Earnings Call: Q1 2019

Apr 25, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the SKS Q1 Report 2019. At this time, all participants are in a listen only mode. Will be a presentation followed by I must advise you the call is being recorded today. Thursday, the 21st April, 2019. I would now like to turn the conference over to your first speaker today. Patrick Extenberg. Please go ahead. Thank you, and good morning to all of you, and 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, Albert Danielson followed by our CFO, Christian Johansson. And yes, for the information, we also have other people present in the room here. We have Karina, heading up our accounting and financial department and Theo Shelbury heading out our media department, apart from myself. With that, I hand over to our CEO, Alrich. Please. Thank you very much, and thank you for listening in on today's conference call. Well, the first quarter was a strong quarter with solid margins and a strong cash flow. Despite a moderate moderation in growth that we've seen during the quarter, we delivered a good operating profit of almost SEK 2,700,000,000 which in fact is a record amount for the 1st quarter in SKF. Positive pricing in efforts to reduce our underlying cost base continued to show results. Our operating margin was 12.5%. This despite higher raw material costs in the cash flow was EUR 684,000,000, 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'll talk a little bit about the industrial business. Our Industrial business continued its strong performance. In Q1, we saw increased sales volumes in our 3 largest regions, Europe, North America and Asia. Organic sales grew with 3% and operating margin reached 15.4% in the quarter. We turn to the next place, wet next page. A few comments around the automotive. Well, the automotive business remained resilience in the sense that in the despite the fact that the organic sales declined by almost 6% due to foremost lower cost sales in Europe, Asia and North America. We had operating reach an operating margin of 5.5 percent 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, Breast Care. We had record sales, record operating profit and record cash flow. And I'm 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 percent 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 leases. But it's still well below the target of 80%. And I am convinced that we will continue to improve this figure going forward. And we are making progress in reducing our networking 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%. So as we've mentioned, 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 absolutely convince these targets, which is switch to next Page, you're talking about the regions. We saw stable revenues and high level in the first quarter in Europe grew by 1%. We saw good industrial demand with higher volumes in most industries. And, 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 waivers were all significantly higher. Sales to industrial drives have heavy industries and off highway were higher. While sales to industrial distribution were slightly higher. Automotive, on the other hand, were 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 place, well, let's talk about some of the highlights of, of, and I have 2 highlights to mention in this conference call. One is that we have inaugurated a new taper roller bearing factory in Changshan, in China, previously operating across three sites in China, and now we have consolidated the 2 into 1 modern and efficient site. You see the picture here. On the on the screen. And this new Changshan factory employs approximately 600 people. This is an important step for SKF. We were able to bring our 3 brands SKF peer and GBC together, combine R and D and manufacturing competencies and strengthen our position with the industrial drives and automotive segments in China. If we turn to the next page and talk a little bit about the industrial side, we together with Siemens, during the Hanover Fair, we launched, SKF And Siemens Corporation in the MindSphere. As you know, the MindSphere is a comprehensive IT platform for managing your industrial assets. And, SKF And Siemens are working together. So if you are using MindSphere, you can automatically connect the SKF condition monitoring equipments into your facility and get the benefits from both the four sides and the insights that SKF can give you about the conditions of your machine. And of course, this is an important step of making the condition monitoring accessible to a wide range of customers And of course, we will continue this kind of development and promoting the condition monitoring throughout the world. And with those worlds, I actually finished my part and I give the word to you, Christian. You, Alex, and good morning to all of you. The picture on this slide then show the remel Backwind services that we have started up in Colombia this quarter, it's really nice that, as yet with this, are contributing to the circle economy. And then we have turned them to this page, and I will go through the economy of the quarter, starting them with sales. Net sales increased by 3.5% in the first quarter. Organic sales grew by 0.3%. Industrial grew organically by 3, as you heard from Malorie grows in all the 3 main regions. And the 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 nickel aftermarket. Current effect on sales was positive in the quarter by 5.7%. Largest effects as you should come in from the U. S. Dollar, euro and the Chinese renminbi. Structure component was negative 2.5% related to the divestment of linear activation last year. And if you turn page, operating profit by quarter has shown a positive trend during the periods that are covered on this slide, and this was in the first quarter of 2019, operating profit 2.658 1,000,000,000, which is then higher than the first quarter of last year and thereby also is our best first quarter result for SKF in history. So if we turn to next page, I will take you through the return to 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 is mainly the linear recreation business of SEK 49,000,000. The currency impact was positive SEK 120,000,000 compared to last year Operational performance decreased by $138,000,000 year over year. Organic sales and manufacturing volumes increased by 2 16, including positive effects from pricemix 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 inventories. Was SEK 60,000,000 negative in the quarter. Price mix impacted positively. Both pricing and from mix. Cost development costs were SEK 364,000,000 higher than last year. And this is more than 200,000,000 better than what we discussed at the last conference call. So we are very pleased with our cost management in the quarter. We see good cost flexibility, less product expenses than what we discussed at that time, and we see more cost reduction effects than we forecasted. While we are also on the material cost side, we see somewhat larger negative effects than what we guided for. Some comments to the 2nd quarter guidance then to the bridge. M and A side, lost results from that as the company is about $50,000,000, pricemix continued positive effects. We expect from pricemix also in 2nd quarter. The stock side, we expect to see a slight reduction of finished goods inventories in the 2nd quarter were very low end in the first, which then will give a negative year over year effect in the bridge of about EUR 20,000,000. On cost development, we foresee in total about SEK 400,000,000, higher costs than last year, consisting of cost inflation about 2.25 material costs around 150 negative we also see somewhat higher restructuring costs versus last year to about SEK 30,000,000. 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 days and also price mix positive. And while we have done, as we have said, and higher fuel cost and lower production volumes that impacted negatively in the quarter. Automotive and 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, and obviously negative effects from lower volume and increased material costs offset by pricing. So if you turn to next page, The income statement for the group, as we've said, the best quarter 1 results to date The moving 12 months margin trend is now at 12.8%. Gross margin unchanged versus last year, 25.5, and selling and admin expenses as a percentage of sales was also stable. $13,200,000 versus $13,100,000 last year. Financial net, 216,000,000, and this includes the accounting for leases effects on IFRS 16 with about 1,000,000 negative. Taxes in the quarter, 661,000,000, giving an effective tax rate of 27.1 percent. Earnings per share SEK3.77 per share, which is exactly the same as last year and on a 12 month trend and we remain at we are at SEK16 versus SEK12.7 last year. If we move to cash flow on the next page, and if you have that, excluding then, the impacts from M and A, we were at the $820,000,000 in the quarter compared to $254,000,000 last year. And the improvement mainly related to the lower in capital, lower taxes paid, and also that we had implemented on 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 and A impact for the last 12 months, this has increased from SEK 4,300,000,000 last year's NGL to 6,500,000,000 after the 1st quarters of 2,200,000,000 increase And that then includes an increase of CapEx of some SEK 460,000,000. So we have, I would say, certainly a strong cash flow performance Next page, please. Net working capital for the December sales by endofthequarter 1.7 percentage points lower than in the first quarter last year. And this was positively impacted by lower stock levels as well as the divestments and negatively about the exchange rate development. Turn to next page. That equity ratio was 57% by endofthequarter. And the main reason for the increase is the implementation of IFRS 16, where we have a 3,000,000,000 assets, that position now. And 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. It was down to 12% by end of the quarter. If you turn to the next page, we have the guidance for for the year. And for the second quarter, we expect the financial net of around CHF 240,000,000 negative including then the IFRS 16 effect exchange rates, currency impacts on operating profits, 110,000,000 positive compared to 2nd quarter last year based on the end of March rates. And based on the rates from April 23rd, it's positive CHF 160,000,000. Tax rate guidance unchanged to 28% and the additions to property and equipment, also unchanged $2,800,000,000 for the year. So with that, back to you, Alex. Thank you, Christian. Well, just 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 expectation and organic sales were relatively unchanged compared to last year for the group. We continue to see positive pricing in our efforts to reduce our cost base, our shown results, I'm pleased to see that the operating profit at almost SEK 2,700,000,000 is the best Q result for SKF. So far today, Our operating margin was 12 point in the quarter. Cash flow was $684,000,000, 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 relative the unchanged demand for industrial and lower demand for oil moments. With those words, I thank you, and I leave it back to you, Patrick. Thank you, Alrik. And now we are ready to take on your questions. And 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, hand it over to you. We ask you just to limit each of your questions, just two questions. 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'll limit myself to 2. Could you tell us please what was the raw material headwind in Q1 2019? Yes. It was we guided for $108,000,000 and we came out of $230,000,000, And I would say it's not the guidance when it comes to pricing And, negotiation results and so on was, I would say, accurate, fully accurate. What we have seen is somewhat negative consumption and mix effect. Which is difficult to forecast. It's a mix of products and components that we produce and in which factories and what volumes there. So we had a we had a deviation versus guidance when it comes to that. Got it. Thank you. And 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. We, there is a, a communicated list change here in Europe that And otherwise, this is, as we, as I say, always, this is a dynamic thing. And of course, there's myriad of different customers all over and different countries with different lists. But the major one is what's happening now in in Europe. And if I may just follow-up, I mean, is this sort of a similar magnitude to last year or just trying to assess how pricing kind of develops 2019 versus 2018? Yes. Well, I would say that it's similar, but on the other hand, it's always dynamic. It's very pricing is depending on what segments will grow, what are customers, it's always what I would say is SKF, I think we have proven that we, manage our pricing well. That there is a strong possibility for us to compensate for cost increases and get paid reasonably paid for our products. And that continues. Thank you very much. The next question today comes from the line of Gail De Bray from Deutsche Bank. Please go ahead. Good morning, everybody. So two questions please. The first one is really a follow-up on the pricing side. I mean, material costs have been pretty high now for a few quarters. And surely, we should start seeing some lower pressure here the next few quarters. So I was wondering how this could impact you and your peers' pricing intentions really mean, 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. So that's question number 1. Question number 2 is on the cooperation with Siemens and the MindSphere platform. Could you elaborate a bit more about this one? I mean, what exactly MindSphere brings you that you did not have before. Was it basically going to be responsible for running the data analytics and what's the the monetization approach, between you and Siemens. Well, if you start with the first, this is Alrik, if you 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 sort of price pressure from our supply base. And that will, of course, in a way, translate to the same kind of behavior with our customer that's nothing more than normal. And 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. And that dynamics, I see no change going forward. When it comes to, MindSphere, there's going to be 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 and they had 20 different computers logging into different kinds of suppliers. And in the end, it came to be an internet based integration with your system. And that's how you deal with orders with the 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 sort of manage your assets throughout the value chain, even in parts where SKF has no no road 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. And 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 start benefiting from the SKF reliability systems support. And 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's a product kind of fair, but where the buzz is, the buzz is where you see this different kind of joint initiatives for digitalization and to promote the new technology quickly into the marketplace. And I foresee that you will see more of these kind of, of partnerships between different kinds of suppliers in the digital space, because that's the only way to sort of get a real good impact. Okay, thank you. The next question today comes from the line of Ben Aglou from Morgan Stanley. Please go ahead. Good morning and thank you for taking my questions. I had to. Or 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. So that's question number 1. Question number 2, I don't know how to pitch it sort of succinctly, but Or 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? And we kind of go back to business as usual, or do you see classic signs of a more significant down cycle? How are you viewing the current growth moderation? Well, when you take the China question to start with, we when we put the ears to the ground China, we realized that there's a lot of discussion and there's a lot of things happening. And you could also follow in the global press how there's a, 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, to, to prop up the activity. And not least, a lot of focus to, if there's a agreement between the U. S. And China, that will of course, be positive both on sentiments and the way also the customers in China see their business going forward. But you know, you see how we guide and this is how we see it. And 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 print with it's also been more or less global. Yes, there's some, some Latin America and so forth. But on the other hand, on the you see also certain sectors coming very strongly, certainly. And there is a technology shift in the in many areas of the economy that are also sort of keeping a structural demand. Look at aerospace. The aerospace is is very, 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. And 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. And that's a positive sentiment, if you understand. There's more interaction on the technical side than I've seen in the long haul time. And that is something that has a potential to, in the midterm, propel growth. But that's more or less what I can say. That's helpful. Thank you. The next question today comes from the line of Andreas Koski from Nordea. And good morning, Aldrich, Christian and Patrick. I have two questions as well, or I have 3, but I will leave it myself to 2. I'm sorry if I missed this on the call, but On the balance sheet, the inventory seems to be up by SEK 1,000,000,000 quarter on quarter. So how much Did you build finished goods inventory during the quarter? Or did you say what kind of impact the inventory change had on the EBIT bridge in the quarter? Yes. I said that within quite significantly last year, and we have been a little bit this year. So you have a the delta is that we have a negative effect in the in the P and L of some SEK 60,000,000. Sorry about that. And then the second one is for you Christian as well. And it's actually related to the annual report When looking at the cost structure or you present, I think it in Note 7 expenses by nature, there you have other expenses line that increased by 29% in 2018 compared to 2017? And 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 Yes, we will provide you a written answer on that, outside the meeting. Could I do another second question then? And 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? Yes. Thank you very much. The next question today comes from the line of James Moore from Redburn. Yes, good morning, everyone, Howard, Christian. Hi, I wanted to, can I follow-up on Andres' question just then on the demand? Because I think I heard you mentioned that volume was negative, obviously there's a range minus 1+1. I guess is that what you're talking about at the negative end of the the range for the development in the quarter? First question. I mean, we have our guidance relatively unchanged is plus minus 2. So it is within that range. So, and since we've said it's negative, you know, the interval there, but we don't give you more. Yes, that's fine. Thanks. And the second question, as many of the others I wanted to ask, I have been asked, I might 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 I MX-one and the I MX-sixteen plus. Could you update us? I know it's early days and these things will take time, but could you update us with whatever KPIs you look at as to how that's developing in the marketplace? Yes. As you recall, we said to you during the, to all of you that one of the measures that we will show you in the beginning now is, of course, how many of these, how many assets do we have booked up to SKF? And I'm not going to update you exactly on the number today. We will do that together with Patrick, but of course, it's growing. You can imagine that it's growing, it's, it's a very good development and it's, 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, very good path on this. And, and you know, how, how, with the new sensors, you mentioned the IMAX 1 and we have the data applied that we that we've launched now, it becomes very easy and it becomes relatively inexpensive that makes it possible to be something that everybody can benefit from. So, yes, it's growing. I will update you, regularly on this, but it's very positive. And the fee based model? Yes, the fee based, yes, it's growing all the time. I have no I have no specific numbers on you, but But my absolute conviction that, that, this is the new way of doing business, not only in automotive, but in in many areas. And 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. But yes, it's developing favorably. 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 and you look at the 2nd most important market after distribution. It's one called industrial drives. And I wanted to focus on your downgrade really on the outlook. What actually is the end markets and impacts are going on regionally in industrial drives, exactly what are these, because it had been one of the strongest end markets in industrial. Now fallen off a cliff in terms of the little barometers that you give? Well, I don't think I don't think it's falling off the cliff. I mean, 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. And 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 is has industrial dynamics, meaning, as now supplies come more in line with demand, 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 to, to, compensate maybe. But I don't see any of the kind of words that you are talking about. We see this as still a good market. But I mean, in terms of the actual sort of, I don't know, cuff customers or end markets. Clearly, it's different from the other end markets or customers? Well, this is, you can imagine, industrial drives everything from in any factory, in any operations and even in supermarkets, you have gearboxes, there are small promoters, you have all kinds of pulleys and things like that. And these are the sort of the industrial drive segments And 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 and then it's differentiated to a lot of underlying businesses. Okay. But in terms of the outlook downgrade, I mean, distribution also seems to have been downgraded in terms the outlook, what would be the impact to margins of the division? Well, as we see it, I think we're 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, and we will continue to to, to, do a good performance also next quarter. So I don't see this in a similar way as you do. Sorry. Go ahead. The guidance is relatively unchanged on industrial. Yes. I guess I'm just looking at these little customer industries, as you give on each the second page of the I'm sorry, the second part of the 4th page. Remember also that the second quarter last year that we relates the guidance to was the clearly strongest sales quarter we've ever had in SKF. Okay. So I appreciate it. It's a tough comp. Yeah. And just finally then the second question is around net working I mean, I know you've got this target of 25% and obviously it's good to have something that's a as a reach to get to, but how realistic is it and what sort of volume assumptions you make about the market and what sort of, KPIs or not KPIs, but what sort of incentives to line managers, have they been put in place in order to get there? Because it seemed 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. And we have described, I think you attended the Capital Market Day went through some of the initiatives and we continue to implement these funds. So, I mean, if you take first quarter, it's also a seasonally one where we usually build a bit on inventory levels. And so you have that, but I mean, the overall assumptions is more of a normal market. It's not, you know, relates to some, some, you know, high volume or so. It to be under normal circumstance, Then you should also note that in the first quarter, the 30% which is clearly better than last year also have a negative FX effect. I mean, by the exchange rates at the end of the quarter. So I think we see good underlying development on net working capital there. We will strive towards the 25. It will take some time, but it's certainly realistic. The next question today comes from the line of Andrew Wilson from JP Morgan. Please go ahead. Hi, good morning guys. Two questions for 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 sort of SKF position versus your competitors. In terms of the level of connectivity and kind of how you're moving forward with that? As a first question, please. You know, I'm absolutely convinced that all, everybody is going to work in this direction. But I like to think that we are, from our in our industry, the absolute forefront have been so for a while. And 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, steaming. So have our own platforms and different platforms. There will be, some platforms that in the end will be the ones that use to monitor their entire factories, etcetera. And I think that Siemens is going to be definitely one of them. And the areas gap is in there ready. And you as a customer, you can start benefiting from day 1. And I think this is the the kind of dynamics that you see in this, and that's very positive. Thanks. And for my second question, just thinking about capital allocation, obviously the balance sheet, whether we look at it kind of IFRS or pensions, either way, it's clearly in a lot stronger shape than it's been for some time. Kind of how should we think about the portfolio or should we think about potential cash returns and time as you obviously continue to see good levels of cash generation? Well, cash has always been a fort there at SKF, as you know, I always argue. So interesting, bad time, good time. SKF is usually delivering excellent cash flows. And from our operations, we are absolutely convinced that this will continue. And the investments we do are of course to increase our competitiveness. So we're doing investments and we're using the capital in a wise wide way, which will improve our our competitiveness and our growth potential. At the same time, of course, we're now It's after a while, during a relatively, period where we have now strengthened our balance sheet, we have the resource. We're also looking at What can we do to improve our portfolio going forward and looking at acquisitions and solve a small one during this quarter? And we're now looking at that as well going forward. But cash flow will always be a good could be good from 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. Thanks, Eric. The next question today comes from the line of Prest Bergelind from Citi. Please go ahead. Yes. Hi, Ollik and Kees tennis class from Citi. Sorry, I was I was late on the call. Can you can you please repeat there, Kristian, what you said on the cost line, 1,000,000 expected for the 2nd quarter, I think. And how is that other line moving within that IT and R and D, etcetera? You guided for that to be $110,000,000 this quarter and that surprised positively again. So how will that line develop as we go into the 2nd quarter? It was positive now in the bridge, I think? And do you think when you go into the second, how will that develop? Please, I'll start there. If you start the 400 on the year over year, and the other other costs part of that, it's eliminated. So eliminate. It's eliminated. So we don't we have I mean, we are quite proud of it. We know what we have to do. We have our investments. We have print 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 within, with a much less cost impact on what we saw. So what we have there is we see more restructuring costs. So the full run that is lower cost inflation, we are seeing costs coming out. We have 150 when it comes to material, which is improving. I mean, we see less negative effects. The material side, we should also remember that in the 150, we do have some import tariffs also that we didn't have. We came in in the mid last year. So in Q2 still, we have a year over year effect on import tariffs. So material is improving and, cost inflation improving. And then some restructuring. That's what we have. All right. Thank you. My second one is on North America. And again, sorry, for being late on the call. And maybe you talked about this, but growth was lower than I thought. Guidance is also a bit lower than I thought. And we know Trucks is weaker, but it feels pretty widespread across automotive and also on the industrial side. Could you tell us a little bit more what happened in the quarter? And obviously, we're hearing that things are looking a little bit better at the start of the quarter as trade issues with China seems to abate. But any color here on North America would be very helpful. What we see is if you we've had a solid growth in the industrial business during the quarter. And then what has been little bit dragging it down. It's 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 not to be able to sort of burn inventory. But when we see there, their sales out of our distributors, it's still strong. And then there's some in the agriculture business, we see some weakness and so forth. But otherwise, it's been a strong industrial sales also for us in the U. S. So on the automotive side, yes, it is cars down and trucks stable, and that's what we've seen. Thank you very much. The next question today comes from the line of Anders Roslin from Pareto Securities. Please go ahead. Yes. Could you elaborate a little bit on those cost savings going forward and also how you look on the production level in the second quarter? Yes. I mean, on cost side, 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. I mean, we have also all the initiatives we have in footprint and investments and so on, which has the cost component in that. So we are quite positive too that we, we, we will see good cost management also going forward. I mean, it all depends on, our volumes goals 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. And then on the production level in the 2nd quarter? Yes, production level obviously year over year is down. That you won't take out more inventories now or you try to be in line with sales? Now, I mean, we have 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 take, we see a slight reduction of the stock levels in the second quarter. With a small negative impact, on that. So of course, we are trimming, stocks for the products lines and the segments where we see weaker demand. I mean, obviously, we are working on that in automotive and naturally, we volume developments that we've had there. And this time, there's what I think we've done as you remember, we've been focusing this all the way from actually second quarter last year. So 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. And that's one of the benefits you see also in the way we're we're looking at how we're managing only also in the past during the quarter, but also going forward. Okay. Thanks. We have a follow-up question here from the line of Graham Phillips from Jefferies. Please go ahead. Yes, thanks for taking follow-up question. I wanted to focus on Automotive. And 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 at, 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, or do you think you'll be in line with the 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, and I think that we've shown lately during the last year or so that as we 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 drives, etcetera, drivetrains, I think SKF is absolutely well poised to have a strong position going forward in, in the automotive in all regions. In the future. So I'm positive about this. Having said that, I mean, as you as you know, these are These are, these are slower movements, takes more time, before it's actually it's not a thing about the next quarter or so. No, I understand. And 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, or we just again expect to sort of seek to continue sort of weakness in that end market for you? I mean, we're working, diligently to look at the right channels to market. And like all markets, they are developing And we hope to, to work with it. And as you saw, for instance, in the quarter, we had very positive development in China. Had less positive development in the U. S, etcetera. But, we would do our utmost to keep our our turf and 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, the last long time. Yes. Okay. Thank you very much. Thank you very much. The next question today comes from the line of Eric Golrang from SEB. Thank you. I have one question. On the cost development, it appeared as you told the 4th and the first quarter, you came out stronger than expected on the at least compared to what you guided in terms of cost. And my question is this, the guidance you now provide for the second quarter, is that something that is continuously updated? Or is that stemming from something, some bigger planning work you did earlier on last year. And to what extent does the stronger development relate to headcount? Coming down or at a quite good pace given where volumes still are? And could you say anything on where headcount is expect you to go from here? A lot of details, but I mean, if you take the guidance for the second quarter, I mean, obviously, we work with a rolling forecast ourselves. So, and you can say that's on the same level as year over year as what we've had in the first quarter is slightly higher there, which will relate so that we have some smaller one offs in the first quarter. We don't expect irritated. But I mean, we and on the headcounts or we don't have to share with you, but I mean, you see the and how we are working on that and how we you can take a longer perspective on that also. And you can see that on white color, we we haven't moved up during the, during the, the strong part of the cycle here. And we have kept that and we worked we work here diligently on that with productivity from that level as well. So I mean, you will see a positive cost development from SKF here going forward. That's clearly our ambition, and we are confident we will be able to show that. And always when we do our 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. And lately, we've been, if you see the last year or so, we've been actually quite accurate with our, our, our forecast for the coming quarter. I hope it will continue like that. Thank you. And remind me, the reason, the key reasons for the better than expected outcome in the prior two quarters, what was that on the call? Side? No, I mean, we have had quite a lot of activities coming to IT to footprint factory moves, to, to, investments where you have product costs and so on, which is obviously comes on top of an order normal business, right? And we have been able to carry through those activities in a more cost efficient way. That is one main main item there. And then as I said, we start to see costs going out. Organizational costs coming out. Thank you very much. And the last question we have today comes from the line of Elok Cartre from Societe Generale. Please go ahead. Hi, thanks for taking my question. Just one really, on the auto side, I mean, clearly, the tighter 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 the general industrial sort of side of thing. I was just trying to sort of go back and if you see the oil and gas softness in the U. S. In 2015, 2016 and how that kind of spread a bit more wider than what people perhaps imagined initially. So just trying to understand if this is what we're seeing from the autos, let's say, slowdown across across your customer base. No, what I wouldn't say that that's what we feel, I mean, my comment about oil and gas previously was just that we see some of our customers in the U. S. Burning inventory as they had to be sure that they were getting the materials they ordered a little bit more than they needed. And now they're sort of burning a little bit of inventory. What we may see, of course, intuitively is, of course, if there's lower demand for cars, there will eventually be lower demand for steel. And maybe that's one of the first effects that could come. But I don't say that I can see that today Thank you. With that, we, thank you for all your questions. And we will be, readily available to answer more than on film. So 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.