Trelleborg AB (TREL-B.ST), a world leader in engineered polymer solutions, reported a 5% decrease in sales to SEK 8.2 billion in the first quarter of 2024 but maintained its full-year guidance. Despite the sales dip, the company achieved an EBITA of SEK 1.49 billion and an 18% margin. The acquisition of Baron Group is expected to bolster Trelleborg's medical solutions segment.
The company experienced varied regional growth, with Asia performing positively, Europe remaining flat, and North America showing a decline. Trelleborg's sustainability initiatives have successfully reduced carbon dioxide emissions, and the company continues to target a 20% margin. The earnings per share rose by 16%, excluding items affecting comparability, and the cash conversion rate held steady at 95%.
Key Takeaways
- Trelleborg's sales decreased by 5% to SEK 8.2 billion in Q1 2024, with organic sales down 3%.
- EBITA reached SEK 1.49 billion, maintaining an 18% margin.
- The acquisition of Baron Group is set to enhance the medical solutions business.
- Growth varied by region, with positive outcomes in Asia, stability in Europe, and a decline in North America.
- Industrial Solutions improved profitability, while Medical Solutions had a soft start, and Sealing Solutions saw a slight decrease in sales.
- The company aims to grow its medical sector to 20% of its business.
- Trelleborg will continue with high CapEx and bolt-on acquisitions, maintaining a strong balance sheet.
Company Outlook
- Full-year guidance for 2024 remains unchanged, with CapEx of SEK 1.6 billion and restructuring costs of SEK 250 million.
- The second-quarter outlook mirrors Q1's solid performance, despite geopolitical and inventory uncertainties.
- Long-term investments in the industrial sector, particularly in liquid natural gas and automotive, are expected to yield positive results.
Bearish Highlights
- North America experienced several quarters of destocking, with an unclear end.
- Certain segments, like hydrogen and fuel, impacted by low residential construction.
- Inventory adjustments in the Medical Solutions sector led to a soft start in Q1.
Bullish Highlights
- Positive growth in Asia and a strong improvement in infrastructure and semiconductors in China.
- Investments in key segments anticipated to drive incremental sales and margin improvements.
- Earnings per share increased by 16%, excluding items affecting comparability, supported by an improved financial net and share buyback program.
Misses
- Sales and organic sales both saw a decrease compared to the previous year.
- Sealing Solutions experienced a slight sales decrease and margin impact due to acquisitions and lower volumes.
Q&A Highlights
- Executives discussed replacing PFAS in their portfolio and the time needed to see full benefits.
- The Baron acquisition is pending formal approvals, with closure expected within the quarter.
- Plans to reach a 20% EBITA margin in the medical solutions division post-Baron integration, despite current destocking impacts.
Trelleborg's expansion efforts include building new factories in Vietnam and Costa Rica, along with enhancing its European and North American footprint. The company's capital expenditure and acquisition strategy remain aggressive, with a continued focus on share buybacks and maintaining a robust balance sheet.
Despite a mixed bag of regional performance and sector-specific challenges, Trelleborg's leadership expresses confidence in the company's strategic direction and its ability to meet long-term financial targets.
Full transcript - Trelleborg AB (TBABF) Q1 2024:
Peter Nilsson: Thank you and welcome again to all of you to this presentation of the Trelleborg Interim Report for the First Quarter of 2024. As already stated, speaking Peter Nilsson, President and CEO of Trelleborg; and also joining me on the call is Fredrik Nilsson, who is the CFO, who will guide us through more the financial part of the presentation; and also on the call is Christofer Sjögren, our Head of Investor Relations, who is also able to support us if there are any questions, which needs his support. So using the presentation that we have on our web since a few hours, turning to the first page, which is only saying Trelleborg interim report. Turning to Page 2, which is the agenda slide. As usually we listed some highlights from my side and also some comments on the business areas, which are going to be three this time for the first time since in some time. Then financials, Fredrik going to guide you through this and then we're finishing off with the summary and some comments on the outlook for the running quarter and then summing up with the Q&A. So then turning to Page 3, highlights. We have, let's say, the heading improved margin despite slightly lower sales. Sales came in at SEK8.2 billion, which is let's say down by 5% compared to year ago, which is then reflected as 5% down, reflected organic sales down by minus 3% and we also have a negative structural thing here of minus 2%, which then gets us to this minus 5%. Currency basically no impact in this quarter first time since a few quarters. And then, of course, we note looking at that organic sales, Easter Holiday as all of you is aware, has been – was seen in April last year, in March this year. So that is impacting organic sales by close to 2% in the quarter and primarily then impacting our sealing solutions activity, get back and comment on that. EBITA ending up at SEK1,490 million which is then let's say corresponding to margin of slightly north of 18%. Still running restructuring in order to continuously improve our structure so that we have, let's say, items affecting comparability in quarter of SEK55 million also relatively strong cash flow in this quarter. As usual, the seasonality means that cash flow in the first quarter always a little bit weaker than the other quarters in the year. But if you compare to a year ago, this is a strong cash flow for Q1, which shows that we have been managing our working capital good, although at least a little bit muted sales – Fredrik will comment on that as well. And as already told, we are for the first time, let's say, also presenting individually Trelleborg Medical Solutions, get back and comment on that. Soft start for medical solutions in a challenging market, but also I will get back and comment on that when we speak about that business area. We're also happy to sign the agreement to acquire a Baron Group, which is going to be a game changer for medical solutions when we get that into the books. Also to be noted, I mean, beyond the end of the quarter, we finalized the earlier announced MNE acquisition in Korea, which is then strengthening us substantially in seals for the semiconductor industry and we also have signed an agreement to acquire BP-Tech Group as it's called or more used name is called Boldan, which is then a pipe repair business based in Finland by selling globally. So this is kind of the highlights of the quarter. Moving from that to over to Page 4 to comment a little bit on organic sales. As you can see it varies quite a lot across the globe. It is starting with the positive. We have positive growth in Asia driven by strong development in China where we see a good bounce back, a continued good bounce back, a good order intake and an overall good development, but once again driven primarily by China. Europe flattish with a kind of a mixed development between countries and between markets, but summing up to no growth at all in the quarter and then we have a negative, substantial negative growth in North America driven by some inventory focus, but also some kind of challenging markets in mainly the construction of highway related activity then, which is primarily linked to our hydraulic and pneumatic sales, which is then used in areas like construction equipment, agriculture and also partly mining. So that is kind of the explanation of this fairly heavy negative in North America. Turning back to Page 5, business areas quickly to page six and comment on industrial solutions, heading improved profitability despite lower sales. Organic sales down by 3%, M&A supporting by 1% should be noted that this is kind of in relation to a fairly strong quarter a year ago is basically the same development that we've seen the last few quarters here where we see residential construction and certain industrial segments. The industrial segments which is mainly exposed to distribution, continue to be soft. We see that the overall kind of project related sales in Antivibration Solutions [ph] continue to perform well and we especially note that the liquid natural gas customers is increasing orders and sales substantially, which is kind of assisting us and also we note that automotive sales still growing in the quarter. I mean we are watching this carefully, but at the moment we still see good automotive sales in this business area. Overall well managed, I mean we continue to benefit from structural improvements, good, good, let's say, price management and also positive sales mix, which is then pushing the margin to high levels for this business area. And also, as already commented, we also continue to build on our business for pipe repair by this acquisition in Boldan and that continued – let's say continued the kind of prioritized area for us where we hopefully can continue to build this even better position in this attractive and rapidly growing segment of pipe repair or aligning of water pipes. Turning to Page 7 and commenting on the new business area, medical solutions. A fairly muted start impacted by inventory adjustments in the industry. We have some heavy, let's say, bigger customers. We just, let's say, done heavy inventory reduction in the quarter. The underlying demand is still okay and that is why we although we know that this is a soft organic sales and we're also guiding for a soft organic sales in the next quarter, in the running quarter. We still feel that the underlying demand is good and that we overall will see a fairly flattish development actually for the full year in medical solution in relation to organic sales development. EBITA actually mix is improving and we are therefore able to although on this, yes, fairly dramatic sales drop we still managed to deliver an EBITA in line with last year and actually with an improved margin. And we also continue to tell about Baron Group, which we believe will be, let's say, closed – this deal will be closed within the running quarter. We don't know exactly when, but within the running quarter we expect that to be closed. And when that gets in, we know that we will have synergies and we'll also have a substantially better overall performance of medical solutions. We are also growing, continue to develop this new business area structure and we're adding resources in order to be able to approach all interesting customers and all interesting segments and this is also something that we also as before we want to note that we're running with a slightly higher cost – overall cost level in the business areas in order to position ourselves in the best possible way for the future. Turning to Page 8, commenting on sealing solutions, organic sales is a minus 2%, which is, let's say to – yes, lion's share impacted by the, let's say, yes, placement of Easter this year. So, let's say, if we allow ourselves to adjust for that, we do – as you know it's a flattish sales in the quarter. Sales to general industry is the one which is being pushed down where we then, let's say, in-depth is seeing or being told by our customers that this is mainly related to continued inventory focus and not really to a lower overall demand, automotive demand in this business area flattish and then it really no change from a year ago. And we note the continued very strong sales development in aerospace with order intake and also good sales development in quarter. The EBITA margin down from related earlier acquisitions still being integrated and in a good way, but the benefits will kick-in, as we said before, here during later this year and also going into 2025. But of course also impacted by the slightly lower volumes as we are on top of the is also focusing our inventory. We are not, let's say, overproducing, we are actually more or less under-producing in the quarter in order to make sure that we protect the cash flow in north let's say, building inventory in any way. And also in this area like in medical, we are continuing to invest in some, what we call, fast growing market segments like semiconductor, aerospace where we are still running ahead a little bit with our resources in relation to the sales, but where we see that this is going to be a positive impact on the more medium, long term for the business area. So this is really what we are going to say about this business area this stage. And moving on then a few comments on our sustainability KPIs with the focus on carbon dioxide continue to develop very favorable result, we are successful in lowering our emissions, as you can see on the slide and especially also, if you will, and primarily driven if you turn to Page 10 with the continued increase in the share of renewable and fossil-free electricity, we feel that we are very well underway of developing on our targets in relation to the CO2, but more of that in the future. And turning down to Page 11 and the agenda slide and the financials and then leaving to Fredrik to guide you through with the sort of Page 12.
Fredrik Nilsson: Thank you, Peter. Starting with the sales development for the quarter, as Peter mentioned, organic sales dropped by 3% in the first quarter. Industrial Solutions declined 3%; Medical Solutions 11%; and Sealing Solutions was down 2%. And then as you can see on the slide report net sales decreased by 5% and I said 2% minus from structure, which is mainly related to the divested business in Czech Republic during the autumn 2023. Moving on to Page 13, showing the historical organic growth, as you can see here, the first quarter was below on our sales growth target, which is 8% over a business cycle. Moving on Page 14, showing the quarterly sales and rolling 12 months for continuing operation. The sales in the quarter reached SEK 8.2 billion and at the rolling 12 months it reached SEK 33.8 billion. Moving on Page 15, looking at the EBITA and EBITA margin development, the EBITA excluding items affecting comparability, decreased by 2% to SEK 1.490 billion with profit growth in Industrial Solution, a flat development in Medical Solutions, while it declined in Sealing Solutions. In the result, there was a small translation impact of which was negative of SEK 14 million compared to the corresponding quarter last year, margin wise up 0.6 percentage points from 17.5% to 18.1%. And that is despite that, we initially have some acquisitions with lower margin and that also, as Peter was mentioning, we have invested in the organization on some costs growing market segments. Moving on Page 16, looking at the rolling 12 months EBITA, it amounted to SEK 5.964 billion with a margin of 17.6%. That implies that we have had an EBITA growth of 7% during the last 12 months. Going into some more details on Page 17, in the income statement, we have items affecting comparability the quarter of SEK 55 million, which is entirely related to restructuring costs. Due to that, we are adjusting our cost base. We'd also like to highlight our financial net that is down from SEK 165 million negative to minus SEK 20 million, and that is mainly due to that, we are now in a net cash position, but also that in the corresponding period last year we have a short term loan for financing the Minnesota Rubber & Plastics acquisitions that was repaid during the second quarter in 2023 when we received the proceeds from Wheel divestment. Tax rate for the quarter 25%, which is fully in line with earlier guidance. Moving on Page 18, looking at earnings per share, a strong improvement of 16% for earnings per share, excluding items affecting comparability, and that is due to the improved financial net, but also due to the ongoing share buyback program that we have fewer shares when we calculate earnings per share. If we look for the total Group, you can see it’s down 24%, but that is explained with the discontinued operation related to Wheel Systems and printing blankets that was divested in May 2023 and that added the discontinued operations added SEK 1.81 to the EPS. Page 19, cash flow a good improvement compared to 2023. As you can see, working capital, an improvement of SEK 150 million and also slightly less CapEx in the quarter. Looking at Page 20, the cash conversion remains at a really good level and reached 95% on a rolling 12 months basis. Looking at gearing and leverage, and I would like to highlight here that we are still in a net cash position. The reported debt rate becomes negative and amount to minus 2. And if we look at net debt to net cash in relation to EBITA, EBITA, it was minus 0.1. And we have also bought back own shares of SEK 1.85 billion in the first quarter. Return on capital employed on Page 22. Exclude items affecting comparability was 12.7% compared to 14.9% a year ago, and that is due to acquisitions with initially lower returns and also the small profit – lower profit that we have this year. Looking at Page 23, some guidance for the full year 2024, they are unchanged compared to what was presented in February to CapEx still SEK 1.6 billion; restructuring cost of SEK 250 million for the full year; amortization of intangibles SEK 500 million and underlying tax rate remained unchanged of 25%. So by that, I would like to hand back the microphone to you, Peter.
Peter Nilsson: Thank you. And turning to Page 24, agenda slide again and quickly to Page 25 to give you a summary again. I mean, improved margin despite slightly lower sales and we feel the quarter is well managed. I mean, we still had this negative organic sales primarily driven by inventory reductions and not really, let's say, a firm indication on any kind of lower demand. We still, as usual, we have a mixed picture. I mean, we will see a few segments doing very well. We already mentioned LNG, oil and gas. Aerospace also have semiconductors performing well. And we do also see kind of a good underlying demand in the medical area, although we are heavily impacted by inventory focus for some of our key customers. Overall, solid quarter, we feel impacted, of course, by the Easter holiday. I already commented on a few times. Strong cash flow in the quarter. Let's say in relation to the season, I mean, we feel satisfied with the management, the working capital well down but our units to do to manage this in the quarter. And we also noted satisfaction that we are adding to our medical business by this Baron Group. Now we are eagerly looking forward to close that deal and integrate it and get the synergies that we identified in order to push and improve medical solutions substantially following the disintegration. And we also see this call it smaller bolt-ons but the very interesting, needless to say on MNE in Korea, which is offering a new platform for us in Asia for sales into the semiconductor manufacturing industry. And we also noted satisfaction. Another interesting and a very nice add on for us related to the pipe repair aftermarket for water and wastewater infrastructure. So I mean, a good quarter, a lot of things moving in the right way. We continue to have our focus on delivering on our margin target 20% plus. And we feel that this quarter is a step in the right direction. I mean, we are able to increase the margin, although we have decreasing organic sales and we feel with this normalize that we see, let’s say, a little bit of growth potentially, then we feel confident that this extra growth will deliver a good leverage and we will then get closer to our target of 20% plus EBITA. And turning then to Page 26 and commenting about outlook, we don’t really see any changes. I mean, order book is solid in a way we don’t see a decline in the order book. We see overall good development, but we are of course, fully aware of this uncertainty where we see opportunities to see around the world with the continued disaster in Ukraine and also with this or to the say, uncertainty in the Middle East, which, of course, could impact us. And we also see a continued focus on inventory reduction, which is for some of our customer segments. But with that said, we still have once again the solid order intake, which does not really indicate any kind of dramatic changes. But once again, this outlook is, of course, let’s say, linked little bit to a bigger uncertainty than usual. But overall, looking into what we know from before and what we see in our businesses, where we feel that it’s going to be equal development to Q2, as we said in Q1. And with that, turning to Page 27 and quickly to Page 28 and opening up for the Q&A session. So please go ahead.
Operator: [Operator Instructions] The next question comes from Erik Golrang from SEB. Please go ahead.
Erik Golrang: Thank you. I have a couple of questions. First on the demand side, for the second quarter, you had a 2 percentage point drag from the Easter. You talked about sort of generally stable demand trend. And then you have this destocking element in medical, which is a bit uncertain about the net income. But you must have been an alternatives to guide for sort of higher growth given the swings in seasonality and no other really sort of underlying factor changing much. That’s fair to assume.
Peter Nilsson: Yes. And the quick comment on that. I mean, we are of course, if you look at the order book, it will be better in Q2. But we also note that there is uncertainty and we want to be a little bit more on the capital side, if you may say, I mean, we are still trying to make sure that we don’t overproduce and that we don’t really believe in a brighter future than that we see. But of course, I mean, you are right in that way that I mean, the Easter effect would be positive in Q2 and was negative in Q1. So you could – I could agree with you that we are a little bit on the capital side. But nevertheless, I think when we put everything in the bag and we look at it, then we believe this is a fair comment and the fair assumption that we’re going to see similar development in Q2 as we see – as we saw in Q1.
Erik Golrang: Okay. Thanks. Then two…
Peter Nilsson: Let me – but yes, I’ll have to go to highlight on this also, Erik, I mean, the order book is solid. I mean, the unknown is the how much continued inventory focus we have. We still see that some of our polycore industrial customers is kind of trying to get their inventory down, although they continue to place orders. So this is a kind of a development we see in for a few quarters. And I think I commented to you before as well. I mean, we are little bit surprised about that. And that is nothing that is common. So it’s that kind of trend this is changing that. Then, of course, we will see, yes, more positive sales development.
Erik Golrang: Okay. Understood. And then two questions on profitability. First one, in medical, you say when Baron comes in, it will do 20% EBITA. Yes, it implies Baron is doing 30% or so, which is a very high level. Any reason to feel that’s not the sustainable level for them? And what’s the main factor putting them at such a high margin? And then second, on industrial, you’ve been a bit sort of indicated towards expectations of a more sideways margin development for industrial after a really strong 2023. Now this first quarter, we were up again. Have you been too cautious on mix or price here? What’s the Delta? Thank you.
Peter Nilsson: No, firstly on the medical I mean, we fully understand that there is a big difference between the 14 in this quarter and the 20 that as we guided before, would we be confident we have an operating plan? We know what we want to do with Baron. We know what benefits we will get the Baron. And so that is we fully understand that the kind of the proof is in the pudding there and we have that to deliver. But we still want to comment on I mean, that is the long-term, the medium-term, even short-term target here is to get medical up to 20. And that is what we are still aiming for. And I mean, I understand that you are in doubts, but that is something that we are working for and something that we believe in. And we need to prove that is happening. With industrial, it was a little bit positive mix in the quarter, we said we had some project product sales especially related to liquid natural gas segments, but also a little bit extra volumes in automotive, which is a great. It’s also mix, although in the north on the most profitable part of the business area. But nevertheless, we benefited from that. So there is a little bit negative mix in the current quarter and the running quarter and let say Q1. And we do not fully expect that to continue in the same way. But we still feel that overall the business area is moving in the right direction. So I think the overall guidance still – is still valid, that we believe it to increase by half a percentage point per year. And but we also said comment on that it will vary, let’s say in between the quarters and this was probably a little bit on the high side in this quarter. And we need of course, we will try to continue to deliver on the same way. But I mean, it was a little bit on the high side. I don’t know, Fredrik, if you want to supplement anything on this.
Fredrik Nilsson: No. I think we also flagged already last year that we have some project business. So the Q3 – Q2 and Q3 last year, we had a little bit improved margin, little bit, so I would say we have a little bit tougher comps as well going into Q2, Q3.
Peter Nilsson: Yes.
Erik Golrang: Very good. Thank you.
Operator: The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind: Thank you. Hi, Peter and Fredrik, Klas at Citi. So coming back to this destocking, I lost count almost. I think this is the third quarter we’ve seen destocking in North America. It’s always highly unusual. We had this massive preordering effect, et cetera. And I mean, we expected that. But when you look ahead, Peter, and look at the inventories among your customers, speak to customers also in the channel, are you getting any indication that we’re coming to an end? You get a very specific comment on the destocking in medical, but I’m curious to hear what you hearing on the industrial again construction verticals. Thank you.
Peter Nilsson: Yes. No, I think those we are also surprised, to be honest. I mean, I think it’s not even – I think it’s the fourth quarter that we see this kind of destocking effect. Whether the kind of ordering or not ordering, order intake is actually good, is positive in the quarter. But they still continue to do the call offs on a lower level. And I mean, it’s not – its difficult process, well, to be honest. I mean, we don’t really follow it. We get guidance from the customers that the destocking is ending, but then they still continue to order below. I don’t know what is cost that they are expecting speculating with lower pricing or that they are even more cautious. What will be highlighting in this specific quarter is more related to off highway, which is kind of where we see an increase destocking in the area, sort of construction equipment and mining a little bit and also agriculture. So these are the areas which has been, let’s say, more impact in the quarter. And we continue to see kind of a low also, which we are – had for some time. Also less and more residential construction is also continuing on the downward trend. But we are also like you to be honest, a little bit surprised that this is continuing and we don’t really customers or the indicating lower demand or indicating that they are more cautious. So that is something we are watching carefully. It's something that we are all aware of that this is a strange, I mean, historically, if we go back earlier cycles, this destocking us only being for two quarters and now we are up to the fourth quarter. So it is a surprise Klas and I don't know what to what to say more.
Klas Bergelind: I appreciate it difficult. And my second one I get, Fredrik your answer on TSS that obviously there was a little bit of an anomaly there to have it at these high level but and coming to the margin in TSS better margin than I thought despite the Easter effect. I mean, we get this calendar effect. Obviously, there is more underabsorption, which is set to reverse through into the second quarter. And given that you say that the MRP integration is on track. I'm just wondering if we can get closer to almost 22% once Easter effect reverses. I know that the 23% target is more towards mid-2025, but the margin was better than I thought. Despite the negative volumes. So I'm curious on the Easter impact, if you can quantify it. Thank you.
Peter Nilsson: But we are not guiding specifically on the margin for an individual quarter Klas by there. What we meant, we had the MRP integration. We have clearly also said all the way about it's back and heavy. So most of the synergies will materialize in 2025. But we are seeing progress with the projects that we are running. That's how you should read that comment.
Fredrik Nilsson: But we are of course running with the new capacity utilization. We are running with the low capacity utilization. We are underproducing actually in the quarter. So of course, if there is, let's say a positive volume impact, we – if we manage that good that there should be a good drop through. But we are not confident to say that this kind of volume, extra volume is kicking in already in Q2. But when it comes, we do expect a substantial leverage on that extra volumes.
Peter Nilsson: But it's just a mathematical almost certainty that you get 2% back. But that was my point. And my point as well was I totally get the whole comment. You don't guide sort of – you don't guide by quarter. But I think still it was an encouraging level given that you're still early days, so the MRP and then Easter reverses. So I guess that was my point. But thank you.
Klas Bergelind: Thank you.
Operator: The next question comes from Timothy Lee from Barclays. Please go ahead.
Timothy Lee: Hi, Peter. Hi, Fredrik. Thanks for taking my questions. The first question is about China. So you mentioned about China is the key driver for recovery. Can you elaborate a bit more about from what segments you see the strength to come from and whether it will be something that you see to be a sustainable momentum? Given that when we look at the commentaries from the other companies with high exposure in China, they are actually getting quite a mixed picture regarding the recovery in China. So I would like to hear what you are hearing from the ground about China. That's the first question. And second question, a little bit more on the TSS margin. So again, it is quite a good development in the margin. Can we say that's the impact from the previous investment in the key fast growing segments could be, something behind us so that we will see some more improvement in this segment margin, even though the synergies coming from the acquisitions mainly come in next year rather than this year
Peter Nilsson: On China, I think it is a fairly wide, let's say, improvement. We do not see improvement. If you say residential construction, we are not exposed to that. But just to clarify, so coming from that, where we still see the limited exposure we have for that segment, we still see a downward trend, but we have, let say, the overall say infrastructure construction is doing good also then related to mining, most the construction equipment for the, let's say, infrastructure construction is doing better, but that is from fairly depressed levels, to be honest. So it's not really back to where it were before, but nevertheless it is a strong uptick. Semiconductors is another area which is still doing good for us. We also see general industry is also improving. So there is a fairly wide, wide improvement. But also we need to be aware that is coming from fairly, let's say low levels. So there is very easy comps. So we must not kind of over react to it or make it too big of a thing. But nevertheless, it is a substantial improvement compared to two year ago. On the second question, what was that on TSS or what is I didn't get it there really was it an industrial solutions? It was more I don't know Fred, if you can take that.
Fredrik Nilsson: Timothy, I understood. It was ceiling solution. I mean, the investment organization and the payoff of those investments.
Timothy Lee: Yes, exactly.
Fredrik Nilsson: Yes. And I mean, that will come gradually. We have invested in the organization. I mean, we talked about aerospace, health and medical in the past. Now is medical solution, semicon and a few other segments? And then of course, that should turn into incremental sales. So that will come gradually during the year and coming years. We see, let's say, in aerospace from payback in volume. I mean, honestly, they’re struggling with the growth a little bit there. So we don't really get the efficiency we want in the aerospace. There we also need some operational improvements. So that is kind of in investment is paying off in terms of extra sales by about I mean we should get the better margin out of that. Is that simply to be very blunt about that? Semiconductor is also kicking in. I mean, it's a small-ish area for us, but nevertheless, now with MNE investments and with this, I should say the desire from some of the Asian users of semiconductor equipment to get away from American supplier, we are benefiting from that. So that is also something which is also in the same very strong order intake. But also on that one, we are in a bit struggling to get the full efficiency out of that, that growth yet, but nevertheless very positive. So there is kind of several areas. The electrification is another area also where we have a lot of small businesses is not kind of big orders but a lot of small pockets, which is growing where we are launching a new food grade material as well, which is also picking up. I mean, as you know, there is this discussion on PFAS no papers material and we have a let's say, a very good position to in the areas where PFAS is going to be replaced. We have a very good portfolio of material also with we see good order intakes. So in general, I think the efforts that we are doing is paying off, but that's commented before, it will take time to get it into the factories and get the full efficiency and get it into the profitability in the right levels. But overall, we are satisfied. And then of course there is a few areas which is lower, like hydrogen or something like that, which is slower, which is more very early days. But overall, we feel water segment is also an area. But just to note and on the fuel which is still slow, which is the end of the impacted by residential construction being low, but we also see it as we move forward. We have a good, good range of material being launched into that area, but we still don't have the optics. So even though we are kind of having exposed to depressed sales, we are still investing in those segments because we believe in the long-term. So this is the mixed bag. But we think it's we believe – we firmly believe I'd be doing the right thing and that we are going to get the full benefit of this eventually.
Timothy Lee: Cool. Very helpful. Thank you so much.
Operator: The next question comes from Hampus Engellau from Handelsbanken. Please go ahead.
Hampus Engellau: Questions for me. My first question is related to Baron. It would be interesting to know when you were doing your due diligence, from Baron, if they had any significant impact on sales and earnings from the COVID-19. That's my first question. Second question is related to…
Peter Nilsson: They are not exposed to COVID in the same way, so that they are exposed to other segments where we are not really being fully transparent yet about what segments, but they are not exposed to the COVID segment that would like that.
Hampus Engellau: Super. Next it's more like to get your sense for underlying activity in the market. We have heard some other -- goods companies reporting on improving demand in early cyclical heard something from – something talking about their business with, heard ABB (ST:ABB) and also some positive signs in Europe. It would be interesting to hear your take on that given that you had earlier Erik talking about your being a bit cautious on your guidance. So I guess I'm coming back to that. Thanks.
Peter Nilsson: That's one, I mean, we don't – the order intake is better than sales. People would like that. So we are moving in the right direction. But generally, we say especially in ceiling solutions, if we get orders, there is a three to six months ahead of us before we do the sales. But there is, if we see [ph] solely look at the order book, it’s going to get better. But of course then we still have this uncertainty on inventory and geopolitical situation overall, which could, let’s say create some extra cautiousness among a few of our customers. But I mean, it is we do see the same and if you refer to that we see the same that this is slowly improved demand. Order book is growing but sales is not growing in the same speed as the order book is improving.
Hampus Engellau: Fair enough. Thank you very much.
Operator: The next question comes from Douglas Lindahl from DNB Markets. Please go ahead.
Douglas Lindahl: Hello, gentlemen. I only had one question, actually, and circling back to the Baron acquisition. Given the importance that this company brings in terms of pull-through [ph] margin contribution, I would be curious to hear if you have any sort of updates on when more specifically, we can expect this to be finalized. Obviously, you said before H1, but if you have any sort of updates would be hugely interesting to hear.
Peter Nilsson: Yes, I mean, we are moving forward on that and we are more or less all approvals in place. We’re waiting for some formal approvals and that is kind of difficult. The indication is that this will be closed, let’s say well within this quarter. Let’s put like that. But I mean, it’s still uncertainties since we waiting for some – how should we put this. So some formal approvals where we cannot control. So everything which is under our management, our control is in place and we are still waiting once again for some formal approvals. Indication is that we are going to get this in the next few weeks, put it like that. But once again, it relates to the close, as you know, we need to close it at the month end or mid-month or something like that. So we are curiously looking at exactly the date where we’re going to get this if we done yes, [indiscernible]
Douglas Lindahl: Okay. That’s good. Thanks so much.
Operator: The next question comes from Agnieszka Vilela from Nordea. Please go ahead.
Agnieszka Vilela: Perfect. Thank you. I missed the beginning to the call, so apologies if my question has been asked. But on medical solutions, you do expect to reach 20% margin after the Baron integration. But we can see that so far the business has been running at about 15% margin. And with Baron adding 30% to sales to the division, it needs to run at significantly higher margins. So my question really is, if you did quantify the exact EBITA margin that Baron is doing right now.
Peter Nilsson: We are not yet the owners and we don’t really want to comment on that, but we understand that this is looking ambitious. But we have a firm plan how to get there with synergies, with the integration of Baron with also with the kind of operational improvements in running business. This is a combination of a few things. But that is a challenge that we have taken on and which we believe that we will conquer and that we will get to this 20%. I fully understanding and yes, there is some doubts on exactly how to get there, but that is yes, the proof is in the padding there. And we believe that we are going to show you, let’s say – by the end of this year that we’re going to get to these running rate of 20%.
Agnieszka Vilela: Perfect.
Peter Nilsson: Definitely. I don’t care if I can comment anymore on that one because there is some synergies related to this as well, which is not yet being communicated.
Agnieszka Vilela: Understand. And then on the destocking, the division, when did it start really? And when do you expect it to finish?
Peter Nilsson: We have been fairly late. I mean, I know, of course, we know we’re a little bit. But if you look to other, let’s say our competitors, that they were kind of exposed to this already. I think two quarters away we saw two quarters. It was the first one.
Fredrik Nilsson: I would say probably during the autumn of last year and through the winter. So we haven’t had any impact until very recently, basically.
Peter Nilsson: We’ve been holding up call it some project sales to some special sales within medical. And since they are dropping away now, we are fully exposed to this inventory drop. So I think we’ve been overperforming, if I may say, for one or two quarters longer than most of our competitors. And this is now hitting us in this quarter. And we are not surprised in a way, if I may say. We knew this was coming and there is a few individual cases which is impacting us quite a lot. So it’s not kind of an overall drop of 10% is more leading to individual cases, which is then hitting us a little bit harder. But of course, I mean, that is [ph] I guess I don’t understand for you are looking into this a lot as well [indiscernible].
Fredrik Nilsson: To answer your question, we see the same development year-on-year in Q2 and then we see an improvement.
Peter Nilsson: Substantial improvement.
Fredrik Nilsson: Substantial improvement in the second half of the year.
Peter Nilsson: Our underlying order book is good. I mean, then the new project inflow is good that a new [indiscernible] the new project is good. But this is more, let’s say, running sizable customers that we have. We just indicated that they will not order anything before we going into the second part of the year. So that is kind of the impact that we see.
Agnieszka Vilela: Great. Thank you. And then my last question is on your capital allocation. What priorities do you have during 2024?
Peter Nilsson: No, I mean, it’s the same as before. We’re going to continue to invest on a fairly high level. We are improving both our geographical balance, but we are creating new capacity in India. We’re building new – two new factories in Vietnam, we are expanding in China. And at the same time, of course, also improving our footprint in Europe and improving our footprint in North America. So we are going to continue to run CapEx in a good way. And now also with the Baron with medical, we will also be adding a plant in Costa Rica. So CapEx is going to be high – continue on the relatively high level from, for instance, historical forms for us. With regard to acquisitions, we are still scouting for acquisitions. We are targeting primarily bolt-on acquisitions. We once again, we’ve been commenting this Baron acquisition, which is kind of a platform acquisition for us, which is a different than the others. So hopefully you will continue to see bolt-on acquisitions, which is highly synergistic for us and we’re doing that. I said before with the focus on this speedboat segments and let’s say very close to – yes, the core of existing business in a way. So we are not looking for any new areas outside of our current scope. But we do see in some time we have intensified the actions in order to kind of get a few of these cases executed. Also to note that we still feel that the kind of valuations is still quite attractive. Of course, there is always competition on the acquisitions, but we don’t really see the competition increasing at the moment. So we will try to get the ones done which is available and fits us. So you’re going to see us investing high on let’s say capital and CapEx and you’re also going to continue us to see making acquisitions. I mean, once again, the Baron one and this kind of size, don’t expect that to happen. It’s going to be smaller acquisitions in the – yes, what we say tens of millions of euros. I mean, that is really the size that we are primarily looking at the moment.
Agnieszka Vilela: Yes. And lastly, on share buybacks, is there any limit that are setting yourself on that repurchases?
Peter Nilsson: No. And we continue on the same. And we have the AGM here in an hour or two. And we’re going to ask for a new mandate to continue in the same way for another year, which is a run rate is then going to continue to be 1 billion second [ph] quarter roughly. So there is no change in that one. We feel that we can manage this pace or buyback well while still maintaining, let’s say, a strong balance sheet, still having the cash to execute both the, yes, increased CapEx levels and also to continue to execute on this, if I may call it smaller bolt-on acquisitions.
Agnieszka Vilela: Perfect. Thank you, Peter.
Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Peter Nilsson: Okay. Thank you. Thanks to all of you for showing interest in Trelleborg. And as usual, Christofer is, well, very prepared to support you further with any other questions. And Fredrik and myself will be on roadshows in the next few days, so some of you will probably meet. And if you want to meet us, then please make contact. And we are eager to support you to get the better grip of the Trelleborg story. So thanks again and see you or speak to you soon again.
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