Earnings Call: Q2 2019

Jul 17, 2019

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Q2 Report 2019 Conference Call. At this time, all participants are in I must advise you the conference is being recorded today, Wednesday 17th July 2019. Would now like to hand the call over to your first speaker today, Patrick Steenberg. Please go ahead. Thank you, and good morning, everyone. Welcome to the conference call on the 2nd quarter results for SKF. Today's speakers are President and CEO, Darlingsom, and we're Senior Vice President and CFO, Niklas Rosendell. Kevin Nafelenburg, CEO Shandberg, and myself, Patrick Zember, are also present here in the room representing groupcontrolling, media relations and IR. As usual, we'll start by presenting the results it will probably take about 20 to 30 minutes, and we will follow that up by a Q and A session. So with that, welcome once again. And I leave the word to Alrik, please. Thank you. Thank you. Welcome to what I see as yet another strong quarter from SKF. We have seen in the second quarter a strong operating performance on lower volumes. Our efforts to keep costs under control are showing good results in a market with lower demand. Operating profit for the second quarter was SEK 2,500,000,000, including costs for restructuring and impairments of SEK317 1,000,000. The underlying operating margin was 12.7%, the 6th straight quarter above 12% in a row. Our operating performance was positively impacted by cost reductions and price. Restructuring and impairment costs on the other hand had a negative impact. Net sales were 22.5000000000 Swedish kroner, a drop in organic sales of 1.6% compared to last year. Sales were relatively unchanged in Europe, slightly lower in Asia and North America and significantly higher in Latin America. A cash flow from operation, which is always one of our fortis, was in line with last year. If we turn to the next page, a few comments about the Industrial business. The Industrial business had yet another strong quarter with operating margins of almost 14%. It was 14.6% last year and organic growth of 0.5%. The underlying year operating margins was higher than last year, with restructuring costs and impairment impacting reported results negatively. Sales in Europe and Asia and North America were relatively unchanged, but increased in Latin America. If we take and turn to the next page. We talked a little bit about the Automotive. And the Automotive business contributed with an operating margin of 5%. And the organic growth was negative with 6.8% compared to a 5.2% growth last year. With significantly lower volumes in North America and Asia, lower sales volumes in Europe and significantly higher sales in Latin America. If we take and turn to the next page, we talk a little bit about our goals and we can see that Last year was a very strong year for SKF. We had record sales, record operating profit and record cash flows, in 2019, we are seeing a moderation in growth rates, but we are delivering a solid performance in both Q1 and Q2 with good operating margins and return on capital employed. The net debt ratio has increased somewhat due to the implementation of IFRS 16 on leasing but it's still well below the target of 80% and we will see it going down in the future. We continue to work the target of 25%. Grading of our plans and our integrated planning and other activities, we will gradually be improving this figure. I'm absolutely convinced. If we turn to the next page and talk a little bit about the regions, Well, we saw revenues coming in in line with guidance. We saw relatively stable revenues in the quarter. In Europe, organic sales were 2% lower than last year. We saw a relatively unchanged in Europe industrial demand with increased demand in aerospace, energy and railway industries. And relatively unchanged demand in distribution and heavy industries. Automotive volumes were lower in Q2 compared to last year for both trucks and light vehicles as well as for the vehicle aftermarket. Organic sales in Asia was 2% lower than last year, with industrial sales, we saw a relatively unchanged demand looking at our different industries, sales to energy, railway, and the agriculture sectors, food and beverage industries were significantly higher and sales to electrical and industrial distribution were relatively unchanged. While sales declined to heavy industries, marine, industrial drives, aerospace, and off highway compared to last year. In the automotive, volumes were lower than last year with significantly lower volumes for cars, relatively unchanged volume for truck and higher volumes for the vehicle aftermarket. In North America, sales were 3% lower than last year. We saw relatively unchanged industrial demand, sales to the energy industry, to the industrial distribution and sales to heavy industries increased. While sales to aerospace and industrial drives were relatively unchanged. Sales to the electrical segment railway of highway and marine declined compared to last year. And automotive volumes were significantly lower in North America. In Latin America, sales grew organically by 9% compared to last year. We saw higher volumes with industrial and significantly higher volumes. To the automotive as we are ramping up with more and more items made in Latin America for the automotive industry. We then turn to, the next page and talk a little bit about Circular Economy. Which is one of my absolute favorite topics, how I see now how we SKF around the rotating shaft, are gearing up for not only substantially reduce our customer's costs and improve their efficiency, but also be able to significantly improve the environmental impacts of industrial operations. And around here, you see the different ingredients. You have the assets. You have the remote monitoring. You have the data takes, you have the application knowledge where we can go in and help our customers to re engineer their, machines and their applications. We have the remanufacturing opportunity that we have talked about where we can really become circular, not talk about scrapping bearings, but actually reusing bearings for the benefit of both SKF and the customer. And of course, the new logistics setups that we are working on with integrating planning and supply chain point 0 and lubrication management. And this time, I would like to highlight this lubrication management, how important it is, you can imagine how central lubrication is and how important it is to always have clean lubricants in a machine to extend the life and reduce downtime. So what have we done during the quarter? We have, if we change to the next page, we have acquired company called reconned Oil. And reconned Oil is a small startup at this moment, but with a ready technology to clean lubricants to an extent that you can prolong the life the machine and you can reduce the usage of oil significantly. And you can you see here on the page picture a industrial oil on the left side and after being treated by our double separation technology where we're both using a chemical separation method and a normal filtering constantly can provide into the machine a clean oil and a clean environment. And also extend the life of these oils considerably. And I am actually absolutely convinced that this is a perfect addition to our ability to improve the working conditions of bearings and machines at our customers. And you will see in here much more about this going forward as we roll this technology out during the second quarter 3rd quarter of this year and onwards. If we buy that, go to the, the next page, I want to just talk a little bit about, our latest announced investment. You know, last year, last quarter, I talked about our new factory for taper roller bearings in Changshan, in China, bringing our 3 brands SKF here in GBC together in a state of the art manufacturing facility. Well, during the second quarter, we continue this path and we announced the regionalization and out of our manufacturing footprint. We have announced a 450,000,000 investment within the approval bearings. It is an investment in our existing factory in Bali in Italy. We will upgrade our facility there to be competitive and have absolutely the right cost performance ratio for the European markets and it creates a factory in Chincheon. I apologize for my Chinese pronunciation in China, where we will have a state of the art in competitive and customer service oriented factory already next year. And this supports our ambition to adopt full value chain approach as we have talked about Asia for Asia, Europe to Europe, Americans for Air America. This strive that we have in SKF and now we're taking this to deep pool ball bearings. And as you can understand, the main market for deep ruble bearings in the world is China. So very soon, you will be able to visit for the ones who want the world's best vehicle borne factory in China and you're heartily welcome. If we then take to the next page, I, by that, introduce Nicklas, our new, CFO that joined us also just during Q2. And we're very happy that you are with us, Niklas. Welcome. Thank you, Ulrich, and good morning, everyone. So I'm Nicholas. And before moving on with the presentation, let me take a few, let me take the opportunity to introduce myself briefly. So extremely pleased to have joined SKF on the day exactly a month ago. I have a background in technology, software and banking. And during my working life, I worked in Europe. North America and spent a fair amount of time in the fast moving Asian market. And truly impressed, having just a few me with SKF. I'm truly impressed about SKF's global reach in multiple industries. You'll get to know me as a team player for whom business understanding and results matter. And besides many other things, I do look forward to working on IP, on digitalization, as well as the new business models related to the Circular Economy that, Alrik just talked about, including REP, where there's actually many similarities to what we see in the software industry. With that, let move on with the presentation starting with sales. 2nd quarter, net sales decreased by 0 point 7%. Organic sales were 1.6% lower than last year. Industrial grew organically by 0.6%, while then, automotive declined by 6.8%. Currency effects on sales was positive in the quarter by 3.5% with the largest effect coming from the dollar, the euro and the renminbi. Percent, and this was related to the divestment of Lotte last year. The Lotte business And you could say in sum, we had a stable sales development in the quarter. Moving on to operating profit. Operating profit in the quarter, have shown a positive trend or during the period covered by this slide, so 2016 onwards, we've seen a positive trend The operating profit in the second quarter was 2539,000,000, which include restructuring and impairment costs of $370,000,000. The underlying operating profit was 2856 in the quarter, and this represents a margin of 12 points or an underlying margin of 12.7 the 6th straight quarter, about 12% as I'll recall already mentioned. Few more comments on the operating profit and taking it through the operating profit bridge for the quarter. Firstly, we had a negative effect from divested companies amounting to SEK 68,000,000, and this related to the disposal of the lab business. The currency impact in the quarter was a positive SEK 112,000,000 compared to last year. And then, let's spend a bit more time on the operational performance. So the operational performance decreased by $430,000,000 year over year. Contributions from organic sales and manufacturing volumes was $60,000,000 lower This included positive effects from positive effects from pricemix as well as negative effects from lower sales volumes. It was also negatively affected by lower production volumes versus last year. And in terms of finished goods, the year over year effect from changes in finished goods inventories was negative $20,000,000 in the quarter. In terms of cost development, costs were $370,000,000 higher than last year, and note that this includes the higher costs for restructuring and impairments of SEK 2 96,000,000. So in absolute terms, we had $370,000,000 this year versus $21,000,000 last year. Which is clearly higher than what was discussed at the last conference call. Excluding this cost improvements, where significant compared to last year, which we are very pleased with. The restructuring costs relates primarily to our restructuring activities in Bali, Italy, in connection with the announced investments in Deep Grew Ball Bearings. The impairments, on the other hand, relates primarily to us upgrading to the latest SAP platform on S4HANA. The negative material cost impact was slightly lower than guided for And we do see good cost flexibility in production and more cost reduction effects than what we had actually forecasted. And let me take the opportunity here to comment a bit on the third quarter guidance to the bridge. And I'll do this kind of step by step in the same way as we see it in the bridge. So in terms of M and A, we expect lost, kind of results from divested companies, so essentially lots of about $70,000,000. In terms of pricemix, we expect to see a continued positive effect from pricemix in Q3. In terms of inventories, we expect to see a continued reduction in finished goods inventories in Q3 versus Q2. However, slightly less than the reduction we saw during the third quarter last year, which would translate to a positive year over year effect on operating profit of about 30,000,000 in Q3 2019. In terms of cost development, in Q3, we expect to see an underlying cost inflation of about SEK 225,000,000 And this would be partially offset by cost savings of about EUR 100,000,000. In terms of material costs, to Q3 2018. And we expect to have similar restructuring costs as last year. And last year, it was about 86 $1,000,000. In Q3, last year, we also had a positive effect from land sale amounting to about SEK 185,000,000 that we will not have this year. Moving on, performance by customer group in the quarter. Industrial, quite happy with the development in industrial. So organic net sales within real increased by 0.6%. Sales in Europe, Asia and North America were relatively unchanged. And we saw increased sales in Latin America. The reported operating margin was year. The underlying operating margin was higher than last year as the kind of restructuring costs and impairments impacted reported results negatively. Price mix contributed positively to the results in industrial while then higher material costs and lower production volumes had a negative effect in the quarter. In terms of automotive, our organic sales, declined by 6.8% in the 2nd quarter as car sales continue to be weak across Asia, Europe and also North America. The operating margin The negative effect from lower price, from lower volume and increased material cost was actually partially offset by pricing, so higher pricing. What comes to the income statement for the group in the quarter, we reported a solid Q2 results with an operating margin of 11.3%. And note that this includes the restructuring and impairment costs of $370,000,000. And as mentioned, the comparable number was $21,000,000 last year. The moving 12 month margin trend was at 12.4%. Gross margin was unchanged versus last year at 25.1 percent, selling and administrative expenses as a percentage of sales actually increased compared to last year, primarily driven by higher IT costs restructuring costs and impairments as well as currency effects. The financial net in the second quarter was negative $278,000,000. The financial net was negatively impacted by exchange rate fluctuation as well as the kind of IFRS 16 impact, IFRS 16 related to leases with a negative impact of EUR 40,000,000. Taxes in the quarter were EUR 682,000,000 and this resulted in an effective tax rate of 30.1 percent. Our earnings per share was 3 point 32 sec, and the 12 month trend for EPS was 15.07 versus a year ago. When we were at SEK14.43. Moving on to cash flow As Alrik already commented, quite a strong cash flow, in the quarter, cash flow, excluding acquisitions and divestments. Divestments was 1849000000 compared to $2182,000,000 in the quarter. And the decrease here is mainly due to the lower operating profit which again is mainly due to the items affecting comparability. So the restructuring and footprint investments and projects that we initiated during Q2. The cash flow, excluding acquisitions and divestments for the last 12 months, has actually increased from 5,100,000,000 last year to 6,200,000,000. Net working capital was 30.1 percent of sales at the end of the 2nd quarter. Which is one percentage point lower than in the second quarter last year. The decrease is mainly explained by exchange rates, divestments and then lower inventory levels. What comes to the net debt equity ratio, it was at 68% at the end of the quarter. The main reason behind the increase is again, IFRS 16 on leasing, 26,976,000,000 impact And the net debt equity ratio, excluding leasing, was actually unchanged on the total, while we saw an increase in provisions for post employment benefits, so pensions, net debt, excluding pensions, and leasing, was 17% of equity by the end of the quarter. Finally, some guidance, additional guidance We for the third quarter, we expect a finance net to be about SEK 245,000,000 negative including IFRS 16 effects. And in terms of exchange rates, based on the 30th of June exchange rates, the currency impact on the operating profit is expected to be positive by about SEK 130,000,000 compared to the third quarter last year, based on exchange rates at July 15, The currency effect in the 3rd quarter would be, about $190,000,000 positive. For the full in property, plant and equipment. And for 2019, we expect to see additions to plant and property of about two point 8,000,000,000. And with that, I'll hand the floor back to Alrik. Thank you, Niklas. Thank you. Thank you. Well, just to summarize, if we go to the next slide, the second quarter was a strong quarter with solid margins despite lower volumes, demand developed in line with our expectations and organic sales were relatively unchanged compared to last year, We continue to see positive pricing in our efforts to reduce our cost base are showing results. Entering the third quarter, we expect to see slightly lower volumes compared to last year, including relatively unchanged demand for the industrial and lower demand for the automotive. Demand is expected to be relatively unchanged in Asia, slightly lower in Europe and North America and slightly higher in Latin America. And I give the floor back to Patrick. Thank you, Andre. Thank you for the We are now ready to take your questions. So with that, I'll leave the word back to operator, please. Questions. Your first question comes from the line of Eric Golrang. Please ask your question. Thank you. I have a couple of questions. Starting on the development in Asia and your guidance there for the third quarter. As I understand it, you saw a stronger end to the second quarter than the initial month, which is a bit surprising. Could you give some flavor on the different segments there perhaps particularly on the automotive side? And then my second question relates to the SAP impairments. What is the risk that there's more of that coming given that you have capitalized quite a bit over a number of years? I'll talk with those 2. Thank you. Well, let me let me start by saying that if you take the Industrial business, I think it was clear that there are some very strong segments like wind and railway and there are other segments that are a little bit weaker. And I think there's no mystery in that. The big question, of course, is that we've seen for a long time now in China, lower, automotive market. And And what we've seen is, it's interesting how uncertainty actually drives, of course, a more reluctance from consumers, for instance, to buy cards. And what has happened in China is that there's been new emission laws coming and originally the idea was that these laws were going to be implemented a year from now. But then to get rid of all the uncertainty, they have actually implemented these laws now. So are actually in place. So right now, the consumer knows exactly what are the emission regulations and what it means for their purchase. And what we see, what we've seen then is that actually in the end of the quarter, we saw an improved demand. And in June, as a matter of fact, we reflect And when we talked there, I was myself, I tell you, just in China, a little bit more than a week ago, And speaking to our many of our big, Chinese car customers, This is how they see it too. I mean, it's not that the in other regions, the weakness in the automotive business is coming out recently, as you may recall in China has been going on for quite a while. So what we're saying is that we see for the first time now a flattening out of the Chinese automotive market. And then maybe cautious sort of understanding that maybe we have reached a trough and and we will be able to see some improvements compared to what we've seen in the last I give it back to you, Nicholas? Yes, thanks. In terms of the SAP, kind of related impairments, Essentially, what we did was that we signed an agreement to move to S4HANA, and that made some of the old licenses redundant. And therefore, we wrote down the old of licenses. I don't think it's worth speculating on kind of future, write downs or not. I mean, the whole point is is that we are moving to a new The next question comes from the line of Klas Berglin. Please ask your question. Classe on Citi. Can I come back there, Alek to Asia and China? Could you talk a little bit on the industrial side distribution versus heavy and how we moved through the quarter. You talked about Automotive. We would be interested to hear what happened through the quarter also on the industrial side? I will start there. So, you know, I can tell you what we see here in the quarter is what we've said. We see some of the segments for smaller drives and electrical, smaller, electrical motors, weakening, that we saw through the quarter. And businesses like we, there's a we must understand right now there's a legislation that says that as if you get your win win ready by theendofnextyear, you will get a certain tariff, sort of, sorry, a feeding tariff, if you understand price for electricity. Beyond that point, it's unknown. So you can imagine now how everybody currently are pushing for getting their windmills ready for that date, that year and a half as a time frame. It may continue or it may not. So there you have side of an induced improvement. And of course, that we see continuing and that had been accelerating during the quarter. The same as transport in rail and so forth is strong as we see, we can we see continuing. But otherwise, it's, it's, we've been quite good at C1 quarter ahead and And I think if you recall, if you look at how we've been sort of guiding, we've been quite successful so forth. I hope that streak will continue. I cannot promise because of course, we're always talking about the future, but this is how we see it, what we guide. And this is the that the flavor I can give you, so to speak. Yes. No, I am aware of wind. I was just at the pure industrial bit, but it seems like smaller drives, etcetera, weakening a bit. And my second one is on price increases on spot. I think you were planning to push through there on distribution in Europe. Last quarter. I was wondering how effective these increases were? And if you're planning to increase yet again now in the second half, obviously very solid cost control yet again, but could mean that increasing prices is a bit more difficult. Price hikes often works better if there's a lot of cost inflation. Obviously, it's the other way around now. So I was wondering how the distribution pricing happened Yes. I think that as far as what we've done in distribution, it's been doing well and working well. And we're very split in this and there's absolutely, you know, we're pushing this through and it's holding. And as far as pricing in general, of course, we're always thanking the opportunity. There's more always work to do. And I think there's a good initiative still on selective pricing going forward. But you are right in the sense that it's easier when the the demand is really hot, but it's still possible to work with pricing when you have a good product and a differentiated offering. And on your last comment there that we now see it the other way around, well, I don't really see that yet. And I don't think our customers see that yet, so to speak, that there is tendency of course that we will see that maybe steep prices, etcetera, will be different going forward. But right now, I think in many markets, what we've seen so far there's quite a resilience in this. So there's no increase. No, there's no increase, but we haven't really seen the inflection on this yet. And that is also the true for us and for our competitors and for our customers. So we're still not in that in that kind of territory, I would argue. My final one is for unique the bridge. Just to confirm, you guided for SEK 225,000,000 in cost inflation into the quarter and this was I think a little bit more than 1,000,000 here in the second quarter, if that's correct. Reason for asking is that the last couple of quarters on SKF have been better on cost it was more on IT, logistics, R and D where costs came down, but the plus million underlying cost inflation, I think we all thought what's more difficult to cut back on. So first, is the delta correct? I think it is 74 versus 225 guided. And now it seems like a guiding for 100,000,000 cost inflation of the savings into the 3rd. So again, a low level, just to understand how you can cut back here and what to expect ahead? Yes. Let me let me actually, I mean, Patrick, not to make sure that I don't say anything stupid, which we have to regret and miss guide you. So on the exact details, I mean, Patrick, feel free to comment here. Yes, accounting on the performance in the current quarter. I would say we performed really strong on cost. As we discussed in the bridge, we were able to almost offset raw material cost inflation, which was about $90,000,000 negative in the quarter, and the underlying cost inflation, which is about 2 25 percent by quarter by reducing our underlying costs. We've had very good cost flexibility in our manufacturer operations, We have also released quite a few people during this quarter compared to previously. So I would say we've been successfully doing that. Going forward, guidance for Q3, yes, underlying cost inflation is still there, about 225, raw material cost inflation on a similar level compared to what we saw now in Q2 as about $100,000,000 in Q3. And we expect to offset some of that with the continuing cost reductions of about $100,000,000 in the Q3. That's a pure cost type. Yes. But, Patrick, the 1,000,000, you're talking about 1,000,000 savings and typically you don't you don't split out the $100,000,000 savings. So if the $225,000,000 less $100,000,000, that is your cost inflation that should be compared with the $74,000,000 you did this quarter? Correct. Yes. Your next question comes from the line of Andrew Wilson. Please ask your question. I sort of had a broader question on the extension, I guess, of what was asked on Asia. But just in terms of Europe and North America, can you talk a little bit about how you saw the industrial markets develop kind of through the quarter. I think there's been some concerns that we saw further down in June, but it sounds like it's been a pretty consistent message. So just interested, I guess, on some color on that, please? Well, I think broadly, you can say that when we started the turnaround when it started to come in 2016, it was a broad base, real strong, geographically bar based. It came in almost all segments going up. Now we're in this situation where we see some segments actually being positive and growing strongly as we have commented on and some segments weakening as we've also commented on. And that's where we are at. At the same time then when we look forward into our next quarter, We see that developing continue. There are some strong segments also in the industrial that is developing favorably and there are some other segments that are a little bit weaker. That comes, that gives us this guidance that we have on this general industrial stability. And then, you know, yes, we are as aware of the reality of the automotive industry around the world as you are. And the only thing maybe where I feel that some people may think that are a little bit surprised when we say that we actually see this flattening out of demand in the automotive in China and where we actually can see maybe some light in the tunnel there. And I would only say in the if you look at China and you understand that the down turn has been going on for quite a while, but maybe then it's not so strange, actually. If I can just ask a follow-up just on some of the cost savings, which you've mentioned kind of flagged in the Q3. And apologies if this was discussed before, but In terms of what actually these cost savings are, I mean, is this it's sort of direct reflection of what you're seeing in auto markets? Or is this just the more general sort of structural improvement of the business? It's definitely more the latter. It's a general, general initiatives across the whole business. Rather than specific to automotive. It's also automotive, but it's across the business. And can we expect to see sort of similar benefits in future quarters? And it sounds like there's still quite a lot that you guys are targeting in terms of opportunity. Well, again, I mean, we don't want to speculate on kind of, kind of falling to the future, but exactly as you say. I mean, we've had, initiatives ongoing. I mean, the footprint related to factories is only one area, but that's pretty clear. And we'll, of course, continue with these initiatives. There's no kind of end date to them. And I think that what pleases me is to see, we've been preparing for this. You know, that we've been sort of saying that we have to prepare and we've been doing that for a while and we're ready with activities and we're doing them. That's perfect. Thank you. Your next question comes from the line of Andre Kootenin. Please ask your question. Good morning. Thanks so much for taking my questions. I'm sorry, but I'll have to come back to the bridge. And, can I just build on what was said before? And, run through what I see as the kind of cost development guidance for Q3. So if we look at just that particular item excluding the organic sales and manufacturing volumes impact. So I've got minus 100 for raw materials I've got minus 2.25 normal inflation minus 70 for Delta Restructuring. -1.75 1 off reversal and plus 100 cost improvement. Do I get this right? And am I missing anything in that line in terms of the guidance you've given? Hi, Andreas, it's Patrick. I think you misunderstood a little bit on the restructuring. There's no delta on that. We expect to be on the similar level in Q3, this year as we were last year. So in the bridge, there's no restructuring delta. Right. So 0 on the bridge and it's a seventy two level is the same. Okay. So we sum up to minus 400. Great. Thank you very much for this. Can I just also ask on price mix? You clearly indicated that you have been successful in raising prices and it was positive in Q2. The guidance for Q3 for that to be positive, can you calibrate it at all compared to Q2, do you expect it to be as positive, more positive, less positive in Q3? Yes. As we've said, it's been mostly price and very little mix in this quarter. And we see probably that's the way it's going to continue. So similar. Thank you. And lastly, just much broader question on the Circular Economy and selling kind of bearings per rotation. Just wanted to come back to that. If you could could you give us more detail on kind of where are we in terms of level of sales from this new business model? How significant is this, for a SKF now? And How does that actually impact the economics for you? I mean, is this a higher margin business? What is it growing out? So, there are 2 effects of this. One is, I can tell you right now, as we've said, the, apart from Latin America, I this is not yet a very big portion of our sales. And what I mean by saying that where we have sort of fee based arrangements where everything is included, the bearings, the services and everything. And we take a sort of a fee based arrangement with our customers. That's still a relatively small part of our business today, but it's going to grow. It's going to grow. I mean, as I am completely convinced that this is going to be the general way we interact with our customers globally in a few years time. Just that it is a the much larger portion, as you can understand, in Latin America, where we've been doing this for a while. And it keeps us a possibility to both increase market share and profitability, both for us and also for our customers. And the key here, of course, you understand, there's so much way still to be eliminated. And when you have a fee based contract, the interest of the supplier and the customers are completely aligned. There's no conflict of interest. And this is why I'm so absolutely convinced that all of our customers, if there's any customer listening in, They would love to have a fee based arrangement with us because it makes it possible for us to together eliminate all the waste. The other thing that actually happens when we start approaching the customer with these fantastic value propositions that even if in the beginning, we don't act actually managed to have a fee based arrangement from day 1, the customer sees us as a completely different kind of supplier. We've become sort of straight into the strategic development, how they're going to run their factories in the future, how they're going to improve their efficiency and how they're going to lower their environmental impact. And I suggest there's a video on YouTube about River Steel. And SKF. And if you want to see sort of the perception of a customer that we've just signed up on this kind of agreement, it's not a bad thing to have a look on that, YouTube, River Steel And SKF. I'll definitely look it up. Thank you. Can I just follow-up on this on in LatAm, can you give any idea on how big it is in LatAm? And is that contributed to the faster growth that you've seen there? Yes. Well, the short term growth that we see in Latin America is, of course, basically based on how we're working with our customers, where this is already sort of a main way of working our customer on the industrial side, but also because we're coming in with a lot of new interesting localizations of production for the automotive space. So as you see in Latin America, we're actually growing from an automotive perspective. And there's a lot of really interesting initiatives that that has enabled us to grow also our automotive business in Latin America. Got it. Thank you very much for your time. Your next question comes from the line of Alexander Virgo. Please ask your question. Thanks very much. Good morning, everyone. I just had a sort of a slight pedantic question, I suppose. If I compare the word for the demand outlook for Q3 from the report to the presentation and what you said, Alrik, you described, North America in the report and then what you said is slightly lower. And in the presentation, it says lower. I'm just wondering, A, can you just clarify which one it is, and whether that reflects a judgment call on exactly how weak the region is? It should be slightly lower. Slightly lower. Okay. So it's not a reflection that we're kind of on the border and it's a bit difficult to call and visibility is low. It's just a, it's just a, I guess, just a question. I haven't seen this. I apologize for this. Is true. I didn't see this. But you hear what we're saying. This is how you see it. So I apologize for that. Okay, that's great. Thank you. I hope no harm done. I just wanted to clarify that all. Just on, as a follow-up, I'm slightly surprised at how weak VSM is, in auto. Are you not surprised to see a little bit more resilience in that part of the market? Maybe can you talk a little bit about the regional development in terms of guidance as well? Be helpful. Yes. I mean, there is there are two things you that you have to see in this respect. And one of the areas we're actually doing a good development is in China, for instance, where we see this developing better. If you look at the amount of cars that, you know, DSM really comes kicked in after about 7 years. So when you limit, when you look at where you think the VSM is going to go as a market trend, you have to sort of extriculate what were the cars that were sort of sold into the market, let's say, from 7 to 15 years ago. And that's how you're going to see the market develop. And And if you see it all around, 7 to 12 years ago, it was not a great, so of amount of cars entering the market. And that's of course having a dampening effect. On the other hand, we're doing, I think we're doing a lot of good things to improve our channels to market and so forth. And we have a lot of of activities to mitigate this. So my midterm prediction is that we will improve in VSM. Got you. Okay. So it's not it's more of a phasing thing or a temporary thing. It's not something that we need to be well, no. Well, there's also dynamics in the marketplace, more, OES channels, you know, more the car manufacturers taking over some spare parts dealing. There's a more channels coming up. There's a change in the DSM dynamics coming with new technologies as well, the new channels to market But I argue that we're going to be part of that as well. This is what I'm talking about. Okay, thank you. And then just a quick follow-up on it We've heard a number of companies commenting about, a sort of extension in terms of customer decision making processes. Customer behavior around conversion from inquiry to orders. I appreciate that's probably more of an industrial thing than an auto thing, but maybe talk a little bit about what your customers are actually saying and how they're behaving, would be really helpful. Yes. Well, from our point of view, it's we have, with many of the, if you're talking about OEM customers, we have an understanding and a business where we have very good service levels. So it's more of actually seeing sales development. And as we have guided you on both what happened during the quarter and what we believe is going to happen in the next quarter. That's actually how we see behavior as well. Okay, that's helpful. Thanks, Howard. The next question comes from the line of Ben Aglow. Please ask your question. Good morning and thank you for taking the question. I had a couple. First one, Howard, you sounded cautiously optimistic about the China auto outlook. And just from a kind of 10,000 foot view, don't some of the same rules apply in Europe and North America in the sense that, you're going to begin to face easy comparables. Do you see any signs or are you as optimistic about Europe and North America in auto as you are in China? That was my first question. Well, I, my, my, the logic I'm trying to sort of portray on China is the fact that the downturn you recall, came much earlier in China, been going on for quite a while. And when something is has been going on, for quite a while. And you understand that both governments and other forces are trying to to mitigate these activities. And you see this confidence with the fact that everybody now knows what emission rules are going to prevail in the foreseeable future, there's a logic to actually believing that that could be actually truly a change. And I think that is more what I'm alluding to in other markets like in Europe, as well as the downturn has not been going on for as long and there's still not the same clarity in what's going to be the rules going forward. And that may actually And then that's what you see in our guidance as well, the way we look at it. Understood. Thank you. And second question, and I don't I hope I'm not reading too much into it, but in the press release, in Asia Pacific, I think Claus tried to pull this point out earlier. You do seem to make a distinction between what's happening in China in electrical and industrial distribution and what's happening elsewhere. Are you due do you see any signs or do you believe that any of the of the trend you saw in the quarter in China is due to a pre buy effect or an inventory effect in the distribution channel. Is that something that you've seen or am I reading too much into it? No, no, no, that's not what we see. No. There's no industrial dynamics in this thinking from our side. But you have to understand, if you look at the markets as such, there are some south Asian markets that are very heavy into mining and heavy industry and these segments, while the big, electrical motor producers and small gearbox producers and compressor producers etcetera, they are in China. Understood. Thank you. And final question for Nicholas is we're now guiding to about 1,000,000,000 of investments in CapEx, which is around 3% of sales. My question is, is this a one off in 2019, or should we expect CapEx to continue to be at this type of level? Do we think that 2019 is an unusual year or is this going to be the sort of cost of doing business going forward? I don't it's not an unusual year, whether the exact amount is 2.8 or plus minus something. It's just been a different thing. But I mean, we have a major initiative modernizing upgrading, we call it world class manufacturing here, which is a multiyear kind of program. So in that sense, do expect some of that to continue going forward. But I resent ircomitant saying cost of doing business. I can tell you all of these investments, all of these investments are have high returns. So as a shareholder, I would be happy to see SKF doing investing in the operations with high returns. So it's not about cost of doing business. It's actually something that will improve our competitiveness over time. Yes. I mean, that's the whole point. I mean, it affects our cost competitiveness. It affects the kind of product competitiveness and so on and so on. And is it fair for me to say that the restructuring costs, 1 over 1% of sales as well, that that is again, that's just a one off that's not, and I don't want anybody to resent anything, but that's not a cost of doing business. Well, what happens is when you take individual actions, so there are 2 kinds of, of, of, invest you understand. One is when you're taking a existing factory and you're upgrading it, etcetera, then it's a straightforward investment like we are doing in the case of body where we took part of the production that was in Charlie in Italy and we upgrade the part that we keep for Europe and we take out a part of it and restructure that part and and moves it also with good returns. Please understand with very good returns and puts them in China. Well, when we do these kinds of things, you will get a small or one offs when those activities happen, but they are also with a good return, they're also with a fantastic return. The last question comes from the line of Lars Branson. Please ask your question. Thanks. Hi. This is the last question, Lars. Thank you. Thank you. Understood. I'll keep it short and sweet, thanks. Hi, Ulrich, Nicholas. Patrick. Hi, hi. Hi. Hey, a quick one on Automotive in North America, Ulrich. I'm struggling a little bit with the performance, particularly for the car and light vehicle segment down significantly now for the 2nd consecutive quarter. So call it down high single or low double in a market where car production levels are down, call it low single. Could you explain to me why that is? Well, I think that if you look at the kind of models that are really holding up in the U. S, as I think I've been saying, we 4, maybe those are not really the ones where SKF has been in the past, or more leggate at all. And this is the kind of mix maybe that is a little bit in our display at this point. We're working good. We have good business coming in We have really good contracts coming in and really good developments coming in for the future. So just as you remember, years ago where we had a situation where we had been not been homeligated on a few platforms. We were back on those platforms. We So all the good development, what we see a little bit now is maybe our strongest platforms are not maybe not where where the American market is performing the best at this moment. Clear. Can I clarify just the raw material guidance for Q3, the negative 100, is that net of the savings in the quarter? And I'm struggling a little bit with a negative 100,000,000. We've seen obviously a rebound scrap in July, but still down materially year over year. Could you help me understand what you're baking in from a raw material standpoint and what's being baked in from a tariff headwind standpoint to the extent there is any? Carlos, Patrick, on the negative guidance, on raw materials, it's not primarily price. It's primarily driven by our consumption we have some of the industries and some of the products that we expect to perform best, consume a relatively higher proportion of raw material than others. So it's mainly a manufacturing mix issue than an actual price. Some and tariffs, of course, to some extent, but yes. With that, I, we are done with the Q And A session. We have overstate our hour by a couple of minutes, and I leave the word back to Alrik. Well, thank you very much for listening in. And, and I hope to have you all back in 1 quarter. And again, thank you for your very enlight questions on this, as I see it, yet another strong quarter from SKF. Thank you very much. Thank you. That concludes the conference for today. Thank you for participating and you may all disconnect.