Trelleborg’s journey toward becoming a specialized polymer group continued at a high pace in 2016. The year was characterized by several major corporate transactions. The sek 11 billion acquisition of the agricultural and specialty tires company CGS was followed by six other acquisitions. In addition, Trelleborg divested its 50 percent share in Vibracoustic. Another piece of news during the year was the adjustment of the Group’s financial targets. This included raising the operating margin target, following a strong year when Trelleborg once again achieved its highest sales and profits ever.
Peter Nilsson, President and CEO of Trelleborg, what is the most important explanation for the strong figures?
Structural and organic growth in combination with good operational control at a local level are important to us. But the 9-percent growth in sales in 2016 was primarily driven by acquisitions. We can see that organic sales were negative during the year and this was a result of continued weak demand from several segments, such as agriculture, oil & gas and certain parts of the construction and civil engineering industry.
That we successfully maintained our margins, despite substantial exposure to several depressed industries, I see as confirmation that our strategy and operational
model works. I can also see that we have been successful in integrating our acquisitions and despite this focus on integration work, we have maintained strict and careful cost control.
When you look back on 2016 at some stage in the future, which of the year’s transactions will you see as most important for the long-term development of Trelleborg?
The divestment of Vibracoustic was an important transaction since I see it as the beginning of a new phase in the company’s history. Trelleborg began its transformation twenty years ago from a conglomerate to a more specialized company, focused on polymers. Over the past ten years, this transformation has been finely tuned in many small steps, where exposure to the light vehicles industry in particular has decreased and focus is on niches where we want to continue to operate.
At the same time, the acquisition of CGS creates a global position for our tire operation for agricultural machines and materials handling vehicles. It also complements our offering in other tire niches and broadens our geographical presence in other selected industrial segments, which significantly improves our positions in these sub segments in the long term.
If Trelleborg is now entering a new phase, does this mean it also needs a new strategy?
No, we feel we have a strategy model that will continue functioning highly effectively moving forward. We will remain a decentralized company with a local base and we will continue to improve our positions in order to be the clear leader in selected segments. We will continue to improve the geographic balance and move our
positions forward in geographic areas where we can increase our presence and improve cooperation with our customers, with a focus on making it easy for them to do business with us.
I firmly believe that we are actively following this strategy. Look at the example of developments in the aerospace segment over the past two years. We have upgraded two manufacturing sites in the U.S. for all practical purposes into completely new facilities. The focus has been on our global structure and we now have eight central hubs, in three different parts of the world. We have also expanded in selected sub segments, such as seals for aircraft fuselages. In this area, we have developed world-leading products, improved our test opportunities and invested in new operations in the U.S., U.K. and China. Our operations have also been complemented with four smaller acquisitions, such as the acquisition during the autumn of a company in the U.S. that adds a unique range of precision seals for the aerospace industry to our offering.
Similar journeys have been made in other segments, such as healthcare & medical, antivibration outside the light vehicles segment, marine systems and agriculture. Trelleborg has again invested in new products, new facilities and bolt-on acquisitions. This has occurred in very small steps, but overall, the changes are considerable and our positions have improved notably compared with a few years ago.
You now have operations in about 40 niches – isn’t there a risk that the Group becomes too broad?
It is an important part of our strategy to be present in segments where we can hold a leading position. If that happens to be a minor segment or not, that does not matter for Trelleborg. I see being broad as a strength, as it provides us with stability. When the economy is weak in some industries then it is strong in others. We can distribute resources, continue to grow at a Group level, retain a long-term approach and, above all, achieve stable and healthy profitability. I think that last year clearly shows that this strategy works.
Many of last year’s acquisitions are smaller companies from completely different segments and on different geographic markets. Is there a common thread with these acquisitions?
There are a few clear common elements. If you look at the last two years, then the companies acquired are primarily within five clear segments. These include the aerospace segment, while another is healthcare & medical, with the important acquisitions of Silcotech and SSF. Within the field of tires, we have increased both our geographic reach and product range with the acquisition of Armstrong, Standard Tyres and, not least, CGS, and a few other smaller acquisitions. We also have our marine operations, where the acquisition of Maritime and Marimatech has moved us to where we want to be and strengthened our total offering. Within antivibration solutions, Schwab and Loggers have significantly improved our position in rail vehicles and vessels.
Another common denominator with the acquisitions is that the companies all support our organic growth by improving our offering and our positions, thus making us a more complete partner for our customers. They simply fit in at Trelleborg.
For various reasons over the past two years, a number of companies have been put up for sale that have fitted into the Group. This process is difficult to control and we must act when opportunities arise. However, it is important to point out that we are not opportunistic, rather the companies we have acquired are businesses that we have been monitoring for several years.
Will you continue to acquire companies, and if so what types of companies?
In 2017, we will probably make fewer acquisitions. Our focus is on integrating the completed acquisitions and strengthening the balance sheet. But we are always open to acquiring good companies that drive our organic growth. I expect these to be smaller, but you never know.
We will also continue to invest at a historically high level in order to position ourselves in the best possible way with a long-term focus and to improve conditions for organic growth, not least in the acquired businesses, to leverage all the new possibilities these create for us.
Your largest acquisition last year was the Czech-based CGS Holding, how is the integration process progressing?
It was a special acquisition, partly because it was large but also because different parts of CGS fit into different business areas at Trelleborg. In some areas, CGS
complements our product offering, in others it offers us an opportunity to reach new customers and in several cases it complements us geographically.
So we are working with quite a complex integration. Our focus is on customers though at the same time, we have assessed that synergies up until 2020 will amount to about sek 400 m, so naturally we are also focusing on this. These are mainly cost synergies, but also a great deal of sales synergies. The estimate could be conservative and is based on how the market looks today. If there is a rise in demand, then sales synergies, above all, will increase.
CGS, with an exposure to the weak agricultural sector, is one of several acquisitions that is operating in a depressed market. Has the timing for these acquisitions really been optimal?
We always maintain a long-term perspective. It is therefore important to say that even if we work to gain cost synergies in all of our acquired companies, we do not maximize this work fully within companies that operate on depressed markets. We take a more long-term view of this and must be sure that we can handle a future rise in demand. Because we know that it will eventually turn around. Take the agricultural market as an example, where sales of machinery are down about 25 percent from its peak. We now see how cereal production is continuing to rise, without sales of tractors and other machinery increasing, but rather decreasing. This gap can, of course, not continue to grow for too long. So, we do not know when it will turn around, but we must be prepared when it does. We prefer of course to buy a company on a market that is close to the bottom than one that it is close to its peak.
Trelleborg has changed several financial targets during the year, including the growth target. What is behind this?
The previous target included only organic growth and was at 5 percent. We felt that we needed to include acquisitions in the growth target and have therefore established a target for a combined growth of 5-8 percent. This is a way to show that Trelleborg is driven by an interaction between organic and acquired growth. The
target is over an economic cycle and will for some years be either above or below this range. However, we do not see the change to the growth target as particularly dramatic. Since 2009, we have actually reported average growth of about 6 percent.
The raise of the operating margin target from 12 to 15 percent could be seen as more aggressive as Trelleborg has never achieved this level, what is behind this change?
At Trelleborg, we have improved our position in several of our niches. Substantial synergies can still be gained from acquisitions. I believe digitalization is also positive for us and that we will benefit from it on several fronts. Moreover, recent years have shown that Trelleborg can maintain healthy margins even if parts of the Group are suffering from weaker demand. This all suggests that the new margin target is entirely realistic and attainable.
Today, almost all major engineering companies are talking about how digitalization, internet and the Internet of Things is influencing their operations. How is Trelleborg adapting to new technology and new trends?
This is something we are continuously working with as it strongly changes how our customers act and work and thus also the conditions for us. It creates new opportunities that we must fully leverage. All of our operations must take advantage of the opportunities offered by new technology in all areas of the company, always in the best interests of the customer.
Our products are becoming increasingly intelligent and in turn have a higher value for the customer. One good example is a product in offshore oil & gas that can now monitor waves and water movement using advanced sensors and thus provide more efficient operation of drill rigs. Digitalization and mobile technology also opens up for new ways to integrate with and make life easier for our customers, such as various ways to offer support via the internet or apps. Our marketing and way of communicating are also changing, as we utilize ‘big data’ to refine information about how our customers think and act. We do all of this with the overall ambition of making it easier for customers to do business with us than with our competitors.
However, digitalization and other new technology are still in their infancy in many of our industries and we are probably only at the beginning of this journey. Our assessment is that we are at an advanced stage compared with our competitors in terms of digitalization, though there is of course still a lot to be done.
How are you working to stay ahead of your competitors?
I would like to refer here to our Excellence Programs, which is at the core of our continuous work to improve our processes in production, purchasing, capital management and sales, and where we also run projects linked to digitalization in the various sub-programs. This is largely about taking care of our resources in the best way and goes hand-in-hand with our clear responsibility for the environment and for people within the framework of our Corporate Responsibility (CR). Contributing to a sustainable society is a business opportunity for us.
In the next few years, it is naturally one of our main tasks in the CR area to work to improve our newly added operations to ensure they reach the target levels we strive for in the Group.
Trelleborg is, and should continue to be, a decentralized Group, at the same time as we must learn from each other at a local level and utilize our global capacities.
Talent development is increasingly important. Our ambition is to utilize talented people across the entire Group and, through these, disseminate work methods, processes and successful local initiatives.
During 2016, we invested more than ever in our own university, the Trelleborg Group University, and this will continue in 2017. More than 6,000 employees are taking part in its various programs at the moment. We want all employees to feel that they can develop within Trelleborg. This provides us with the best employees. Besides, we already have the best employees, and will continue to have in the future.
Trelleborg, February 2017