Earnings Call: Q1 2021

Apr 22, 2021

Welcome to this conference call on the 1st quarter results. As in the last couple of quarters, we will use video instead of the traditional telephone conference. So please make use of the chat function for the following Q and A session. Post your questions there, and we will answer them after the presentation as usual. Today's speakers are our President and CEO, Aldrik Danielson and our CFO, Niklas Rosenlever. With that very brief introduction, I will leave the word to Alrik, please. Thank you. Good morning, everybody, and welcome to this conference. I'm pleased I'm proud to stand here today after yet another strong set of results. During the Q1, we saw strong sales and demand growth. Organic sales increased 8.6% in the quarter. Sales were significantly higher in Latin America and Asia and relatively unchanged in Europe and North America. We're also managing significant headwinds in terms of higher costs For logistics, a material and a negative currency impact, affecting our operating result by SEK 1,300,000,000. Despite this, we delivered a very solid adjusted operating result of almost SEK 2,800,000,000, representing an adjusted operating margin of 14%. We are already working actively to implement price increases, both in industrial and automotive to compensate for rising input costs. The Q1 is historically lower in terms of cash flow generation. The sharp increase in demand in the quarter contributed significantly to higher accounts receivables. And as the results, Cash flow was lower than last year. All in all, another real strong set of results, which we are all very proud of. The industrial business delivered a very good performance with a record high 16.3% adjusted operating margin compared to 15.5% last year. 5.4% in organic sales increase, really good. Compared to last year, sales were significantly higher in Asia and Latin America, relatively unchanged in Europe, Middle East and Africa and in North America. SKF's great strength is our ability to meet needs of almost any rotating application. One of the most demanding for bearings, although you might not think so, is in agriculture. Farmers need their machines to run without downtime through mud, dust, grime, dirt and water. Tilling machines and seeding machines are just 2 of the applications that rely on a multitude of bearings in order to perform. This is also an area where we have been most successful in developing and delivering what we call application specific solutions, solutions that are designed, engineered and manufactured to meet the specific needs of a customer. The key to why we are successful And has been doing so well in our offers in agriculture is straightforward. Our engineers maintain an unrelenting focus on each of the customer Without over engineering for the sake of it, we're able to capitalize on the speed of value in the value chain, taking ideas from design to manufacturing in a matter of days, not months sourcing and manufacturing at competitive rates and being able to combine the SKF bearing and seals technologies in a way which is unmatched in the market, Especially in an application with such a harsh operating environment, that is absolutely key. What makes this a really interesting area as well is the ability to market and price these solutions based on the value they generate for the customer. We price the bearings on their performance and on the uptime they enable, not based on manufacturing cost plus kind of markup. When you look at this slide, you can see what I mean. Through our engineering and seeding offer, we can essentially engineer an AgriHub, which is specified to meet the needs of the individual farmer. The larger the farm is, the higher needs and expectations on the bearing And therefore also the value of the bearing to the farmer. Smaller farms of lower requirements and their Agri Hubs are engineered to a different performance level. Remember, it's about performance level, not quality. The quality is always the same top. This slide is the one that's really great to be able to show you. As you can see, there's no doubt the value of this application Specific offers in terms of direct impact on the business. In 10 years, sales has gone from SEK 100,000,000 to over SEK 1,000,000,000. What's more, it's really in the last years or so when it's really taken off as we have invested more in our engineering in manufacturing capabilities. The same approach is now also being implemented in food and beverage, metals, fluid, machinery, to name a few. Another part of the business that's growing well is our fee and performance based rotating equipment performance business. By offering a combined service, including bearings, seals, remanufacturing, lubrication and of course, condition monitoring and analysis, We are able to offer a completely new business approach. Customers pay for uptime and machine performance. Process industries are really where this setup works best. And we will have yet another win with a pulp and paper company in Brazil. As you can see, it's a 5 year deal, which includes a full SKF offering. And just to give an idea of the scope of the contract, It includes over 3,000 connected analysis points. The Automotive business continues to perform well. Strong organic sales growth of almost 17% with an adjusted operating margin of 8.9%. We're also seeing continued strong growth in electrical vehicles. The car on this slide is the NIO ES8, a full size 7 seater all electric SUV. And with those words, I leave the word to you, Niklas. Thank you, Alrik. And if we turn to the next page and Go through our financials. First of all, let's start actually with sustainability. Sustainability is something that we've been reporting on for many, many years. It's also an integral part of SKF's strategy, our operations and our business. And we will now actually start to report on sustainability on a quarterly basis just as part of our normal quarterly report. And what you see here is a snapshot of that report. As you can see, we've seen a strong increase in our cleantech revenues during the last couple of years. They've increased from SEK 4,000,000,000 in 2018 to SEK 7,000,000,000 for the last 12 months. This includes revenue from, for instance, renewable energy, wind, electric vehicles and other similar segments. We are also making good progress towards our target of being carbon neutral. Here, it's demonstrated by the reduction of scope 1 and scope 2 CO2 emissions. And furthermore, our accident rate has also continued to consistently come down over the years and over the quarters. Moving on to our sales development in Q1. Sequentially, our organic sales continued to improve with quite consistent progress since The trough in Q2 2020 compared to last year, our net sales decreased by 1.1% in the 1st quarter. Organic sales increased by 8.6% compared to last year, as Alrik mentioned here earlier. The currency effect, as you see by this difference, on sales was substantial at negative 9 the Indian rupee, the Brazilian real and the Russian ruble. The recent quarters have, as we all know, been extremely volatile with significant swings in demand. This has actually put our organization and the whole value chain to a real test. And we are extremely pleased to say that we manage to serve our customers well in this quite tough situation. Our improved flexibility and our lower cost base have also materialized in excellent profits and also in strong margin resilience. In Q1, we've seen increase in cost inflation on both components and on logistics as well as a significant currency headwind. Despite this, our operating margin or our operating profit was SEK 2,800,000,000 and that corresponds to a margin of 14%. This is actually an increase an improvement of 1.2 percentage points compared to Q1 last year. We are continuing to invest in innovation. We continue to improve our competitiveness, continue our push within sustainability, and we are adapting our operations and our ways of working. This has continued to deliver good results as we see now in our Q1 results. So all in all, Q1 was strong, and we continue to transform our business. So our profits improved despite headwinds from currency and increased material and logistics costs as we continue to invest in innovation and competitiveness. So let's go through the profit bridge. Firstly, The currency impact was strongly negative at SEK 761,000,000 compared to last year. We also saw strong headwinds from increased prices But then on the other hand, our organic sales and manufacturing volumes contributed with a positive SEK 780,000,000. And if we tune in on this, within organic sales and volumes, price was positive and mix was neutral. And then our cost development continued to be good and costs were SEK 735,000,000 lower than last year. So to sum up, our operating profit improved to SEK 2,800,000,000, a 14% margin, despite SEK 1,300,000,000 in headwinds from currency and increased material and logistics costs. So in Q1, we experienced global supply chain bottlenecks, resulting in increasing costs, Logistics costs, also longer lead times as well as material cost increases. It's pretty natural in this environment, and we have a good track record of this. We do continue to take action on pricing to offset This cost inflation and while the net impact, if you look at the cost inflation, Logistics cost, material cost versus pricing impact, it was negative in Q1, and there could actually be a mismatch Also in single quarters going forward, we do expect our pricing actions to offset inflation over time. Zooming in on our performance within industrial. The organic net sales increased by 5.4%. Sales for Industrials was significantly higher in Asia and Latin America, while sales were relatively unchanged or was relatively unchanged in both EMEA and in North America. The adjusted operating margin For Industrials was a record high 16.3% compared to 15.5% last year, And cost reductions contributed positively here, while then on the other hand, cost for material components, logistics as well as currency had a negative effect in the quarter. For Automotive, our organic sales increased strongly by 16.7% in the quarter. Sales was significantly higher in Asia and in Latin America, And sales was higher in EMEA and slightly lower in North America. We've been successful in delivering on the higher demand to our OEM customers, and this is something we are pleased with in these volatile times. The adjusted operating margin reached 8.9% in Q1 compared to 6% last year for Automotive. Moving on to net working capital, it was 30.2% of sales at the end of the first quarter, and this was 0.7 percentage points higher than at the end of the Q1 last year. We had an increase in receivables, and to a lesser degree, we also had an increase in inventories and payables compared to Q1 last year. And as Alrik commented earlier, this increase, especially in receivables, was a result of higher customer demand. Moving on to cash flow in Q1. Excluding acquisitions and divestments, it was SEK700 1,000,000,000 negative compared to SEK1.9 billion positive last year. The decrease compared to last year It's mainly explained by higher working capital driven by higher volumes in the quarter, especially towards the latter end of the quarter. And the cash flow for the last 12 months is SEK 2,600,000,000. Commenting on the balance sheet. We continue to have a strong balance sheet and very solid liquidity. The net Financial debt amounted to SEK 1,500,000,000 and the net debt to equity ratio, excluding pensions, It was 10.2% at the end of the quarter. So to sum up, in Q1, We continued to implement our transformation journey. We had good sales growth. We had improved profits and we had stronger margins. We continue to regionalize our business, consolidate and automate our manufacturing footprint, And we announced consolidation of operations, for instance, in Italy as well as continuing to expand capacity in China. What comes to our Q2 outlook, demand has improved quite consistently since the trough in the Q2 of 2020, And we expect net sales to continue to grow, and we expect net sales to reach pre COVID levels in the Q2 of 2021. And with that, I hand back to you, Alrik. After close to 7 years as CEO, this is my last quarter. As the Board announced in January, Richard Gustafsson will be joining As President and CEO at the latest by 1st July. My last working day with SKF will be the 30th April, A head of Rick has joined the business. And in the meantime, the Board has appointed Niklas Russellev as Interim CEO, in addition to his current role as CFO. To all colleagues, customers and shareholders, Thank you for your support during these years, making all that we have done possible. Now we will continue with Q and A. Patrick, please. We are now ready to accept your questions. Please note that the Q and A will be conducted via the webcast only. Please submit your questions via the questions tab on the webcast. There will not be any questions taken from the telephone conference. I will now hand the floor over to Patrick Steinberg. Thank you, operator, and thank you, Alrik and Niklas. We'll now go through all the questions that you've posted. The first one It relates to our guidance for Q2 and it's posted by Andreas Koski and several others. You are saying that you expect net sales to reach same levels as in Q2 'nineteen. Can you clarify if you expect The absolute sales level in insect to be in line with Q2 or if you expect your organic sales volumes to be in line with Q2? Thank you. Yeah, I'll take this one, Niklas here. Thanks Andreas. This is organic, that's a short answer. So we do see us coming back to pre COVID levels and it's measured in organic sales. Thank you. Another question that has been posted by several others are about semiconductors. How are semiconductor shortages impacting you in Q1? And how do you think it will impact in Q2? Okay. I'll take that one. Yes, it's an interesting question. There's a lot of debate about it. In the Q1, it's been very slight. The delayed deliveries because of customers standing still in production lines because of The semiconductor shortage is very, very small. It's insignificant. You've seen how strong the growth was anyway. When we look at forward, it's difficult to say. When we look and talk to our customers, it seems like, yes, there's a lot of discussion about it, but Most of them are sort of managing anyway. So it's very hard for us to be absolutely clear on how much impact Really will be out there, but we think that there will be probably some Minor effect in Q222. But as far as we understand from our customers, it's also I think we see it also in interviews with automotive CEOs. Yes, they are worried, but it's not clear for them also. Thank you. Moving on to another question posted by James at Redburn and several others as well, Jefferies, for instance. Can you help us just understand the gross cost side of the equation? How do you see the SEK 37,000,000 In raw materials and logistics, cost of output in 2nd quarter and full year, are we talking about SEK 2,000,000,000 for the year and similar to 1 quarter through or is the current quarter above the average for the year or will it get even worse? Lot of questions. Yeah. Hi, James and others. If we tune in on the NOK 500,000,000 a bit more Q1, if we just explain that. So you can say that half of that in rough terms is related to raw materials, input costs And then half is logistics. And if we take that half, which is input costs or raw materials, Roughly half of that half is kind of price inflation, While then the other half is, call it, mix related. So that maybe gives you a Bit of kind of insight into the dynamics here. And then the other half is logistics And that's various things. It's of course, I mean, we've all seen and read about container shipments costs going up and so on, But there's also custom stuff and so on. So I would say the important thing here is that we are taking action. We have taken action already and we continue to take action to mitigate this and we are pretty confident that we'll be able to mitigate the impact. Then it's a bit hard to kind of speculate exactly how raw material prices will develop quarter by quarter here going forward, but We are taking action and we believe this will pay off. So I'll leave it with that. Maybe I'll write down. No. Just to clarify, when Niklas says mix, it means we have been selling relatively bigger bearings compared to Before, both in automotive and also when we sell larger bearings to wind, for instance, the material content goes up. And this is What Niklas means when he says mix, just to clarify. Yeah. Thank you. Another question then about industrial. The industrial performance and growth is really strong. What do you expect for the 2nd quarter? Well, I mean, if we take this together Yeah. Well, what we see as we have said, we see a strong development. There is it is really the customers are asking for product. And when we talk about When you see the inventory is going up, for instance, there's a lot of material now on ships going out to customers, etcetera. And in the industrial space, the demand is strong at this moment. So there's a good development to be foreseen. Thank you. Next question, can you please give us some flavor on the Cash flow development in the quarter, which was perhaps lower than what we would have expected. Sure. If I take that one. Yes. So the main thing with the cash flow is that it's demand driven. And I mean throughout Q1, we saw an increasing demand, increasing sales. We saw strong sales Towards the end of the quarter and of course that resulted in higher receivables. We have not Seeing any problems with getting paid. And our DSO, for instance, it is at a very healthy level, and we see it continuing I like that as well. So it's really a timing question and demand high demand driven thing that is behind The cash flow, so we had a SEK2 billion negative from increased receivables and then we had, give or take SEK600 1,000,000 negative from Increasing inventories and both of these are demand driven, so strong demand. One of the things that I think we've done well, which We should actually be pleased in a way that we have a little bit more cash inside the companies that if you see and when you saw Mikaelas showing The development previously in the chart, you can see that we started to buy already this autumn To sort of expecting that we were going to see an increase by buying materials already this autumn that we were expecting to see A stronger development to be prepared. So there's no money lost. And I mean, all in all, we see this as a positive. I mean, as said, we're also positive about Q2 and the outlook here. And of course, we want to Our customers as well as possible and it over time will pay off to build up a bit of inventory and also see receivables going up. You have a global business like ours where we are all over the world with this. This is what you should expect. And if you look at SKF, the cash flow is our forte And it will continue to be our forte. Thank you. Then we move on to the next question. It comes from Klas at Citi. Car production in the quarter was up around 13% and you did close to 17%. China car production up nearly 80%. Can you give more exposure to Europe and North America. You gain more exposure to Europe and North America, sorry. So this must be driven by good product mix. You have a pretty strong position in parts of electric vehicles. Was this the driver behind the outperformance? I think Actually, we are doing well now and not the least in Asia. We are doing really well now in with new products. And You've seen not only the volume development, but also the profitability. We're doing well in the vehicle service market where we have Work diligently also to be the one who actually can deliver. If you remember last time I told you that during the COVID, we never closed down. We were always There to deliver and that is also paying off right now. So yes, and of course, we're strong at electric vehicles And that is helping us at this point as you see that they are growing so strongly as part of the fleet. So all in all, I think we're on a good track on in the automotive side and the customer wants our products and It's we have new interesting launches coming in with new hub units and new transmission bearings and new Solutions for Electrical Vehicles. So there's a it's coming to fruition, the hard work for many years. Thank you. Moving on to a question from Andy at JPMorgan. Can you provide some guidance or help on how to think about the cost development in the coming quarters, raw materials, logistics and usual labor cost inflation. I would also like to thank Alrik and wish him all the best for the future from Andy. Thank you, Andy. Okay. And if I comment on this and it goes a bit back to what we just discussed. What we saw in the Q1 was €500,000,000 of increased costs coming from these categories, so raw materials, logistics, if we take those ones first. And as I explained, roughly half raw material, half logistics. The actual inflation component is not the full €500,000,000 but it's actually a smaller part. Then there's this mix thing, which Alrik clarified also, which is us selling more wind, for instance, and more automotive. And here on this particular point, we are working on this mitigated For instance, pricing, there's other actions taken as well and we are quite confident that we can offset the impact over time. Then when it comes to labor cost inflation, I mean, yes, we are back to, I'd say a more normal world compared to 2020, but we do see labor cost inflation, essentially salary increases. And I would say nothing unusual there back to kind of normal world again compared to 2020. But Andrew, I would all I would like to just stress this that It is a strong demand in the marketplace. There is around the globe and that gives a player like SKF a good possibility to actually have a good Ability to actually have a good performance going forward, in many ways sort of compensating For this inflation that worries us, of course, all of us. So please understand, there's a good possibility now. And I'm confident that the way SKF has always done it, we will do it again. Yes. And of course, on labor cost inflation, I mean, that is something that we Have been managing and will continue to manage, I mean, the salary increases are what they are, but then, of course, we look at this holistically and continue with the transformation that we've been discussing in the past. Look, we are investing SEK 3,600,000,000. And of course, you will continue to see results On how SKF is structured from this also this year. Thank you. Next question comes from Ben at Morgan Stanley. Again, thank you to Alrik. Alrik, thank you for your time as CEO and best wishes. Just in general terms, I. E, your experience of business cycles over the decades, are you surprised at all that Europe and North American industrial sales are flattish? Would you not have expected some more momentum by now? Is this just a delay because of lockdowns? Or is it evidence that a recovery outside China is stalling? My personal feeling is that no, I'm not surprised that it's been taking that China was first and Asia was First, I mean, look at the how the COVID has developed. And when you are in China now, And I tell you, I have first hand information because my son lives in China. And basically, life is back to normal in a different way than it is in Europe and North America. But look at it, look at the U. K, look at North America coming quickly out of it, look at all the stimulus that's in the marketplace. It's and look at how the all governments are now starting also in Europe to have real plans on how they're going to open up. I think this is now going to come. And when I look in when we look in and talk about how we see us coming back To pre COVID level in Q2, this is actually what we see also in the way our customers are requiring our pilot products. So I wouldn't say it's stalling. It's just a little bit behind. Thank you. Moving over to Bank of America and Mehdi. Can you discuss trends in general industrials? Which end markets are lagging? Can you discuss trends in aerospace? How is it still contributing about 8% within Industrials? Does it mean you have seen very limited impact on the business? What percent of business is derived from rotation as a service model now? And what are the challenges you are facing in executing here? How are customers responding to you on this? Quite a few questions. That's a big one, Madendra. But it's relevant. And I say, yes, of course, we've seen the effect On Aerospace, during the COVID period, it's been was down. But Right now, we see it coming back very strongly. During the COVID, helicopters and other areas were strong. Now also civil aviation is actually coming back. If you look at the U. S, for instance, it's in some routes now it's difficult to even get a seat. So of course, we believe that Aerospace will recover as soon as the pandemic Loses its grip on it and we will back to normal. And we have worked hard also in aerospace to get business and become the preferred supplier to many of our customers. And I think we have had a very we've prepared well for taking good This opportunity when it comes back also into SKF is very accretive. But the business that is derived from I think we talked about this last quarter, It's growing fine. I had one example now. One example we have it's coming and it's coming little bit also helped by the COVID crisis in a way because To go from a traditional transactional model to having a fee based business model, there is an understanding that must be an understanding from the customer to understand that By eliminating the waste in the value chain, that's how you can truly create value together with the supplier. And as we are now visiting the customer digitally, As more and more customers understand that they there's a benefit to hook up to SKF and you saw just this example from Brazil, there's Over 3,000 connected points at the customer that we suddenly manage their whole plant To give them insights on exactly what's happening inside of their machines, as this is now coming on everybody's agenda, It's very, very the inroad, so to speak, to make everybody understand that it's the fee based A model that's going to come and you know my conviction, it's going to be like this. This is just a matter of time and that's why during my years I've been pushing it so hard because In a way, if you understand, you eliminate the intrinsic difference of interest in the value chains by going from traditional to fee based. And Patrick can tell you more about this if you are really interested and have still not grasped it. So it's growing fine and it will grow more in the future and the pandemic has sort of pushed it to make it more evident to everybody. And the challenges of executions are the same always when you make change management. It's about Making your own people understand how to do it and feel comfortable about it, and it's about making the customer understand the fantastic benefits. And why do we talk many times about Brazil? Because in Brazil, we started this 20 years ago and it's enormous Developed and it's becoming contagious. 7 years ago, we started all around SKF, but it's becoming contagious also in the rest of the world. But of course, there we in the rest of the world SKF and our customers are a little bit behind in this setup because So far, we are the only ones. But I'm sure that soon, more companies will come up with a similar kind of business model. We also comment on this. I think, I mean, it's we see quite a broad based recovery in Industrials. And I mean, you are right, Mardi, that I mean, Aerospace is the one of a few, which is not on a growth path yet. But as Alrik said, I mean, it's not like the it's a complete black hole And we also see recovery in Aerospace. And then I mean some of the reason or a reason for our strong growth in Latin America is exactly what Alrik He's saying that the fee based models are more broadly adopted there, and it's really supporting our business there. So it's good. The way of taking market share. Thank you. Moving to Deutsche and Gail. May I ask how big in the Chinese exposure of your wind business sorry, take that again. May I ask, how big is your Chinese exposure of your wind business today? And what trends do you see over there? Some industry experts are increasingly talking about the risk of a major catch down in the Chinese wind market in the second half of this year. Thank you. I don't know if we talk about China specifically the numbers as far as our exposure to wind, but You know how strong and how much we have been growing in wind in the last years. And there's a fantastic development with very close cooperation With the winning both gearbox manufacturers and windmill manufacturers In China, and we're planning to continue our expansion into this. And yes, there may be, of course, set things going up and down. But I think When I look into it, China is very committed now to the environmental turnaround. And with the kind of technologies that we have presenting, not only with investments in large bearings, but also in midsized spiracles And also the reconned oil sort of technology, I see a very, very strong interest and I see A lot of customers really want even though I haven't been there physically for a year now, remotely I participated now in where we inaugurated our new Factory and I see a lot of enthusiasm in our team and with our customers around renewable energy as such in China. So Without say telling you that there will not be a sort of set down in the second quarter, I think generally we can say that China is really betting on renewable energy going forward. And we are also not only betting, I mean we are also investing Time into Renewables and it's been a good trajectory and we're quite confident that there's more to come. But of course, as you say, I mean, Ups and downs occasionally, but over time this will be But my assessment, we're really strengthening our position with our Chinese customers at the moment around wind. Thank you. A question from Goldman and Daniela. Do you expect to continue to invest into working capital in the coming quarters? Or how should we think about cash conversion for the rest of the year after the negative Q1. Well, I mean, it's almost like we hope that we will do this Because it's all about increased sales and maintaining good service levels to customers. Of course, over time, this will then stabilize. If we think about this short term, yes, there might be a bit of a buildup going forward also. And as you know from the past, I mean, Q2, we do have a bit of seasonality where we tend to build up. But over time this we do see things of course then normalizing. And I would say that A lot of what we have in worker partly what we have of this excess is on ships going to customers and of course that you will see Converted into cash during the next quarter. So of course, if you look at SKF, We haven't any customer losses. Our customers are paying us. We're growing. This money will come into SKF As it always does. So you can look a little bit behind in the mirror and see what happens and you will see it coming Back, so to speak. Yeah. Another question, a bit more detailed from Andrea at Credit Suisse. And the question is, can you please provide details on the €676,000,000 negative other non cash items and the $446,000,000 other lines in the cash flow from operations. On working capital, when do you expect receivables cash outflow to reverse? Given receivables were driven by growth in Q1, why did Pivos not follow to a similar extent? Yeah. I would say on the other just general comment, there's an element of FX in there, So relatively big element of currency, negative. And then there's a smaller portion of payouts for restructurings that we have announced previously. And I think on the Receivables, I mean, receivables absolutely as discussed driven by growth, So SEK2 billion of the impact came from that. I think payables, of course, follows a slightly different sequence. I mean, it's Not like we buy exactly when we have the sales, but we buy over a longer period of time. And as Alrik mentioned here in the beginning, We started buying already a bit in advance back in the fall in anticipation of growth. And I think also it's fair to say that I think we've been good at securing materials for SDF during this upturn. And you can understand that's not the time maybe when the thing is you need to get the whole hands on the material To push your luck too much on actually delaying payments or trying to negotiate extended payment terms. So Niklas and I, we have a little bit of an argument. If you can say, well, we have to be better at extending our payment terms. And I agree. I fully agree that I think we will do that. I'm sure you will see to it now that I'm gone that it will be done. But at the Anders said, I think it's prudent of us actually to Be the one who actually secures deliveries at this point. Do you should basically see this as a positive? It's not we know what we're doing, so to speak. Yes. And Andre, I mean exactly as Alrik said, I mean on receivables, I think we have potential to improve. It's not bad, but we absolutely have And then on specifically on the other SEK446,000,000 as you mentioned, There's an element there of the we repaid and refinanced our bond And there's an element of FX related to that repayment of bond, which is a one off negative in Q1. Thank you. Moving on to Seb at RBC. Does your Q2 guidance imply sales around 22,500,000,000 and thus includes FX effect. How much of this 16% sequential increase is volume? How much is price? Or how much will SKF need to raise prices for an average wheel bearing to compensate for steel cost increase this year. Some of them have been answered already. Yes. So the Q2 again is organic, so that's excluding the currency impact. And I think, again, we're not commenting specifically on what price will be going forward. But as discussed earlier, we are working on a pretty broad front, of course, with price as one tool. And you know from the past that we have a good track record working with pricing. That's also a reason for us being quite confident that over time we can offset some of the Costs going up. And again, please remember, there's a strong demand in the marketplace and that makes it more Feasible actually to have a discussion where these kind of cost increases will be shared through the value chain. Another question on pricing from Klaas at Citi. What is distribution pricing running at right now and when do you think OEM pricing can kick in. I appreciate you don't want to discuss pricing in open forum, but will distributing pricing be stronger in the Q2 versus the Q1? And when can we see OEM pricing kicking in, Q3 or do we have to wait until the Q4? I think that you can say you understand this clause already that when you talk to distributor level, it's more of a price list Dependent pricing and of course, we have already announced an increase we're working on following this. And as you say, as I said, the demand in the value Strong, so there's a good acceptance. And I'm sure that the things that we are preparing will be accepted and Due to this, when you come to OEM customers, it's a little bit more tricky. As you know, it takes a little bit more longer time. It's more that you have a contract, yes. But on the other hand, when there's a need for increased deliveries, etcetera, there's usually an understanding that when you come with With a plea for please help me for a completely reasonable cost increase that I have to be able to serve you well, the customer has a good understanding and you reach agreements. And I am completely confident that in this time, there will be no difference in this. So I am confident that you will see There may be a discrepancy during a quarter, etcetera, but you I'm convinced that you will start seeing some of the and we and I honestly, I already see it, Some of it coming in already now and throughout the year. So my assessment, we will compensate this year. Thank you. Whilst continuing, but on the cost side this time. Logistics costs Should go down through the year, but raw materials could accelerate given your inventory turns. There is always a lag. At current spot What kind of levels can we look to into the second half of this year? And I think maybe going back to the big picture and not answering specifically, Klas, your question on spot prices and the impacts going forward. I mean, we work with both the cost side and then pricing and other actions, of course. It's business as usual and we expect things to even out for us on the results side Over time and as Alrik said, quite confident that we can fix it during this year, Almost regardless of where the spot prices go as long as they stay within somehow reasonable limits of course. We don't want 2,007 back. No, no, no. And I agree with you. And I think that you explained it a little bit yourself in the lags And we're on top of this. We are well inside. We know exactly. We have very tight dialogues With our customers, we know exactly how this is driven and we have it on the top of the agenda, I can tell you, in all meetings, in all discussions. And there's a very confident team behind saying, we are confident we will manage this in a good way. We won't disappoint you. Thank you. And we have a set of questions from Lars at Barclays. I believe we have answered all of them, so we'll move on. They were in raw mats, they were in price and on our ability to offset raw mats with price. So we move on To a question on the temporary savings from last year. How much of these savings Do you think we'll reverse in the Q2 of this year? And should we assume a similar cost headwind from raw mats and logistics as in this quarter? I'm trying to understand what the net cost development can be for the 2nd quarter. Well, on the We had, as we discussed in the bridge, I mean SEK700 1,000,000 a bit more in cost down activities benefiting us. And these are really mostly permanent. And of course, there's an element of travel, for instance, and being still at a very low level, and we expect that To start to creep up, but all in all, I can say that the major part of that NOK700 1,000,000 is really permanent, very much in line with what we, by the way, discussed throughout Q2 to Q4 last year when we discussed temporary And then I think the kind of headwinds from raw materials logistics we've discussed, so Maybe we don't comment on that now in addition to what we've already said. I mean, we are quite confident that as discussed that we can offset it over time A quarter or so, there might still be a discrepancy. A little bit more longer term or mid term question from Olof to Abigail, ABG. Can you talk a bit on how continued savings from the ongoing investment program your production platform both during the rest of the year and also in the years to come. Thanks. Well, I think this is I mean, it's very much On track, if we think about what we call the world class investments, Our SEK3.6 billion investment that we have in the plans for this year, I mean, that's very much in line with we have been discussed in the past, for instance, in the Capital Markets Day, and there's really no big surprises there. So that's on track. And as you know, I mean, we do expect quite good returns on those investments, the 3.6% and going forward also maybe even higher levels. So we see good returns. We expect good returns also going forward from those investments. Thank you. A specific question from Eberik Mele from BDL on pensions. Good morning. Can you quantify the P and L impact of your pension adjustment, please? Is it around 500,000,000? Not entirely sure what this refers to, but if you think about our pensions, I mean, we have, Give or take SEK15 1,000,000,000 in net pension liabilities and these pension plans are closed. And of course, what we see in the quarterly results is that the SEK15 billion moves a bit up and down, really driven by mostly interest rates. So now for instance in Q1 with interest rates going somewhat up, the The pensions went down and then we of course have a portfolio here of investments to against the pensions and that also moves a bit with the market. But maybe No effect on P and L? No, no. No. No effect on P and L. This is equity. This is in the balance sheet. Yes. So this is how you should see this. There's no P and L effect on these variations. Another question from James at Redburn. Can you talk about whether the daily average demand in April is similar, higher or lower than daily average demand in March globally and with any regional color you like. I think James will duck this April. I mean, what we see overall It is that the demand now is very much supporting what we see for Q2. So the outlook is the demand and the outlook goes hand in hand. As I said earlier, I mean, Within Q1, we did see a bit of an acceleration towards the end of the quarter. And the Q2 outlook is back to pre COVID levels. And but the demand is strong, James, it's really strong and I think it's partly driven of course by an expectations of the COVID crisis, but there is an underlying very, very strong solid demand from most customer segments, I would say. It will give the effect that we talked about, but I'm less worried about demand this quarter if nothing Unforeseen happens actually. So I can give that as You know, my nose in the marketplace. A question from Gelder Bray at Deutsche on our margin target. All told, with rising inflation and the reversal of COVID-ten savings, is there any much upside left to the current 14% margin levels? If yes, what will be the drivers? It's a good question. I mean, 14%, We are quite happy or very happy actually with that margin. Do we see upside from here? Yes, we see upside from here. And then we talk about longer term and we go back to kind of the whole transformation that we are going through as a company. The investments that we are making in the factories, competitiveness of our products and so on and so on. So yes, absolutely there's upside and we are working on that. And I think if you look at SKF, One of the good things, I think, and soon I will be looking from the outside is that, yes, there's not this Ups and downs. We despite the fact that the market moves up and downs, SKF has a solid, strong step by step improvement of profitability and market shares and you see it coming step by step. It's quite predictable And everything is set for this to continue. And when you hear Patrick and Niklas talk about the different building on how we're working through the value chain. This is where it's going to come from. And that's the way I see it. I'm confident that as a shareholder that I will continue to be very happy with the development. Thank you. Finishing up here. We have couple of minutes left. One question from Kepler and William. Against the comment about increased costs, you have achieved a very positive development on your gross margins From 27.4 up to 28.9. Can you explain a number of the main drivers for the uplift? Is this mainly mix or have there been any reallocation of costs? On the reallocation, the short answer is No, if you've looked at us over time, what we did now in Q1 was that we took out R and D from gross margin and are showing it separately. But we haven't really reallocated any costs as such. They're still in there. And you see it, it is what I tried to say before. It is the development of the underlying business and how we are gradually having more technology content in our products, innovation, Slimmer value chain, this is what drives it. Thank you. Final question comes from Guillermo at UBS, relates to EVs. For bearings going into electric vehicles, do you see competition heating up? I think that we will see more of that coming maybe in the future still so that these bearings are really sophisticated. And you know an electrical motor for a vehicle, it's sealed for life and there cannot be any currents going through Of course, there is competition, but I don't see it heating up. I see more the demand being extremely strong and that customers are seeking more and more Our support going away from maybe in the beginning, I was looking for the bearing in a catalog to actually saying, hey, when now I'm going to expand this, I need a true partner around the rotating shaft. And one of these examples was actually in the car or the picture You know that where we have been working closely with them since they started actually and now when it's taking off, of course, It is paying off. And the reason is we are working in a true partnership. So It will there is competition, but I still think that it's a very, very good opportunity going forward for SKF. You will see a lot of good development there. With that, I believe we conclude the Q and A session. So thank you all for listening in and thank you for posting all the questions. A couple of finishing words from Alrik, please. Yes. Thank you very much for your kind wishes. And I must say, It's been a very, very stimulating and good relationship with all of you during these years when That way, we don't meet in person as we used to do, but also in the past. And I want to thank you for this. And I've learned a lot from you And a lot of the things that you have told us, I hope that we have implemented in the way we communicate to you. And I'm sure now Under Niklas, Patrik and Rick Adzen, not to least to say Tito, our Head of the press that you will see this continue and thank you very much everybody and thank you every SKF employee that is listening in. SKF will always be in my heart. SKF will be successful. And I am so Happy and grateful for having had the opportunity to spend 25 years of my professional life in this company. Thank you very much.