Trelleborg AB

STO:TREL B

Q1-2025 Earnings Call

[Operator]

Welcome to the Trelleborg Q1 2025 Report Presentation. [Operator Instructions]



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

[Peter Nilsson, executive]

Thank you, and welcome to all of you to this run-through or presentation of the financial performance of Trelleborg in Q1 2025. As usual, I will, let's say, start giving some overall headlines on the report, the way we look at and also give you some input on the way we look at the business areas. And then Fredrik Nilsson, our Group CFO, will guide you through financials before I summing up with the summary and some comments on the running quarter outlook, before finishing off with the Q&A.



And as usual, we're using a slide deck presentation, which is on our web page. We're using that and turning to Page 2, agenda, as I said, highlights, overall highlights, business area comments, financials, summary and outlook, and then a Q&A.



So moving to Slide 3 on the overall [indiscernible] had a solid quarter with record results. And basically, we can start off by saying the development in the quarter was very much in line with our expectations, and we are happy that all our business -- all our 3 business areas delivered well in line with expectations. In summary then it's summing up, then on sales of SEK 8.8 billion, an increase of 8% compared to a year ago. And this 8% it is split on organic sales, 1 percentage points, M&A adding 6 percentage points, and then currency assisting us with another 1%.



EBITA basically following the sales development and ends up at SEK 1,616 million, which is then a margin of EBITA margin of 18.2%, which is 0.1% higher than last year. And this is then in total, let's say, both highest sales and also the highest EBITA in a quarter for us up until now.



We continue to kind of invest in improving the structure. We have, let's say, items affecting comparability on similar levels as a year ago. We also noted satisfaction that even though this first quarter is usually quite challenging in terms of cash flow due to seasonality, but we managed also to grow that in the quarter, and we're -- Fredrik will comment on that later as well, but we are, let's say, satisfied to see that we remain on the 90% level, rolling 12 on cash conversion.



We also with satisfaction, we also have included in the quarter acquisitions of CRC U.S. and NuFlow in Canada, U.S., as well. Good add-on bolt-on acquisitions for us, which is strengthening already strong positions. We also post the ending of Q1, we also announced 2 acquisitions, Aero-Plastics, which is an American acquisition related to interior for aircrafts, airplanes, and also National Gummi or National Rubber in Sweden, where we do also an acquisition supplementing our business within extruded sealing profiles.



So a good quarter, solid in most aspects of not all aspects from our point of view, which is then delivered in a good way, resulting in a record result.



Turning to Page 4, organic sales, a mixed development. As you see in the quarter, Europe, a little bit more challenging, minus 5%, partly then compensated by North and South America delivering solid organic growth of 3%, but most of the benefit of best development actually happening in Asia, the rest of the world where we grow 10% in the quarter compared to last year.



Turning to Page 5, agenda again, business areas. And then quickly turning to Page 6 to comment on Industrial Solutions. Solid growth in the quarter, higher earnings, organic sales 2%, M&A adding another 2%. We did mixed development in diversified industrial where we see, I can say, continued strong development in Marine Solutions, LNG project-related businesses, and also water infrastructure, all of them showing strong growth.



Still continue to be challenging, you would call it construction segments, maybe flattening out in Europe, but we still see a -- where we do see a continued downturn, especially in North America in this segment, and that is hurting us -- continue to hurt us in the quarter. Automotive also a little bit subdued, and we see negative growth in automotive coming from a very, let's say, strong few quarters last year. So no surprise for us in a way. But nevertheless, it's a fact.



All in all, well managed as usual, I should say. And we are -- continue to manage the operational aspects of the business very good, and we also continue to invest in structural improvements, which means that overall, we managed to deliver the highest ever EBITA and also actually margin with a slim margin to before, but nevertheless, the best ever margin in the -- in this business area.



Also already commented on the NuFlow acquired, which is then, let's say, opening kind of a new geographical area for us for pipe relining and pipe repair. Very happy to have that, and we will be synergistic for us as we will be able to have, let's say, a better way of selling these technologies also in North America. And then post quarter 1, a smaller acquisition, but nevertheless, very important for this small niche business of extruded profiles, we're buying the Swedish National Gummi, and thereby kind of supplementing our offering going into a little bit higher dimension profiles, which we're kind of lacking in our offering before.



Then, turning to Page 7 and commenting on Medical Solutions. Strong growth with high margins is the heading organic sales, solid organic sales of 5%, and then M&A, benefiting from the acquisition we did mid-last year. Baron Group in -- especially then with the presence in China and Australia. Organic sales coming from improvements in Europe, but we still see a little bit muted development, both in North America and Asia. But overall, nevertheless, delivering plus 5%. So solid growth overall.



We also noted satisfaction that the life science segment, we earlier called it biopharma segment, is also improving from fairly low levels. That has been depressed for quite some time, but we now see that, that segment, which is then related to kind of active bacteria and vaccine and such stuff, we also see that improving now, which is going to be beneficial for us. EBITA and margin up, of course, mainly due to the acquisition and synergies from the integration of the Baron Group.



We also want to comment here that we have in Medical Solutions several ongoing, what we call capacity-enhancing projects ongoing in order to really develop this into a global business. We are investing in Europe to grow our manufacturing platform in Europe. We are also progressing well with the project in Costa Rica in order to become both more complete, but also more competitive in the Americas region. So good development overall for Medical Solutions and managed to deliver then an EBITA margin above 20% in the quarter.



Turning to Page 8. Sealing Solutions, here, we say stable despite some challenging markets, challenging market in some aspects. We'll get back and comment on that. Organic sales ending up at basically flattish, while M&A then adding 5% to the sales. We see the sales, so we call it diversified industrial declined in Europe and North America, but a solid improvement in Asia.



And here, of course, it's kind of a mixed development where we continue to see that the construction equipment and ag is being challenged, while we have, let's say, continued good development in other areas like semiconductors.



Deliveries to the automotive industry weaker in all markets. I think that is general for all our business areas, but that is once again, it's not unexpected. We had very strong sales end of last year, maybe too strong sales end of last year, and we are well prepared to manage this weakening in a good way. Aerospace continued to deliver very well. I mean we are global in these aspects, and we are kind of covering all the main OEs in a good way. And we continue also, which I'll get back to later, we continue also to add acquisitions into this portfolio, which is growing our portfolio even more and thereby improving our abilities to kind of support the industry even better going forward in the Aerospace segment.



EBITA, unchanged in absolute terms, but impacted a little bit by lower production volumes. And also, we have to note, as usual, when we buy something in sealing solution, we are initially being hit by somewhat lower margin in the acquired business, which we then continue to work with and we continue to, let's say, improve in order to get them back to the margin where we want them to be. Two acquisitions, one in the quarter, one post the quarter.



CRC then which is South U.S. exposed to this Gulf area, which is a good local area, especially for oil and gas activities, both onshore and offshore. Nice addition to our portfolio in North America and then also acquisition of Aero-Plastics, which is then, let's say, once again, I commented on that before, which is then, let's say, improving our offering, widening our offering for the aerospace industry.



So overall, a good quarter for Sealing Solutions with kind of known challenges in a way, especially related to this construction equipment and agriculture.



Turning to Page 9, a little bit on sustainability. We continue to improve 8% lowering of the carbon dioxide emissions on a year-to-year basis, but we are getting to levels here where we will not see big percentages of improvements going forward. There's still some way to go. Of course, we're adding resources to make sure that we continue to deliver improvements. But I think this 8% year-on-year improvement is for us now a good figure for this improvement and kind of the areas, kind of the figures that we should expect also going forward.



Turning to Page 10, the other sustainability KPI that we are showing. Of course, we're working on a lot of other areas as well. But in these quarterly reports, we're focusing on carbon dioxide and also share of renewable and fossil-free electricity. Here, we are basically flattish. We are already running on a 90% plus activity, and we are having a few areas where it's difficult actually to get fossil-free electricity. But nevertheless, we're working on finding solutions to this as well in order to improve this figure even a little bit more.



So I guess that is the overall comments on the business areas and the sustainability and basically turning to Page 11, financials and then quickly turning to Page 12, I'll ask Fredrik to take us through this section.

[Fredrik Nilsson, executive]

Thank you, Peter. Looking into Page 12, the sales development. Reported net sales up 8% from SEK 8.2 billion to SEK 8.9 billion. Organic sales, up 1% in the quarter, as Peter said, with organic growth for both Industrial Solutions and Medical Solutions, while Sealing Solutions had a flat development. M&A added 6% in the quarter and then another 1% coming from currency effects.



Moving on, Page 13. showing the historical sales growth. The first quarter was actually almost in line with the growth target of 8%, and it was the highest sales growth since the third quarter of 2023.



Moving on to Page 14, showing the quarterly sales and rolling 12 months for continuing operations. At last 12 months, the sales amounted to SEK 34.8 billion.



Moving on, Page 15. Looking at the EBITA development, we had a good growth of 8% from SEK 1.49 billion up to SEK 1,616 million. EBITA was the highest so far for a quarter. We have profit growth in all 3 business areas, with, as Peter mentioned, a very strong growth in Medical Solutions due to the acquisition integration of Baron Group. And we also had a good growth of 5% in Industrial Solutions and more a flattish development for Sealing Solutions. FXs effects on the EBITA in the quarter of SEK 5 million. Margin-wise, up from 18.1% to 18.2%, an increase by 0.1 percentage points.



Looking at the rolling 12 months trend, we have an EBITA of SEK 6,266 million with a margin of 18%. And we have had an EBITA growth of 5% during the last 12 months.



Moving on to Page 17, looking at some more details on the income statement. Items affecting comparability in the quarter SEK 61 million, entirely related to restructuring costs for adjusting our cost base.



Looking further down in the income statement, financial net, an increase from minus SEK 20 million up to SEK 144 million. And the main reasons here is that last year, we were sitting with a net cash position and got some interest income of SEK 86 million. And now we are sitting with a net debt position and which, of course, also implies that we get some interest expenses in the quarter. So that is the main reason why we have gone from minus SEK 20 million to minus SEK 144 million in financial net. Tax rate in the quarter, 25%, which is in line with our underlying tax rate of 25%.



Moving on to Page 18, earnings per share. If we look at, starting with excluding items affecting comparability, we were up from 4.23% to 4.28%. And the reason here for plus 1% is, of course, the good improvement in EBITA, offset by the higher financial net that I just explained. If we then look including items affecting comparability, earnings per share amounted to 4.08%.



Moving on to Page 19, cash flow. As Peter said, we had a good cash flow in the quarter of SEK 821 million, supported with a good EBITDA development of SEK 148 million. And then cash flow from working capital was negative, but that is due to normal seasonality. And then CapEx was in line with the communicated guidance for the full year. However, somewhat higher than Q1 last year.



Moving on to Page 20, cash flow conversion, running at a good level of 90%. So we still have a high cash conversion ratio.



Looking to Page 21, looking at the gearing and leverage development. We ended the quarter of SEK 6,733 million in debt. We have done share buybacks of slightly more than SEK 1 billion during the quarter. Debt-to-equity ratio of 17%, so almost flat compared to year-end of 2024 and the same with net debt over EBITDA, 0.9, which was exactly the same that we had end of 2024. In other words, our balance sheet remains strong.



Moving on to Page 22, return on capital employed, 11.8% for the quarter. And of course, capital employed was impacted by our recent acquisition and also on the higher pace of greenfield investments.



Finally, moving on to Page 23, our guidance for 2025. They are unchanged compared to that was presented in late January, which means that CapEx, SEK 1,650 million for the full year, approximately SEK 300 million in restructuring costs for the full year, amortization of intangibles, SEK 650 million and then the underlying tax rate of 25%.



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

[Peter Nilsson, executive]

Thank you, Fredrik. Page 24 then, a summary and outlook.



Turning quickly to Page 25. A solid quarter with record results. I mean, all business areas delivered well in line with our expectations and good execution from all my colleagues in Trelleborg. We are delivering a solid sales growth of 8%, driven 1% on organic and 6% on M&A, and then we're also adding some currency to that.



EBITA following the development on the sales, and we are delivering a margin of 18.2% compared to basically on the same level as last year, 0.1 or 0.1 percentage point up. Cash flow, good as well, as Fredrik said, we are happy with the cash generation, and we're also happy that we continue to deliver very nice and synergistic bolt-on acquisitions, although these acquisitions is somewhat pushing down the margin short term.



Turning -- leaving that and turning to Page 26, talking a little bit more about the future. This is actually an area which is, as you know, with a higher uncertainty than usual due to known happenings around the world. But we are ending up with this. Demand is expected to be on par with the first quarter of '25. We actually had, let's say, increasing -- improving business environment throughout the quarter. The good order intake end of the quarter.



But nevertheless, of course, we have to also recognize this global uncertainty, which is being around from a Trelleborg perspective, on the tariffs, where we are not overly concerned with our own operations. We have this local-to-local setup. and we will be able to deliver without any kind of noticeable impact on our earnings.



But of course, there is uncertainty and it will be strange if people were not kind of a little bit more concerned than before. And that is why although we are kind of, in a way, without this tariff situation, we would, of course, be more positive, but we're ending up with the best estimate we can do at the moment is that the demand will remain on par with what we saw in the earlier quarter.

So that is -- but once again, it's a little bit tricky than usual since we don't know exactly what's going to happen in the quarter.



But also with that, we are, let's say, ready to adjust. We are ready to kind of adapt if needed. So we feel that we're staying close to the operations, and we are having kind of an operational model, which will address whatever happens in a good way.



So with this, turning to Page 27 and the final agenda point, Q&A. And then turning to Page 28 and opening up this Q&A session.

[Operator]

[Operator Instructions] The next question comes from [Technical Difficulty]

[Unknown Analyst]

Three questions. First one on margins in Sealing Solutions. I get that volumes are down, that's negative, but you obviously have price mix that's positive. Is that not helping margins at all? Or is it all the dilutive impact from acquisitions that drags down the margin year-on-year? And if so, say something about the time line to bring up margins on acquisitions? Let's start there.

[Peter Nilsson, executive]

Yes. I mean we still have [Technical Difficulty] Lost you there for a while. Are you back now? Can you hear me now? Sorry, we have some problems here.

[Operator]

The next question comes from Erik Golrang from [Technical Difficulty] SEB.

[Erik Pettersson-Golrang, analyst]

Okay. I have no idea if you answered the question or not. But you can say something about the scope of margin dilution from the acquisitions in Sealings and the time line to resolve that.

[Peter Nilsson, executive]

We have some problems there, Erik. Sorry. Can you hear me now? Erik, can you hear me now?

[Operator]

The next question comes from Erik Golrang from SEB.

[Erik Pettersson-Golrang, analyst]

I can hear you, but my line keep mute and unmute.

[Peter Nilsson, executive]

[Technical Difficulty] Sorry, Erik. I don't know what it is. Moderator, please take the next question and see if it works better with someone else. It might be that Erik has some problem on his side.

[Operator]

The next question comes from Agnieszka Vilela from Nordea.

[Agnieszka Vilela, analyst]

I have 3. So maybe starting with the outlook, Peter, you mentioned that there has been some uncertainty in the outlook related to the geopolitics, and this is maybe why you gave a bit conservative guidance for Q2. But could you tell us about the development so far in April? Have you seen any hesitance from your customers already due to the tariffs?

[Peter Nilsson, executive]

I mean I cannot say that there's been any major change. But of course, everybody -- we don't know exactly if there's some pre-buying or if there is any kind of delays. I mean it's basically impossible, Agnieszka, at the moment to give you a view. There's no drama. There is no, let's say, major changes, but it would be strange if people were not pre-buying or delaying until they know it. And we need to be cautious here. I mean we don't really have any meaningful facts to guide us. But of course, we're talking about the flattish demand. We were plus 1% in Q1.



And I mean, we would probably, with kind of a normal situation and the order intake we have seen, we will probably be slightly more positive here for Q2. But I mean, it is still -- you know it, I know it, that there's a lot of things happening every day, and it goes a bit up and down, and that is really where we need to be a little bit cautious in this one. But there's nothing really in our weekly order intake or on our weekly sales, which is indicating that there's kind of any major change in direction here in the first weeks of April.

[Agnieszka Vilela, analyst]

Yes. Perfect. Understood. And then on medical, I think that when you reported Q4, you warned a bit about the timing of the New Year in China that this would impact the margin in Q1. However, the margin you reported for medical was rather strong. So can you explain what's happening? Did you see at all any negative impact from the timing of the Chinese New Year?

[Peter Nilsson, executive]

There was a negative. It was bumpy in the quarter, and that is something -- we have a good March to be very open about that, which is kind of creating an uptick. And it is a small down. I mean I think if I remember the figures correctly, it went 21% in Q4 and now 20% in Q1. So it was slightly down and a normal quarter where we lost 1 or 2 weeks due to Chinese New Year, and that is, of course, impacting us also for this, let's say, slim downturn in margin.

[Agnieszka Vilela, analyst]

Perfect. And the last question maybe to Fredrik. In your profit and loss accounts, you report quite negative other operating expenses in the quarter compared to previous quarters. And that obviously affects the reported EBITDA, whereas your gross margin is quite strong actually in Q1. Can you explain what's behind this other operating expenses and whether they are temporary?

[Fredrik Nilsson, executive]

Two main components. One is relating to PPA depreciation. Of course, with -- now we have Baron in this quarter. We didn't have that in Q1 last year, and there's also some other acquisitions that we have done here later in 2024 and early 2025. So there is higher PPA depreciation. And then there's also some FX impact now with some entities where you have got to strengthen the local currency compared to, for example, dollar or euro. So there is a negative when you revaluate your, for example, accounts receivables. So there is a little bit of negative FX as well. So that's the two main components.

[Operator]

The next question comes from Forbes Goldman from Pareto Securities.

[Forbes Goldman, analyst]

I have two, and I'll start with one on automotive. If you could talk about that exposure a bit, what you're seeing in terms of how it differs the demand between Europe, North America, Asia and if you've been seeing any pre-buys as of recent?

[Peter Nilsson, executive]

First of all, we do not have any direct exposure to OEMs, very, very limited direct exposure. So our exposure is mainly to Tier 3s, Tier 4s or in all occasions to Tier 2s. So we are kind of ahead -- generally ahead of the underlying business. So it's somewhat challenging for us to give some geographical differences. But overall, we see the same development everywhere with maybe a little bit more positive view on Asia than Europe and North America. But I mean, it's really not -- we are not exposed that much to automotive. So it's difficult for us to comment on that market.

[Forbes Goldman, analyst]

Okay. Just a follow-up on that because Europe has been the worst performing market now for you for 2 quarters. And could you talk about what is driving that? I guess it's not the automotive exposure then or what are you seeing in Europe?

[Peter Nilsson, executive]

Automotive is down, but so is the kind of which will be mainly core industrial, like hydraulics, pneumatics, machinery. This kind of stuff is performing a little bit lower than we kind of have seen before. But I mean, we don't see any drama in that. That it's also, let's say, also the project-related businesses, which is adding a few extra percentage points in the quarter where we had higher project sales in Europe a year ago, which is this quarter kind of benefiting us a little bit more and more in Asia.



So Asia is being pushed up a little bit by higher project sales and Europe is pushed down a little bit with lower project sales. So once again, we don't see it as a drama and we don't -- I mean the only area where we actually see the notable downturns is in this, what we call, let's say, construction equipment, hydraulic, pneumatic. That is an area where we are exposing continued downturn.



But with that said and done, we have actually seen an improved order intake in the quarter, and we see it kind of flattening and even improving here going forward. And hopefully, that will -- these orders will turn into sales and then hopefully, we will see a slightly better performance going forward than we see in the last few quarters in Europe.

[Forbes Goldman, analyst]

All right. And a final question for me is on the Sealing Solutions margin. And you're starting the year now [Technical Difficulty] and margins are particularly higher in H1 and H2. So [Technical Difficulty] do you think [Technical Difficulty] towards later this year? Or how are you thinking about the moving parts around that?

[Peter Nilsson, executive]

No. I mean our ambition in Sealing Solutions is that, that margin will improve, and that is still in the -- in our overall plans. And then I mean, we need to work with it. We need to get a little bit of demand back in certain core segments. I mean we know that we are fairly satisfied with the margin in a way, even though we're aiming higher, but we still have had a little bit of challenges in the major segments. If I say Fluid Power, which is a major segment, Sealing Solutions has not been performing as expected volume-wise. And we do believe we're working with a fairly high contribution margin, fairly high gross profits in Sealing Solutions.



So if volume is getting somewhat back, you're going to see a good leverage from that one. But of course, with the high uncertainty at the moment, we don't know really when that's going to happen, but it's continued to run on a fairly low level, lower level than we wanted to be. And we believe once again, if or when the demand kicks back a little bit that you're going to see a good leverage, good upside when these volumes kicks in and we start to sell more on the gross profit levels, which we have.

[Operator]

The next question comes from Timothy Lee from Barclays.

[Timothy Lee, analyst]

My first question would be on the -- also the month-to-date development. Can you also comment a little bit about any difference between the performance in different regions that you can call out? Any changes in particular noticeable in each region that you can highlight?

[Peter Nilsson, executive]

If I understand, you're relating to the sales development. I mean, in Asia generally is doing good. Asia generally is doing good, driven by project sales. We have good LNG sales, good semiconductor sales, good, let's say, harbor production sales, good infrastructure sales. So a good, let's say, overall demand.



And we also see the machinery industry in both China and India, especially is doing good for us. Korea benefiting from our point of view, both on semiconductors and also on LNG. Japan, flattish. But overall, good development in Asia.



Europe, a little bit more challenging in certain aspects, no pickup in the construction and also somewhat muted in some of what we call core industrial or in this kind of more construction equipment-related agriculture is more challenging, while most of the other markets in Europe, food, beverage is okay. So there is a kind of mix and geographical differences, honestly, I don't know, it's kind of still the core market is somewhat muted.



And of course, this uncertainty in Germany is seen on a few customers. So it's nothing strange. U.S. or North America, good project deliveries. In South America, for instance, we have good oil and gas deliveries there, which is benefiting us, but still struggle in North America, especially, we still struggle in the construction equipment, agriculture, also this kind of construction in general is also challenged.



But -- but then we have other segments also in the U.S. doing good. Once again, LNG and some of these machinery segments are actually doing quite okay. So it's kind of a mixed portfolio. Automotive soft all over with a slightly better performance in Asia than the rest of the world. But I mean that is weak all over but also that is kind of expected. It's been -- I think I commented on that before, it's been a little bit too good. So I have no -- it's really no surprise that we have, let's say, a small downturn in automotive. And I'm not sure that is kind of a guidance for the future or more kind of an inventory focus in those areas. So that -- I can say, Timothy, I don't know if you're happy with that or we have a follow-up question.

[Timothy Lee, analyst]

Understood. Yes. Maybe a follow-up on. So are you seeing, say, in the U.S. market, the end users or your customers to be relative more [indiscernible] than the other regions? I just want to [Indiscernible] if there's any sequential developments difference between customers in different regions.

[Peter Nilsson, executive]

Not really. I mean it -- it's more customer-specific and segment specific. I mean let's say some customers are closer to the business and other customers are a little bit slower in responding. So -- but that is not really linked to the geography as such. I don't see any difference there between Europe and North America. So it's the same kind of behavior everywhere.



And of course, I mean, we all know it is high uncertainty. And I mean, nobody is speculating at the moment. People are a bit cautious. I think that's of course pushing down the sales somewhat, but it's difficult or even impossible to give kind of a figure on the impact from that.

[Timothy Lee, analyst]

Understood. And my second question would be on your guidance for the second quarter. Can you also separate between pricing and volume? And how do you see the developments in the second quarter?

[Peter Nilsson, executive]

Pricing, of course, getting lower. I mean, of course, we'll be adapting prices if you are hit by tariffs or hit by some kind of nonoperational stuff. There's some currency movements also which is pushing the pricing. But overall, we are not expecting any kind of major price increases going forward. So in a way, the mix going forward should be more volume positive than price positive. But once again, we're talking about very small figures here.

[Operator]

The next question comes from Erik Golrang from SEB.

[Erik Pettersson-Golrang, analyst]

I'll try again then on Sealing Solutions margin, if you can help us out to the magnitude of the margin erosion year-on-year that comes from acquisitions. I would assume that price mix still helps offset at least some of that volume.

[Peter Nilsson, executive]

Let me just say that I mean there is a negative. We don't want to give, let's say, an exact figure on it. But I mean, it's less than 1%, let's put it at that. But -- so it's a let's say, a meaningful impact, but it's less than 1%, I think that we can say from the acquisitions. And then price mix, is probably a slight positive in a way. But then also, we still are suffering a little bit from volumes. It's not kind of really taking off as expected, especially in those kind of, what I say, the core volume segments, which once again, I mentioned many times, hydraulic, pneumatics, but that is kind of the big bulk of Sealing Solutions.



And that is where we will see benefits if volumes gets back there, which we have, let's say, a more positive order intake in the quarter compared to the previous quarters, but that is also where I think the uncertainty is and whether this kind of increased orders will actually turn into increased sales in this quarter or that's being pushed forward.



But what we do see -- I want to be clear on that one. We have been complaining about this, once again, construction equipment, ag for a few quarters. It's been depressed, and we've been running, let's say, 10% plus/minus, minus 10% plus on those segments, and that is more flattish positives in terms of order intake now. So we do see a change in that. And if that is happening, then you're going to see some good drop-through in Sealing Solutions. But that is kind of dependent on actually how sales will turn out. Orders are there, but we don't know exactly when the customers will call for their products.

[Erik Pettersson-Golrang, analyst]

Okay. Then second question on Medical. If you could try and sort of -- what do we need to see more of an uptick here? And I guess if it's especially related to the North America market, which is the biggest part here. Do we need the Greenfields coming online? Or is it more the end market or the customers that are a bit hesitant to place orders?

[Peter Nilsson, executive]

We think overall, I mean, we are plus/minus in the quarter -- plus 5% in the quarter, and that is fairly seasonal. And we do see some -- so these are some -- I shouldn't say to be careful, it's our customers, but they are a little bit bumpy orders sometimes, which is not really -- and they are generally not taking -- this business is more taking weekly orders and they're not ordering. So they are not as focused on inventory and working capital as our normal customers. And that's why it's kind of a little bit bumpy.



So we shouldn't put too much. We have to expect -- we have to be prepared that it is a little bit bumpy. But overall, we feel that demand is better. We see the life science, biopharma finally, let's say, kicking in a little bit positive. We do see inroads in Europe. As you say, we are smaller in Europe, but we do see that the inroads there is paying off a little bit, and we do getting more orders, and we do have a mixed bag in, let's say, North America.



So when we say that it is down overall in North America, I don't think it's the market down. I think it's more that we have had, let's say, a little bit unfortunate mix of customers in the quarter. So we are generally quite positive that the volumes will remain on a solid positive organic growth. But that is said, with some uncertainty related to this, once again, this little bumpy call-offs or whatever we want to call it.



But -- so we are -- we feel that we have turned the corner and it's getting better. But with that said and done, it's still going to be a little bit bumpy quarter-on-quarter here due to the fact that they're ordering bulk more than kind of daily deliveries.

[Erik Pettersson-Golrang, analyst]

Okay. And then the final question on the margin, I guess, potentially in Industrial Solutions. It seems that division continues to surprise positively, also to some extent compared to your expectations, if I get it right. What's the -- I mean, is the potential continuing to move up here given what you're doing on the M&A side, entering some new markets? What's the long-term potential now for Industrial?

[Peter Nilsson, executive]

I mean we still keep overall that we want 0.5 percentage points up a year. It's a mixed bag. It's a lot of different businesses. And also like -- like in Sealing Solutions, we have to also be open. I mean, we are -- okay, we want to improve, but we are already, let's say, performing slightly better than most of our competitors. And when we do the acquisitions, they're actually coming in with a slightly lower EBIT margin, where we have synergies in all of them. So we are very, let's say, confident that it's going to improve. So -- but still, overall, I think we don't want to raise our ambitions more than we are aiming for this 0.5 percentage point up per year. So that is really, let's say, the overall guidance that we can give.

[Operator]

The next question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, analyst]

Two questions from me. Can you talk about the Industrial Business during the quarter? How was underlying organic growth if we kind of remove the project businesses that are kind of more lumpy? I think you had a lot of project business in Q4 and it continued in Q1. Just to get a sense on how that is trending if we exclude that part of the business? And then I'm sorry to come back on the marginal ceiling, but could you maybe talk a little bit how the integration is going in Minnesota? It seems like it's now very much dependent on volumes and cost synergies. But just if you could add some more flavor on that one.

[Peter Nilsson, executive]

Project business, I mean we call it project business, but I mean it's small projects. We're not talking about EUR 10 million, we're talking about smaller than that. So we see it more kind of bread and butter project business. So we don't really take that out. So it's not that we have individual very big projects, which is kind of improving in the quarter. But -- so that is kind of a normal business for us. So it's not -- I mean, it's difficult to separate it. When we call project business, it's probably more that maybe we should phrase it differently. It's more that this kind of sales into infrastructure construction, into LNG, and they are slightly bigger in terms of invoicing per delivery than the others, but it's not that it's individual quarters.



And they are benefiting that we took out that kind of business, maybe we would have been flat instead. I mean we -- that is what we're talking about. But I mean, I don't really have the figure looking at Fredrik. But I mean, I think it's -- it's not that kind of impact that we're going from plus 2% to minus 5% or something like that. So -- but there could be individual percentage points if we kind of exclude the LNG, excluding the tunnel sealing, excluding the harbor fenders, excluding the oil hoses.



But I mean, then we take out, let's say, a big part of the business. And that has kind of been integrated in that business. It's not only project business, also aftermarket and small upgrades and stuff like that. So it's not that it's kind of individual big projects. So that is kind of, how should I put it Hampus, we're both neglecting the questions, but it's not meaningful for us to look at it in that way.



And then on the other one, on the margin, I don't know if you want to comment on it, Fredrik. I mean it's really...

[Fredrik Nilsson, executive]

No. But I mean you are referring to the MRP, Hampus. And I mean, we're very -- we were clear from day one that it's mainly related to sales synergies, we need the volume. And we have also said that we have delivered more cost synergies than we had in our initial plan. So it's related that we need to get volume growth.

[Peter Nilsson, executive]

And once again, I mean to get back to that, where we're primarily suffering, if I may say, in volume and especially in North America, it is this construction equipment and where it's kind of a downturn. And we want that to get back. We have seen -- once again, we have seen a positive order intake for the first time in a while. And if that turns into orders, which they will do eventually, but we don't know where the actually the call off will be, then we will start to see more, let's say, benefits from the -- I'd say the Minnesota, from the improved structure that we have in North America because now we have integrated the factories and we are set up, we have streamlined the manufacturing. So when now volumes kick in, that will kick into a more efficient structure, and we'll start to see more benefits in that aspect.



And also, I should say also maybe as a side comment here for North America. But I mean, North America is probably where we are most exposed to, call it, Asian competition on the sealing, where we kind of start to see and that is partly probably why order intake is better because we see some of these guys who is buying straight from Asia are kind of redirecting to local supply. And we are able to supply locally while a lot of our -- a lot, I should say, while several of our competitors actually is manufacturing in Asia, which is primarily non-American and Asian or Asian company.



So that is probably an area where we potentially see, let's say, a small benefit actually from this tariff situation if we can start to look for that. But that is an area where we do expect that to improve going forward. But we will -- will, let's say, require a more stable development in North America and without this weekly uncertainties floating around. I don't know -- that's sufficient Hampus.

[Hampus Engellau, analyst]

Yes absolute.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

I believe this might be partly related to Hampus question on Minnesota here. But regarding capital allocation and return on capital employed, you have a Group target of 15%, which is now at 12%. It's 17% in Industrial, 5% in Medical, 13% in Sealings. So what is the potential and time line for all divisions to reach the Group level, if we put it in that way? And then also when taking the larger acquisitions recently, for example, Minnesota and Baron into account, do you assess that they meet your Group target of 15% return on capital?

[Peter Nilsson, executive]

But we don't have individual targets per BA. We only have a Group target. So that is kind of a mix of Group targets. And in some areas, they are kind of beneficial in terms of margin, other areas they're beneficial in terms of return on capital employed. I mean that is the same for EBITA margin, it's the same for growth. It's the same for return on capital employed.



So we don't really have a kind of individual targets, and that is why we don't really want to comment on that. Of course, we have reached other plans. And we feel, once again, if we -- when we reach the 20% on Group margin, we reach the sales growth target, we will also deliver on return on capital employed on Group level. I think you can do the calculation yourself and see that if we get this growth in EBIT, both by sales and by margin, then of course, the return on capital employed will jump up also in a very meaningful way. And that is, of course, our game plan.

[Karl Bokvist, analyst]

Understood. That was really the main question. Then it was just a smaller follow-up regarding the cash flow generation throughout the year. You've done a lot of work internally on working capital discipline, et cetera. And just regarding this kind of current turbulent environment, do you feel there is an opportunity to lower your internal working capital further? Or do you feel that there is -- it's a good level right now to perhaps have a bit of safety stock and working capital spread across different regions?

[Peter Nilsson, executive]

We are not overly concerned about the supply chain. We don't buy that much across the continents. We buy it locally. So we have a very minor flows across, let's say, the continents again. So we don't see that as a risk. At the moment, we don't see from our point of view, the supply chain is not kind of -- of course, we're looking at it, and we are redirecting some and we are adjusting some. But overall, it's really a minor topic. So we don't see a need for increased safety stock.



But -- and then on the other one, we still continue to see -- I think we are well in accounts receivables generally. We still have some inventory, let's say, things to improve. But overall, I mean, that is still on a reasonably good level. Of course, we -- once again, we see improvements, possibilities in the inventory. Receivables is fairly okay. So -- but we're talking about fairly small money here in the -- yes, if you compare it with kind of where the vast majority of the cash flow is coming.



So it's not going to be a cash improvement due to lower working capital, it's not going to be a cash deterioration due to, let's say, growth in working capital. So we think we are well under control and it's kind of we know what to do. And then of course, some issues, once again, some issues, I shouldn't say there is some issues related to this new way of doing global trade, but it's not kind of in any way, a meaningful impact for Trelleborg.

[Operator]

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

[Peter Nilsson, executive]

Thanks for listening in. And I think it's a solid quarter for us, record results, still kind of waiting for some volume coming in. We have been working with the mix. We have been working with the gross profits, as I trust you see, I mean, we have also a record high gross profit in the quarter, which means that now as we believe volumes will eventually get back, then they will be getting into a more efficient and more profitable structure.



We have had a good order intake in Q1, especially at the end of the quarter, and we are a little bit now -- maybe a little bit careful, you can call it, on our kind of guidance for Q2, but we think that is reasonable, and it would kind of be strange if there would have been no impact on the, let's say, global uncertainties, which is flowing around. And that is -- but we have good order book and we have a better order book. But once again, we are -- that is why we are cautious on the running quarter.



But eventually, we believe that we're going to get further payback on the improved structure that we are working on. And hopefully, we will be able to share that with you in the next few quarters. This is high uncertainty for the quarter, but we still have some beliefs that we're going to see a better end of the year. And that is -- I mean, I think all of us hope for that. And if that comes, I'm sure that you're going to see an even better Trelleborg.



So thanks again for listening in. And then if there is any kind of follow-up question, Christofer is available as usual. And of course, Fredrik and myself is going to support Christofer and yourself in the best way possible. And now we're offering an AGM. So we have an AGM here in the afternoon. So we have to end this. And -- but once again, Christofer is around and as always, open to discuss further. Thanks again. Do take care, and see you soon.