Good day, welcome to the AB SKF second quarter report 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrik Stenberg. Please go ahead, sir.
Good morning, welcome to the Q2 conference call. Present today are our President and CEO, Alrik Danielson, our CFO, Christian Johansson, our Head of Controlling and Accounting, Carina van den Berg, Theo Kjellberg Press and Media Relations Director, myself, Patrik Stenberg. As usual, this call will take about an hour. We are targeting a presentation time of some 25 minutes. After that, we will open up for Q&A. At the Q&A, I would like to remind you to try to limit yourself to one or two questions so that everyone gets their shot. With that, I'll leave the word to Alrik. Please.
Thank you very much. Welcome, everybody. If we turn to page number two, here in sunny Gothenburg, it's a pleasure for me to present a record second quarter. The second time now in a row that we make a record second quarter. It's fantastic. Record sales, strong growth of 9% organic growth, almost just shy of 3 billion SEK of operating profit, record high operating margin now at 13%, just shy of 13%. Also due to the fact that as we indicated after Q1 that we were going to maintain a good service level to the marketplace without building inventory, we can also see that our cash flow is very, very strong. I can't say but to congratulate my team for a very, very strong quarter.
If we turn to a little bit more detail, turn to page three, the next page, you can see industrial business performing well. Growth is also now picking up in North America. You know that for a couple of quarters, even though the underlying business in America has been strong for us, the comparison has been a little bit hazed by the fact that energy hasn't been doing that well. Now we see also that the growth is coming through in America on the global scale, 11% organic growth, an operating margin of a strong 15%. If we turn to the next page, look at automotive briefly, we are absolutely convinced we're now outperforming the market, the margins continue to strengthen. I think that the team is doing a fantastic job.
We started this journey three years ago, and step by step, we're showing that we can do it. We're growing with 5%, and we now, in this quarter, had an operating margin of 9%. As you know, if we turn to the next page, we have financial targets, and they are five. I think it's good to see that we have recently done real good progress on all of them. In Q1, we met and exceeded the targets of growth, margin, and net debt to equity. Now, this quarter, we also met the return on capital employed. Of course, there's still work to do, improvement potential on our working capital. What we're doing in the value chain we are absolutely convinced that as we move on during the next year and beyond, we will be seeing clear improvement also in this particular target.
I'm pleased to see that we are now delivering on almost all of the targets we've set to ourselves. If we turn to the next page, a little bit look at sales growth in the world and performance in the world, we can say that we have now sales growth in all regions except Latin America. Europe growing in Q2 with 8.7%, strong industrial demand with significantly higher demand in most industries. Heavy industry, railways, industrial drives, food and beverage, aerospace. In automotive, we have a high, good development in Europe for trucks and light vehicles. The only one that is not performing with this kind of growth, where we have a slight lower sales due to restructuring in the markets and a little bit of a dampened market is in the vehicle aftermarket.
If you look at Asia, an extremely strong 17.2% growth, both in industrial and automotive, significantly higher in most industries. We're talking about drives, heavy industry, railway, agriculture, food and beverage, distribution. They're all significantly higher. Automotive, significantly higher in light vehicles and vehicle aftermarket. As we all know, the truck side has been flattish in Asia, and that's also seen in our figures. North America, 5.3%, as I mentioned initially. We see that demand is higher in industrial drives, aerospace, heavy industries, agriculture, food and beverage, railway. Sales in industrial distribution is relatively unchanged. It's the energy sector that is still lowering the figure somewhat, but also here I am sure that we will see improvement going forward. On the automotive in America, we can see that the strong light vehicles are significantly higher, whilst the vehicle aftermarket is slightly lower.
In Latin America, yes, it's again the energy sector that's holding us back, and as we all know, Argentina, due to the economic situation in Argentina, is of course not helping the sales development at this moment. On the rest of industrial distribution, and heavy industry, sales are developing according to market. If you look at pricing, we've been talking about that. I think we show, as we said, we have pricing power. We have been managing to increase our price as well. Industrial distribution, it's all implemented. Industrial OEMs and end users, the pricing situation is as it should be in this kind of market situation, in the automotive vehicle aftermarket as well. Of course, as we've always said, these things are a little bit slower in the automotive OEMs, but also there it's developing according to plan.
All in all, I think, we are delivering a result according to what we have sort of predicted in our previous calls and explained to you. If we turn to the seventh page, to the next page. We talk a lot about unplanned production stops and how SKF is an ideal partner for industrial companies to improve their performance and reduce their stoppages, et cetera. We've been talking about that for a very long time. Of course, the new technologies that are available to us and the ones we are developing and launching gives us an absolute enormous potential now to actually deliver on this like never before. I want to highlight in my presentation this time what we're doing now in this quest. If you turn to the next page, we have inaugurated during this quarter our Rotating Equipment Performance Center, also here in Sweden.
These centers we are now establishing around the world. It's a center where we sort of couple together all these activities around the rotating shaft, where we can detect, monitoring our customers' machines, we can organize and solve the problems they have. We can work with rebuilding both their machines and even remanufacture bearings if that's necessary, and give a good value added to the customer. We can, by this, grow the data-driven business, and develop these new business models that we have been talking about. We can optimize supplies to our customers, and we can work closely with the machine health development people to develop the new solutions.
This is sort of a command center that we are now developing, and putting in place in all regions to take the next step on adding value to our customers through our abilities to solve problems around the rotating shafts. With those words, I would like to hand over to Christian. Thank you.
Thank you, Alrik, and good morning to all of you. I will, as usual, take you through the details, if we turn page. Starting with the top line, net sales increased with 11.8% in the quarter. As you heard, we still experience a healthy growth in most of our markets and most customer industry, both in industrial and in automotive. Organic sales increased by 9%. Currency effect was positive 3.4%, while the structure component is negative 0.6% in the quarter. That, as you know by now, relates to the Reelcraft divestment that we did last year. I can also say that this quarter is the last time we report Reelcraft as structure. If you turn page, the business cycle sinus curve, which we can rename to the plateau now. Last year, we grew for the full year 8.2%, which was equally distributed over the quarters.
That first half year, we have grown 8.3%, and in the second quarter, as you heard, 9%, which is of course very pleasing, also knowing that we have significantly higher comparison values this year. The day effect is just minor in the quarter. We have a half a day more if we compare it to last year. Next page. Operating profit in the quarter was SEK 2.925 billion, some SEK 610 million higher than in the second quarter last year. As you heard, it's the highest operating profit SKF has reported in a single quarter in the history. The second highest was, in fact, in the history was last quarter. It's the second quarter in a row that we hit the record. For the 12 months rolling, operating profit is now at SEK 9.5 billion.
If you turn page, I'll take you through the bridge From left, and we have a negative effect in the bridge from the Reelcraft divestment last year that contributed by SEK 35 million in operating profit at that time, which we don't have this year. Currency impact turned for the quarter positive, different than we've guided, and we know the development there. It's positive SEK 31 million compared to last year. Operational performance was very strong and increased year-over-year by SEK 614 million with a very good leverage. If I take you through that, we have organic sales and manufacturing volumes that increased by SEK 957 million. This, as you know, includes positive effects from sales volume, from price mix, and from fixed cost contribution from increased production volumes.
This quarter also includes a negative effect, I come back to this, due to that we did not increase our finished goods inventories as we did last year. Let's come back to that. Price mix, clearly very positive compared to last year. As we have reported, we have had an improvement trend on pricing over the last few quarters, and that continued also in the second quarter. We have a slightly better price mix component in the bridge than we had last quarter. Mix was also, if I talk to that, positive with industrial growing stronger than automotive. Manufacturing contribution, as we said, overall positive.
Negative profit effect in the bridge of around SEK 80 million from the fact that we had flat development, which we also guided for, as you might remember, finished goods inventories in the quarter, compared to that we built some SEK 400 million in last year, same quarter. Cost development, negative SEK 340 million, consisting of material and inflation as always. Material cost for the quarter was negative SEK 90 million in the end. You know this, that we have raw material developments, we have compensating activities on cost reduction and redesigns and so on, and the net effect of that was negative SEK 90 million.
Remaining cost development, then negative SEK 250, which is in line with our guidance, which is consisting of ordinary cost inflation and also some extra cost related to that we run production on a high capacity utilization, which normally requires some change, more extensive shift patterns and rush freight and that type of stuff. If you look at the cost development guidance for the third quarter, we are, as you see, SEK 343 this quarter. We guide you to same level, SEK 350 for the third quarter. The split up of that material cost, somewhat less negative as we see it now, minus SEK 60, and the remaining parts of the cost cake, SEK 290. It's same bridge effect as we have seen this quarter. Maybe I should also mention then on inventories for third quarter, we forecast to reduce finished goods inventories in the third quarter.
Last year, we built inventories in the third quarter, so we will have a negative bridge effect of that. Our estimate is that we'll reduce inventories with some SEK 300 million in the quarter. Okay, if you turn next page, performance by customer group. Industrial organic net sales increased by 10.7%, and as you heard, sales were significantly higher in both Europe and Asia, slightly higher in North America. Reporting margin 14.6% compared to 13.7%, and what I talked about, the leverage components there is, of course, valid for industrial with increased sales and manufacturing volumes and a clearly positive price mix effect. Automotive grew 5.2% in the quarter. Good sales growth for both light vehicles and trucks. Strongest automotive markets continue to be Asia. However, demand was also good in North America, as you heard from Alrik.
Operating performance continued to strengthen, and the reported margin was 8.9% in the quarter compared to 6.4% last year. If you turn page, the income statement for the group. Good development on operating margins in the quarter, 12.9% as you've heard, one and a half percent increase. I'm pleased with the profit leverage that we have achieved the last few quarters, including this one. Financial net, second quarter, negative SEK 142, and last year we had some SEK 100 million additional there, which relate to the group that we repurchased the debt last year, which had a financial effect of negative SEK 100. Taxes in the quarter, SEK 759 million versus SEK 837 million. Effective tax rate of 27.3%.
If you say last year, we had then a tax cost related to the divestment. Last year's tax rate was about the same level as what we have this year, so 27.2% we had last year. Finally, some comments. Very good trend on earnings per share increased in the quarter to SEK 4.25, so almost 70% versus last year. The last 12 months or four quarters, we are above SEK 14. A good development there indeed. Next page. Cash flow. Strong cash flow in the quarter, excluding acquisitions and divestments. We had that, as you know, in the reported number last quarter. This year then we are at SEK 2.182 billion, so some SEK 700 million, almost SEK 800 million higher than last year. Improvements mainly related to the higher operating profit come through in the cash.
Investments also in line with what we communicate to you, it's slightly higher than last year, and as a consequence of that, we upgrade manufacturing technology in our plants. If we turn page, net working capital, 31.1% of sales in actual currency, 1.3% higher than last year. We have experienced currency swings, so it's mainly impacted by currency. If we see on the trends we have, and if we see a bit longer term also, we have good development on payables. We have also seen over, if you say, since 2016, good development on receivables. On inventories, as we've communicated, we were flat sequentially in value, which is good, and we foresee to reduce inventories further going forward. Next page. Net debt equity ratio stable at 67%, same as last quarter, despite that we now have paid dividend in the quarter.
If we exclude pensions, we are now down to 30% debt equity ratio. Next page, guidance for the year. Financial net for the third quarter, negative SEK 200. Currency impact, if we go on the end of June rates, it's positive SEK 180 million compared to last year. If you go on the exchange rate that we had beginning of this week, we have a positive SEK 140 million currency effect. The tax rate, where we had a guidance of 29% for the full year, we are now taking that down to 28%. The main driver of this is that we have higher profits taxed in Sweden to a tax rate which is lower than average. Additions to property, plant, and equipment, the same guidance as previously, SEK 2.4 billion for the full year. That's all from me. Back to you, Alrik.
Thank you, Christian. If we turn to the next page 20, just as a wrap up. Continued strong growth, if I summarize, of 9%, growth in all major regions and in most industries. Record high sales and operating profit and strong cash flow. As we turn to the next page and talk about our guidance, we expect to see continued growth in demand in Q3 with higher volumes year-over-year. If we look at that, and I read it to you, SKF demand outlook for Q3 2018. Demand compared to third quarter 2017. The demand for SKF products and services is expected to be higher for the group, including industrial and automotive. Demand is expected to be significantly higher in Asia, higher in Europe and North America, and slightly lower in Latin America.
I think this is absolutely in line with what we've said since the beginning of last year. We've seen a broad-based recovery in most markets, and that has continued into 2018, and we expect this to continue in the third quarter as reflected in this outlook. With this, Patrik, we hand the conference over to you again.
Thank you, Alrik. Operator, now we are ready to go to the question and answer session. Please.
That is great. Thank you. If you would like to ask a question today, please signal by pressing star one. We will take our first question from Marcus Almerud from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, Marcus Almerud from Kepler Cheuvreux here. Thank you for the details on the bridge. If you can just start there. Then follow up later. You don't report extraordinary cost in [Longse]. If you could help us with that, what that was, just to get the components of the bridge right compared to last year. Then also Unite, if you have anything there. Then can you just repeat what the inventory effect in Q2 was? Was it SEK 80 million? That's my first question. Then if I could just ask about the trends in North America, what you're seeing throughout the quarter. If there's any weakness in demand in North America and Europe, given where the PMIs are going and what the sentiment in the market is, also what kind of growth did you see in China? Thank you.
Yes. If I start, Unite, if you listen to our last call, we have a full year forecast, which is positive SEK 100 in the bridge, and we had SEK 50 in the first quarter. Yes. Which means that this is a minor impact going forward. That's where we are on that. That's the case also in the second quarter. It's not anything significant in this in any direction. Inventory effect is in the bridge. I estimate a negative SEK 100. Sorry, SEK 80. It's negative SEK 80 in the bridge. One-timers, as a consequence of skipping one reporting line, that means, of course, that we don't disclose the part in that if it's not significant. Obviously we had one-time items last year and we have this year. It's slightly lower this year, but it's not anything significant in explaining the results.
I could also eventually mention, I should have done that for the third quarter, we had a significant or a larger item as a one-timer, which is a customer settlement of SEK 190 million. Obviously, that is not repeated, or at least, for the moment, not known. It is a positive SEK 190 in the bridge related to customer settlements that we had last year. I hope that clarifies it.
If you look at the demand, your question about demand in North America, I think you can say that for quite a while, our underlying, if you take the industrial business, the underlying demand for our products and our sales have been good, and they have been sort of fogged by the fact that the energy sector has been weak, as we know, in the U.S. for quite a while.
If you look at it has been a good demand in the industrial side, and also the only thing that is basically holding us down is the VSM side, where it is not growing like it should, and like we would like it to. We are working hard on that. New products coming in and new channels going on. I am sure that we will be able to manage that. On the automotive side going forward, we see that the amount of business that we have coming in now with platforms that we are ramping up, this is part of what we see that motivates the outlook that we have in North America.
Okay. Thank you.
We will now take our next question from Gael de-Bray from Deutsche Bank. Please go ahead. Your line is open.
Yes, good morning. Thanks very much. Firstly, could you perhaps elaborate a bit more on the pricing environment, in particular in the U.S.? What do you see possibly in terms of the impact of the tariffs being put in place against the Chinese products? Of course, in the U.S. first, also if there's been, or if you see some of the Chinese production possibly being redirected elsewhere, something that could perhaps affect other regions. That's question number one. Question number two is on the working capital reduction target. I think we are still pretty far away from the target, obviously, at this stage. In particular, what do you see in terms of the potential, perhaps obviously in terms of inventories, but also the potential to better optimize the trade payables?
It seems to me that you're maybe being a little bit too nice to your suppliers in terms of payment terms, at least relative to a lot of other industrial companies.
Well, if you start with your first question, it's too early to say exactly how this will play out, you can understand that in the U.S., it means for many of the customers that actually it's not so that there's an enormous big capacity in the U.S. waiting to take up the slack from whatever price increases you would get from China. In many cases that you see, these are being pushed through the value chain, and you see a possibility and a market where actually prices are going up. This is what you see. On the long term, how much of this will be redirected. It's too early to say. Many of these products are for the particular markets. We're talking about components. It's not always finished product as well. We're talking about components. We're talking about steel.
This is a big market. The steel market is a big market, for me, it's still too early to say what kind of effect this will be on it.
Yes. You asked about working capital, and you felt whether we are nice with our suppliers, and that's what I'm telling our purchasing organization also, but they obviously not always agree. I think you see that also in the graph, which is, of course, mixed up with currency. I think we have a decent development since, I would say, a few years now, end of 2015, that we are improving on that. I wouldn't say that we are significantly lower in terms of days of payment than peers. Certainly, there is always more to do, and you can trust that we are pushing this. It's a very important KPI for our purchasing organization on that. Generally, when it comes to working capital and the target of 25, yes, we are not there. You can trust we are working on it.
If you attend our capital market day here that is planned for the autumn, we will give you an update, of course, on the more underlying programs we have on that. We don't have time for that now, but we do have things related to, I would say, also IT, and that's one of the driver for our Unite SAP Program there and also other initiatives to get better tools in order to how we plan production and how we can do this in order to reduce capital tied up in that. Yes, inventories is the area to focus on getting a significant improvement in the working cap ratio.
Thanks very much. Can I just have a follow-up on the pricing side? Out of the 9% organic growth you had this quarter, what's the price mix component? Is it plus 2, plus 3? Above that?
We don't give you numbers on that, as we have said in previous meetings. I think if you calculate with the different pieces of information you get here, you will see that what we are saying, that we have gradually improved the bridge component on price mix, and you will see that also for quarter two, and that's what we do, but we don't give you an absolute figure on that.
Okay, thank you.
We will take our next question from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.
Good morning. Thanks very much for taking my questions. Firstly, can I just double-check on the inventory plans for Q3 versus what you did in Q3 last year? I've got from my notes that you build SEK 220 million of inventory in Q3 2017 versus Q2 2017. Can you confirm that?
Yes.
Okay, you expect the same drop-through on that change as you had in Q2 2018 of 20%?
I don't give you a number on that, but I give you the number that our ambition is, of course, is to reduce inventories. Please remember, to reduce inventory is something good. Obviously, it has an impact-
Of course
in the profit bridge. The forecast is that we will take it down sequentially SEK 300. You get a delta of SEK 500, roughly.
Yes.
Inventory reduction. You can play with your fixed cost average there.
Okay, great. Thanks for the clarification. The broader question for me is just on the pricing versus raw materials development that you envisage for second half and into 2019. Firstly, do you expect your pricing to continue to climb up sequentially during this year or in Q3 specifically? Also, I was a bit surprised that you expect raw materials to ease off in Q3. We saw some pretty pronounced inflation in scrap prices in U.S. in particular, but also in Europe. How do you see that?
Yeah
maybe into the end of the year?
I will try, even though I know you might not be. You're right, raw material is, gross wise, it's not easing in Q2 to Q3 sequentially. We talk about our compensating activities, and we're talking about the bridge effect, which is less. We had increases.
Right
last year. The bridge effect is improving in what we see right now. The raw material itself is still there. When it comes to price mix in the bridge, if that's your question?
Yes
I would say it like this, that we forecast to keep the bridge delta, which means that since we already last year, third quarter, increased pricing, it means that we should see some developments also in Q3 this year in order to be able to achieve that.
Sorry, I must admit, I don't think I quite followed you. You aim to keep the bridge delta, so you aim to have the same increment on the profit bridge this year as you were seeing last year. Is that the right interpretation?
You're talking about Q3, yes?
Yes.
we said that
Yeah.
I said that the proportion, the price mix delta that we have in Q2 will remain in Q3.
Okay. The 50 basis points that we discussed before in previous quarters of sequential improvement.
I'm not talking basis points. That you have to calculate yourself. Whatever you conclude, that will remain in Q3. That's what I'm trying to say. We continue to push on pricing. You can bet on that.
Since we increased pricing in Q3 last year, and in order to keep it, we expect to see some effect also in Q3 this year.
Great, thank you. If I may, just a quick follow-up on the North American energy comment, Alrik. Is this mainly related to the power generation activities or still oil and gas segments driving?
This is mostly the big business.
Wind.
the one that makes a difference, so to speak, is wind. You know that as we announced previously in Q1, there's been a slump in the overall wind business globally, actually during last year. It's just starting to pick up now. Also there have been some businesses in the U.S. that we decided not to follow, not to take, which makes this kind of difference where you can see it affects the underlying volume growth so much that even though we've actually been growing also in Q1 in the U.S., due to this difference in the wind between one year and the other, you didn't see it. This is coming through, and we see again how we're growing in the U.S.
Great. Thank you.
Even though there's still a negative on the wind, that is now being improved, and a solid growth in the rest of the business like we actually have had in Q1 as well.
Got it. Thank you very much to both of you.
We'll take our next question from James Moore from Redburn. Please go ahead. Your line is open.
Yes. Hi, everyone. Alrik, Christian, I have three questions, if I may. My first question is trade tariff related. Can you put a percentage number, please, on the proportion of U.S. purchases that come from China, whether that's imports from PEER and GBC that you bring in directly, or other purchases from other companies that you bring in from China? My second question is on your good acceleration in Asia Pacific to 17.2%. Could you help us understand that a bit better? Is firstly, China similar to the rest of Asia? Secondly, your development comments suggest there's been a good wind performance in the quarter.
If you could, if you were to look at the core short cycle side of China, I'm thinking industrial drives, other industrial distribution, could you perhaps talk about the development there and whether that's still growing quarter-on-quarter or whether that's now sequentially a bit more stable? Finally, on your outlook for higher, the 4%-8%, I wonder if you could give us a sense as to how confident you're feeling on that. It's quite hard for us to know also how to read it because it varies if price mix is 2.5% or 1.5% as to what it really means for organic. Making an assumption of 2%-2.5% on price mix, I wonder whether you're feeling you're at the lower end of that range.
I'll start with the last question. I think, when you look at SKF, we have been quite accurate. We're looking into the future, right? I think that if you look in the past, we've been quite accurate in actually giving you information that actually correlates to what actually happens later on. I would say, I don't think that there's any reason at this point to say that this will differ. We've been quite good at outlooks, I have no reason to believe that should be different this time. As far as Asia, yes, it's true. It's all of Asia. We see the same. If you take quarter-on-quarter, we're growing in almost all the segments, everything, broad-based growth during the quarter. You know how it is.
When you look one quarter between the other, et cetera, it's the overall trend that you see that you have to focus on. There's always a little bit between the quarters. One, there is more deliveries coming in one month and one quarter, and another quarter is a little bit different now. If you take the first half of the year, you see good development in China and Asia. I think that's what you should focus on. It's, from my point of view, extremely positive. When you look at the exact amount of how much we trade from China, we don't give you, but I tell you, I think we've been somewhat clear on the fact that we are sure that, as I said before, there's sort of not a ready supply base in the U.S. for anybody.
We're all sort of buying from China, if you know what I mean. We're living in a globalized world and the supply chain is globalized. There is going to be, of course, price increases in the U.S. based on this. It's already happening as a matter of fact. That's clear. There will be some possibility to resource from other regions. In many cases, also SKF has the possibility of picking up this business. Let's just hope that we're for free trade. Let's hope that this rattling with trade barriers and import duties will soon abate and we come back to what the world should do, is come together. I tell you, I'm so proud we're the key sponsor of something called Gothia Cup where 1,700 young people from nine to 17 are gathering here in Gothenburg. It's going on right now.
We, as SKF, apart from being the main sponsor, and all of you shareholders, you can feel proud when you own our shares that you're part of this. We take also 28 teams from less favored places around the world to play here. When you see these people, these young kids from all around the world playing together as one big family, it makes you feel that we have a lot to learn from the young people.
That's very helpful, Alrik. Thank you, I appreciate it. Could I just follow up on your comment that everyone's buying from China, and I think that's true, but when I speak to companies, there's quite a range on the proportions they're buying. Some companies say, "Oh, we're buying 5% of our supply base from China." Some say 50%.
It's not the big thing. It's not the thing that will change SKF in China. That's what I was trying to say. There are some businesses where you see that there's an alternative, and many times, that alternative could even be SKF somewhere else. Without giving you any absolute figures, I don't think at this point you should worry too much about that.
You're not buying more than a quarter of your purchases from China, so to try and put a number on it.
No way. No.
Okay.
No way.
Okay. [Tamar]. Thank you very much.
We will take our next question from Matthew Spurr from Exane. Your line is open. Please go ahead.
Good morning. I had a couple, please. First one, if you go back to the inventory levels again, can you just outline what the trigger is for you to be reducing inventory levels now? You talked about demand picking up, I think you've been quite clear there. You also flagged the balance.
Yeah, I'll take that. This is something we've been discussing. I don't know if you've listened in on the previous calls. When the market changes like it did in 2016, we started to speed. When you start to speed, you build inventory, and in the industrial environment we've had, you are fighting to serve the customer, and you do everything to have the kind of readiness to give the best service level you can to the customer. As you ramp up and become more and more in sync with your capabilities of serving the customer, you can start looking at inventories and see, how can I now still keep a good service level, still grow, because I'm ramped up already, I have my flexibility in my system, and I don't have to build inventory anymore to serve the customer.
This is where we are. This is what we said in Q1, that now we're in a situation where we can deliver to customer at the same time as we can start looking at the inventories, and tweak them. This is exactly what we're doing. I think this is a normal how you manage your business. I'm proud of my team of doing this in such a good way that we've been growing 9%, we've still kept our promises to our customers, and we haven't increased inventory. Well done.
Okay. Have you done that efficiently? You flagged in the bridge, didn't you, with the cost inflation, you said part of that is expensive overtime.
No
I guess there's no-
What we're saying is, you can imagine, the bearings are in all products. Our main product, the bearing, is the world's most common industrial product. It's in everything. In some parts of the value chain, this is still choked. In those parts of the value chain, we're still having excess overtime in our factories and sometimes air freights to sell to the customer. This is some kind of general situation in all our product lines that you see. Yes, there are parts of our product lines where we reduce more our inventory. There is part of the product lines where we actually had to increase inventory. Because it's 40,000 different kind of products and myriads of product lines and myriads of business.
I think to do this, to be able to keep the levels now, grow 9%, and looking forward to keep on growing and still manage to tweak the inventory is an ambitious and good development.
Okay, thanks. We haven't touched on automotive yet. Can I just have a quick one on that? Just firstly, the outperformance has been going on against underlying production for a while. Going into Q3, are you going to be affected by changing production schedules for WLTP?
Well, it's of course like this. We hope now that this will be solved, and you will see the part of the car companies that are affected by this to be able to release their vehicles, already now coming online. Nobody really knows. Of course, if this doesn't develop as everybody hopes, that it will be normalized very soon, of course.
Okay, thanks.
I just wanted to add, we don't have those indications presently.
We'll now take our next question from Johan Sjöberg from DNB Bank. Please go ahead. Your line is open.
Thank you. I had just coming back to your favorite topic to answer here, prices. If you look at the Q2 prices, would you say that this July price increase you announced last year, would you say that it's pretty much fully now in the figures in the second quarter?
I don't understand the question.
The question is, you raised prices in July last year, and then you coming back to the OEMs, you raised those prices especially at the beginning of the year. Would you say that there's still some impact from that, further contracts will be renegotiated from that price increase in Q3 this year?
I think we see this more holistically. We cannot talk about single price increases here and there. You got the comments on how we see the bridge for Q3, and I think it was a positive comment, at least. Pricing is a daily activity.
Yeah.
It's still a good dynamic in the marketplace, and that gives still a good dynamic for discussion prices in the marketplace. I think that the main message, we have delivered what we said we were going to do, and we will continue to deliver as we see what we are saying that we're going to do. There are price increases and price discussions going on every day.
Got it. Also this second price increase to distributors, which was announced in, I think it was in April.
Yeah.
Could you say something about the progress of those? Are they coming through?
I think as we said, this is just implemented and then it goes. That's how it works with distribution.
Wonderful. Could you say something about the magnitude of the second price increase? Is it around about the same levels as we saw when it comes to the first price increase?
No, we cannot say that. Things are going fine. It's going as we have been saying. You see it in our figures, and you hear us saying this. Yes.
Good.
Things are going good.
Thank you so much.
We will take our next question from Ben Uglow from Morgan Stanley. Please go ahead. Your line is open.
Good morning. Thank you for taking the question. Quite a few have already been answered, but I guess, and I realize that this is very early stage, and I'm sorry to come back to tariffs, but Alrik, when you listen to customers and you have conversations around the world, do you sense that people are beginning to change behavior or is it too early? The reason why I ask is in the past when these events have come through, either trade related or weather related, whatever, there tends to be initial anxiety and then stockpiling and component shortages. Do you see any evidence at all at the moment of, I don't want to say panic buying, but let's say of people beginning to adapt to a potential situation that could get worse? Is there any evidence of that so far?
No. The only thing I can say I've seen is that as this was announced, some people tried to move forward deliveries to the U.S., for instance, of components before the deadline, as much as possible, and what the supply chain quarter sort of permits. I think you see that also in the U.S. trade figures, the deliveries from China to the U.S. started to peak just before the tariffs were put in place. This is what you see. So far, that's what I can see that I've seen. That's not material, if you understand in the overall situation.
Okay. It's not like your sales guys or guys you talk to on the ground are saying that people are adapting behavior right now.
No. This is going to be a discussion, of course, to see what are the opportunities. People will need to do what they can. SKF is there too. It's a global supply chain.
Okay. That's it. Thank you very much.
Thank you.
We will take our next question from Peter Prodan from Hansabank and Capital Markets. Please go ahead.
Hi. Good morning. Thank you for taking my question. On the demand again, Alrik, your outlook. I appreciate that you've eased it a bit by taking out a sequential one. Listening to your wording when describing the outlook here, do you expect sort of demand, daily rates, whatever, to plateau on this level? It seems like some segments, some areas have accelerated into Q2, to get the maths correctly there's quite a bit of a seasonal effect here. My question is, do you see demand plateauing now, or do you actually see it growing sequentially? That's my first question. The follow-up would be on another sort of reporting issue, which is fine that you take out the non-recurrings. I appreciate that again.
Normally, SKF have taken quite a lot of restructuring in order to maintain the vast production sort of set up, and now it was some time ago. How should we think about this? If you were to do another program for another set of factories like you did in Gothenburg, Schweinfurt and so forth, will you tell us the amount of that, so we can exclude that in our numbers? Also, do you see something on that happening for the remaining part of 2018? Thank you.
Well, we're not talking sequentially, the guidance is like it is. Then, of course, in a dynamic business, you see some segments going up and some segments, the growth is tapering off. In some segments, I tell you right now, we have the record high order books, et cetera. I would say the guidance is, as I put it there. I could say that I have really nothing more to add than what I said when I talked about the guidance as it is. Things are going well.
Hi, Peter. It's Christian. When it comes to your question then on shaving off cost and doing things in our factories, I believe you've heard that before, that the base guidance from us, I mean, to work with the cost and productivities, is SEK 400 million a year. That's where we are. Then if we have bigger stuff, that's communicated to you. We don't have any such to communicate to you now.
Okay, very clear. Thank you.
Thank you very much, everybody, and thank you for listening in on this very busy day with so many calls, and thank you for spending time with SKF. Thank you for rejoicing with us on a good record quarter for SKF and a good outlook for the future. Thank you very much.
Ladies and gentlemen, this now concludes today's conference call. You may all disconnect, and thank you all for your participation.
For a moment