Earnings Call: Q2 2020

Jul 21, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the SKFQ2 Report 2020 Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Session. I must advise you that this conference is being recorded today, Tuesday 21st July 20 And I would now like to hand the conference over to your first speaker today, Patrick Stenberg. Thank you. Please go ahead. Thank you, and good morning, all of you to, this presentation of the Q2 results for SKF. As future, we will start with a presentation of for about 20, 30 minutes. And after that, we will follow on with a Q and A session. So with that, very deep interaction, I will leave the word to Alrik Donin, please. Thank you. Patrick, thank you everybody for listening in today. We have delivered another very strong operating result. Despite sales falling by 20 stronger SKF maintaining high levels of investments in our factories and in new customer offerings, whilst at the same time, capitalizing on new ways of working. Net sales fell organically by 25% to Swedish kraft $16,600,000,000. Sales continue to be impacted by both government imposed restrictions and lower underlying demand. Sales in both Europe and North America decreased by about 30%, while sales in Asia were 10% lower compared to last year. Despite this significant drop in demand, we continue to improve our cost flexibility and we were able to deliver an adjusted operating margin for the second quarter of 9.4% compared to 12.7 percent last year, with an adjusted operating profit of SEK 1,600,000,000. We continue to reduce costs and adjust the size of the business, with the ambition to be even more flexible and to support customers in an even better way mute. During the quarter, we announced further SEK 400,000,000 investment in our Qing Chang Ball bearing Factory in China. During the 1st 6 months of the year, our efforts to reduce fixed costs regrettably resulted in a reduction of 1350 permanent employees and 7 50 temporary agency employees. These efforts will continue. And as a result, we expect to see a continued elevated level of restructuring costs during the second half of twenty twenty These are difficult but necessary steps that we need to take to protect the business and make sure we have the foundations in place from which to emerge from this crisis in an even stronger fashion. Cash flow during the quarter was Swedish kraftlen838000000 negative as a result of the lower operating results, increased working capital, which in turn was driven by lower payables and higher quarter and sales. We continue to reduce inventories during the quarter, which I think is the highlight. So to say negative cash flow, but for the right reasons. If you turn to the next page and look a little bit at the Industrial business, the Industrial business continued to deliver a very good operational performance on lower sales. The adjusted margins were 40% compared to 15.7% last year, despite a drop in organic sales of 17%. Sales were significantly lower in North American Europe and lower in Asia. He returned to the next page, say some words about the automotive business. Well, the automotive business was heavily impacted by customer closures and lower demand. The adjusted operating margin was negative of 8.4 percent, largely driven by a 45% drop in organic sales. Sales were significantly lower in all major markets where many of our OE customers have been shut down for parts of the quarter. It's, however, encouraging to see that we are continuing to win new business and that we are growing our share of the markets. If we take the next phase and talk a little bit more about the automotive business many of our automotive customers have been severely impacted by the COVID-nineteen situation and our teams have made fantastic efforts to serve our customers and to reduce costs. We're also taking more structural measures to improve operations going forward. These measures include simplified structure and organization, taking advantage of synergies with regional industrial sales, manufacturing move to bearing operations where we buy this, consolidate our management of our factories in a more efficient way. All this with the purpose of being leaner and costs in cost and to increase efficiency without any way losing focus on the automotive business on the contrary. Becoming an even stronger partner level, say, page, and talk about a little bit about the different areas. We can see that we saw a decline in organic sales of 25 percent compared to last year, with net sales of 16,600,000,000. Sales in North America were 30% lower within Industrial. Sales to Marine Industry were significantly higher, Sales to other industrials were slightly higher and sales to aerospace industry were lower. Sales, all other industries were significantly lower. Automotive sales were significantly lower to both cars and trucks. In Europe, Organic sales were 31% lower than last year. Demand from both industrial and automotive customers were significantly lower than last year, within the industrial, Sales to the Marine industry were higher, but sales to all other industries were significantly lower compared to Q2 2019. If you take organic sales in Asia, it decreased by 10% with lower industrial demand and significantly lower demand for automotive, We saw continued strong development in the energy industry and relatively unchanged demand in marine while most other industries showed significantly lower sales compared to last year. In automotive, sales to truck industry were significantly higher while sales to light vehicles and to the vehicle aftermarket were significantly lower. In Latin America, sales decreased organically by 38% compared to last year, and we saw significantly lower sales to both industrial and automotive customers. If we turn to the next page and talk a few things about what we're doing, for the future, well, Sustainability is the core of SKF's strategy and will when well integrated in our business. In June, we announced that our manufacturing operations will be carbon neutral by 2030. We have been working with sustainability since Skip was founded more than 100 years ago. Reducing the impact of operations has always been a priority. To give an example, since 2015, we have decreased the CO2 emissions in the manufacturing by 36% per bearing and we are already operating 2 carbon neutral factories in Styrro Austria and Trella Spain. Simply put, sustainability has always been key to SKF. If we take the next page and talk a little bit about what we're doing to strengthen our regional manufacturing footprint. Over the last two years, we have made great progress in China. The world's largest market for the approval bans. In June last year, we announced a $370,000,000 investment in a new factory in Xinjiang. The factory is now operational, and we are now making further investments in strengthening our manufacturing footprint in China. The next phase of the investment will allow us to serve our customers even better across wider applications and with a wider product range. This investments is part of our strategic ambition to develop our regional manufacturing footprint, moving manufacturing closer to our customers. The 2nd phase of the factory in Chincang is expected to be operational during the end of 2021. And with these words, I hand the word over to Nicolas. Thank you, Alrik. Thank you. If we turn to the next page, please, I will take you through the details of our financials in the quarter, starting with sales. Net sales decreased by 26% in the 2nd quarter. Organic sales were 25% over the last year. For Industrial, we saw a decline in organic sales of 17% and Automotive declined by 45% in the quarter. The currency effect on sales was negative in the quarter by 1% with the largest effects as usual coming from the U. S. Dollar the euro and the renminbi. If we turn to the next page, please. We have seen a dramatic slowdown in growth since the peak in second quarter 2018. During this time, we've continued to invest in innovation, in competitiveness, and we are adapting our operations to a lower growth scenario and reducing our cost base. Looking at the operating profit development, we've been successful in this process In the second quarter, we managed to deliver an adjusted operating profit of $1,600,000,000 corresponding to a margin of 9.4%. We move to the next page, please. Taking you through the operating profit bridge for the quarter. Firstly, the currency impact was negative $138,000,000 compared to last year. Our operational performance was 1,153,000,000 lower year over year, Organic sales and manufacturing volumes was dramatically lower at 2398,000,000 We had a negative effect from lower sales and production volumes. The other hand, both price and mix were positive in the quarter. And then what comes to cost development, it continued to be very good, and we saw higher realized co savings and cost increases resulting in a positive net contribution to operating profit in the quarter of $1245,000,000 compared to last year. Given the special circumstances during the quarter, I take the opportunity to give some further details on our cost development. The 1240 $5,000,000 included a gain from a land sale of slightly less than $200,000,000. Out of the remaining savings are about half can be categorized as permanent, while the other half is more temporary in nature. Out of the temporary, less than half is related to government contributions. During the 1st 6 months of the year, our effort to reduce fixed costs resulting in a reduction of 13 impermanent employees and 750 temporary or agency employees. This effort will continue. And as a result, we expect to see a continued elevated level of restructuring costs during the second half of 2020, as Alrik already mentioned. We move to the next page, please. Here, you can see the performance by customer group in the quarter. We start with Industrial, Organic net sales in Industrial decreased by 17%. Sales in Asia were lower while sales in North America, Europe and Latin America were significantly lower. The adjusted operating margin was 14% compared to 15.7% last year. Cost savings contributed positively to the results while lower sales and production volumes had a negative effect in the quarter. What comes to automotive, Organic sales in automotive declined by 45% in the 2nd quarter with significantly lower sales volumes in North America, Europe Asia and in Latin America. The Automotive business had an adjusted operating margin of negative 8.4% compared to a positive 5.1% last year. The result was negatively impacted by the significantly lower sales and production volumes partly offset by cost savings We move to the next page, please. Net working capital was 30 percent of sales at the end of the second quarter, which was on the same level, as at the end of second quarter last year. We are pleased that we have been able to reduce our inventories during the quarter despite the very sharp drop in demand and inventories as a percentage of sales is kept stable compared to the previous quarter. We are seeing a reduction of both accounts payables and receivables, a natural effect due to lower business activity and reduced production levels. However, receivables increased somewhat in June due to higher order and sales. We move to the next page, please. We are maintaining a strong focus on Cash flow despite having increased our investments in manufacturing significantly over the last couple of years. Cash flow in Q2, excluding acquisitions and divestments, was a negative EUR 854,000,000 compared to a positive 1849,000,000 last year. The lower cash flow is mainly due to the lower result in combination with an increase in working capital. The cash flow, excluding acquisitions and divestments for the last 12 months was EUR 4,100,000,000. We'll move to the next page, please. We have a strong balance sheet. The net debt to equity ratio was 62.5 percent at the end of the quarter, The net debt to equity ratio, excluding leasing and pensions, was 12.7%. Provisions for post employment benefits, benefits net decreased by 1550,000,000 in the 2nd quarter, mainly due to net actuarial gains on plan assets and exchange rates exchange rate effects. Escaped financial liquidity is strong. We have about EUR 18,000,000,000 in cash and committed, but unused credit facilities. In Q2, we issued a new SEK3 billion bond with a 4 year maturity. The proceeds will be used for general corporate purposes, including We'll move to the next page, please. When it comes the demand outlook, we are of course impacted by the fact that the industries and regions in which we operate are being impacted by initiatives by authorities and by SKF's customers relating to the spread of the COVID-nineteen virus. As a result of this significant level of uncertainty, it is not feasible to provide a reliable demand guidance for the coming quarter. If we move to next page, please. Finally, some additional guidance for the third quarter. We expect the finance net to be about EUR 225,000,000 negative. For the full year, we expect a tax rate of about 29%. Over the last in property, plant and equipment. And in 2020, we expect to see additions to plant and property of SEK 3,300,000,000. And with that, I'll give the word back to you, Orec. Thank you, Nicholas. Well, to summarize, I am really happy, and I think that done a fantastic job to deliver a very strong performance And I think also we see how we are able to reduce costs when we need to, and we are finding new ways of working. Where digitization is really getting a push. We delivered an operating margin of 9.4%. And our efforts to reduce costs continues, both in the short and the long term. We are strong financially. We are continuing to invest in our manufacturing. And looking into Q3, there is a high level of demand uncertainty, but we are taking every step to continue to make SKF an even stronger company going forward. With those words, I thank you for listening, and I move over to you, Patrick, Thank you, Alrik. And Nicholas, operator, with that, we are ready to go into Q And A. And having said that, in order to get, everyone online, please limit your questions to 1 or 2 and then please get back in line. So everyone gets very sharp. Operator, please? And we'll now take our first question. And this comes from the line of Olav Cedar Hun. Your line is now open. Please go ahead. Hello, gentlemen. It's Olof with ABG. Just my few questions. Is it possible to say anything about sort of a level of organic sales run rate in June or early July to give us a sense of what the momentum was when we go into Q3? Of course, if we kind of look back a bit in time, throughout Q2, I mean, April was the worst, May was a notch better, and then June was a notch better. I wouldn't put too much weight, frankly, to kind of run rates. But anyway, I mean, What we see is that July has started roughly at the levels of June, But, but again, I would not put too much weight on those sort of run rates. And the reason it's, of course, Obviously, you can see on the automotive side, one of the things I see where the estimates did not understand properly that it was a complete stop in the industrial in the automotive business, where lead times in industrial dynamic is very low. So we saw that immediately. Then now when the car companies and truck companies as we started their production. We have then come back to a different level that we see going into also the new into July. In industrial, the same, we saw it coming down, and we saw July ending stronger than April May, in line with what we in June. And I mean in China, we were even growing during the quarter. And what we see in China is, of course, that when we look forward, the uncertainty also there on demand is increasing as the effects actually of government interventions when they have been keep starting, not the least, the energy sector with wind, trucks and others, how will that now continue into the second half of the year, it's very difficult to say. But July started in the same way as June. End it a little bit better, maybe. Very good. Thank you very much for that color. Very useful. 1, my second question would be on pricemix. Did you were you able to have a positive pricemix also within the industrial division on a stand alone basis? And could you, well, extended question. Could you also maybe elaborate a bit on the pricing environment? Thank you. The answer is yes. And, but on the on elaborating on the future, so far so good, and you can say And even the businesses that we are gaining in the automotive space are also better than the portfolio we've held before. But going forward, it will all depend on how strong the recovery is. And so to say how much capacity and what will be the activities from the different plays in the market. Having said that though, I think we're all, everybody's aware of, there's not so much margin to give away in these kinds of circumstances. And and I hope for good sense to prevail in the marketplace. And we will now take our next question. And this comes from the line of Gail Debris. Your line is now open. Please go ahead. Thanks very much. Good morning, everyone. Could you, I've got two questions, please. The first one is about some of the costs you've excluded from your definition of the adjusted EBIT. Could you give us a bit more details on the customer settlement cost? I mean, what are these costs related to? And I think we've seen them now becoming a sort of a recurring feature over the past 3, 4 quarters or so. So So would you expect these costs to continue into H2? And I also can see that there was a capital gain of nearly EUR 200,000,000 within the EBIT, and I'm not so sure what it is related to. So just a clarification around that. And the second question I have is about the Automotive business, for which you flagged a good backlog and mark share gains. Could you perhaps describe a bit more this backlog? I mean, is this meaningful enough to give you a bit of visibility for the coming quarters? And how does the margin in that backlog compare to current margins? Yes. Hi, Gayle. We'll split this, Nick, as you know, I'll take the first and then hand over to Alrik for the Automotive. Yeah. So we had one off for IAC cost amounting to SEK 900,000,000 in the quarter. Which is clearly higher than what you've seen for instance in Q1. And we split that roughly $650,000,000 of that was related to restructurings and then the remaining, was primarily settlements. And, settlements is essentially customer settlements related to the old EU case from 2014. And it's, of course, hard to say how it continues, but that's it. In terms of the capital gain, it's very simply a a sale of a real estate land of a slightly less than 200. And just to add, now that I am also running the automotive, my assessment is those settlements are now coming to an end. It's actually coming to an end. It's been an ordeal, but it's coming towards an end. When you look at the automotive, well, it works in the following way. We have been doing well in the VSM segments in the aftermarket. We have managed to stay open, for instance, in Europe during the whole quarter. When some others other of our competitors were closed. So we have had a good development. We see that in the VSM in Europe, for instance. And we have also gained a good business But there, we still have this uncertainty how much of these how large will these businesses be because of course, you know how it is. You get nominated for a program and then it depends how good that program actually sets. So it's positive. It means that we are we our order book is good, but we still the uncertainty is still there how much cars will actually be sold. And then if you look at the profitability of those businesses, they are higher than the current business. At the same time, as of course, we are aggressively restart also our automotive business to be even more competitive going forward. And we're investing in new technology and new offers Okay. Thank you very much for this. Yes. And but please understand, our main business is industrial. And in industrial, we are excelling, I think, in our performance. I am really proud of what we've been doing in industrial during this quarter. And SKF is predominantly an industrial supplier. Your next question comes from the line of Andre Kockin. Can I just follow-up on June, July run rate, please? If I may ask, the following way that some of your peers with very similar market exposure talked about sort of minus 20 to 25 for June, July. Would that be the right ballpark for you? Sorry. I mean, what do you mean lower than last year? That what you're talking about? 25 was year on year. We had a quarter of 25, and we were doing slightly better in the end of the quarter. Slightly better. Okay. Thank you. And then just on the, adjustments to reported EBIT The GBP 200,000,000 is included in 1565 adjusted EBIT. Is that right? That's right. And which division is that? In it's in industrial. Great. Thank you. And just finally, on under production, it looks like you have taken down inventory significantly. Could you help us with quantifying the P and L impact from that from manufacturing? Yes. Hi, Andre. It's Patrick here. Yes, first, we've been, we managed to reduce inventory sequentially during the quarter, but 260,000,000 in terms of finished goods inventories, which is slightly more than last year. So we have a negative impact on EBIT of about 1,000,000 or so from that. Sorry, Patrick, my line broke up literally, as you said, the number on the EBIT impact, you said, 26260 is the reduction and then the reduction this year. Last year, we had a reduction of about 100,000,000 swing 160,000,000 that would translate to a negative EBIT effect of about 1,000,000 in the quarter in the bridge. Got it. Thank you very much for taking my questions. Next question comes from the line of Andrew Wilson. Please ask your question. Just wanted to dive into the cost development number that you provided. I'm just trying to understand the kind of the components within that. I think you talked about the kind of the 1245 benefit year on year. And I'm assuming that is the net of the cost savings less the usual cost inflation. Is that correct? Just so I'm understanding that. Yes, correct. And could you help us a little bit with the cost inflation number? And maybe if that includes raw materials, for example, I'm just trying to clearly trying to work back to try and understand the degree of cost savings and obviously helpfully give us the split in terms of temporary impairments. So if you could just sort of drill down a little bit on that, that would be very helpful, I think. Yes, maybe Patrick has some comments on the on that level of detail. I think, I mean, as we all know, it was an exceptionally volatile and tough quarter, all of us, all companies or people actually. So I think I mean, the way we look at it is, again, the big picture. So we have the $12.45, we had the land sale And then out of the remaining, you can roughly speak and categorize, put half of it in temporary and half of. Temporary, but short term, shorter term and then half of it, in more permanent type of cost savings or effect. And there, as you understand, there's a lot of moving parts volatility some downs there. So, maybe trying to stay away from the decimals in this case. So I mean, could we then assume that the cost inflation was similar to the counter numbers you've given us in previous quarters? Is that a reasonable starting point? Hi, Andy. Patrick here. I would say things are a bit special during these circumstances and as Nicholas pointed out, I think we leave it up looking at the bigger picture, but obviously wage inflation is, of course, lower than usual. We don't expect to see the same kind of a salary increase that we normally have. Then there's the time lag in that, of course. So I would say underlying cost inflation is probably slightly lower than usual, but it's the big picture here that really matters. And I think we are doing our utmost to shed cost both in the short term, but also in the long term. And you have seen a lot of activities during this quarter. A lot of people unfortunately leaving us high restructuring costs, you will see more of that during the second half of this year as well, both in terms of restructuring, but also in terms of cost reductions. And you know, the it's interesting. I think you hear that for many companies, these new ways of working with the digitization, you're hooking up to your customers from a digital point of view and you're monitoring their equipment. You're not traveling so much out to customers, etcetera. This will prevail in largest states. I don't foresee that we will come back to the kind of moving people around that we use to be able to do business with new technologies actually really taking a grip. It was already in the making. This is nothing new, but it's getting a push. People rapidly see the benefits of it. And those kinds of savings, they will stay That's helpful. I appreciate all the details and clearly a lot of moving parts. Maybe if I can ask a broader question just around around kind of some of the comments you've made on energy and wind specifically. Could you just kind of give us a little bit of, I guess, a recap on what you're seeing in wind mark across each of the three geographies and kind of how, if that you can give us any help in terms of how you see that developing or changing that would be helpful? Well, you know, that what we have seen clearly in not the least in China where we grew during the quarter is that in the industries where the government is sort of incentivizing growth, it's actually growing. And of course there, you see the energy sector growing very clearly in Asia with a very, very strong growth in Asia and also in Latin America. And with a lot of project coming also in the future in Europe and so forth, and you see and I think you can see the perceived also in the way governments are portraying what they're doing with the kind of support they're giving to the industry. There's a clear drive for clean tech and environmental technologies in there. SGAAP is in a good position to be able to support that. The same one of the things that we've seen is in Marine, for instance, we've seen the growth and they're a lot of companies taking out the opportunity now when they've been sort of docked and they have made their their repairs. That kind of marine growth, I don't believe it will be as strong going forward, for instance. And the same on car and trucks, for instance, if you see trucks business in China has been very strong due to an emission change. It's been really good growth. How strong the growth will be on the trucks truck segment during the next half year is going to be very, very hard to say. And the same in Europe, if you look at at the industry. We see industry sort of coming back. Many sectors are especially in in with food sectors and certain parts of paper, etcetera, they've been doing okay and growing fast. So it's this is what we see. That's great. I appreciate all the detail. Thank you guys. Next question comes from the line of Mehdi Singh. Please ask your question. Hi, thanks for the call. First question, just following up on the growth trends, if you could give a bit of a regional color on how July has been compared to June, let's say, in China, especially Asia, Europe and Americas, if you could talk about that? Again, Nicholas here, I think I think as commented earlier, I mean, we had an improvement with that throughout the quarter, April, May, June on a global level. And, as I said, you know, going into now July, what we see with the limited visibility we have of, looking forward, I mean, July has started roughly similar to June. I would not like to comment on the separate regions per se kind of the run rates because of the significant uncertainty that we have even with the kind of global figures in this environment. I was particularly interested in trends you are seeing in China because that has been one region which has actually been recovering quite well. So if you could talk about the growth trends there, that will be quite good and helpful. And like I said, we saw it very clearly in in, coming back at the lockdown, there was a need to recover and we saw that coming in many segments. We had with a net growth during the quarter. We saw specifically strong growth in energy and in the truck market. We saw good activity also in most segments increasing in China, but of course, it's still a great uncertainty, how much of that is pickup from the lockdown and how much is resilient into the future. And that's why it's so difficult for us to tell you. And you can imagine, for instance, the part of China that's a dependent on exports to the rest of the world, for instance, will be dependent on how strong that those markets. So the rest of the world's markets actually recover and so forth. So that is one of the reasons that it's so difficult for us to give you any specific flavor on what we see more than what we have already said that the quarter was good and July started in a similar way as it did in China. May I extend then what I'm trying to what I'm understanding here is that if the expectations were that recovery will be a bit we shaped, especially in short cyclical businesses, you are not really seeing enough evidence on the ground to say that recovery will be reshaped. Likely much slower than expected. Is that a fair understanding? But it's very much like you understand. There's a large sector industry sector in China as an export driven, right? So of course, depending on how the export out of China develops will influence how that part of the industry develops during the next coming quarter or quarters. And that's what I'm trying to say. Of course, that we can't see yet. That will depend on how quick Europe and U. S. And other markets recover from, from the pandemic. That's okay. Okay. And then for the health care, is it a good position? End. To take advantage of future growth. And we are confident that we will continue to have this kind of flexibility that we have shown during the last quarters. Okay. And thanks. And second question, on the cost cuts as you have said, you have let go of several employees. I'm wondering in case you see, recovery coming, let's say, better than expected, how flexible or how easy would be for you to ramp up the production to match the increased demand? Or it would could it be a hindrance in, let's say when the things recover the similar level, you are not able to make demand because History tells us history tells us that ramping up is seldom the problem. It's more actually being on the ball when it goes down. And that's why I am so pleased that we have really been able to adapt ourselves in the downturn. There will if and hopefully, there will be a strong recovery we will be ready The Orenx question comes from the line of Joe Spangen. Please ask your question. Yeah, good morning. Just a few, come back on some of the one off restructuring costs. Was the, just wondering if you can clarify, was the 1,000,001 charges that you took in the quarter, were they entirely cash costs? Yes, mainly cash, yes, but to be expensed over a period of time, of course, but they're largely cash. Okay. So in terms of the impact on the cash flow, it was predominantly felt in this quarter. And going forward, you said that there'll be further restructuring charges should we assume therefore that they will also have a pretty direct impact on cash flow? Well, I argue that it's quicker in the beginning. And the more you work in the future, the cash effect will be more over time. And still some of the things we have been doing for the quarter has still not had the full cash effect in SKF also in this quarter. You understand when the more in the beginning, it's quicker as you work more in-depth, so to speak, it becomes more a longer process and the cash outs will take longer in going forward. Yes. This is very much, as you know, it's very much related also to local legislation. And accounting rules, what you should book up from and what you cannot look up front and so on and so on. So it depends a bit on the level of activity, going forward. So Understand. But what I think is a good thing with the cash flow to understand is that since we've not been building inventory, we've actually been reducing inventory We have a good possibility to defend our Forte, which has always been to create cash. Skf, if you look back, we this is one of our absolute strong points to create cash. And of course, as the situation stabilizes, we should be able to I may have missed this, but can you comment at all around raw material pricing, in the quarter and what your view on that is currently? It's, we haven't commented on it, so you didn't miss it, but it's, it's still positive, but small amount, so that doesn't really move the needle in the circumstances. Your next question comes from the line of Ben Jaglou. Good morning. Thank you for taking the questions. And I appreciate that you probably had more than enough questions about sequential trends, but I just wanted to ask one more. You very kindly gave some, details around wind. On auto, obviously, it's clearly not the strong point. But sequentially, do you see any kind of differentiation in auto should we be more enthusiastic about China? What are you feeling in North America? How are things progressing in terms of auto production coming back if at all? Yes. Well, in China, I think we have covered it clearly. We saw it coming back. And the question now is how resilient this and of course, it will entirely depend on auto sales now going forward and what kind of the market in itself and also the kind of subsidies that may or support that the government may or may not put in place in Asia. And on the truck side, It was a clear government change of emission rules that helped also. The sales during this quarter. And the question is here, how resilient is that? In the rest of Europe and U. S, you can understand, with the lockdown in April, it was a complete standstill. I mean, I've never seen that before that all factories are basically standing still at the same time. Then we start the lockdown stocks people start coming back. We see sales starting to inventory levels going down. Sales starting to come up, production starting to come up. There's some rebate programs going on in Europe and so forth. But the big question, of course, how resilient is this? How resilient is this sort of comeback in sales in Europe and also in the West. And that is why it's so difficult for us to say anything because it's all going to be dependent on how resilient the sales are during the coming months. And now summer is coming, and it's a big question mark. But there's no secret to it. The sense that when you see sales of cars and trucks developing positively, you know, it's also going to influence SKF positively. Understood. And the same in the industry as you see industrial activity coming up and And you know now how strong and resilient we are in this sector and you will be able to evaluate this as the coming months actually developed. Understood. That's helpful. Thank you. One further question, it's really a bigger picture question about strategy. Some of your competitors we're still seeing are beginning to kind of pull back a little bit in terms of their capacity and CapEx. And when I look at your CapEx guidance, EUR 3,300,000,000, you're still really going kind of full steam ahead, more than 4% of sales. It was only a couple of years ago that we were looking at SEK 2,000,000,000 to SEK 2,500,000,000 of CapEx. And obviously, we're expanding in Xinjiang at a time that we're also doing pretty aggressive restructuring. So what is the thinking behind that, Alrik? And how what stage would you potentially consider changing direction around the CapEx spend if at all? Yes. Well, you know, it is clear so that the world is changing and always it's been changing also before the COVID crisis towards an automation dead like patient, efficiency, etcetera, that will drive productivity in a very, very significant way. That has accelerated, I argue, during this pandemic, meaning that it's going to be more important than ever to be close to the end market to have state of the art manufacturing facilities and have the technology to be able to hook up to your customers with remote monitoring and give your value propositions in a more indirect and digital way. And this is what you see. You see today what we have announced in Xinjiang is actually we built a factory And we were successful in filling it. And so now we're expanding it. Understood. That's helpful. Thank you. I'll pass it on. And hey, I just wanted to clarify one of the earlier questions where we maybe left it a bit unclear, specifically on the land sale. So the question was whether it's in industrial Automotive and it's actually roughly split, so call it 70 industrial and 30 automotive, just to be clear there. And if I may still add, so this land sale, it's actually an old SKF site. And the sales process started a long time ago, and it just happened to close it now in April. Next question comes from the line of Jay Moore Please ask your question. Good morning everyone. Hi, Eric Nicholas, Patrick. It's James. Thanks for taking my questions. I've got a 2 parter on savings. And then I'd like to follow-up on Ben's questions on automotive. So maybe go one at a time, but Thanks, Nicholas, for the helpful split on cost development. If we do the math, it suggests roughly without being precise million of savings from your permanent actions, which I presume is the automation, the footprint, the support function costs, the IT plans, which to me looks like a really nice acceleration from the 1,000,000 dollars, $400,000,000 running rates on those savings in previous quarters. And I guess my question is, this acceleration, was it helped by COVID, or is it an acceleration that could have almost happened without COVID? I mean, it's a good one. I mean, I'll recommend on this as well, but Much of this, of course, is are things that you could say that we would have needed to do anyway. So we would have done them anyway. But, yes, COVID has accelerated things to accelerate things in Q2 closing some of the things that we should have done anyway, but would probably have taken a bit longer. When we look at this change in digitalization, automation and where you have your plant in the future, we've discussed it many times and it's been on an agenda. And of course, in a normal environment where factories are more or less loaded, etcetera, This becomes more a delicate matter and you have to plan it very, very diligently. You need to have capacity so that you can do the changes, etcetera. In a crisis like this, of course, there are certain things that can accelerate. At the same times, when you talk about new ways of working, the same. I mean, we always believe that We were going to have more customer interactions using the internet and teams and Zoom and and Skype or whatever, they're called. And we saw that, but we saw a certain resistance in some industries and you still were looking for face to face meetings, etcetera. But now, everybody has been forced into it in a record speed and it works fine. It's great. We get the meetings are more concise and you get really nice with customers and you get everybody around the table. And I believe that now that's not going to go back, which means for instance, that on absolute basis, travel will be reduced for SKF and that kind of costs. So there are things also that are accelerating that are extremely positive, I argue, and ways of working that are changing much, much quicker that they then it would have taken maybe half a generation to change them in without this kind of shock. And now they're being changed very quickly. And I can imagine in your industry, you're finding exactly the same. Totally. I can see very much on the support function side, how that would accelerate. On the manufacturing and automation side, have you come to any structural thinking changes because of COVID as to how you can adapt that plan that was already in place? Yes. Well, of course, we're flexible to see how the world economy develops. So we will we there's no plan that's so rigid that we will not adapt to what's actually happening. But you can understand that also here, people are better at actually implementing things. We have done things, implemented things around the world with experts where there was no experts on-site. So we've seen new ways actually of implementing new technologies as well. And we see also at our customers a bigger sort of understanding of the needs to make the change. And this is very encouraging. Interesting. Thank you. And the other question I'd love to ask is on your Automotive reorganization, I wondered if you could just walk a bit more through what it is you're really changing. And I'm thinking, what does it mean for the longer term financials of I know it's the smaller business, but not the Automotive division when and if demand returns to old levels. So what we're trying to do and what we're what wasn't sort of what was left to do to put automotive where we wanted is to really. We have been driving the structures simplifying, taking away administration and silos, etcetera, during the last 5 years. Now we're taking the last step in the automotive or there's never a last step, but yet another step where for instance, we have the automotive factory clusters under one head, but they are integrated into the general supply chain organization, and by that we can streamline. The same we are doing still with an enormous focus on automotive, both on R And D and on sales with clear sales responsible, etcetera, etcetera. But more taking advantage of the infrastructures that we have built now overall in the industrial business as well. And by this being able to be even more cost efficient and flexible. And so the idea is actually to be able to reduce costs at the same time as we're keeping a very, very high focus on the automotive business. And taking that yet to another level. If you see it traditionally, we have been doing okay. We've been improving in the last years. Now we're taking the last step to try to improve it a bit more. And just finally, if I could, Eric, I mean, your automotive business is really a series of businesses from the U. S. OE, the European OE, the VSM, the truck, etcetera, etcetera. And does this new strategy make it easier to break out sell exit pieces might be thinking of doing that or is it still shared production facilities with industrial and other areas that makes that hard? Yes. Well, you know, 50% more or less of what we are selling to the automotive space, it's coming from factories making products that go to similar applications outside of the automotive space. And 50% are sort of specific automotive like wheel hub units. You can understand they are a different vial. Electrical motors that are now increasing, of course, an electrical motor for for a vehicle or an electrical motor for an industrial application, the kind of products that we are supplying are similar and coming out of the same value chain. So that doesn't change. But if you would like, to restructure, the more profitable you are, the leaner you are, the more flexible and the more the better technically advanced product portfolio you have, the easier it is. But the ambition is to make it a real profitable and value driver for SKF in the future. But it will increase our possibility Either way. Yes. It's Patrick here. I think we are running short of time. So we would like to conclude the conference call here. I know there are a couple of you that haven't been able to put your questions, but please, give me a call afterwards and we'll try to solve them with that, I'll leave the word back to Alrik for some closing words. Thank you very much for listening in. And for the good questions. From my point of view, I don't know if this is, given the circumstances, one of the best results SKF has been producing since many years. And rest assured, we will continue to try to give you a excellent performance going forward and hope to see you next quarter. That does conclude our conference for today. Thank you for participating. You may all disconnect.