In Trelleborg’s Annual Report for 2020 Peter Nilsson, President and CEO of Trelleborg, talks about the past year, but also things to take into 2021.
Despite a downturn in sales and earnings of 10 and 8 percent, respectively, excluding items affecting comparability, the operating margin was 13 percent, which represents a year-on-year improvement. Operating cash flow rose 28 percent, the best to date for the Group.
How would you describe 2020?
It really was a different year. There is so much of 2020 we would like to leave behind, but there are also things to take into 2021. Despite a downturn in sales and earnings of 10 and 8 percent, respectively, the operating margin was a strong 13 percent, which is a year-on-year improvement. The fact that we managed to improve the operating margin in a year like 2020 is an indication of excellent operational control, that the way we work is successful and that concrete measures were able to offset the lower demand arising from the pandemic.
Operating cash flow also strengthened significantly in relation to operating profit. In 2020, we delivered record-high operating cash flow – the best in the history of the company. We therefore reduced our indebtedness substantially during the year and are entering 2021 with a clearly stronger balance sheet.
At the same time, we should also remember that some 1,700 employees left Trelleborg during the year due to the negative market trend brought on by the pandemic. While the situation meant that we had to adjust our costs, this was nonetheless regrettable.
Overall, however, I consider net profit for 2020 as further confirmation that our strategy and decentralized business model can withstand various types of challenges and market turmoil.
What is the key factor behind Trelleborg’s earnings in 2020?
As I mentioned, our decentralized organization showed its strength during the year and, despite the pandemic, we retained our agility and focus on serving our customers. I would really like to thank our dedicated employees for their fantastic efforts – while maintaining safety – to sustain our customer relationships and deliveries when also adhering to strict cost control with good pricing discipline. Very impressive!
We have built a stronger Trelleborg over many years based on continuous improvement, so we were relatively well-equipped from the start. This has taken the form of minor but continuous improvements of our operating reality, complemented by investments and synergies from acquisitions that accelerated our progress. Regardless of the challenges that arise, we will continue to focus on steadily improving our leading positions in selected segments, and on making it easier to do business with us.
What similarities do you see with the 2008–09 financial crisis?
Not that many. Both the financial crisis and the Coronavirus pandemic had a negative effect on the world economy, but the course of events and conditions are widely different. Trelleborg was a completely different company during the financial crisis compared with today. Now, for example, Trelleborg has a substantially improved financial base with high liquidity and solid long-term finance in place.
Both times, we were quick to respond to the changing circumstances even though neither situation was easy to review. In the early days of the pandemic, there was an extra
challenge due to the restrictions imposed by authorities in the approximately 50 countries in which we operate, varying both regionally and locally. But, as I said, the Group’s business operations make their own decisions, and we have shown our regional strength and maintained better customer support than very many others.
What lessons can you learn from the pandemic for the future?
It confirms the strength of how we work, that it is important to act locally and fast, but also learn lessons from these kinds of global crises – to initiate strong general measures at Group level from the start, and to ensure that actions are initiated locally.
Trelleborg always puts the safety and well-being of its employees first. And we did that in this situation by introducing extensive procedures and measures to prevent the spread of the virus, while continuing to focus on the needs of our customers. And in general, it worked. In Italy, which was very hard hit, we received an award for our ability to organize and maintain continuity while so much was under lockdown.
In general, I think that our model, with effective local decision-making close to our customers, worked well during the difficult circumstances that prevailed during 2020.
Have there been any changes in trends that affect Trelleborg?
Customer behaviors, urbanization...
While long-term global trends may have changed slightly, we do not expect to see any major effects over time. We still believe that our model of a global presence combined with local customer contact and support is the model of the future. It’s possible that more decisions will be made regionally or locally in the future. That outcome would be in line with our existing business models and we feel comfortable with the fact that we are also well-positioned in this aspect compared with most of our competitors.
One relevant question in relation to sales is how we can attract potential new industrial customers and develop new solutions in a fully digital environment. Existing customers are obviously easier to reach via digital channels because we already know each other. Another challenge in a more digital environment is how to build a local relationship for customer interaction.
Advanced projects, where customers need more guidance at every stage, are also difficult to start up and maintain from a digital perspective, while new business models focused on customer support and services are well suited to digital mediums. These issues are high on the agenda and we also feel we are making progress in this area.
The Businesses Under Development reporting segment is almost intact after its establishment. What’s happening?
Several divestments were carried out during the year. Molded components operations in Sweden and Estonia were divested, as well as a small operation in France for rubber-covered rollers and belts.
For other units in this reporting segment, we continued to prepare both processes and legal structures during the year. The structural work is largely completed, which will enable us to act swiftly if certain conditions are met. Discussions with external stakeholders were limited during the summer, obviously affected by the restrictions related to the pandemic. However, several discussions on structural alternatives resumed at the end of the year. I have high hopes that this will generate results within a reasonable time horizon, and well within the framework of our initial communication. On the one hand, it involves proceeding with potential buyers for some units while, on the other hand, it means integrating other units that have shown the right positioning and earning capacity into our core operations in the best way possible.
What segments performed particularly well during the year? Why?
The general impression is that all segments and geographic areas experienced volatility during the year.
During the first six-months, we saw a rapid and sharp decline in demand in the automotive industry, but this recovered fairly quickly for us. The situation was reversed for the healthcare & medical sub-segment, which showed a strong trend at the beginning of the year, probably due to overbuying, but later declined when customers seemed to have built up their stocks.However, sales of tires for agricultural machinery remained stable at a positive level during the year. This was very gratifying, because we entered the year in a subdued market, which was also impacted when several original equipment manufacturers of agricultural machinery shut down their production facilities for a few weeks because of the pandemic.
Geographically, the trend varied in different parts of the world. In simple terms, the pandemic originated in Asia, and Asia is also the region that recovered first. Europe was affected somewhat later and is also behind Asia in terms of recovery, while North America is even further behind Europe.
But this is how Trelleborg is. Our various parts largely covariate with the global industrial production and our diversified operations help to reduce underlying risks. The challenge here is that we experienced a business cycle that is usually five to seven years long in 10 to 12 months.
Do you think aerospace will recover? How have you adapted the company?
Sales to the aerospace industry halved compared with 2019 and we are not expecting any immediate improvement, despite a slight uptick in demand at the end of the year. However, we still have faith in the segment and believe that future demand for advanced technical solutions will be very positive for us, albeit from a new and clearly lower level than before, which we are currently adapting to. We have a very good reputation in the industry, and meet the industry’s extremely high standards for quality, safety, and environmental considerations.
Name some major investments during the year.
We have been cautious about starting major investments during the year, but also careful to continue those we have already started. Nonetheless, our investments amounted to SEK 1,220 M in 2020.
In China, for example, we are expanding our production capacity for marine fenders. We are continuing to invest in the facilities where we produce special solutions for medical technology applications. In the Czech Republic and Serbia, we continue to expand our manufacturing capacity for agricultural tires. We are also increasing our investments in processes and systems to ensure that we can benefit from new digital tools that are being developed and established. All our operations are carrying out these types of investments. For example, we are investing heavily in both the business and the logistics systems in our sealing operation. Preparations are under way to increase the efficiency of our customer support with more integrated solutions, while also benefiting from the efficiency improvements offered by these new ways of working. All these investments combined will generate high returns in the form of lower costs and higher sales.
Name some major restructures during the year.
We are working continuously to improve the Group’s structure, to ensure we are in the right place with the right business. As part of these processes, we have consolidated a number of operations in North America, with the aim of having fewer but more efficient production facilities on that continent. These include our production of coated fabrics and fender operations. Some of this restructuring was accelerated by the effects of the pandemic, but we have been working on the vast majority for some time.
Where there no acquisitions made during the year?
Acquisitions are a key element of Trelleborg’s strategy, but it was challenging to make reasonable valuations of companies during the year. We are continuing to seek on an ongoing basis companies that can improve our offering and market positions. But, as previously mentioned, we are mainly interested in small bolt-on acquisitions that can strengthen us in niches or broaden our offering to existing customers.
What segments and niches do you consider most important for Trelleborg’s continued growth in the coming years? Where is innovation taking place?
We have generally favorable positions and a well-balanced portfolio. Everything could obviously be further improved, but we have a good starting point. There is a reasonable balance between operations that are growing early or late over a business cycle. The key to success is always that we can combine our polymer expertise with in-depth application know-how in the relevant niche.
That said, some of the largest and most important changes for us are still, for example, the mechanization and automation of agriculture, which has significance for our agricultural tires. The general electrification of vehicles, machinery and tools is also important and is placing new demands on machinery designs that require newly developed sealing and antivibration solutions. This is favoring those of us who really understand these applications. In addition, healthcare & medical is an attractive and growing area for us; sensors, semiconductors and electrical transistors are another. In these cases, for example, we can often benefit from our advanced cleanroom technology.
We work continuously with product innovations and 2020 was no exception. One example was the launch of an innovative seal for sliding doors and windows, which is helping manufacturers to design larger and more complex buildings. New and improved seals, including fire seals for aircraft, were launched during the year. I would also like to mention Trelleborg’s range of tires for off-highway vehicles, which was expanded during the year and offered a higher degree of technical content.
A growing area for us, especially in mature markets, is innovations that create attractive and effective customer offerings. One such example is Intellistok, a restocking innovation that replaces physical inventory counts and manual orders of specialty seals, or the ongoing roll-out of our Interfit concept in our tire operations, where we can offer a service package for our customers that is a first in the tire industry.
Can you say anything about Trelleborg’s digital transformation?
We want to use technology to streamline and simplify underlying internal processes, administration, and external offerings, with the ultimate aim of providing our customers a simpler and better solution. This includes smart and intelligent products, communication with our customers, and new business models or sales approaches. However, all product development should be carried out at a pace that works for our customers. Nobody gains from digital solutions perceived as too complex, or where the benefits are not available to customers because of their own internal processes. There are many fantastic ideas linked to digitization, but all parts of the operations must be on side to create real value for everyone in the value chain.
Tell us about Trelleborg’s new sustainability ambitions.
If we begin with climate action, we have really raised the bar with our target for 2025. We are aiming to halve our CO2 emissions relative to sales within five years. From a slightly longer perspective, our vision is to achieve carbon-neutral operations by 2035. We will also be working with our suppliers to radically reduce emissions in our supply chain.
While climate change was the most important issue during the year, we also worked on the roadmap for how we can achieve our target while strengthening our entire sustainability strategy.
‘Protecting the essential’ has become the motto for our new strategy. I will give you some examples in addition to our emissions reduction targets. We will be working toward circular material flows, which means a higher share of bio-based and recycled materials, improving the wellbeing of our employees in various ways, monitoring our supply chain even more closely, and becoming even more involved in the local community in the places where we operate. I am proud to say that, even during such a difficult year, we were still able to focus on strengthening our corporate responsibility.
Does Trelleborg have the talent required?
Our starting point is to recruit locally. That is in line with our decentralized organization and belief that decisions are best made locally, by the people who are close to the business and understand the local conditions. Finding the best talent is a never-ending struggle and there is a labor shortage in some regions. Access to good employees is important and we always take into account whether the right skills and qualified labor are available prior to, for example, establishing new sites and investments. Companies are made of people – their ideas,skills, and commitment – not machines or facilities.
At the same time, we must motivate and develop our current talent. We want to retain our employees and continuously invest in in-house leadership training, specialist training and training through our Excellence programs. The continuous exchange of best practices via the Excellence programs is raising the bar for what we can achieve in our core processes. In our decentralized organization, it is important that we challenge ourselves to do better every day.
How is Trelleborg working to improve diversity in the company?
We believe that a diverse pool of talents creates added value for our business. We cannot discriminate against anyone because of their ethnicity, gender, or religion. We must include and develop everyone for the benefit of our company. I am proud of the ethnic diversity in our leadership, and we are working in a variety of ways to increase the number of women in leadership roles.
Trelleborg celebrated 115 years as a company in 2020.
Yes, that’s right. In October 1905, Trelleborgs Gummifabriks AB was registered with the Royal Patent Office, with the entrepreneur Henry Dunker as majority shareholder. The company soon became the leading rubber company in Scandinavia, and we are now a world leader in engineered polymer solutions. The company has made a fantastic journey, through economic cycles and crises, technological and product innovations, and changes to production processes.
How do you see your own role in the company’s continued development? What are the immediate challenges for you and the company?
My main task is to ensure that we have the right leaders in the right places and that major strategic decisions are implemented successfully and effectively. In a normal year, I would spend most of my time thinking about the future – the development of our employees and planning ahead. Due to the circumstances, the past year led to more focus on getting things done as soon as possible and adapting to the effects of the pandemic, rather than initiating new things. Now it’s time to lift our gaze again and create the right conditions, so that we can continue to build a stronger and better Trelleborg. We can do lots of things well, but we can always be better, and now it’s time to raise the bar after a challenging year.
I have previously said that a successful Trelleborg requires motivated and engaged employees who have their feet planted firmly on the ground, see the world as it is, act accordingly and take action fast and methodically. That became a key element of leadership in 2020 and could be the most important lesson we are taking with us into 2021.
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