter. Moving on to page 21, return on capital employed reached 13.9% in the quarter and this was impacted by acquisitions, which initially has lower returns. I will finish off this section by the financial guidelines for the full year. Most of them are unchanged. But if we start with CapEx of SEK1.5 billion for the full year, unchanged. Restructuring costs, we have increased from SEK250 million to SEK400 million and that is due to that we have adjusted our cost base to the somewhat lower demand and also that we are working with some of the acquisitions to realize some of the synergies. Amortization of intangibles unchanged of SEK500 million and underlying tax rate for the full year remains unchanged at 26%. By that, I would like to hand back the microphone to you, Peter.
Peter Nilsson: Thank you. And quickly moving at the page 23, agenda again, summary and some finishing off and then comments on the outlook for the running quarter. Page 24, another strong quarter, strong sales increase of 18% and split on organic sales, M&A, up almost 10%. Currency, of course, also benefit as we all know from the Swedish kronas weakness and EBITA up by 14% and to a margin of 17.9% or 18.0% depending on how you calculate and this is then turning out to the highest quarterly EBITA to-date. Items affecting comparability is somewhat higher on a higher level, with also Fredrik also comment on linked to some ongoing measures to adjust in the areas where we are, let’s say, hit with the lower demand, but also to make sure that we get the synergies out of the acquisition -- acquisitions kind of announced. Cash flow, very strong, almost doubling two a year ago, which then turning into a very solid cash conversion. And of course, also, we noted satisfaction with all of you already know that we have, let’s say, fully finalized now the disposals of the tire business and the printing blankets and that is also on the Captain Marketer Day, which we held a few months ago, we also updated our financial and sustainability targets. Once again, you can read more about them in the press release for this event or in our quarterly report. Turning to page 25. We are guiding for the running quarter to have a somewhat lower end of the second quarter. We are not really seeing yet, if I say the underlying demand deteriorating, but of course, we note with kind of some awareness that, let’s say, the external macro data continues to go down and we also see our customers in some areas becoming a little more careful with focusing on inventory and also with kind of the order backlog. We also see that when some of the customers being a little more careful. So, all in all, we made the conclusion that it’s going to continue to be a somewhat lower demand in Q3 compared to Q2. No drama in this and this is the direction which we feel is well in line with the kind of the ways all once again all the macro data is being reported and the guidance that we usually follow ISM or VDMA or whatever is, of course, pointing towards a slightly sour environment. But that is an area -- that is the kind of the development, which actually we are quite okay with as we are kind of working on integration of acquisitions and we’re working and creating a better platform for growth being forward and also with the strong balance sheet we have and our ambition to continue to make M&A, which is also might be a development, which is actually good for us in these aspects and that is something, of course, we’re working actively with to try to utilize this uncertainty, which we see in certain parts of the market. And then, of course, we know the political situation, as all of you know, with Russia-Ukraine and other kind of discussions ongoing. There is, let’s say, as we see it a higher degree of uncertainty in these aspects that are normal and that is why we’re making a special point on that as well. Turning to page 26, agenda, Q&A, and then quickly turning to page 27 and opening up for questions. So please go ahead, those of you interested in getting some more flavor on this report. So please go ahead.
Operator: [Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier. Please go ahead.
Karl Bokvist: Yes. Hello. Thank you and good afternoon. First one just on the outlook comment there and if you feel that the somewhat lower demand you anticipate is due to mainly a change in kind of end market demand or if it’s more related to the inventory adjustment among your customers?
Peter Nilsson: It’s a combination. We see in some markets. We say, let’s say, construction-related markets and indirectly some construction equipment, maybe some agriculture in those areas, which is a kind of a strong consumer of different kind of hydraulic and pneumatics power equipment, where we see a weakening. I mean we see the order backlog, I don’t have an idea, I only briefly checked on the Volvo, but I saw the, I know the construction equipment is down by some 40%, if I’m correct. And I mean, this is, of course, something we also see in this part of the market. But also in other areas, we also see this more focus on inventory and focus. I mean you should say that is a part of inventory reduction, but also I think an impact from -- and that is where it gets a little bit more difficult impact from a reduction in lead times, because the capacity is increasing and we see that delivery times getting shorter and we see some of the customer’s order with kind of a little bit shorter cycles. So, but overall, it’s a mix of, let’s say, inventory reduction for sure, let’s call, we see in certain areas where we see it’s a weakening. But also to balance that, of course, on strengthening -- continued strengthening automotive doing fine and we see also aerospace and medical healthcare continuing. We see also some other, let’s say, end markets, which is still strong. But overall, we see in the big segment of Sealing Solutions with this kind of fluid power, which is related to construction equipment, different kind of tools and different kind of equipment where there is certain weakening for sure. I don’t know whether that is enough for you.
Karl Bokvist: Yeah. No. That’s good. Thank you. And then within Industrial Solutions, the EBITA margins are up clearly compared to the first quarter. Seasonality is one thing, but there seems to be other aspects here as well. So could you just explain, if in case there are any particular aspects to keep in mind, and also, just going forward, how we should think about the profitability within Industrial towards the coming quarters really in case there is also a bit of -- end market?
Peter Nilsson: I mean, we’ll see -- there’s a mix. I mean we have already commented. I mean that is a good. I mean within Industrial Solutions, it’s a mix of early cycle, light cyclical and light -- late cyclical, which is more railway, marine construction and maybe some LNG is kind of living its own life in a way, oil and gas. So there is a combination and we -- this is some ups and downs, but it’s well managed. We are, let’s say, quickly adjusting for the down segment, while trying to benefit from the up segment. So we don’t really -- it’s not a particular change from before. I mean, we -- I think we guided on the Capital Market Day that we’re still aiming for a slight uptick in margin year-on-year, but it’s not going to be any drama and we feel that we’re moving this business in a step-by-step improvement area. But I don’t really want to give any more guideline exactly on the margin or what we’re doing. This is a long-term effort and that has been -- Industrial Solutions has been improving for a multiple of years step-by-step and that is kind of the ambition going forward as well.
Karl Bokvist: Understood. And then just a final one on, perhaps, let’s call it, the timing in between now and you are investing and adding costs related to Medical and Minnesota, and when you first expect to start realizing synergies, be it on revenue or costs?
Peter Nilsson: Cost synergies is fairly okay from Minnesota. I think that has been well delivered. But, of course, the sales synergies as we aiming for takes a little bit longer time. And I mean it’s really -- we have guided that we’re going to be back and we have no kind of margin impact from lower initial margin in MLP [ph] in two years, three years and I think that is something that we need to adjust to. And of course, step-by-step, we’re going to get closer to that overall margin within Sealing, and at the same time, also start to get the benefit from. We are already getting benefits in partly in aerospace and medical and healthcare and that is something that we also continue to invest. So we are kind of ahead of the curve and maybe investing more than we get the benefits. If we you simply focus on margin optimization then, probably, we shouldn’t invest in this, but we want to create a better long-term growth profile and that is kind of our target at the moment to build a better Trelleborg with a long-term focus and to get and deliver on these targets that we have that we’re going to get to an EBITA margin of 20% plus and on top of that also delivering solid growth here of some above 8% annually. And I mean, we feel that we are well in line, well, let’s say, geared up to achieve that and that is kind of our target at the moment to create the foundation, which will deliver this financial KPIs over time.
Karl Bokvist: Understood. That’s all for me. Thank you.
Operator: The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind: Thank you. Hi. Hey, Peter and Fredrik, it’s Klas Bergelind.
Peter Nilsson: Hi.
Klas Bergelind: My first question was also on, Peter, I want to come back to the margin here. To me, at the Capital Markets Day, I really like the margin ambition, but I struggle a little bit with the moving parts of why we should get this 50 basis points per annum improvement to the margin. I’m trying to understand to what extent this quarter had any project deliveries end of the quarter with a good margin. And if that’s the case, typically, those deliveries used to have a negative margin impact on projects and it looks like it’s projects with positive impact, which is good to see, but if you could comment on that, Peter?
Peter Nilsson: Are you talking about Industrial Solutions, Klas…
Klas Bergelind: Yes.
Peter Nilsson: … especially or...
Klas Bergelind: Yes.
Peter Nilsson: Yeah. Yeah. No. No. Well, really as usual, it’s more project dependent and it varies in between quarters and that is why, okay, I know you’re focusing on the quarter, but for us, it’s more a rolling 12 development. So there’s going to be some deviations between quarters, but we feel that not necessarily, I mean, okay, that was probably, let’s say, more the old story of a bad margin when we had kind of more oil and gas exposure and stuff like that, but the projects is not necessarily having a worse margin. It varies a little bit, and of course, it comes on top, contribution margin brings, it comes on top of everything else, but that is the way it is. But I mean, in general, I don’t feel that I say the project business is kind of worse than anything else. It’s more than a bit bumpy…
Klas Bergelind: Okay.
Peter Nilsson: … on the sales side, but from a margin perspective, it’s really not any kind of drag in any way as we see it.
Fredrik Nilsson: If I may…
Peter Nilsson: Yeah.
Fredrik Nilsson: … say also. I think you’re correct, Klas, in that the project businesses that we supply today does have better margins than a few years ago, if you will. And we have divested a lot of projects that did not help contribute towards our margin ambitions, whereas today’s LNG hoses and so forth tend to be a good project margin for us since a couple of years or a year back.
Klas Bergelind: Yes. That’s correct.
Fredrik Nilsson: If we do invoice for a project today, it does not hamper the margins.
Klas Bergelind: That’s great.
Peter Nilsson: It’s bump in sales -- it’s going to be bump in sales, but not a margin.
Klas Bergelind: Very good. And my second one is on the construction verticals. And Peter, can we talk through a rough magnitude of the decline here by regions? You’re going to meet easier comparatives in the second half at least in Europe and I’m trying to understand the volume declines there. And also if you could help us with how much construction Europe is for you at Group level? And then finally, sorry, a lot of questions in one, how much is new build versus replacement?
Peter Nilsson: You say the construction, I mean, we have…
Klas Bergelind: Yes.
Peter Nilsson: … some early cycle construction, some late cycle restructuring. If you take early cycle construction, which is more kind of window manufacturers and stuff like that, that has already been hitting us in Europe, seems like you say, a year ago. But I mean, basically hitting us now in North America and then we talk tens of percent in a downturn in that segment. And that is something we don’t know exactly, honestly, how much is inventory for the window manufacturers and much, it’s really underlying demand. I think it’s a combination. And we do expect that too as flatten out on a year-on-year comparison here by the end of the year, not necessarily in Q3, but probably going into Q4 is going to be more flattish year-on-year and potentially a slight uptick. So there is -- but that is mainly hurting Industrial Solutions, which is then in Industrial Solutions being compensated with other strong segments. So that is something which we don’t see as -- but that has been the dramatic downturn, if you may say. And then the other construction-related exposure we have is more in Sealing, which then comes into equipment for construction and that’s an area where we think we are entering that. This quarter was a little bit lower in order intake. We see that once again. I don’t want to point out Volvo. They have to comment on their figures themselves. But we use that since that is kind of the flavor of the day, down by 40%. It means, of course, that they start to order a bit less from us and that is something we note now and where we probably saw a little bit this quarter where we saw probably we expected to escalate a little bit into Q3 in that segment and that is more difficult to quantify at the moment, to be honest. But there, we’re not talking tens of percent, there we maybe talking more potentially 10% for us, because there is also we’re supplying both the OE and to the aftermarket. So that is something which is more difficult. There’s more of inventory buildup and stuff like that. And then when you talk about new construction renovation, I mean, windows is a lot of, if you may say, renovations. But nevertheless, it’s kind of -- so there we see new construction, new sky rises and stuff like that, it’s still holding up fairly well, but that is driven not by Europe and more driven by Asia and Middle East and all that. So that is still okay. But we cannot really see how much of these window manufacturers goes into, if I may say, renovation and new construction. We don’t know that. And then I mean we need to look and it’s not a major part of Trelleborg. We don’t want to kind of -- as I said, I mean, the most dramatic downturn we have had is Industrial Solutions, but that is kind of more compensated, well compensated by other strong segments. So that is kind of a mixed bag of business. So I don’t know whether that Klas give you some more flavor on the way we look at that.
Klas Bergelind: That’s good. Very quick final one on the aftermarket and autos in Sealing Solutions. You said it was lower, but bouncing back. Are you seeing this already in July or is it something you expect and I agree…
Peter Nilsson: That was a temporary downturn, which was kind of unexpected for us, to be honest, especially...
Klas Bergelind: Because you have the brake shims there which…
Peter Nilsson: Yeah. The brake business was…
Klas Bergelind: Yeah.
Peter Nilsson: …was that one and we are actually -- that’s bouncing back.
Fredrik Nilsson: We can…
Klas Bergelind: Okay.
Fredrik Nilsson: We can credit…
Peter Nilsson: I mean, it was already bouncing back here during June, but it was a major impact.
Klas Bergelind: Okay.
Peter Nilsson: There are a few big customers in that one, making brake pads and for whatever reason, which, once again, difficult for us to really fully understand that they were kind of two of the bigger ones, suddenly didn’t want to buy anything for a month.
Klas Bergelind: Okay. Thank you.
Operator: The next question comes from Hampus Engellau from Handelsbanken. Please go ahead.
Hampus Engellau: Thank you very much. I have two questions, if I may. Maybe starting off on the organic sales growth during the quarter at 3% and I understood between Industrial at 6% and Sealing at 1%. If you strip up the price contribution, which I would assume would be quite high given where we see inflation rate trending, I would assume that we have negative volumes. And if that is the case, is that for each of the business areas in specific segments or is it broad-based lower volumes? That’s my first question.
Peter Nilsson: You can go on that one first.
Fredrik Nilsson: Yeah. I mean, if you’re looking at taken by BI, I mean, yes, with the Industrial Solutions with 6% that implies there was a small volume growth -- underlying volume growth. But of course, with Sealing Solution of 1%, that was negative from a volume point of view.
Hampus Engellau: And in Sealing is that specific -- some specific end segments that you should think about or is it kind of broad-based?
Fredrik Nilsson: I will say it’s more the general industry. So it’s for overall than a specific segments.
Peter Nilsson: It’s hydraulic and pneumatics, which is a big one, where we have a multiple of customers, multiple of end markets where you have this kind of all kind of moving parts. We have that and that is probably the area which was kind of…
Fredrik Nilsson: Yeah.
Peter Nilsson: … a little bit. But there is where we’re reading in, Hampus, that was kind of inventory reduction on our customers in a multiple of kind of, the problem for us, if you sell into a vacant pump or something, then, of course, we sell seals and they have some subassembly parts on vacant pumps and then they have finished vacant pumps, they decide to kind of cut down an inventory is kind of hitting us in a different -- a few different steps. And that is what we see, especially in this, if I may say again, on this, what we call fluid power segment, which is a sizable segment within Sealing, even though getting smaller in relative size as we grow aerospace and medical and some other sub-segments.
Hampus Engellau: Yeah. Fair enough. And if we look at -- if we could maybe add some more flavor on the order activity during the quarter and also a bit on the lead times? Are they times shorter now in second quarter compared to first quarter or how should we think about that?
Peter Nilsson: It is shorter lead times. I mean the customers are ordering with shorter -- expecting shorter lead times and that is why it also makes the order book a little bit trickier to discuss. I mean we have commented that many times, the order book is shrinking, but it’s shrinking -- the majority of it is sinking with kind of long-term orders, which is, let’s say, three months and beyond. And that is why it’s difficult to really get the firm conclusion out of it since they are, let’s say, ordering with shorter cycles. And I mean we have been moving from more or less, if I may say, 100% orders going into a quarter and now maybe getting back to a normal -- more normal scenario, let’s say, before this, let’s say, lead time challenges where we had kind of 75% give or take of the orders when we go into a quarter. And I mean, a few last quarter, we’ve been almost 100%. So sometimes on top of 100% because we know that some of the guys have been delaying the orders. So that is where, all honestly, it’s a little bit difficult for us to really follow that, because it’s definitely changing the order pattern and changing the way customers expect us to deliver. So, but as a fact, was the order book, order intake was lower than sales in the quarter. But once again, I mean, we are difficult to get to a very firm conclusion on what the impact that will have on sales.
Hampus Engellau: Okay. Fair enough.
Peter Nilsson: We are following the -- Hampus, not to be too complicated, but I hope -- you are clever enough to understand.
Hampus Engellau: Maybe I can do one more question. Just because I -- if I remember correctly, in third quarter last year, we had a similar inventory reduction. I think, I guess, it was very out spoken on that. But then we’re more indicating that we had a weaker underlying demand and then we had demand is coming back. For you guys, do you have like more visibility this time to say that it’s not only inventory adjustments at customers that it is actually some slowing demand or if you would compare the third quarter last year?
Peter Nilsson: You know basis on the -- I mean I don’t recognize that comment from a year ago from us, because, I mean, we have not seen this, we...
Hampus Engellau: No. No. I know that.
Peter Nilsson: No. No. So the way we see this Q2, Q3, now coming into Q3, where we do expect some inventory reductions. And we do expect also in Q3 some underlying softening, once again, we talk about construction, construction equipment, agriculture, which is a big user, especially of this kind of fluid power equipment. And they are cutting inventory. They are maybe having less hydraulic cylinders on stock and having less -- so that is going to happen. But -- so I think there will be an over softening in a way in Q3 due to the fact that you have some softening end user demand, but on top of that, an inventory reduction. But really to split that is honestly challenging. We are trying to look at this…
Hampus Engellau: Okay.
Peter Nilsson: … but we do VDMA and all of that, that is indicating kind of a lower expectations. Even though VDMA is difficult to read, because that is more based on expectations than really firm orders.
Hampus Engellau: All right. Thank you.
Operator: The next question comes from Agnieszka Vilela from Nordea. Please go ahead.
Agnieszka Vilela: Perfect. Thank you. Yes. My first question is on the pricing component of your growth. I guess that there is some carryover from the price increases that you implemented for quite some time ago. So I would like to ask, when was the last time you implemented price increases and also what are your expectations for pricing going forward?
Fredrik Nilsson: It’s, of course, some rollovers from earlier price increase, but I would say that is, of course, getting less and less by quarter and we are continuing to raising prices when it’s possible. So it’s -- I would say, it’s impossible to explain, let’s say, when we last increase the prices.
Peter Nilsson: That’s part of also, I mean, we are continuously doing that. We are working on the prices every quarter. We have been doing it every quarter. But of course, it’s not as dramatic as before. But for sure, we are still pushing in. We had another round of price increases here from 1st of July and we’re going to have more price increases kicking year from 1st of September. That’s depending a little bit what kind of contracts you have with your suppliers. So price increases will continue and I’ll be clear on that we do not see any kind of price decreases at the moment. We note that some of the raw materials are flattening out. But I mean, with the -- if I may say, the new Trelleborg, we’re going to be a lot less dependent on raw materials and we are not really exposed to these kind of fluctuations that we saw more in kind of our wheel systems business before where we were exposed more directly raw materials. Our raw material content generally in our products is very limited. And of course, we have some pockets where this might be higher. But in general now, we have very low raw material exposure to be honest and so we are not really working on that. So more of the price increases is more, as Fredrik said, is more continuously addressing where can be increased pricing. Where are we creating a lot of value? Where do we have a position to kind of be able to further persuade the customers that we’re creating value for them. That is a continuous effort. We are by far not end the price increase. The price increase is never going to end. It’s always going to be…
Agnieszka Vilela: Okay. …an item on the agenda.
Agnieszka Vilela: Perfect. Thank you. Thank you for the flavor. And then my second question, probably to Fredrik. Out of the SEK150 million increase in your restructuring efforts, how much is related to the integration of acquisitions and how much to the kind of restructuring due to expected somewhat lower demand?
Fredrik Nilsson: By far, the majority is related to the lower demand.
Agnieszka Vilela: And just when you budget for that, maybe, first of all, you could give us a bit more information about what you’re doing, what kind of restructuring efforts are you taking and then also what kind of job decline or volume decline are you preparing for when it comes to H2 or 2024?
Fredrik Nilsson: I mean that is already what we saw in Q1. So we are adopting and also we saw towards last -- end of last year. So, I mean, it has been a reduction of headcount. We have closed one or two...
Peter Nilsson: Three new factories.
Fredrik Nilsson: And some factories, since mainly those kind of costs. And then, of course, when we see a further decrease of demand, then we accelerate and do a little bit more. So it’s not that it’s a big thing at one site, it’s more that we take a little bit here and there.
Peter Nilsson: We’re doing that all the time.
Fredrik Nilsson: Yeah.
Peter Nilsson: But we have internally here that we should go which is above SEK30 million or SEK40 million.
Fredrik Nilsson: SEK40 million.
Peter Nilsson: SEK40 million to -- so one project should be above SEK40 million in order to call it…
Agnieszka Vilela: Okay. Yeah.
Peter Nilsson: So that is ongoing also in the underlying business…
Fredrik Nilsson: Yeah.
Peter Nilsson: … where we continuously adjust.
Fredrik Nilsson: So this is the larger one and then, of course…
Peter Nilsson: Yeah.
Fredrik Nilsson: … with some closure of some sites that was part of the plan.
Agnieszka Vilela: Yeah. But it’s not like you’re preparing for a massive decline in demand. It’s more slowed down.
Peter Nilsson: No. That sound…
Agnieszka Vilela: Yeah.
Peter Nilsson: If you have -- I mean, a few areas you, I mean, that sounds bad. Maybe you use this opportunity to create a more efficient structure and you need to push it through. It’s a little bit easier when you have a downturn, and that is, of course, where we have…
Agnieszka Vilela: Yeah.
Peter Nilsson: … always a long list of ideas and sometimes you pull them out of the drawer and you use them and sometimes you keep them in the drawer.
Agnieszka Vilela: Perfect. Thank you. And then my last question is on China and Asia, but predominantly China. We get, I would say, quite mixed commentary from different Industrials now in the reporting season. So some see some improvement in the Industrial demand, some see not that much rebound there. What are you seeing? What’s your expectations?
Peter Nilsson: We -- I mean, we did expect a rebound, but the rebound is not really coming as we see it and we see that there is some kind of -- which is kind of benefiting us long-term. There’s some localization ongoing that, I mean, people are getting a little bit concerned in China being dependent on imported material. So there is definitely some changes in the -- in terms of supply chain. But overall, I mean, we see a worsening. I mean you are talking you’re following us well and yes, one study from you actually from Nordea this morning was kind of more focused on consumer confidence and savings, rationale and all of that. So that is where we see these segments, which is more linked to consumer spending is kind of shrinking. We have the construction-related segments. So it is a mix, but I still continue to invest a lot in railway, that is based in energy, subway still being, let’s say, being built out and all of that. So it’s a little bit dependent on what kind of segments you’re exposed to. But I’m sure construction and consumer segments is a lot down. It varies also between the different kind of parts of China. In fact, no office is tough, Dalian, Shenyang. And then you have, of course, the government business more in Beijing, Chaoyang [ph] area, which is still holding up, more of the industrial areas, which is Qingdao and Shandong province and around, let’s say, Shanghai still, let’s say, mixed message and then you get down in the South where we’re still holding up the consumer-related in, let’s say, Hong Kong and Guangdong areas, of course, more impacted by the lower demand. So it is a little bit -- as always China is a big country and the different regions is a little bit moving in different directions. But for us, if I may say, overall, it’s a softening and it’s related to construction and consumer-related businesses, with the pure infrastructure related is still holding up and also the export business a bit mixed. I mean that is where we need to see that this kind of restrictions kicking in, in a few areas and that is a little bit dependent on what kind of customer exposure you have. So it’s not an easy question to generalize about China, because you have to break it down in region, you have to break it down in a different sub-segments.
Agnieszka Vilela: Yes. Thank you, Peter.
Operator: [Operator Instructions] There are no more questions at this time. So I hand the telco back to the speakers for any closing comments.
Peter Nilsson: Thanks. Thanks to all of you for joining us on this call, and as usual, we look forward to seeing you in different environments and meeting up with you to clarify any potential outstanding questions or if you want some more flavor on some topics, happy to support both Fredrik and myself, but especially, Christofer is, of course, available here for any potential follow-up and then, yeah, take care and see you soon.