At meetings with investors this week, Trelleborg’s Chief Executive Officer Peter Nilsson will communicate that increased raw-material prices, mainly related to natural rubber and aluminum, are adjudged to be having a more negative effect than expected on Trelleborg’s earnings during the second quarter of 2006.
“The turbulent price trend for raw materials in the form of sharply increased prices has been compounded during the second quarter and resulted in greater cost pressure. This is mainly affecting Trelleborg Automotive. Increased raw-material prices affect us following a certain time lag and, because we work under contracts of various durations, the length of such lags and the impact of our various raw materials also vary.
“We’re continuing to focus on several actions to offset the increased costs, such as hedging the raw-material clauses in our agreements with suppliers, efficiency measures at all levels, including a continuous review of our production structure, and adjusting the prices we charge customers,” says Peter Nilsson. “The price trend is volatile and difficult to estimate and the magnitude of the price increases also varies among the various raw-material grades that we purchase. Moreover, based on the current raw-material prices, extensive hedging with futures contracts is not attractive. Although this is having an adverse effect on our margins in the short term, our continued favorable positions in four of five business areas enable us, with a certain time lag, to offset the higher raw material prices.”
In total, Trelleborg purchases natural rubber and aluminum for between SEK 1,000 M and SEK 1,500 M on an annual basis.
Peter Nilsson also comments on the continued efficiency problems being faced by Trelleborg Automotive’s Fluid & Acoustic Solutions area. “While we are continuing to focus on solving these problems, we have encountered a delay that will probably last for another quarter, meaning throughout the third quarter of 2006. However, the problems are solely related to Fluid & Acoustic Solutions and, if they are disregarded, Trelleborg Automotive is performing well in line with its earnings for the year-earlier period.
“As a result of the increased raw-material prices, the problems affecting Fluid & Acoustic Solutions and the impact of there having been fewer working days during the quarter compared with the year-earlier period, our total assessment of the second quarter of 2006 is that we will not match the earnings* we reported in the corresponding quarter of 2005, although earnings for the first half of 2006 will be in line with or slightly exceed the result reported for the first half of 2005” says Peter Nilsson.
Outlook according to the interim report for the first quarter of 2006:
“The outlook for the first half of 2006 remains unchanged, with market growth in the Group’s seven principal markets expected to be in line with the second half of 2005. A high level of demand for natural rubber and continued high oil prices affecting the pricing scenario for certain polymer raw materials is expected to result in continued cost pressure during the second quarter of 2006.”
* Operating profit from continuing operations excluding non-recurring items.