Earnings Call: Q3 2018

Oct 25, 2018

Good day and welcome to the SKF Third Quarter Report 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Patrick Stenberg, Please go ahead. Thank you. Good afternoon, and welcome to this conference call and third quarter results. As usual, the conference call won't take about an hour. We'll spend some 20, 30 minutes on the presentation. And after that, we're open to take your questions. Treson today are 0 and President, honored Donaldson, our Senior Vice President and CFO, Christian Johansen, Keri Napanenbaum, Director of Group, controlling and accounting, Theo Shelberg, press and media relations and without Patrick Stenberg, Head of Investor Relations. With that, short welcome, I will hand over to Alrik. Thank you very much, Patrick. Welcome to this conference where we're going to talk about a record strong third quarter from SKF. The 3rd quarter was a strong quarter with good sales growth, solid margins and a strong cash flow. We saw continued growth in both our industrial and automotive businesses. Sales grew organically by 7% and our operating profit was SEK2.86 billion, and it is the highest operating profit reported in SKF for the third quarter. The operating margin was 12.2%, We introduced our inventories during the quarter as we announced already in the beginning of this year that we were going to do. And we had a very strong cash flow of SEK 1,600,000,000. If we now turn to the next page, The Industrial business continues its strong performance with an operating margin of 14% and organic growth of 9%. We saw significantly higher sales volume in our 3 largest regions: Europe, North America and Asia during the quarter. If we now turn to the next page, I can talk about the Automotive business that delivered an operating margin of 7% and sales grew organically by 2% despite a drop in European car sales resulting from, as we know, the implementation of new test cycles. And a slowdown in truck sales in Asia. If we look at the next page, we can talk about our performance targets. And as you know, we have 5 financial targets covering organic sales growth and operating margin. In the income statement and net debt to equity, net working capital and return on capital employed on the capital side. All targets are valid over business We are currently making progress in all of them. As in Q2, we met or exceeded the targets for gross margin, net debt and return on capital employed. In the third quarter, we have reduced our inventories and we are starting to make progress towards our target of new working networking capital. We are now at 29% So still, yes, lots of hard work left before we can reach the 24.5% target, but we're on the way. We turn to the next page and talk about geographies. We can see that we had continued growth in Europe think with 6%. We saw strong industrial demand with significantly higher volumes in most industries. You know, we're talking about industrial drives, railway, agricultural, food and beverage, marine and aerospace. In the total, in total automotive volumes were relatively unchanged in Q3, but there were large differences. We saw significantly higher volumes for trucks and slightly lower for cars due to, as I said, the implementation of the new WLPT test cycle. Asia grew by 11% with industrial, significantly higher demand in most customer industries. Industrial drives, energy, heavy industry, railway, industrial distribution was significantly higher. Automotive volumes were slightly higher than last year with higher volumes for cars and the vehicle aftermarket, while we saw significantly lower volumes for truck sales. Organic sales grew by 8%, a strong 8% in North America, We saw significantly higher industrial demand. It's industrial dives in aerospace, energy, agriculture, food and beverage, Railway distribution, industrial distribution, significantly, all is significantly higher. In the automotive space, volumes were higher with significantly higher volumes to both trucks and cars. In Latin America, volumes were relatively unchanged compared to last year, and this is valid for both our industrial and our automotive business. If we now turn to the next page, talk a little bit about give you highlights of innovation. And as you know, it's the only assurance against the relevance going forward. So I'm proud to give some examples of what we're working on. During the summer, we have entered into a development partnership for the industrialization of fiber optic sensing systems, fibrotic sensing technology is an extremely exciting opportunity as enables bearings to become process and quality control instruments. We have worked for some time to develop these sensors. And by taking this next step, we will be able to speed up the process of integrating these into customer application. If you take the next step, we talk about new taper roller thrust bearings that we're just launching for the oil and gas industries to continue to push the limits of technology, as you know, to meet the demands of leading top drive manufacturers, we have developed a new generation of taper roller cross bearings. 1st, the first ones in this catarator join the Explorer family of high performance bearings products, with higher loan ratings and bearing rating life extended by up to 300% The new bearings are ready for the next generation of larger non powerful top drives. They can also be used to optimize the reliability of a sisting designs, we are sure this is going to have impact. If you then move to you, this is all I have intended to, to say. Thank you, Eric. And good afternoon to all of you. I will take you through the details from top to bottom. If we turn to next page, I will start with sales. Net sales increased by 14.6% in the 3rd quarter, with organic sales growth for the 8th quarter in a row, strong growth in our industrial business in all three large regions and most customer industries, And our automotive business is growing despite some headwind in the quarter. So organic sales increased by 6.9%. Currency effect on sales was strongly positive in the quarter, 7.8% with the largest effect coming from the euro followed by the dollar and the Chinese renminbi. The structure component was almost none related to a smaller divestment transaction. So if you turn to page, operating profit by quarter has shown a positive trend since the second half of twenty sixteen. And the operating profit in the 3rd quarter was SEK 2,600,000,000, some SEK 630,000,000 higher than the third quarter last year. It's the highest operating profit SKF has reported in the third quarter in the history, and it's also the 3rd highest quarter itself, only beaten by quarter 1 quarter 2 this year. The 12 months moving value was SEK 10,200,000,000 by end of the third quarter and is the first time ever that SKF has been above SEK 10,000,000,000. Operating profit for a 12 month period. So if you turn to next page, taking you through the operating profit bridge for the quarter, which as usual will take some time. So I ask for your patience here. We had a small positive effect from a minor divestment which generated a loss of SEK 2,000,000 last year. The currency impact was positive SEK 161 million compared to last year. And as I commented on sales development, and the single largest positive currency effect on sales is from the euro. Result wise, however, I'm sure you know, We have negative effect from the euro, which means that the strong euro impact our operating margin negatively and has done so in the quarter. Our operational performance increased by SEK 469,000,000 year over year, corresponding to a leverage of 36% on net sales. Contributions for organic sales and manufacturing volumes increased by SEK816 1,000,000, including positive effects from Sales volume from pricemix and from fixed cost contribution from higher production volume. It also included a negative effect of about SEK 100,000,000 due to that we reduced our finished goods inventories in the quarter. The improvement trend on pricing that we have seen in previous quarters continued and contributed clearly positive. Mix was also positive since our Industrial business grew stronger than Automotive and our distribution business was strong. Cost development in the quarter gave a negative effect of EUR 347,000,000 year over year, The material cost increased by SEK 160,000,000 versus last year. And the higher material cost is due to delays in cost saving projects a negative mix consumption effect and to steel tariffs. Cost inflation was around SEK 275,000,000, and included higher utility costs due to the warm summer. Remaining cost items sum up to positive SEK 88000000000 and I will mention some of them. We had extra costs related to that. We run production on high capacity utilization, this, we have talked about also in previous meetings. This quarter, we also had the new import tariffs on bearings from China to U. S. That was introduced this summer and has increased our import costs. And we had also costs related to implementation of industrial footprint projects into R&D And IT Development. We had again on sale of assets in the quarter reported here in the bridge. And last year, as we talked about last call, we also had costs from the customer settlements within Automotive or SEK 490,000,000, which not is repeated this year. So if we now take some comments to the guidance on the bridge for quarter 4. We expect to see a continued positive effect from pricemix in quarter 4 with a similar year over year effect as in quarter 3. Inventories, we will continue to reduce our finished goods stock, and we expect a negative year over year effect on operating profit of about 120,000,000. And on the cost side, material cost impact, we expect to remain at SEK 160,000,000 We will see more cost saving activities implemented, but steel tariffs will increase somewhat. Cost inflation will also remain on similar level as high energy costs will remain. And then we expect some additional increases from bearing import tariffs due to volume. And then the impact on footprint, R and D and IT will remain also in quarter 4 as these are good. And improve our efficiency and pricing power for the future. Also last year, in fourth quarter, we had an items effect comparability of a net of negative EUR 75,000,000 with restructuring costs offset by the gain when we closed our German pension plan, and we forecast restructuring costs in quarter 4 this year over some SEK 75,000,000. So the new drill bridge effect. So all in all, materials, cost inflation and other costs would add up to some SEK 750,000,000 bridge. That was a long one. So if you turn to next page, performance by customer group. Industrial organic net sales increased in Industrial by 9.2%, sales were significantly higher in all our three main regions, Europe, Asian of America, operating margin was 14.3% compared to 13.5% last year. And the contribution from increased sales and manufacturing volumes was positive. Together with the clearly positive effects on pricemix. Organic sales in the automotive industry grew by 1.7% in the quarter. Sales in Europe, as you heard, were impacted by lower sales to cars and light trucks. As this WLBT test cycle as were introduced. And also, we saw lower sales on trucks in Asia. Operating margin was 6.8% compared to 3.9% last year. Last year, in Automotive, it was included in the customer settlement cost of SEK 119,000,000. And beside that, Both the multi profitability was impacted mainly by import tariffs and material costs, as mentioned on the bridge slide. Return page, income statement for the group, good development on our operating margins Quarter 3, we saw 12.2% increase of 1.7% versus last year, and 12 months, we are at 12.1%. Gross margin same level as last year. S and A expenses as a percentage of sales decreased with 1% to 12.9 The financial net was SEK 253,000,000 negative and impacted by the debt repurchase, which had a net financial effect of negative SEK 73,000,000, and this was communicated to you in a separate press release. Taxes in the quarter, a negative SEK 753,000,000, giving you an effective tax rate of SEK 32 0.1%, and this was impacted negatively by withholding tax on dividends, If you exclude this effect, tax rate was from 7.8%. He has a very good trend on earnings per share. UPS increased by 46% in the quarter and was SEK 3 35,000,000. For the last 12 months, we are at 15.5 gram versus about 9.8 grams a year ago. The turn page, cash flow, we had a strong cash flow in the quarter. Excluding acquisitions divestment, it was one point $593,000,000,000 in the quarter compared to $880,000,000 last year. Improved cash flow due to higher operating profit positive working capital contributions mainly. And on the 12 months period, we were at SEK 5,800,000,000 by end of quarter 3. The term page, net working capital were 29% of sales at the end of the quarter, So 0.4% lower than the third quarter last year. And this ratio is also negatively impacted by currency. And we see good progress when it comes to inventories and trade receivables with sequential improvements on both. And as we have communicated to you, since the first quarter telephone conference, in April, we are reducing our finished goods inventories still with good availability in order to keep our service levels to meet customer demand. In July, we announced the divestment of our linear activation business. Are very pleased with this, the outcome of this transaction. Total consideration is SEK 2,750,000,000. On a cash on debt free basis, and we expect this transaction to close at the end of the year. And the integration of business contributing last year with sales of SEK 2,000,000,000 and had about INN 12 100 employees. It's on page. Net debt to equity ratio is still very strong. Reduced further to 60% by endofthe quarter, excluding pensions further reduced to 25 And by end of the quarter, the net debt was about SEK 20,000,000,000 reduction by more than SEK 11,000,000,000 since quarter 1, 2015. Next page. In September, we issued a new 7 year bond, EUR 300,000,000 bond in order to extend our maturity profile. It was better received in the market and the coupon rate for for us was a record for SKF record low of 1.25%. We used the proceeds to repurchase parts of the outstanding bonds with maturities of in 2019 2020 with higher coupon rates, as you can see on the slide. The turn page. Finally then, I come to the guidance for 2018 We expect the financial net to be about EUR 225,000,000 negative. And based on exchange rates of the end of September, currency impact on the operating profit is expected to be relatively unchanged compared to last year. And based on the exchange rates, for the other day, October 23, the effect would be about EUR 60,000,000 positive. The full year, we expect a tax rate of about 28%. And as we have communicated gated to you before, we are increasing our investments in property, plant and equipment. For the full year, we now expect to see additions to plant and property of SEK 2,600,000,000 for the year. And previously, we had a guidance of SEK 2,400,000,000. So with that, thank you, Alex. Thank you, Christian. Well, just to summarize, if we turn to the next page, yes, The 3rd quarter was strong quarter with good sales growing selling margins and strong cash flows. We saw continued growth in both our industrial and automotive businesses. We grew by 7% and our operating profit was SEK 2,600,000,000, This highest that we've had so forth in the 3rd quarter and operating margin of 12.2 with a cash flow of 1,600,000,000 I think that summarizes well, what has happened. And, we saw also that our industrial volumes were higher and slightly lower automotive volumes year over year, as we have explained previously why this but still a growth. So if we take next, next page, I say, just to read to you the SKF outlook for the sake of good order. So demand compared to the fourth quarter 2017 as we have. The demand for SKF products and services is expected to be slightly higher for the group. Including higher demand for industrial and slightly lower demand for automotive. Demand is expected to be significantly higher in North America, higher in Asia, relatively unchanged in Europe and slightly higher in Latin America. And words, well, I hand over back to you, Patrick. Thank you, Alrik. Thank you for the presentation. And now we are ready to take questions. So operator, please. You. You. We'll now take our first question Klaus Berglin from Citi. Please go ahead. Your line is now open. Yes, hi, Ulrik, in case then it's Klas from Citi. A couple of questions please. First one is on China. It seems like China is growing above 11.2% in total Asia, and this is the price, automotive slowing. Now you're guiding for higher demand in Asia year over year, which is still solid given that automotive is likely to see further weakness. So it seems like you're pretty confident there on China on the industrial side into the fourth quarter. Can you talk about seeing in China in the beginning of the quarter and your reasoning on China when you set your guide here in the fourth quarter? I will start there. But I think what we see is, of course, what we say exactly, you put it very well. We see it continuous solid development on the industrial side, and we see a certain weakness that has started into Q3 and that continues into Q4 exactly that you say, but that we see that the total will will, will still be positive. But in terms of automotive, how much sequential weakness can we expect there? Hello? It's what we see is basically what we've guided for. I have no additional sort of comments at this point. I understand that the uncertainty is maybe increasing, but this is what we see. Yes. I guess I'm just curious about the whether industrial is guided flat sequentially in Asia. And then obviously against that you will have automotive taking a big leg down. I was trying to understand roughly the magnitude, but yes. All right. The bridge, Christian, raw mats are moving higher again and also wages and then you have tariff costs. Are you including the tariff costs in the raw mats or is that outside? And how much was it? And could you help us with the way bill in the quarter and how it developed in the first half. As a reminder, just so we can understand the delta? I mean, tariffs, you can say you have 2 types of tariffs. I mean, first, do you have tariffs on steel? So still imports to U. S, that's part of the material, right? So that's one of the explanations why we are at the 160, When you're talking about, tariffs on importing products from China to U. S, That's the intent that is not immaterial, not in cost inflation. It's in other. Okay, got it. And so what is the clean raw materials build then? Or impacted? Sorry. Sorry. What was the clean raw materials impact? I mean, the clean, as I said, the main the drivers behind that we are, worse than the guidance that we gave is mainly not romance, underlying romance. It's the tariffs. It's also that we have, and that's difficult for us. We have 7,500,000,000 of materials a quarter. The mix of products that keeps the consumption and mix effect. That was negative. In the quarter. And then we had also some delays in cost savings and some of them comes back in quarter 4, as I said. So That's my comment to that. Okay. And then the wage bill? Yes, the wage bill, as such, I mean, obviously, which is part of the cost inflation, underlying cost inflation. I wouldn't say that obviously we have some variable sellers teams that are getting better outcome, let's say, when we do well, but the underlying wage inflation is not changing significantly. All right. Then moving on to pricemix, I get this to 2.3% solid and you're managing to compensate obviously for the cost hikes in the quarter, but you're up against tougher comps. Year over year as the pricemix turned positive in the fourth quarter. And now you're saying that year over year, we will be similar in the 4th. So is that just OEM contract gradually coming through at higher price points? Or are you hiking spot prices again? Just to understand how pricing will move sequentially. I mean, you said 2.3. We didn't say 2.3. I know, but We have, so I don't comment on that. We have as you see, we have a good development on price and we have a good mix in it. And this delta that we have in quarter 3 we expect to see also in the 4th quarter. Oh, you're hiking again or is it just OEM contracts coming through at high price points? I mean, you have always a mix in a big, in a big structure like gas. I mean, a global business, There's no real difference in the way it's been playing out during the previous quarters of China. We will now take our next question from Andre Kugnin from Credit Suisse. Please go ahead. Your line is now open. Good afternoon. Thanks so much for taking my questions. Christian, thanks very much for running through the details on the other line on the cost line bridge component. So can I just double check something? What was the bottom line that you gave for Q4, for the, kind of material cost inflation, other impact, etcetera, I'd up to and then my line broke up. 750. Sorry, 750? Yes. Okay. And that's 160 materials and 275, of of cost inflation similar to Q3, but the 315 remaining, is that combination of Unite And Restructuring? I mean, I think I gave you quite some details or comments on that. I mean, mean, we have obvious, as a previous question, we have the import costs for from China to to U. S. On products gets in there. As I said, we do have also what we do on yes, I mean, you said, Junide, we do other things. I would say, mainly other things on IT for the future. We have E Sharp activities. We have other things, integrating the the recent years acquired companies in our common systems to gain efficiency. And we have also R and D step ups that we've done during the year that are giving us a number of nice product launches in the time to come here. Right, right. The reason I'm asking is that $3.15 is quite a lot on the bridge because you as you said, you already had some restructuring of 75 in Q4. So if you have same restructuring that's 0 on the bridge, you had Unite already, in the last year, So presume there's no income, but basically what you're saying is that if the tariffs and other IT and R and D investments that I create this extra 300 something? Yes. I mean, and, you know, we have 19,000,000,000 of costs in the quarter, right? So, so, and obviously, when it comes to our And I mean, not everything less in the future, but also with the balance sheet. So obviously, IT, R and D and so on, these are good costs. And these are things obviously that we control ourselves, right? So these are conscious decisions that we are guiding for, right? And obviously, if we have a business that can't carry this, we take other actions. Got it. No, I appreciate that. As I said, I really appreciate detail. Just on the inventory impact, which you've clarified, how much did you reduce the finished goods inventory on like for like basis in Q3? In line with guidance. $300,000,000? Yes. Okay, thank you. And just last question, much broader one, I guess, I regards mostly for you. Just on the portfolio actions, you've obviously done quite a series of divestments and have generated proceeds from that. You've been generating cash. What is your thinking on portfolio kind of from here and not really trying to step away from kind of next quarter or even from just next 12 months. But more broadly, are you thinking about SKF on the three year view from here as more kind of bulked up through acquisitions or is there more streamlining of portfolio to be done? I think that you see that we now have an opportunity. We stand strong. We have taken over the years since I joined more than SEK 11,000,000,000 of strengthening our balance sheet and strong position. And we have an opportunity now to look for opportunities going forward, both how we can invest in our activities, in our factories and in our R and D, as Christian has mentioned, but also look at acquisitions in a different way, of course. Got it. Thank you very much. We will now take our next question from James Moore from Redburn. Please go ahead. Your line is now open. Yes, hi, everyone. Thanks for taking my questions. I've got 3 if I could. Maybe I could just start with the cost development line. Obviously, it conflates quite a lot of moving parts, but if we were to take out the raw material impact and the reversal of one offs. Could you talk a bit about the underlying cost inflation in the third quarter. And I'm primarily trying to understand the degree to which we've already had R&D IT and tariff ramp up in the third quarter? And how much are signaling that they're incremental in the 4th versus 3rd? That makes sense? I don't think I can't you get into such details and I'm not sure I can give it to you. I mean, And I comment a lot on the material development and the parts that brings us to the 160 And then we are flat in Q4, seeing some of more steel tariffs because since the volume related, some somewhat more cost reduction on that line. I think the main driver on the cost inflation versus previous guidance is that energy prices are up. And that's not unique to SKF, and that will remain as we see we might consume somewhat more volume wise, but I mean, that's the driver in that. And I would say the On the other costs, the sequential impact You have a sequential negative impact on the import of product. As I said, for the rest, it's not a significant step up on that sound, but not that much. Okay. That's very helpful. Thank you. On pricing, I understand you don't want to give price mix. I'm not going to try and ask it directly, but maybe you'd feel and you've said that the year on year impact is better than last quarter. Would you be able to quantify whether it's sort of 10 bits better or 50 bits better? I'm a bit lost as to where we are since you stopped talking about it. I mean, we are on pricing. We don't give that. I mean, you can calculate this. You get so much of this as promise on the volumes and on the stock developments and so on. So you'll have a receipt of somewhere or not. But you can also see that in the marketplace, as I said before, there's still there's no big changes of what became a similar kind of situation that we have delivered in the past. Okay. And finally, if I could go back to China, when you look at your different end markets that you give at a global level, when you look at those in China, do you see some that are still growing sequentially, some that are flat, some that are down. A lot of companies are talking about deterioration in September versus July August in general industrial in China and some concerns going into the fourth quarter. And I just wonder whether you're seeing some big positives in some areas like wind or rail, for example, offsetting some underlying weakness in shorter cycle. Parts of that business. I wonder if you could peel the onion a little bit. Just give us a flavor for what you're seeing. I think the guidance is pretty clear of what we're doing. And of course, there are always fluctuations between months, etcetera, in different is because of their dynamics. But what we see is what we guide for us. I, we're still positive on China the way we have and Asia the way we have guided. That wasn't really the question, if I could, and then I'll finish, but just sequentially, if you look at the last few months, has life come down a bit. I'm not talking year on year, which is your guidance and what you're talking about. Just in terms of running rates, seeing No. You can understand that given the fact that we look, quite positively on continue to sell into Q4, you can understand that it sort of continues. Okay. Thank you very much. Maybe I should add one more comment on the cost questions that you have asked and your We have also in quarter 3, year over year, the SEK 190,000,000, from last year, on a customer settlement plan in the bridge. Yes, which will drop out in the bridge in the next quarter. We will now take our next question from Andrew Wilson from JP Morgan. Hi, good afternoon, everyone. I just actually had a question again on capital allocation, but slightly from a different perspective. There's clearly been a lot of progress made on the cash profile in Alrik. I think you've talked before about seeing kind of the strongest sustainable cash flow at SKF going forward. Just talk about how you think about it in terms of share buybacks and the dividend and returns? Because I guess we haven't seen a lot of a big M and A, and I'm not necessarily sure that that's been a part of the strategy, but just thinking about how you think about M and A versus potential capital returns? Because clearly, we are in a significantly better position from the balance sheet than we were 12, 18 months ago. I think you said it very well. We have worked hard to focus our business and create a strong base for moving forward as far as investment in our business, in developing R&D And Innovation, and also look at acquisitions. And I would argue that I would say that we are not looking at acquisitions. I think that's a clear, clear part of our strategy going forward. And, what SKF has as a dividend policy, etcetera. So I think you can expect a good development in all of these areas going forward. And in terms of the potential for the buybacks or for returns at some point, if targets don't come along? Yes. In the end, it's going to be the owners who decide what we do with with the money we have, if there's excess after we have made investments and acquisitions and so forth. So SKF ForeF has always been a very, very strong cash flow. And I think this is one of the good things with SKF. And And, you this is really positive. So sooner or later, either through higher returns or higher dividends, it will come back to the shareholders. So, I think SKF is a good bank for the future. We will now take our next question from Matthew Spur from Exane BNP Paribas. I wanted to come back to tariffs and price mix. You talked about price mix being a similar level. I presume you mean in terms of year on year improvement to Q3, but you clearly got tariffs going up. So, when do you plan to offset the tariff impacts both on products and steel? And how long do you think that's going to take before you can basically recoup that? Or do you not do you expect to have to take that on the chin? No, but tariffs are offset as we speak. But I mean, and I would say fully recovered, when we enter into next year, you usually get some delays with the big OEMs, even though this is an obvious thing for them. So it's, it's, compensate. We will now take our next question from Andreas Koske from Nordea. Please go ahead. Your line is now open. Yes, thank you very much. I just have a question on the other operating income line, it was positive by SEK141 1,000,000. And historically, it's been around SEARO closer to SEARO So could you just explain what's in that line in this quarter? Thank you very much. Yes, I mean, on that line, we get some various currency effects on the transactional flows, internal transactional flows but we also have, this quarter. I mean, we work with our footprint. We work with we are selling assets and doing things around our footprint. So this quarter, we have a positive effect from from, as I said, in the comments, to the bridge of asset sale. Sorry. Can you quantify the asset sale? I mean, it's the main part of what you see there. Thank you very We'll now take our next question from Lars Bronson from Barclays. Please go ahead. Your line is now open. Follow-up on your 3.15 tariff expected impact in Q4 or rapid tariff. Most of it, it sounds like. Can you just elaborate on what assumptions that is based on, do you assume a 25 percent tariff on items listed in the Section 301 level 3, or do you apply a different tariff rate on that? Just to get to the 315 number, please. Yes. I wouldn't say that the 315 number is the majority is the tariffs. It's not. Is not. But then I don't know the section numbers, but the ones I referred to are the ones on imported products. The U. S. From China. Yes. I know it is. I just wonder what tariff rate you have applied as you're at some to the 315 number. Yes, I don't have it in my Yes, but it is the tariffs that that is applied to these, to the bearings, which is the number that you mentioned. The 25%? And that's a net number. Do you have a gross number? How much are you offsetting with prices? I mean, I appreciate your point, Kristen. Did you expect to be fully recovered next year. I wonder what gives you But there's an dynamic of increasing prices, of course, as you always do, And then there's a negotiation, as you understand. First, you take mitigating actions with, trying to stock up before the actual tariffs coming to place. And then you negotiate and as they come to the end of the year, we will have compensated everything. And this is what we see here. And how much are you redirecting sourcing out from China to other jurisdictions? Of course, we're doing whatever we can to sort of see where there are capacities to reroute, etcetera. But it takes a little bit longer to do that, but of course, we are. We will now take our next question from Markus Mitemayo from UBS. Hi, good afternoon, everyone. Can I bottle up a little bit and let's look at the different geographies and your guidance on underlying growth versus market share? What sort of the dominating element in those 2 at the moment as you look at your different regions? And if you could split it between auto and industrials, that would be very helpful. Well, in a quarter in the bearing business, it doesn't go like that, and the changes are slower than just thinking that you will have market share changes over a quarter. So these are businesses that we have taken and orders that we have and and the kind of sentiment we see in the marketplace, which is still positive. No, no, I understand, but it's all at the bottom of the higher level. Is there any sort of material changes that you expect or that has happened on platforms in cars, for example? That we have discussed before. Remember that in the past, we were, trailing a little bit behind during several years in the U. S. And now you see we had a strong growth in the U. S. And it's, of course, that we have a good momentum in the OEM automotive market in the U. S, for instance, so you've seen our guidance. Positivity on China is largely underlying market. There's no sort of quarter on quarter change in sort of market share or it's really underlying that it's not like that, no. We will now take a follow-up question from Andre Kugnin from Credit Suisse. Hi, thanks very much for taking my follow-up. I just wanted to double check on the Tarius question. I guess what you're guiding for Q4 reflects the Section 301 List 3, right? No, I have, I have a document here. It's the 302 and 232. Okay. And so in the last one, I think that's 301. There's think there's a structure there that sort of starts with 10% and then ratchets up to 25% tariff from 2019. What you said earlier about passing that through to the OEMs, do you think you'll be able to pass it through straight at 25 to the OEMs from begin year 2019, how does that work? Yes. This is how we see it. And This is the sort of the, the, the market dynamics that there is a, both the market, that supports this and also a reality in the way it's discussed with customers that we can actually compensate this, yes. But is there always a lag or is this just the time to discuss this at the end of the year? From start of the year, you'll get the whole thing offset? Well, it's, it's, this is why it's not binary and this is why otherwise, it would have been binary we would already have done it by today. It's a discussion and it's an understanding and we are doing our mitigating having brought in materials a little bit ahead of the tariffs as well. But the main thing that I think is interesting if you look forward is that we will compensate. Okay. Got it. Thank you. And the last one I had was just on the divestment that you made you give us any idea on the profitability of that relative to the group? Is it kind of similar or higher lower so that we can get our models right? So can you repeat that one more time, please? It is about the divestment that you made I just wondered if you could give us some idea of, level of profitability of that business relative to the group. ASKX. Got it. Got it. Thanks so much for your time. But maybe, and then we have to stop that if it's not clear, but on the tariffs, in the way the bridge is built. What we talk about on the costs is the cost. And the compensation obviously comes in pricemix, if that has not been clear. No, that's clear. Yeah, that's absolutely clear. We'll, yeah, make sure we reflect that in the two sides, yeah. Thank you. We will now take our next question from Eric Kodak from SEB. Thank you. I have one question only. Obviously, the financial markets are a bit more concerned about what will happen to demand maybe going into into 2019. So I wanted to get an update on the your cost structure now. And I realize there's a lot of moving parts to this one, but If we assume that you disregard what happens to currencies and raw materials and so on and sort of that you at some point will be taking mitigating what would your leverage be on, let's say, a 10% negative organic growth next year or a single quarter? No, that we don't have an answer to, but I think you if you look back SKF as quite a good track record when it comes to work on cost. So I mean, if you take the different pieces that we should, of course, in your scenario, we should see steel prices and raw material prices coming down. And when it comes to take care of our own productivity, I think we have different measures to do that. And hopefully cost flex systems different in different countries when it comes to our factories. And, and obviously, we have well field time banks. We have different countries having systems where your share costs with the state and the employees and so on. So and then, yes, you will see some restructuring obviously in such a scenario and to a high effect on what you've seen in the last a year or so. And then, you know, also, and we have talked about that many times also that what we do on the footprint in terms of consolidating our industrial footprint. It's not a short term action, but it gives also effect when it comes to cost out. We have been good at this, if you look, so there's a good preparedness. We're prepared. We know how to do it. But overall, you'd expect to develop in a similar way as you've done historically. We guide for the fourth quarter, as we've said, yes. We will now take a follow-up question from James Moore from Redburn. Thanks, everybody. Just a quick follow-up, if I could, on the million other income that was discussed earlier, that gain is that booked in EBIT in 1 of the 2 divisions or is it It's, to the large part in industrial. We will now take a follow-up question from Lars Brorsen from Barclays. Hi, thanks. Just to follow-up on the tariff question, but more with regards to your footprint in China that is selling into the U. S. Obviously, a couple of acquisitions a few years ago, GBC see a peer as well means you still have today a pretty sizable footprint and selling out of China into the U. S. Can you remind me that number is, how much of your U. S. Sales is manufactured in China? Thanks. We don't give that kind of detail. But as you can see, it's manageable. It's not it's relatively on the total, a small amount. Is that 5%? Do you have my answer? It's not very helpful, but okay. Thank you. There appears to be no further questions at this time. Okay. Thank you so much for listening into this conference call. And with that, let me conclude today's event. Thank you. This concludes today's call. Thank you for your participation.