Ladies and gentlemen, thank you for standing by, and welcome to the SKF Q1 Report 2019. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you'd like to ask a question over the phone at this stage, please press star then one on your telephone keypad. I must advise you this call is being recorded today, Thursday the 21st of April 2019. I would now hand the conference over to your first speaker today, Patrik Stenberg. Please go ahead.
Thank you, good morning to all of you, welcome to the SKF Q1 conference call. As usual, we will spend about 50 to 60 minutes on this call. We will start with a presentation by our CEO, Alrik Danielson, followed by our CFO, Christian Johansson. Just for your information, we also have two other people present in the room here. We have Carina, heading up our accounting and financial department, and Theo Kjellberg, heading up our media department, apart from myself. With that, I hand over to our CEO, Alrik, please.
Thank you very much, thank you for listening in on today's conference call. The first quarter was a strong quarter with solid margins and a strong cash flow. Despite the moderation in growth that we have seen during the quarter, we delivered a good operating profit of almost SEK 2.7 billion, which in fact is a record amount for the first quarter in SKF. Positive pricing and efforts to reduce our underlying cost base continue to show results. Our operating margin was 12.5%. This despite higher raw material costs in the quarter. Cash flow was SEK 684 million, a significant year-on-year improvement, but still a focus for us to continue to improve during 2019. We turn to the next page. I will talk a little bit about the industrial business. Our industrial business continued its strong performance in Q1.
We saw increased sales volumes in our three largest regions, Europe, North America, and Asia. Organic sales grew with 3%, operating margin reached 15.4% in the quarter. We turn to the next page. A few comments around the automotive. The automotive business remained resilient in the sense that despite the fact that the organic sales declined by almost 6% due to foremost lower car sales in Europe, Asia, North America, we reached an operating margin of 5.5% in the quarter. We turn to the next page and talk about our targets a little bit. Last year was a very strong year, as you know, for SKF. We had record sales, record operating profit, a record cash flow. I am pleased to say that 2019 has come off to a good start.
We're seeing a moderation in growth rates, but we are delivering a solid performance in Q1, as I mentioned, with 12.5% operating margin and good return on capital employed. The net debt ratio increased somewhat to 57% due to the implementation of the IFRS 16 rules on leasing, but it's still well below the target of 80%. I am convinced that we will continue to improve this figure going forward. We are making progress in reducing our net working capital. At the end of the first quarter, we were at 30%, which is an improvement compared to last year, but still above the target of 25%. As I mentioned, there's still more work to do, but the plans are in place, and during the forthcoming year or years, we will, I'm absolutely convinced, reach this target.
If we just switch to next page and talk a little about the regions. We saw stable revenues and high level in the first quarter, and Europe grew by 1%. We saw good industrial demand with high volumes in most industries. If we talked about the automotive, volumes were lower, of course, in Q1 compared to last year, with relatively unchanged sales in Europe for trucks, and significantly lower sales to light vehicles, and slightly lower sales to the vehicle service market. Organic sales were overall flat in Asia, with the industrial sales slightly higher demand, and automotive volumes were lower than last year, with significantly lower volumes for cars, lower volumes for trucks, and significantly higher volumes for the vehicle aftermarket, which is, of course, a positive. In North America, sales were relatively unchanged compared to last year. We saw higher sales in the industrial segments.
Sales to aerospace, energy, agriculture, food and beverage, and railways were all significantly higher. Sales to industrial drives, heavy industries, and off-highway were higher, while sales to industrial distribution were slightly higher. Automotive, on the other hand, was significantly lower, with higher volumes to trucks and significantly lower volumes to car and aftermarkets. In Latin America, sales grew organically by 2% compared to last year, and we saw slightly higher volumes with industrial and higher volumes to the automotive segments. If we turn to the next page. Well, let's talk about some of the highlights. I have two highlights to mention in this conference call. One is that we have inaugurated a new tapered roller bearing factory in Changshan in China, previously operating across three sites in China. Now we have consolidated into one modern and efficient site. You see the picture here on the screen.
This new Changshan factory employs approximately 600 people. This is an important step for SKF. We're able to bring our three brands, SKF, PEER and GBC together, combine R&D and manufacturing competencies, and strengthen our position with the industrial drives and automotive segments in China. If we turn to the next page, the top page, and talk a little bit about the industrial side. We, together with Siemens, during the Hanover Fair, we launched SKF and Siemens cooperation in the MindSphere. As you know, the MindSphere is a comprehensive IT platform for managing your industrial assets. SKF and Siemens are working together. So if you are using MindSphere, you can automatically connect the SKF condition monitoring equipment into your facility and get the benefits from both the foresight and the insights that SKF can give you about the conditions of your machine.
Of course, this is an important step of making the condition monitoring accessible to a wide range of customers. Of course, we will continue this kind of development and promoting the condition monitoring throughout the world. With those words, I actually finish my part, and I give the word to you, Christian.
Thank you, Alrik, and good morning to all of you. The picture on this slide shows the remanufacturing services that we have started up in Colombia this quarter. It's really nice that SKF, with this, are contributing to the circular economy. Then we have turned then to this page, I will go through the economy of the quarter, starting then with sales. Net sales increased by 3.5% in the first quarter. Organic sales grew by 0.3%. Industrial grew organically by 3%, with, as you heard from Alrik, growth in all the three main regions and a growth in most of our industrial customer industries there. Automotive, we saw a drop in organic sales by almost 6% in the quarter due to lower volumes in Asia, Europe, and North America, mainly in light vehicles, but also in vehicle aftermarket.
Currency effect on sales was positive in the quarter by 5.7%. Largest effects, as usual, coming from the US dollar, the euro, and the Chinese renminbi. Structure component was negative 2.5%, related to the divestment of linear actuation last year. If we turn page. Operating profit by quarter have shown a positive trend during the periods that are covered on this slide, this also in the first quarter of 2019. Operating profit SEK 2.658 billion, which is then higher than the first quarter of last year, thereby also is our best first quarter result for SKF in history. If we turn to next page, I will take you through the Turn to the next page, please. Thank you. Taking you through the operating profit bridge for the quarter.
Firstly, we had a negative effect then from the divested companies, mainly the linear actuation business of SEK 49 million. The currency impact was positive SEK 220 compared to last year. Operational performance decreased by SEK 138 million year-over-year. Organic sales and manufacturing volumes increased by SEK 216, including positive effects from price mix as well as negative effects from lower sales volume. Also negatively affected by lower production volumes versus last year and the year-over-year effect from change of finished goods in inventories was SEK 60 million negative in the quarter. Price mix impacted positively both pricing and from mix. Cost development. Costs were SEK 364 million higher than last year, this is more than SEK 200 million better than what we discussed at the last conference call. We are very pleased with our cost management in the quarter.
We see good cost flexibility, less project expenses than what we discussed at that time. We see more cost reduction effects than we forecasted. We also, on the material cost side, see somewhat larger negative effects than what we guided for. Some comments to the second quarter guidance then to the bridge. M&A side, lost results from divested companies, about SEK 50 million. Price mix, continued positive effects we expect from price mix also in second quarter. The stock side, we expect to see a slight reduction of finished goods inventories in the second quarter versus where we ended the first, which then will give a negative year-over-year effect in the bridge of about SEK 20 million.
On cost development, we foresee in total about SEK 400 million higher cost than last year, consisting of cost inflation about SEK 225 million, material costs around SEK 150 million negative. We also see somewhat higher restructuring costs versus last year to about SEK 30 million. If you turn to next page. Performance by customer group. Industrial, organic net sales increased by 3%, increased in all our three main markets. Operating margin was 15.4% compared to 15% last year. Increased sales and also price mix positive. We had then, as we have said, higher material costs and lower production volumes that impacted negatively in the quarter. Automotive, negative organic sales development by 6%, primarily related to car sales, and weak across all the three main regions. Operating margin, despite of that, 5.5% compared to 7.7% last year. Obviously negative effects from lower volume and increased material costs offset by pricing.
If you turn to next page. The income statement for the group, as we've said, the best quarter one result to date. The moving 12 months margin trend is now at 12.8%. Gross margin unchanged versus last year, 25.5%. Selling and admin expenses as a percentage of sales was also stable, 13.2 versus 13.1 last year. Financial net term, SEK 216 million. This then includes the accounting for leases effects of IFRS 16 with about SEK 30 million negative. Taxes in the quarter, SEK 661 million, giving an effective tax rate of 27.1%. Earnings per share SEK 3.77, which is exactly the same as last year. On a 12-month trend then we are at SEK 16 versus SEK 12.7 last year.
If we move to cash flow on the next page. If we have that excluding then the impacts from M&A, we were at SEK 820 million in the quarter compared to SEK 254 million last year. The improvement mainly related to then lower net working capital, lower taxes paid, and also that we have implemented then the IFRS 16 accounting. We should also highlight then that we continue to invest in property, plant, and equipment on a higher pace than in previous years. If you take the cash flow excluding M&A impact for the last 12 months, this has increased then from SEK 4.3 billion last year same period, to SEK 6.5 billion after the first quarter. SEK 2.2 billion increase, and that then includes an increase of CapEx of some SEK 460 million. We have, I would say, certainly a strong cash flow performance. Next page, please.
Net working capital 30% of sales by end of the quarter, 1.7 percentage points lower than in the first quarter last year. This was positively impacted by lower stock levels as well as the divestments, and negatively by the exchange rate development. If you turn to next page, the equity ratio was 57% by end of the quarter. The main reason for the increase is the implementation of IFRS 16, where we have SEK 3 billion assets at that position now. The net debt equity ratio excluding lease then was unchanged. We also had increases in provisions for post-employment benefits in the quarter, and the net debt excluding pensions, that was further reduced. That was down to 12% by end of the quarter. If we turn to the next page, we have the guidance for the year.
For the second quarter, we expect a financial net of around SEK 240 million negative, including then the IFRS 16 effect. Exchange rates, currency impact on operating profit, SEK 110 million positive compared to second quarter last year based on the end of March rates. Based on the rates from April 23rd, it's positive SEK 160 million. Tax rate guidance unchanged to 28%, and the additions to property, plant and equipment also unchanged, SEK 2.8 billion for the year. With that, back to you, Alrik.
Thank you, Christian. Well, just to summarize, if we take the last page here. The first quarter was a strong quarter with solid margins and strong cash flow. Demand in the first quarter developed in line with our expectations, and organic sales were relatively unchanged compared to last year for the group. We continue to see positive pricing, and our efforts to reduce our cost base are showing results. I'm pleased to see that the operating profit at almost SEK 2.7 billion is the best Q result for SKF so far to date. Our operating margin was 12.5%. This despite higher raw materials costs in the quarter. Cash flow was SEK 684 million, a significant year-on-year improvement, but still a focus for us to continue to improve.
Entering the second quarter, we expect to see slightly lower volumes compared to last year, including relatively unchanged demand for industrial and lower demand for automotive. With those words, I thank you, and I leave it back to you, Patrik.
Thank you, Alrik. Now we are ready to take on your questions. As usual, it would be helpful for all of us if we could limit the number of questions so everyone gets their chance to post their questions. With that, I will hand it over to you, operator, please.
Thank you very much. Once again, as a reminder, to ask a question over the call today, please press star, then 1 on your telephone keypad. We ask you just to limit each of your questions to 2 questions. Star, then 1 to ask a question over the phone today. The first question we have comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead.
Yes. Good morning. Thanks very much for taking my questions. I will limit myself to 2. Could you tell us, please, what was the raw material headwind in Q1 2019?
Yes. We guided for SEK 108, we came out on SEK 230. I would say it's not the guidance when it comes to pricing and negotiation results, and so on was, I would say, fully accurate. What we have seen is somewhat negative consumption and mix effects, which is difficult to forecast. It's a mix of products and components that we produce, in which factories, and what volumes there. We had a deviation versus guidance when it comes to that.
Got it. Thank you. Secondly, could you tell us whether you have communicated further price increases to customers in distribution in Europe, U.S., or elsewhere year to date?
Yes. There is a communicated list change here in Europe. Otherwise, as I say always, this is a dynamic thing, and of course, there's a myriad of different customers all over and different countries with different lists. The major one is what's happening now in Europe.
If I may just follow up, is this of a similar magnitude to last year? Just trying to assess how pricing kind of develops 2019 versus 2018.
Yeah. I would say that it's similar, on the other hand, it's always dynamic. Pricing is depending on what segments will grow, what are the customers. What I would say is, SKF, I think we have proven that we manage our pricing well, and that there is a strong possibility for us to compensate for cost increases and get reasonably paid for our products. That continues.
Got it. Thank you.
Thank you very much. The next question today comes from the line of Gael de-Bray from Deutsche Bank. Please go ahead.
Good morning, everybody. Two questions, please. The first one is really a follow-up on the pricing side. Material costs have been pretty high now for a few quarters, and surely we should start seeing some lower pressure here in the next few quarters. I was wondering how this could impact you and your peers' pricing intentions, really. Don't you actually expect a greater reluctance from customers now on the pricing side, given that volumes are expected to be flat to slightly down and material cost should also be down? That's question number one. Question number two is on the cooperation with Siemens and the MindSphere platform. Could you elaborate a bit more about this one? What exactly MindSphere brings you that you did not have before? Who's basically going to be responsible for running the data analytics, and what's the monetization approach between you and Siemens?
This is Alrik. If we start with the first question, with a less buoyant overall demand for components, there will be, of course, an expectation also from our side that there will be a diminished price pressure from our supply base. That will, of course, in a way, translate to the same kind of behavior with our customers. That's nothing more than normal. Our intention, and the way I think we have proven that we have the ability, is to keep that difference between cost and price that gives us a reasonable margin. That dynamic, I see no change going forward. When it comes to MindSphere, it's a little bit like when we started with Customer Link in the beginning of the end of the '90s and beginning of the '90s.
If you remember, you could go into a customer, they had 20 different computers logging into different kind of suppliers. In the end, it came to be an internet-based integration with your system. That's how you deal with orders with a customer. This is going to be the same. I think that the Siemens MindSphere is an excellent platform for you to sort of hook on your factory, and you will have one comprehensive system under which you can manage your assets throughout the value chain, even in parts where SKF has no role to play. For us, this means that as soon as you have implemented MindSphere, there's no extra
hassle or cost or anything for you to actually immediately start working with SKF to improve your efficiency with our services and products that we can supply to you. For us together with Siemens, this means that the system becomes much more comprehensive also for Siemens. Immediately, anybody who goes with the MindSphere can automatically starts benefiting from the SKF reliability systems support. That's what I think is happening. It was interesting to go to the Hanover Fair this year to see how, in a few years, it's gone from a product kind of fair. Still, it is a product kind of fair, but where the buzz is, the buzz is where you see these different kind of joint initiatives for digitalization and to promote the new technologies quickly into the marketplace.
I foresee that you will see more of these kind of partnerships between different kinds of suppliers into the digital space, because that's the only way to sort of get a real good impact.
Okay. Thank you.
Thank you very much. The next question today comes from the line of Ben Uglow from Morgan Stanley. Please go ahead.
Good morning, and thank you for taking my questions. I had 2. Alrik, could you say a little bit about just the trends you're seeing in China at the moment? In the first quarter, obviously, industrial was quite good and automotive less good. Are there any signs as we move into 2Q, are there any early signs that stimulus efforts and government initiatives in China are beginning to take hold, and benefit your business? That's question number 1. Question number 2. I don't know how to pitch it sort of succinctly. Alrik, you've done this for a long time. When you look at the cycle as it stands today, we've had a couple of down years, a couple of up years. Is this just a growth pause?
Do you feel that it's just a very temporary growth pause, we kind of go back to business as usual? Do you see classic signs of a more significant down cycle? How are you viewing the current growth moderation?
Well, if you take the China question to start with. When we put the ears to the ground in China, we realize that there's a lot of discussion and there's a lot of things happening. You can also follow in the global press how there's several sort of activities in place in China. There will be, I am convinced in the short run, a lower activity, but that there is a clear understanding that the Chinese government will try to prop up the activity. Not least, a lot of focus to if there's an agreement between the U.S. and China, that will, of course, be positive both on sentiment and the way also the customers in China see their business going forward. You see how we guide and this is how we see it.
When you look at the business climate, it's interesting, even though when you looked at the uptake that started in 2016, it was really broad-based, it was really global. Right now, when you see the relatively weaker sales in automotive, for instance, but it's also been more or less global. Yes, there are some-
Yeah
some like Latin America and so forth. On the other hand, you see also certain sectors coming very strongly, certainly. There is a technology shift in many areas of the economy that are also sort of keeping a structural demand. Look at aerospace. The aerospace is very strong going forward, and we see that probably going on for several years because what you see there is actually a technology shifts into new engines, more efficient engines. What I see also is that there's a bigger interest than in long time for technology cooperation with end users and with OEM customers, where there's an understanding that the pace of upgrading your product portfolio, your gearboxes, your machines, is actually increasing. That's a positive sentiment if you understand. There's more interaction on the technical side than I've seen in a long time.
That is something that has a potential to, in the midterm, propel growth. That's more or less what I can say.
That's helpful. Thank you.
Thank you very much. The next question today comes from the line of Andreas Koski from Nordea. Please go ahead.
Thank you very much. Good morning, Alrik, Christian, and Patrik. I have two questions as well. I have three, but I will limit myself to two. I'm sorry if I missed this on the call, but on the balance sheet, the inventory seems to be up by SEK 1 billion quarter-on-quarter. How much did you build finished goods inventory during the quarter? Did you say what kind of impact the inventory change had on the EBIT bridge in the quarter?
Yes, I said that. We built quite significantly last year. We have built a little bit this year. You have the delta is that we have a negative effect in the P&L of some SEK 60 million.
Sorry about that. Then the second one is for you, Christian, as well. It's actually related to the annual report. When looking at the cost structure or you present, I think it's in note seven, expenses by nature. There you have other expenses line that increased by 29% in 2018 compared to 2017. Compared to sales, increased from 22% to 26%. Maybe you do not have the answer on hand, but I would like to understand why that cost line increased that much.
Yeah. We will provide you a written answer on that outside the meeting. No problem.
Okay. Could I do another second question then? That's actually on your volume growth. Would you say that your volume development in the first quarter was in line with your outlook of relatively unchanged amount?
Yes.
Yeah. Okay. Thank you very much.
Thank you very much. The next question today comes from the line of James Moore from Redburn. Please go ahead.
Good morning, everyone. Alrik, Christian. Hi. Can I follow up on Andreas's question just then on the demand? I think I heard you mention that volume was negative. Obviously, there's a range, -1, +1. I guess, is that what you're talking about at the negative end of the range for the development in the quarter? First question.
We have our guidance relatively unchanged, it's ±2. It is within that range. Since you said it's negative, you know the interval there, we don't give you more information.
Yeah, that's fair. Thanks. The second question, as many of the others I wanted to ask have been asked, I might switch to structural issues in the company, relates to your switch from transaction-based to fee-based model and your efforts to sell more sensors like the IMx-1 and the IMx-16 Plus. Could you update us? I know it's early days and these things will take time, could you update us with whatever KPIs you look at as to how that's developing in the marketplace?
Yeah. As you recall, we said to all of you that one of the measures that we will show you in the beginning now is, of course, how many assets do we have hooked up to SKF. I'm not going to update you exactly on the number today. We will do that together with Patrik. Of course, it's growing. You can imagine that it's growing. It's a very good development and this is the future. The future is to connect your assets and to be able to understand what's happening in them, and SKF is in a very good path on this. You know how with the new sensors, you mentioned the IMx-1, and we have the DataPly that we've launched now. It's become very easy, and it becomes relatively unexpensive. That makes it possible to be something that everybody can benefit from.
Yes, it's growing. We will update you regularly on this, but it's very positive.
The fee-based model?
Yeah, the fee-based. Yeah, it's growing all the time. I have no specific numbers on you, but you know my absolute conviction that this is the new way of doing business, not only in automotive, but in many areas. When you present this to a customer and they understand that there's a win-win in this, they all see this as a very interesting part. It's still in the beginning, yes. Yes, it's developing favorably.
Thank you very much.
Thank you very much. The next question today comes from the line of Graham Phillips from Jefferies. Please go ahead.
Yes, good morning. My two questions are firstly on industrial. You look at the second most important market after distribution, it's one called industrial drives. I wanted to focus on your downgrade, really, on the outlook. What actually is the end markets and impacts that are going on regionally in industrial drives? Exactly what are these? Because it had been one of the strongest end markets in industrial, it's now fallen off a cliff in terms of the little barometers that you give.
Oh, I don't think it's falling off the cliff. You are using very strong language. What happens here is when you look at industrial drives, it's one of those segments where you have everything from small gearboxes to different electrical motors and larger gearboxes and so forth, not the big ones for wind and so forth. Of course, this is a segment that is a little bit, this is what you see, the small things that are happening underneath, but also a segment that has industrial dynamics. Meaning, as now supplies come more in line with demands, well, many of these customers, they maybe had a little bit of extra stock during the end of the year, and now they are looking to compensate maybe. I don't see any of the kind of words that you are talking about. We see it as still a good market.
In terms of the actual, sort of, I don't know, customers or end markets. Clearly, it's different from the other end markets or customer industries that you have.
In any factory, in any operations, even in supermarkets, you have gearboxes, you have small electrical motors, you have all kinds of pulleys and things like that, these are the sort of the industrial drives segments. As an OEM, because this is, of course, mainly to the OEMs, this is the kind of myriad of customers that you have all over the world, then it's differentiated to a lot of underlying businesses.
Okay. In terms of the outlook downgrade, distribution also seems to have been downgraded in terms of the outlook. What would be the impact to margins of the division?
Well, as we see it, I think as you can hear from us, we still believe that we will be able to compensate. We are looking at costs. We are having good price mix, we will continue to do a good performance also next quarter. I don't see this in the similar way as you do.
Okay. Sorry, go on.
The guidance is relatively unchanged on industrial.
Yeah, I guess I'm looking at these little customer industries that you give on the second page of the fourth page.
Just remember also that the second quarter last year that we relate the guidance to was the clearly strongest sales quarter we've ever had in SKF.
Okay. I appreciate it. It's a tough comp, yeah. Just finally then, the second question is around net working capital. I know you've got this target of 25%, and obviously it's good to have something that's a reach to get to. How realistic is it, and what sort of volume assumptions do you make about the market, and what sort of KPIs, or not KPIs, but what sort of incentives to line managers have there been put in place in order to get there? Because it seems a little bit unrealistic that you've not been able to achieve it or get close to it.
No, we don't see it as unrealistic, but obviously it means that we need to work a little bit differently. We have described, I think you attended the Capital Market Day, we went through some of the initiatives, and we continue to implement these ones. If you take first quarter, it's also seasonally one where we usually build a bit on inventory levels, and so you have that. The overall assumption is more of a normal market. It's not related to some high volume or so. It should be under normal circumstances. You should also note that in the first quarter, the 30%, which is clearly better than last year, also have a negative FX effect by the exchange rates in the end of the quarter. I think we see good underlying development on net working capital there, and we will strive towards the 25.
It will take some time, but it's certainly realistic.
Okay, thank you.
Thank you very much. The next question today comes from the line of Andrew Wilson from J.P. Morgan. Please go ahead.
Hi. Good morning, guys. Two questions from me, please. On the MindSphere tie-up with Siemens and kind of the potential behind that, I'm just interested in terms of how you see SKF's position versus your competitors in terms of the level of connectivity and how you're moving forward with that as a first question, please.
I'm absolutely convinced that everybody is going to work in this direction. I like to think that we are, in our industry, in the absolute forefront, and we have been so for a while. I think it's unrealistic for all of us, if you understand the bearing people, gearbox people, whatever have you, the people making paper machines or steel rings , to have our own platforms and different platforms. There will be some platforms that in the end will be the ones that people use to monitor their entire factories, et cetera. I think that Siemens is going to be definitely one of them. There SKF is in there ready, and you as a customer, you can start benefiting from day one. I think this is the kind of dynamics that you see in this, and that's very positive.
Thanks. For my second question, just thinking about capital allocation, obviously the balance sheet, whether we look at it IFRS or pensions, either way, it's clearly in a lot stronger shape than it's been for some time. How should we think about the portfolio, or should we think about potential cash returns in time as you obviously continue to see good levels of cash generation?
Well, cash has always been a forte at SKF. I always argue, so interesting, bad times, good times, SKF is usually delivering excellent cash flows. From our operations, we are absolutely convinced that this will continue. The investments we do are, of course, to increase our competitiveness. We're doing investments, and we're using the capital in a wide way, which will improve our competitiveness and our growth potential. At the same time, of course, after a while, during a relatively a period where we have now strengthened our balance sheet, we have the resources, we're also looking at what can we do to improve our portfolio going forward and looking at acquisitions, and you saw a small one during this quarter, and we're now looking at that as well going forward. Cash flow will always be a good
could be good for SKF, and look how we have strengthened our balance sheet during the last few years, and giving us this kind of financial muscle to continue to defend our positions and improve our situation.
Thank you, Alrik.
Thank you very much. The next question today comes from the line of Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Alrik and Christian. It's Klas from Citi.
Hi.
Sorry, I was late on the call. Can you please repeat there, Christian, what you said on the cost line? SEK 400 million expected for the second quarter, I think. How is that other line moving within that IT and R&D, et cetera? You guided for that to be SEK 110 million this quarter, and that surprised positively again. How will that line develop as we go into the second quarter? It was positive now in the bridge, I think. Do you think, when you go into the second, how will that develop? Please, I'll start there.
Yeah. If you start then in the SEK 400 on the year-over-year, and the other cost part of that, it's eliminated.
Eliminated?
It's eliminated. We are quite proud of it. We know what we have to do. We have our investments, we have footprint work, we have things we are taking on to strengthen us for the future. We have IT, as you know, and we do this and proceed with these plans, and we still do it with much less cost impact than what we thought. What we have there is, we see more restructuring costs. The SEK 400 is lower cost inflation. We are seeing costs coming out. We have SEK 150 when it comes to material, which is improving. We see less negative effects on the material side. We should also remember that in the SEK 150, we do have some import tariffs also that we didn't have. It came in in the mid last year. In Q2 still, we have a year-over-year effect from import tariffs.
Material is improving and cost inflation improving, and then some restructuring. That's what we have.
Thank you. My second one is on North America. Again, sorry for being late on the call, maybe you talked about this, growth was lower than I thought. Guidance also a bit lower than I thought. We know trucks is weaker, it feels pretty widespread across automotive and also on the industrial side. If you could tell us a little bit more what happened in the quarter, obviously we're hearing that things are looking a little bit better at the start of the quarter as the trade issues with China seems to abate, any color here on North America would be very helpful.
What we see is, we've had a solid growth in the industrial business during the quarter, what has been a little bit dragging it down is like, for instance, we see in oil and gas, how our customers are burning inventory during the quarter. We see even some distributors, even though we don't have this, that they buy a lot in the end of the year. We see some distributors taking advantage of new tools to be able to sort of burn inventory. When we see their sales out of our distributors, it's still strong. There's some ag, in the agriculture business, we see some weaknesses and so forth, otherwise it's been a strong industrial sales also for us in the U.S.
It's a tough one.
On the automotive side, yes, it is. Cars down, trucks stable, that's what we've seen.
Thank you.
Thank you very much. The next question today comes from the line of Anders Roslund from Pareto Securities. Please go ahead.
Yes. Could you elaborate a little bit on those cost savings going forward, and also how you look upon the production level in the second quarter?
Yeah. On cost side, you've probably seen that in the reports that we have reduced headcount since quite a few quarters now, and we see effects from that coming through. We have also all the initiatives we have with footprint and investments and so on, which has a cost component in that. We are quite positive too that we will see good cost management also going forward. It all depends on how volumes goes and so on, but we are certainly on the ball, and I hope you can see that also as we do in the first quarter.
On the production level in the second quarter?
Yeah. Production level obviously year-over-year is down.
Yeah. You won't take out more inventories now, or you try to be in line with sales?
If you talk about service levels and where we are and so on, we feel we are quite balanced. We have an ambition, as I said in the bridge, that we see a slight reduction of the stock levels in the second quarter with a small negative impact on that. Of course we are trimming stocks for the product lines and the segments where we see weaker demand. I mean, obviously, we are working on that in automotive, and naturally with the volume developments that we've had there.
This time, Anders, what I think we've done is, you remember we've been focusing this all the way from actually second quarter last year. This time, it's not like we are coming into a situation where we are taken by surprise or anything, we're doing this in a good structured way. That's one of the benefits you see also in the way we're looking at how we're managing going only also in the past, during the quarter, but also going forward.
Okay, thanks.
Thank you very much. Once again, as a reminder, to ask a question today, please press star then one on your telephone keypad. We have a follow-up question here from the line of Graham Phillips from Jefferies. Please go ahead.
Thanks for taking the follow-up question. I wanted to focus on automotive. I know in the past you've given us some guidance about where new platform wins were going to lead to some outperformance against the market, particularly in sort of 2016, 2017, 2018. Can you talk about anything like that that may be coming in the coming quarters or years, to the extent that where the underlying level of auto production you should be able to outperform? Do you think you'll be in line with underlying automotive production?
Well, as you remember, we talked about there's been a while where I think we were underperforming in the car segment in the U.S., for instance. I think that we've shown lately, during the last year or so, that as I already said in 2015, that we were going to work on this and we were coming back, and that's the kind of cycles you see. I think that if you look at what's happening now in the automotive, both on innovation, both on electrical drivetrains, etcetera, I think SKF is absolutely well-poised to have a strong position going forward in the automotive in all regions in the future. I'm positive about this. Having said that, as you know, these are slower movements. Takes more time, before it's actually. This is not a thing about the next quarter or so.
No, I understand. Just on the aftermarket, again, the vehicle aftermarket has been a source of pressure, really in terms of bearing use, bearings lasting longer and so on. Is there anything here that you can point to where, again, the market may turn around? We just again, expect to sort of see continued sort of weakness in that end market for you?
We're working diligently to look at the right channels to market. Like all markets, they are developing, and we hope to work with it. As you saw, for instance, in the quarter, we had very positive development in China. We had less positive development in the U.S., etcetera. We will do our utmost to keep our turf, both on product assortment and on channels to market, to keep our turf in the automotive. Having said that, as you rightfully say, our bearings are really good, and they last a long time.
Yeah. Okay. Thank you very much.
Thank you very much. The next question today comes from the line of Erik Golrang from SEB. Please go ahead.
Thank you. I have one question. On the cost development, it appeared that it is also fourth and the first quarter you came out stronger than expected on the at least compared to what you guided in terms of cost. My question is, the guidance you now provide for the second quarter, is that something that is continuously updated or is that stemming from some bigger planning work you did earlier on last year? To what extent does the stronger development relate to headcount coming down now at a quite good pace given where volumes still are? Could you say anything on where headcount is expected to go from here? Thank you.
A lot of details, but if you take the guidance for the second quarter, obviously we work with, we are rolling forecast ourselves. You can say that is on the same level as year-over-year as what we have had in the first quarter. It is slightly higher there, which we relate so that we had some smaller one-offs in the first quarter we do not expect to repeat it. On the headcount target, we do not have to share with you, but you see the trends and how we are working on that. You can take a longer perspective on that also. You can see that on white collar, we have not moved up during the strong part of the cycle here. We have kept that, and we work diligently on that with productivity from that level as well.
You will see a positive cost development from SKF here going forward. That is clearly our ambition, and we are confident we will be able to show that.
Always when we try to look into the next quarter, of course, we're working with the latest kind of information we have in the company. Lately we've been, if you see the last year or so, we've been actually quite accurate with our forecasts for the coming quarter. I hope it will continue like that.
Thank you. Remind me, the key reasons for the better than expected outcome in the prior two quarters, what was that on the cost side?
No, we have had quite a lot of activities coming to IT, to footprint, factory moves, to investments where you have project costs and so on, which obviously comes on top of the normal business. We have been able to carry through those activities in a more cost-efficient way. That is one main item there. As I said, we start to see costs going out. Organizational costs coming out.
Okay. Thank you. Thank you very much. The last question we have today comes from the line of Alok Katre from Societe Generale. Please go ahead.
Hi. Thanks for taking my question. Just one really. On the autos side, clearly, the direct effect, you've kind of elaborated quite well. Just wondered whether you're starting to see some indirect effect of the slowdown in the autos, given how important this is for the general industrial side of things. I was just trying to go back and if you see the oil and gas softness in the U.S. in 2015, 2016, and how that spread a bit more wider than what people perhaps imagined initially. Just trying to understand if this is what we're seeing from the autos, that is slowed down across your customer base.
No. I wouldn't say that that's what we feel. My comment about oil and gas previously was just that we see some of our customers in the U.S. burning inventory. To be sure that they were getting the materials, they ordered a little bit more than they needed, and now they're burning a little bit of inventory. What we may see, of course, intuitively is, if there's a lower demand for cars, there will eventually be lower demand for steel. Maybe that's one of the first effects that could come. I don't say that I can see that today yet.
Okay, great. Thank you.
Thank you. With that, we thank for all your questions, and we will be readily available to answer more of them on phone. Thank you for participating in this conference call.
Thank you very much.
Thank you very much. That does conclude the conference call for today. Thank you for participating. You may all disconnect. Speakers, please stand by.