Trelleborg AB (publ) (TBABF) Q4 2023 Earnings Call Transcript

Trelleborg AB (publ) (OTCPK:TBABF) Q4 2023 Earnings Conference Call February 2, 2024 4:30 AM ET

Company Participants

Peter Nilsson – CEO

Fredrik Nilsson – CFO

Conference Call Participants

Klas Bergelind – Citi

Erik Golrang – SEB

Agnieszka Vilela – Nordea

Hampus Engellau – Handelsbanken

Douglas Lindahl – DNB Markets

Timothy Lee – Barclays

Operator

Welcome to the Trelleborg Q4 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions-and-answer session. [Operator Instructions]

Now, I will hand the conference over to the speakers CEO, Peter Nilsson; CFO, Fredrik Nilsson. Please go ahead.

Peter Nilsson

Hello, everybody. Peter Nilsson, speaking. Sorry for the mess up here. We don’t know exactly what went wrong, but something went wrong. But now, we are live. And as usual, then we would like to refer to the presentation, which is on our webpage and where we are presenting the results for Trelleborg in Q4, October-December 2023.

Rapidly moving then to Page 2, the agenda page, where we’re then going to want to talk about the highlights, business areas. Fredrik Nilsson, our CFO, will then guide us through the financials, and then we will sum up with the summary and some comments on the outlook for the running quarter. And then of course, as usual, also open up for Q&A.

Turning then to Page 3. Solid end to the year. We feel that we have had a very solid Q4, very much in line with our expectations. And — yes, as according to our expectations basically all across, sales at a little bit north of SEK8.4 billion, which is an increase of 4% compared to a year ago, where organic sales is unchanged; acquisitions, adding 3%; and currency adding another 1% when we report in Swedish kronas. EBITA up by 6%, which is kind of not above the sales, which then means also that the margin will be a slight uptick, compared to a year ago.

Items affecting comparability at SEK260 million, where restructuring charges SEK173 million, and we also have recorded a non-cash loss on the divestiture then in the quarter. Cash flow is strong at SEK1.3 billion, not as strong as a year ago. But a year ago, it was a very strong cash flow, and basically everything in our balance sheet managed in a good way. I mean, we managed the inventory in good way, payables is good, receivables is good, but of course, impacted once again by tough comps and also with a slight uptick in CapEx in the quarter compared to a year ago.

We also noted in the quarter, very satisfying, let’s say, acquisition made in South Korea, where we bought a company, a local company, very specialized in special seals for Semicon equipment, and that we see as a strategically very nice acquisition for us, where it is just creating a strong position in the biggest semiconductor market in the world and also creating a great foundation for us to use this technology and the experience that this company has in order to bring it also into other markets, primarily in Asia, but also providing benefits for us and supplementing what we have in our range today also, and making it possible also to create a foundation also for this interesting segment also in Europe and North America eventually.

Also maybe worthwhile mentioning here also it probably should have been on the page, but sometimes you do mistakes. Dividend is also — a dividend is proposed at SEK6.75, which is then up compared to a year ago, of course, subject to a confirmation at the upcoming Annual General Meeting.

Turning to Page 4, organic sales relatively flattish all across, zero, as we already commented on the total, with a slight uptick in Europe and, of course, still down in Asia, but substantially better compared to a quarter — to last quarter. And also then North and South America, let’s say, a slight negative, but, overall, relatively flattish as you see everywhere.

And I mean, in comment, we — forward a little bit, we see Europe basically continuing the same way, maybe slightly more negative view on North and South America, but then a positive view in Asia, where we see an uptick in the order intake in China, where we are believing in kind of an improvement in Asia. Of course, with the notes that we know Chinese New Year coming up, and that is also difficult to judge that one for quarter one. But nevertheless, overall, going into ’24, we see that Asia, especially China, is improving.

Turning now to Page 5, agenda page, going to the business areas and quickly then turning to Page 6, comment on Industrial Solutions. Organic sales minus 1%, M&A adding 2%, basically same development that we saw in last quarter, still weak sales in especially residential construction, both in Europe, North America and also in certain industrial segments, where we still see soft demand in the more kind of distribution-related segment, but also slightly tougher in some of the core machinery segments, especially in Europe. No change basically compared to a quarter ago.

Sales to Marine segment continued to be strong. I mean, we already commented on this special order in Panama for us, but also in other areas related to LNG and related to the marine port construction, in general, performed well in the quarter — continued to perform well. Automotive also remained high, and surprisingly high, if I may say, but it’s continuing in a good way. And we also see relatively good momentum in this segment here going into running quarter.

Overall, EBITA up on structural improvements. I mean, you know that we’ve been investing quite a lot in improving the overall business set-up of Industrial Solutions. We see benefits from that. And also continue to see a positive sales mix as in the last quarter. And we also note with satisfaction, of course, that this is the highest margin we have had on Industrial Solutions ever in Q4.

Moving then to Page 7, and commenting on Trelleborg Sealing Solutions, organic sales, slightly up 1%, M&A adding 4%. We also basically comment very much in line with what we see in Industrial Solutions. We see the general industry declined in most markets, as I mean, we see also Europe and core industrial demand is a little bit softening.

We read into that continued inventory reductions and not really much change compared to last quarter. Automotive demand also here up. And then we continue to see strong sales in aerospace, and also satisfactory development also in healthcare and medical although we see some hints in certain parts of this that we see some customer inventory adjustment kind of continuing there as well. But we see a good underlying demand, a good continued, let’s say, order intake.

EBITA and margin declined, mainly linked then to as we have commented before, also acquisitions coming in with lower margin. We see the integration is running good and we are getting closer to what we had before. We see this is — we expect this to continue to move in the right direction.

Also noting highlighting again that we continue to invest especially, aerospace, healthcare, medical, semicon, some automation and some other segments, where we would like to, let’s say, create a better foundation for growth going forward, which has also continued to hurt the — let’s say, the operational result in Sealing Solutions. So that is kind of no surprises here either. And there’s basically a movement very much in line with our expectations and with our guidance.

And then turning to Page 8, a few slides here on sustainability, continue to improve in all dimensions. Our, let’s say, CO2 intensity continued to improve and our kind of total consumption of CO2 or emission of CO2 is continuing also downwards.

So, turning then to Page 9. I mean, the biggest driver for this is that the share of renewable and fossil-free electricity, which is continuing to improve. And we also here highlight also lost work cases, where we are also continuing in a good way. So also well under control in terms of sustainability. And we are, let’s say, performing, yes, well ahead of our previous targets for, especially for CO2. And of course, we’re now moving also the Science Based Targets Initiative also, as you note, has been approved, and we are now kind of moving away from the previous fulfilled target and launching — we have launched a new target, but we’re now running into that in a more formal way.

And turning to Page 10, agenda slide again, financials and quickly turning to Page 11, where I hand over to Fredrik to guide you through this.

Fredrik Nilsson

Thank you, Peter.

Moving on to Page 11, looking at the sales development. We have a flat organic sales in the quarter. Sealing Solutions reported growth with 1%, while Industrial Solutions declined by 1%. And, as Peter mentioned, reported net sales up 4%, 3% impact from acquisition and currency added 1%.

Moving on to Page 12, looking at the historical organic growth trend. We were below our sales growth target in the fourth quarter. But please remember that we report 15% organic growth and 23% in total growth in Q4 2022.

Moving on, Page 13, showing the quarterly sales around 12 to SEK8.4 billion in sales, were the highest to date for fourth quarter. And if we look for the full year, the sales reached SEK34.3 billion with an organic growth of 2% for the full year.

Moving on, Page 14, looking at EBITA and EBITA margin. EBITA, excluding items affecting comparability, increased with 6% to SEK1.424 billion with profit growth in Industrial Solutions, while Sealing Solutions was on par with prior year. In the result, there was also a small translation impact of SEK4 million in the quarter. Margin 16.9% compared to 16.5%, the prior year. And this is despite, what Peter mentioned, we had initial impacting from acquisition with lower margin and the investments we are making in the organization on fast-growing markets.

Moving on to Page 15, looking at the margin. The positive trend continued with increased EBITA. And if we look for the full year, we were for the first time above SEK6 billion with SEK6.2 billion in EBITA for the full year with a margin of 17.5%. And EBITA and the margin were the highest-to-date also for the fourth quarter.

Moving on to Page 16, looking at some details in the income statement. We have items affecting comparability of SEK260 million in the quarter, which was higher than last year of SEK115 million. Looking into some details here. We have restructuring costs of SEK173 million, and that is due to that we are adjusting our cost base due to the lower demand. And we also divested, as earlier communicated, our offshore and Oil & Gas operations in the U.S., which generated a loss of SEK87 million.

Financial net reached minus SEK38 million, which was an improvement compared to minus SEK76 million last year. And that was related till, of course, if we’re now sitting with a net cash position. So higher interest rates cost, but it’s offset by interest income.

Tax rate for the quarter amounted to 25%, which is slightly below what we have communicated of 26% for the full year. Here, we will make an update and I will come back to that when we are talking about the outlook that we are now guiding for an underlying tax rate for continuing operations of 25%.

Moving on, earnings per share for continuing operation, excluding items affecting comparability, up 20% from SEK3.4 to SEK4.08. For the Group, as a whole, you can see that we are down, but that is due to that we have divested Wheel Systems and the printing blankets that was included in last year’s number with 1.68.

Moving on to Page 18, and the cash flow. And as you can see here, we have a cash flow last year of SEK1.678 billion, this year SEK1.321 billion. Good continued improvement in EBITDA. Little bit less positive from working capital, but as you can see on the table on the right side is still positive, SEK300 million improvement from working capital in the quarter.

And then, as Peter was also mentioned, we are investing more, and that you can see, when you’re looking at the net CapEx and leasing together. So all in all, a good cash flow for the fourth quarter.

Looking into Page 19, the cash conversion. A good cash conversion of 92% for the full year compared to 74% in 2022.

Moving on, Page 20, gearing and leverage development. We are now seeing the net cash position and the reported debt ratio becomes negative and amounts to minus 6 compared to 56 a year ago. And the net debt — net cash in relation to EBITDA was minus 0.2 compared to 2.4 a year ago. And we have also continued to buy back shares during the quarter of SEK1.078 billion.

Moving on to Page 21, return on capital employed, amounted to 12.9% compared to 15.9% a year ago. And the capital employed has been impacted by acquisitions with lower returns.

And then finally, moving on to Page 22, the financial guidelines for 2024. We estimate CapEx to be SEK1.6 billion, which is in line what we saw during 2023. Restructuring costs of SEK250 million, which is a reduction of 50% compared to what we saw here during 2023. Intangibles in line with the numbers we reported 2023. So we estimate that to be around SEK500 million. And as I said, underlying tax rate 25% compared to previously communicated 26%.

With that, I would like to hand back the microphone to you, Peter.

Peter Nilsson

Great, Fredrik. Thanks a lot.

The agenda page again, summary and outlook, turning to Page 24. So we entered the year, as we guided, very much in line with our expectations. EBITA up slightly more than the sales is up, which is then pushing the margin a little bit up making us the strongest Q4 so far for us in terms of margin. Also overall, a good cash management although down from a year ago.

We are happy with most of the items in this respect. And also, with satisfaction, we note that we are building a better position on seals, let’s say, targeting the semicon industry. So a good quarter for us, solid quarter moving in the right direction, of course, creating a foundation to continue to build a better Trelleborg — a stronger Trelleborg.

Good balance sheet as well, as we comment on that, which is offering opportunities both for continued high organic CapEx, but, of course, also to continue to scout for interesting acquisitions for us. So all in all, very solid end to the year, and of course, a very active for Trelleborg. I mean just to use the occasion also to comment on the full-year performance. Of course, we have changed the group and we feel confident that we’re going to continue to improve and we will continue to prove that we are building a better Trelleborg.

And turning to Page 25, opening up just a few comments on the running quarter. I mean, we say, overall, the demand is expected to be on par with the fourth quarter. We don’t — of course, there’s always some ups and downs behind it as I comment on geographies. Europe basically continuing the same way. We see a stronger Asia, driven by an improvement in China. Might — some slightly more negative view on Americas, where we see some pushes in certain areas going down. But overall, once again, well-balanced and everything moving forward.

In terms of market segments, I mean, we see continued strong demand automotive, we see continued strong demand LNG, and let’s say, marine construction. We continue also to see good development in aerospace, solid development overall in also medical and healthcare, and then where we have some more concerns. We don’t see any changes in the construction. Some residential construction segments continued to be not getting worse, but not really improving either.

And then we are, let’s say, carefully noticing the development in the kind of core industrial machinery and that kind of related segments where we have some concerns. But we think that is more balanced by good development in other areas. So once again, overall, of course, there is always some mix behind, but, overall, solid development going forward.

And then, of course, we know geopolitical situation, I mean, we are all painfully aware of the war going on in Ukraine and Russia and the development in the Middle East. Who knows what that’s going to be? So we always add that as well as a comment. But, overall, we feel we have good control of the operations and we are ready to act if needed. So that is kind of the way we look at the running business.

So turning to Page 26, agenda point, Q&A. And then quickly moving over to the final page in our presentation and opening up for questions. So please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] The next question comes from Klas Bergelind from Citi. Please go ahead.

Klas Bergelind

Yes. Hi, Peter and Fredrik, Klas at Citi. So the first one is on Industrial Solutions. It’s a solid margin, again up from 14% last year. I had expected the mix impact in marine, the Panama effect to level off a bit here. So I’m trying to understand a bit more Peter, what is underlying execution versus mix? You have the factory closures to sell. So I might have asked this before, but would be great to get a sense of the savings number running through the P&L, I’ll start here.

Peter Nilsson

Yes, I mean, it’s a mix of impact, of course, but overall we still had some minor benefits from the Panama, but also other big projects related to LNG and some others. So marine has definitely continued to kind of bring benefits. But I mean, we don’t really want to highlight. I mean, that is an overall development. We have some good development also in rail, for instance, in the quarter, good deliveries in rails, continued good automotive demand.

So it’s not really — we cannot pinpoint something really specific. It’s more an overall good development, overall good management. So this is a movement in the right direction, as we have had for many, many years. Of course, the restructurings that we’ve been doing and that we will be spending more money as we already comment on restructuring and that is also creating benefits.

So — but you’re going to see, I mean, our guidance remains. I mean, this is a long-term improvement moving in the right direction. There could be some ups and downs in individual quarters. But overall, it’s a long-term, I will say, climbing the value ladder in order to bring a more profitable business and a better business. So we — it’s difficult, really to kind of pinpoint something very specific on why this is happening.

Klas Bergelind

I’m just trying to sort of — it feels like the underlying execution was a bit stronger and it was more driven sort of more by the Panama effect early in the year. And I guess, that is what I’m trying to get to.

Peter Nilsson

I mean, once again, it’s nothing really changed. It’s just hard work, improvements in a lot of dimensions. And then, of course, you could individually have a few tens of a percentage points giving on individual margins. But Panama is not kind of — it is bringing some benefits, but I mean, 0.1% on the margin or 0.2% or something like that.

But it’s not really any major impact if you look at these individual quarters. Good execution, benefits from previous restructuring, and then also some good project deliveries in the quarter, some linked to LNG, some linked to rail, automotive performing. So it’s a solid quarter, but once again, solid quarter with improvements in a multiple of dimensions.

Klas Bergelind

That’s great to hear. And my second one is on the guidance. You’re guiding for flat demand. I think, you mean that it should be sort of flattish growth again. But if I take into account easier comps, the destocking is leveling off, construction is bottoming, I thought it could be a little bit more growth than that. Is it any end market geography where you still see sort of a big decline in volumes? You talked about North America Peter now a bit weaker, seems to be in teens. Yes, so we can sort of understand that a bit better.

Peter Nilsson

No, no, I mean, I agree. But where we are a little bit more cautious is the core industrial demand, where we see some continued, I mean, prolonged focus on the inventory reduction. We have some in the medical healthcare, which is also some focus on inventory reduction. I mean, I should say the order intake is fairly solid. I mean, we have order intake well in line with sales in the quarter. But we are a little bit cautious on the way. We still see some of our customers being a little bit more cautious, ordering a little bit less.

And then also, we are getting — we and our suppliers are getting our kind of supply chain better in order, which means that also customers is getting also more focused and trusting our deliveries and our kind of sub-suppliers deliveries.

So I think this is a little bit cautious maybe, but this is the way we look at it, Klas. I don’t want to say that we understated it. But this is simply what we believe. But of course, it’s a little bit on the cautious side if you look purely on the order intake and the kind of the expectations. But we do believe that this is what’s going to happen.

Klas Bergelind

All good. Thank you.

Operator

The next question comes from Erik Golrang from SEB. Please go ahead.

Erik Golrang

Thank you. I have three questions. First one on profitability in MRP. Could you shed some light on sort of where is that as we exit 2023, would be helpful to get a sense of how it’s developing? Second question, the destocking, you talked about in healthcare and medical, is there sort of specific segments across your business or in specific areas, given it’s quite diverse? And then the third question, on CapEx, is it still — I think you talked about clearly lower CapEx by 2025. Is that still the base case? Thank you.

Peter Nilsson

Yes. So to talk about MRP, MRP is being integrated and it’s, let’s say, basically developing according to plan. So we are not really tracking that individually anymore in the same way with the same kind of cost base. But overall, development in line with the kind of expectations. We, of course, are also there, hurt a little bit by the residential construction. We have some water segments, but also we have some other segments performing better.

So overall, of course, performance is changing, but overall once again development in line with expectations. We still have high, let’s say, degree of certainty that we’re going to bring the benefits. We are quoting new projects. We are getting into new segments. But, I mean, we also know that the sell-in period for a new seal or a new sealing solution is not that is happening overnight.

So we have a few quotes. I mean, it takes generally two, three years to get into new segment or a new solution. We are quoting and we think we are moving in the right direction. We’re also now touching a little bit, although this is not, let’s say, the greatest synergies with this acquisition, but we also now start to move around a little bit more actively among the manufacturing footprint and integrating the MRP sites with, call it, the legacy Trelleborg sites, and also starting to clean few of the sites to get them more focused. I have had more mixed sites in MRP, while Trelleborg has had more specialized sites. So there is still some integration work ongoing, but overall, once again, development rather much in line with our expectations.

To talk about the medical —

Erik Golrang

If I could just a follow-up there, Peter, on the dilutive impact from this acquisition. Are we at the trough there now in that? We sort of –

Peter Nilsson

So we’re going to get — we are going to have some — we’re going to have negative impacts also in ’24 from the — let’s say, the adding. So I mean, it’s getting closer to put it like that, but I mean, we are not yet through that tunnel.

Erik Golrang

Thank you.

Peter Nilsson

We have guided for that the run rate at the end of 2025, which is still the same guidance. So we’re going to have continue to kind of suffer from that in terms of margin. But we are hopefully going to start to see some — or we are going to see some organic benefits from these new orders. And they will start to kick in here during this year.

Although the bigger — that will increase in ’24 and ’25, because it is rather long selling in periods for a new sealing solution. It’s not that they’re changing overnight. I mean, it has to be new solutions, new kind of versions before we get in. So that’s the way. So it’s very — I mean, we feel, at least, this is very much in line with what we have been saying all along. No changes on that one.

Erik Golrang

Okay. Medical?

Peter Nilsson

And then on the medical, I mean, if it’s a highlight, it’s all across, but biopharma still suffers with, let’s say, the production of vaccines and that kind of stuff, would have been a lot of overstocking that continue to suffer. We still find the segment very interesting and we see the overall medical industry moving in that direction towards more kind of active substances. We see a big benefit and that’s also where they are kind of more replacing.

And then there is more and more interesting, let’s say, sub-segments in the biopharma, but that is suffering. And we also see on some equipment makers, it’s not — we cannot highlight any specific segment besides the biopharma. It’s basically all across. But once again, the order intake is good. And we are kind of gaining ground and we are moving forward. And we still see big possibilities in the medical and healthcare segment.

CapEx, I mean, easily — we still keep the same guidance. And we have some very specific big projects in ’25 as well. I mean, so we say half of the CapEx is probably linked to, yes, a handful or slightly more than a handful of CapEx. And that is why we feel very confident that it will go down dramatically in ’25, as these projects are ending.

Erik Golrang

Very good. Thanks.

Peter Nilsson

Yes.

Operator

The next question comes from Agnieszka Vilela from Nordea. Please go ahead.

Agnieszka Vilela

Perfect. Thank you. My first question is on Sealing Solutions and coming back to the operational leverage, maybe specifically in the quarter. Looking at your sales development in the quarter, it was up by some SEK250 million, but EBITDA was largely flat despite the positive currency impacts. So some contribution from acquisitions and probably also lower kind of integration cost for MRP. So can you just explain what happened in the quarter? And then maybe a follow-up, ending at 21% EBITDA margin for 2023, what do you expect will happen to profitability in 2024, assuming flat or somewhat lower markets and the fact that you still invest in the business? Thanks.

Fredrik Nilsson

I mean, as we said, Agnieszka, that we have also invested in the organization for future growth. So, of course, that has an impact on the margin. We are continuing to investing into the speedboat segments with aerospace, health and medical and semicon and automation and some other speedboat segments. So that is impacting the margin negatively. And then, of course, also it’s a variation between the different segments.

Of course, there are some factories where you get a little bit of inefficiency when you get in with a little bit lower volume, and some are running pool. So of course, that is also impacting the margin in Sealing Solutions. Overall, I mean, we are still sticking to our earlier communication that we will be back here in 2025. So we will start to see a gradual improvement over the coming two years. And then we have said in the run rate when we are leaving ’25, we should be back that we were before the large acquisition.

Peter Nilsson

So we — I mean, in a way, we’re keeping our guidance. We don’t see any kind of deviations from our plan. We are moving in the direction we want. And of course, I mean, as you highlighted, there is also, say this, extra sales, there’s also some price elements in that compensating for inflation. So it’s not really that we have bigger volumes to adopt. We actually have lower volumes probably in the quarter compared to a year ago. So overall, well managed. We feel then, of course, you can have your views on it. But by the way, we feel fairly, yes, satisfied with the development.

Agnieszka Vilela

And then just maybe a follow-up on that. Just looking into 2024, on the potential positive drivers for your earnings in Sealing, can you tell us whether the investments in the business will be lower or higher than in 2023? And also, what do you expect when it comes to kind of underlying profitability at MRP or other acquisitions?

Peter Nilsson

We see an improvement, but I don’t want to give any figure guidance. But we see an improvement in ’24 in terms of margin. That is the way we look at it at the moment. And we believe it’s going to move in the right direction. Then exactly how much, I don’t really want to give any hints on that. But we feel that we are through that and we’re starting to get benefits from the investment we’re doing. We’re starting once again, as I say, to get the first kind of sales unit coming in from MRP.

We do also believe at the moment that we will see an improvement in China, which you probably is aware is kind of positive mix for us. So we see a few positives. The uncertainties, of course, linked to the volumes, and especially this, what we call industrial, how that will develop. But we feel confident that once again, medical and healthcare will continue, aerospace will continue, automotive looking good at least there for the first part of the year. We see now with the semicon entrants coming in.

So we have some positives, while the volumes are the uncertainty. But I mean, assuming that the volume stays relatively flat, we feel confident that you’re going to see a margin improvement in Sealing Solutions.

Agnieszka Vilela

Perfect. Thank you. And then the second question, Industrial Solution, which finished the year at strong margin with 15.6%, up by almost 1 percentage point, which is probably more than what you guided for a yearly improvement. So do you think this is kind of representative level for Industrial Solutions? Or were there any special benefits in 2023 that will fade away in 2024?

Peter Nilsson

I think it’s slightly better once again linked — I mean, we got good benefits in Q3 and also slightly as you see it here in Q4 from this extraordinary order from Panama which kicked in with high margin and high — yes, high benefits. So we still guide for 0.5 percentage point up a year. So of course, it’s been slightly over-performance this year and you should not really see — if you can keep that kind of flattish going into next year, we should be happy. So that is not really where we see, let’s say, another improvement in the same dimension as we saw this year. But, so that is, I mean, what we want to say about that. Our overall guidance still remains 0.5 percentage point up a year. And some — and as you say, some overall performance this year.

Agnieszka Vilela

Perfect. Thank you, Peter.

Operator

The next question comes from Hampus Engellau from Handelsbanken. Please go ahead.

Hampus Engellau

Thank you very much. Could we talk a little bit about the organic growth? If I look underlying, it seems to me like when I look at the different growth components, underlying organic growth was better than expected. And if I’m reading you guys right, there was some price contribution here. Would it be possible to maybe discuss a little bit on how much price contribution you had and how much underlying volumes were developing? And also if there’s — and how much of this we should expect for the remainder of the year? And then I’m maybe talking more Sealing Solutions here, but happy if you also could discuss Industrial. Thanks.

Peter Nilsson

I mean, it’s a mixed issue. But overall, of course, the volumes are down. I mean, then we talk of a few percentage points down. I mean, we don’t really want to comment whether that is two, three or four, but I mean, that is really what we talk about. So there is positive and then a similar positive on the price. I mean, that is what we’re talking about on. So it just really — overall, the volumes are down. And I mean, the only reason for us for providing kind of organic positive growth — positive sales growth is due to, let’s say, pricing actions.

So that is why we are also kind of satisfied although with kind of lower overall volumes, lower capacity utilization of factories, we managed to create kind of an uptick on the margins. So that is why we are overall satisfied and we have been working throughout the year. We have already kind of initiated a lot of what we call restructuring, downsizing. I mean, we managed to kick start that already, let’s say, in Q2 or something.

So we are starting to see the benefits and that is really what is saving us in this one. And of course — so that is the way we look at it. So I don’t really want to — of course, we have internal, but this gets very complicated if we are to kind of go through the different segments. Overall, a few percentage points down on volume being compensated by a few percentage points up on price.

Hampus Engellau

Fair enough. And is it fair to assume that a large part of the price is a spillover, which means that price — year-on-year price contribution should be tougher in Q3 or Q4? Or are you implementing price increases as of January or up –

Peter Nilsson

At the moment, it is lower. There is some price rollover if you look at the full year — full year, let’s say, impact, but, I mean, it’s not really any major. But it will be a slight positive both in terms of pricing actions, but also in terms of these ongoing restructures that’s going to kick in and improve going forward as well. But I mean, we are not — that is normal. I mean, that is something that we’re working with all the time. It’s nothing specific. And of course, we’re doing that in order to facilitate.

We do expect — I mean, throughout next year, we do expect not automotive volumes to continue as high as they are. We still — what I highlighted before, we don’t expect any kind of improvements in the residential construction. And we are a little bit cautious also on these core industrial hydraulics, pneumatics and construction equipment and agriculture equipment and that kind of stuff.

So we are, of course, continuing to watch our costs very carefully and we are continuing to adjust to be able to flex when needed. So it’s — sorry for a lengthy, let’s say, lengthy reply without any really content. But that is the way we’re working with a lot of dimensions and a lot of actions in a variety of actions. I mean, that is also the way we feel that we are less cyclical overall. We have a better performance. We are better balanced. And we are able to maneuver across this slightly more challenging environment.

Hampus Engellau

Excellent. Thank you very much.

Operator

The next question comes from Douglas Lindahl from DNB Markets. Please go ahead.

Douglas Lindahl

Hello, Peter and Fredrik. Thanks for taking my questions. I just wanted to circle back on the pricing topic there. So based on your answer, we should continue or we should expect continued price hikes during 2024? That’s my first question.

Peter Nilsson

I don’t — I mean, of course, in certain areas, we continue to push the pricing, but what I said is more the price rollover because there have been, let’s say, increasing pricing throughout ’23, and now that’s going to be a rollover into ’24. So that is the way we look at it. I mean, of course, price hikes is always on the agenda, but we don’t expect price hikes to be at all on the same level throughout ’23. So that is not going to be a big thing as we look at today. But I mean, that is a constant adjustment.

And of course, we’re looking at inflation. We are entering into salary discussions. And raw material slightly down at the moment, of course, which I trust you’re aware. So that is also something that we need to continue to watch. But we don’t see an increasing inflationary pressure going into ’24. And then, means also that the push for price increase is going to be less. But once again, there are going to be certain pockets where we’re going to, let’s say, increase pricing. But once again, it’s not going to be a major impact in ’24 as we see it here today.

Douglas Lindahl

Okay. Fair enough. Thanks. And you already touched upon my second question, which was basically on the cost base as you view it now heading into 2024. Raw materials coming down, but maybe you could elaborate a bit more on your other cost transportation issues we’re seeing right now.

Peter Nilsson

All of that maybe, if you say, I mean, so far, as you say, on this Suez Canal and all of that, we have not really seen an impact. There’s some of our customers that’s been hinting that there will be problems with that. But I mean we have not really seen it and we cannot kind of isolate any problems with this at the moment.

Overall, freight cost is also — as the volumes goes down, this also seems to be stable. We don’t see any problematics there. So it’s inflation outside of salary. Salary, we do expect, let’s say, above average increase in ’24, average, if you look on the last few years, but I mean, not the same push as we saw in ’23. So overall, inflationary pressure going to be less. But that is something which you say we do that weekly. We are running on that weekly. So it might change. But as we see it at the moment, it’s not really a major impact for us.

Douglas Lindahl

Okay. Thanks. And we touch upon the topic previously as well, but more in broader terms, the destocking that we’ve seen now for a few quarters, in general, maybe looking at sort of your broad cyclical exposure, where would you say that we are there now?

Peter Nilsson

We — I mean, I should be, let’s say, open or honest enough to say that we did not expect this to continue. It’s been a slightly higher destocking going into — in Q4 than we expected three months ago, if I put it like that, and that is also we’re a little bit cautious going forward. We do believe that’s going to be — I mean, we saw on some of the customers having a little bit longer Christmas breaks and we also see now in China, for instance, some of the longer New Year breaks.

Of course, we do see that some of this capital goods industry has continued to destock. But we see that we’ve been undersupplying kind of the overall demand for a few quarters now. And I mean, it can continue in that way. So at some time, it needs to end. But once again, I — we do believe, sitting here today, we do believe we’re going to have a negative impact from that also in Q1, but it should end soon.

Douglas Lindahl

Okay. Fair enough. That’s a good answer. And then my final question is on the topic of M&A. You mentioned China here several times before and we know that it’s positive for your profitability. Is that still on top your sort of M&A agenda acquisition –

Peter Nilsson

Yes. And I mean, we’re still working on, as we said, these speedboats, that we call it, aerospace, medical and healthcare is high on the agenda. We see good possibilities in medical and healthcare to widen both our geographical exposure, but also our segment exposure and becoming, let’s say, a complete supplier. That market is still very fragmented. Moving into the semicon area now, we did is Korean acquisition.

Of course, there is more semiconductors markets in the world, which is of interest for us. So that is still working on and we’re still keeping, we say aerospace, medical and healthcare, semicon, and also some pockets of consolidation in Industry Solutions as well. I mean, although it’s going to be smaller, if you do an acquisition in Industry Solutions, it’s probably going to be on the smaller side, but it’s going to be strengthening already strong position. So we see, yes, solid, let’s say, solid possibilities for acquisitions. And I mean, valuation has gone down as well, just to comment on that.

So, of course, compared to a year ago or something, we see — we can say for any substantially lower valuations in a few areas, which makes it more attractive. And since we — in more or less all acquisitions, have also good synergies, so that makes sometimes these acquisition multiples, yes, very attractive, if you look at the kind of lower valuations in combination with our synergies. And that is why also, once again, I mean, I don’t surprise, but on the Industrial Solutions, some of these acquisitions we’re looking there is actually looking — becoming fairly attractive.

So we continue to scout that and we continue to watch it carefully. We don’t see any movement, if I may say, from private equity players yet. I mean, there’s not really any — they’re still very slow. And I mean, not really — so the processes we’re running is mainly — only, I should say again, strategic. We don’t really see any private equity players yet. And I mean, as we are working mainly on acquisitions with private individuals, and if they decide to sell, they want to sell now. So that is a good — we feel it’s a good timing to continue to scout for good acquisitions.

Douglas Lindahl

Okay. Thank you very much for answering my questions.

Operator

The next question comes from Timothy Lee from Barclays. Please go ahead.

Timothy Lee

Hi. Thanks for taking my questions. The first question is about your guidance. So you’re guiding like stable demand environment in the next quarter. But can you give us a little bit more color, the relative performance of the tool segments? It seems like, in the fourth quarter, we definitely see a little bit better progress in terms of sales improvement in Sealing Solutions. So what do you see in the first quarter developments, specifically for the two segments?

Peter Nilsson

Tim, our guidance is probably we don’t see any difference between Sealing Solutions and Industrial Solutions. It’s the same for both. And I mean, as we — there is kind of ups and downs all across. But overall, we believe, as we see in this quarter, of course, we can discuss 1 percentage points or 2 percentage points up and down whether that’s going to continue like that. But overall, we don’t see any major difference between the kind of sales development in the two business areas.

Timothy Lee

Understood. Understood. The second question is about China. So you mentioned it seems to be improving in terms of orders. Can you give us a bit color about what end markets in China you’re seeing better improvement so far? And whether you see the overall improvement is like a seasonal impact or like a real improvement in the underlying demand, because, like, in the forefront, obviously, it’s a peak season in China, in general, in many of the industries. So I just want to have a bit more about the momentum in China, what’s going on in China?

Peter Nilsson

In China, we can say, we see an overall, let’s say, development and positive development basically in all sub-segments. I mean, we see automotive continuing good way, engineering or machinery, which has been kind of probably the more softer ones, whether [indiscernible] and all of those has been a little bit careful. We see they’re getting back and placing orders. We also see infrastructure investment continuing in tunnels and harbors and all of that. So when I don’t want to — we see overall, a general better development in China.

It’s been a very soft market. Customers are very, very cautious. We see that they’re starting to believe a little bit in the future. We have had very short order cycles. They start to give new longer-term orders. So that is — we read it. Our reading is that there is better kind of sentiment coming and its better people start to believe again because it’s been a kind of extraordinary low, if I may say.

So, of course, if — and that is why we need to watch a little bit more what’s going to happen here beyond Chinese New Year and see what that is coming up. Now, we’re only a week away from that one. And we noticed that some of the factories has already closed. I mean, they have a longer breaks than usual, but they have been placing orders to — for us to execute here, let’s say, after the year of the Dragon has started. So then we will get into and we will — we look more positive in general. And I’m don’t really looking at Fredrik, but I mean, I don’t think we want to highlight anything specific. It’s more a general improvement all across.

Fredrik Nilsson

I agree with you, Peter.

Peter Nilsson

Yes.

Timothy Lee

Yes. Okay. Thanks.

Operator

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Peter Nilsson

Great. Thanks. Thanks for your interest in Trelleborg. And sorry for the mess up again here in the beginning. We will make sure it doesn’t happen again, but that’s the way it is sometimes. I mean, thanks for following Trelleborg as we are now leaving this solid quarter and now focus on the future again, developing and creating a better Trelleborg, less cyclical, more exposed to high-growth segments. And that is a development that will continue. And hopefully, we will continue to present an even better Trelleborg going forward.

And then, as usual, if you have any follow-up questions, I’m available, Fredrik is available and Christofer is available. So hope to see you soon. And do take care and speak to you soon.