Earnings Call: Q2 2018

Jul 19, 2018

Good day, and welcome to the SKF AB 2nd Quarter Report 2018 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Patrick Sennberg. Please go ahead, sir. Good morning and welcome to the Q2 conference call. Present today are our President and CEO, Albert Donuelson, our CFO, Tristan Johansen, our Head of controlling And Accounting, Karina Sandenbeck, CL Shell, Vice President, Media Relations Director and myself, Patrick Steinberg. As usual, this call will take about an hour. We are targeting a presentation time was on 25 minutes. And after that, we will open up for Q And A. And at the Q And A, I would like remind you to try to limit yourself to one question so that everyone gets their shot. With that, I'll leave the word to Ulrich, please. Thank you very much. Welcome, everybody. And if we turn to page number 2, Here in a sunny Gothamberg, it's a pleasure for me to present a record second quarter of the second time now in a row that we make as record second quarters. Fantastic. Record sales. Strong growth of 9% organic growth, almost just shy of SEK3 billion of operating profit record high. Operating margin now at 13% just shy of 13% and 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. So 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 3 and express wells, you can see industrial business performing wells, Growth is also now picking up in North America. You know that for a couple of quarters, mean, even though the underlying business in America has been strong for us, we've been sort of the comparison has been a little bit haze by the fact that energy hasn't been doing that well. But now we see also that the growth is coming through in America. With a on the global scale, 11 percent of Granite Growth and an operating margin of a strong 15%. If we turn to the next page and look at Automotive briefly, we are absolutely convinced we're now outperforming the market. And the margins continues to strengthen. I think that, the team is doing a fantastic job. We started this journey 3 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%. And as you know, if we turn to the next page, we have financial targets, and they are 5. And I think it's it's good to see that we have recently done real good progress on all of them. And in Q1, we in Q1, we met the 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 and improvement potential on our working capital. And 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. So I'm pleased to see that, 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 to look at sales growth in the world and the performance in the world, we can say that have now sales growth in all regions except Latin America. And I mean, Europe growing with the in Q2 with 8.7 percent. Strong industrial demand with a significantly higher demand in most industries have 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 and with this kind of growth where we have a slight lower sales due to restructuring in the markets and a little bit of tap and walker market is in the vehicle aftermarket. If you look at Asia, an extremely strong 17.2% growth, both in the 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. But 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, and we see that demand is higher and drive, aerospace, heavy industries, agriculture, food and beverage, railway, and sales in the industrial distribution is relatively unchanged. And, the energy sector that is still slowing the lowering the figure somewhat, but also here, I'm sure that we will see improvement going forward. And on the, automotive in America, we can see that the strong and light vehicles are significantly higher, while the vehicle after market is slightly lower. And in Latin America, yes, it's again, the energy sector that's, 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 that moment. But on the rest of industrial distribution and heavy industry, sales are developed according to market. If you look at pricing, we've been talking about that, and I think we show, as we said, we have price 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. And of course, as we've always said, these things are more they're a little bit slower in the automotive OEMs, but also they're it's developing according to plan. So all in all, I think, we are delivering results according to what we have sort of predicted in our previous calls and explained to you. If we turn to the last to the 7th page, 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, etcetera. And we've been talking about that for a very long time But 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. And I want to highlight in my presentation this time, what we're doing now in this quest. And if you turn to the next page, We have inaugurated during this quarter are rotating equipment performance center also here in Sweden. These centers, we are now establishing around the world. It's center where we sort of couple together the all these activities around the rotating shaft where We can detect monitoring our customers' machines. We can organize and solve the the problems they have, we can work with rebuilding both their machines and even remanufacture bearings, if that's necessary, and give a good add value added to the customer. We can by this grow the data driven business and develop these new business, 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 solution. So 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. And with those words, I would like to hand over to Christian. Thank you. Thank you, Alex, and good morning to all of you. I will, as usual, take you through the details. And if we turn the page, starting with the top line, net sales increased with 11.8% in the quarter. As you've 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. And that, as you know, by now, relates to the real craft divestment that we did last year. And I can also say that this quarter is the last time we report re crossed our 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 equaled was equally distributed over the quarters. That first half year, we have grown 8.3 and in the second quarter as you've heard, 9%, which is, of course, very pleasing, also knowing that we have significantly higher comparison values this year. The day effect is, yes, minor in the quarter. We have a half a day more, if you would, if we compare it to the last So next page, operating profit in the quarter was SEK 2.925000000000 some SEK 610,000,000 higher than in the second quarter last year. And as you've heard, it's the highest operating profit SGS has reported in a single quarter in the history. And the 2nd highest was, in fact, in the history was last quarter. So the second time in a second quarter in a row that we hit the record. For the 12 months rolling, operating profit is now at 9 point 5,000,000,000. So the pivotal page, I'll take you through the bridge. From left, and we have a negative effect in the bridge. From the rekraft divestment last year that contributed by $35,000,000 in operating profit at that time, which we don't have year. Currency impact, turned for the quarter positive, different than we've guided. And we know the development there, so it's positive SEK31 1,000,000 compared to last year. Operational performance was very strong and increased year over year by SEK 614,000,000 with very good leverage. So if I take you through that, we have organic sales and manufacturing volumes that increased by SEK 957,000,000. And this, as you know, includes positive effect from sales volume, from pricemix 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. So let's come back to price mix, clearly very positive compared to last year. And as we have reported, we have had an improvement to end on pricing, over the last few quarters and that continued also in the second quarter. So we have a slightly better price mix component in the bridge. Then we had last quarter. Mix was also, if I talk to that, positive with the industry growing stronger than automotive. Manufacturing contribution, as we said, overall positive, negative profit effect in the bridge of around CHF 80,000,000 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 400,000,000 in the last in last year, the same quarter. Cost development, negative $340,000,000 consisting of material and inflation, as always, Material cost for the quarter was negative 90,000,000 in the end. And 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 90. Remaining cost development then negative 250, which is in line with our guidance, which is consisting of ordinary cost inflation and also some extra costs related to that. We are, we run production on a high capacity utilization, which normally requires some change more extensive shift patterns and rush to freight and that type of stuff. If you look at the cost development guidance for the third quarter, so we are, as you see, 343 this quarter, We guide you to, same level. So $350,000,000 for the 3rd quarter and the mix, the split up of that material costs, somewhat less negative as we see it now. -60 percent and the remaining parts of the cost gate, 290. So it's the same same bridge effect as we have seen this year, this quarter. Maybe I should also mention then on inventories, for third quarter, we will 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. And then our estimate is that we reduced inventories with some SEK 300,000,000 in the quarter. Okay. I'll turn the 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 and slightly higher in North America, reporting margin, 14.6% compared to 13.7%. And when I talked about the leverage components there, is of course valid for industrial with increased sales 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. The strongest of the multimarkers continues 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 the 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, 1.5% increase. And I'm pleased with the profit leverage that we have achieved in the last few quarters. Including this one. Financial net, 2nd quarternegative 142 And last year, we had, some SEK 100,000,000 additional there, which relate to that we repurchased the debt last year, which had a financial effect of negative SEK100 million. Taxes in the quarter, $759,000,000 versus $837,000,000 effective tax rate of 27.3 percent. And if you say last year, we had a tax cost related to the divestment. So last year's tax rate was about the same level what we have this year. So $27,200,000,000 to $7,200,000,000 we had last year. And finally, just on comments, very good trend on earnings per share. Increased in the quarter to SEK4.25 to almost 70% versus last year. And the last 12 months or 4 quarters, we are above SEK14. So a good fair indeed. So 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 $2,182,000,000. So some $700,000,000 from $800,000,000 higher than last year, improvements mainly related to that higher operating profits come through in the cash investments also in line with what we communicate to you to, is slightly higher than last year. And as a consequence of that we upgrade, manufacturing technology in our plants. So if we turn page, net working capital, 31.1 percent of sales in actual currency 1.3% higher than last year. We have experienced currency wind. 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, to the end 'sixteen, good development on receivables. And on inventories, as we've communicated, we were flat in, in, sequentially in value, which is good. And we foresee to reduce inventories further going forward. So next page, net debt equity ratio stable at 67% same as last quarter despite that we now have paid dividends in the quarter. And if we exclude pensions we are now down to 30% that equity ratio. So next page, guidance for the year. Financial net for the 3rd quarter negative 200 currency impact, if we go on the end of June rates, it's positive SEK 180,000,000 compared to last year. If we go on the interest rate that we had beginning of this week, we have a positive SEK 140,000,000 currency effect. And then the tax rate, while we had the guidance of 29 for the full year, we are now taking that down to 28. And 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 2,400,000,000 for the full year. So that's all from me. Back to you, Eric. Thank you, Christian. I mean, just we turn to the next page, 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. And as we turn to the next page and talk about the our guidance, we expect to see continued growth in demand in Q3 with higher volumes year over year. So if we look at that and I read it to you, SKIP demand outlook for Q3 2018, demand compared to third quarter 20 17, 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. And, 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. So with this, Patrick, we handed the conference over to you again. Thank you, Andre. Operator, now we are ready to go to the question and answer session. So please. You. From Markus Almirall from Kepler Cheuvreux. Please go ahead. Your line is open. Hi, Marcus Anrut from Kepler Cheuvreux here. Thank you for the details on the bridge. If you can just stop there and then follow-up later. Can you the you don't report extraordinary cost in loans. So if you could help us with that, what that was just to get the components of the bridge right compared to last year? And then also unite if you have anything there. And then I would also Was it could you just repeat what the inventory effects in Q2? What was it? 80,000,000? And then that's my first question. And then if I could just ask about the trends in North America, what you're seeing throughout if there's any weakness in demand in North America, you're given where the PMIs are going and what the sentiment in the market is. And also how much, 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 will is positive 100 in the bridge and we had 50 in the first quarter. Yes. And, which means that this is a minor impact going forward. So that's where we are on that. And that's the case also in, in the second quarter. So it's not is not there anything significant in this in any direction. Inventory effect is in the bridge I estimate a negative $100,000,000 sorry, the $80,000,000, it's negative $80,000,000 in the bridge. One timers, yes, as a consequence of skipping one reporting line, that means, of course, that we don't we don't disclose the parts in that, if it's not significant. So 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, explaining the results. Then I could also eventually mention, I should have done that. That for the third quarter, we had a significant or a larger item as a one timer, which is the customer settlement of SEK 190,000,000. Obviously, that is not repeated or at least, for the moment, not known. So it's a positive 119 in the bridge related to customer settlement that we had last year. I hope that clarifies it. And if you look at the demand or question about demand in North America, I think you could say that 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. And so if you look at it, it's been a good demand in that industrial side and also only thing that's basically holding us down is the BSM side that is not, where it's not growing like it should. Like we would like you to, but we're working hard on that new products coming in and, and, new channels going on. So I'm sure that we will, 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 the platforms that we are ramping up. We this is part of what we see that motivates the outlook that we have in North America. We will now take our next question from Gail 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? I mean, 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. 1st, but 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. So that's question number 1. And question number 2 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 payable because 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 to a lot of other industrial companies? Well, if you, if you start with your first question, it's too early to say exactly how this will play out. But you can understand that that in the U. S, it means for many of the customers that actually it's not so that there's a an enormous big capacity in the U. S. Waiting to take up the slack from from whatever sort of price increases you would get from China. So in many cases, as you see, these are being pushed through the value chain and and you see in a higher possibility in a market where actually prices are going up. And this is what you see. On the long term, how much of this will be redirected and there will be. So it's too early to say Some many of these products are for the particular markets. We're talking about components. It's not always finished products as well. We're talking about components. We're talking about But steel, this is a big market. The steel market is a big market. And for me, it's still too early to say what kind of effect this will be on it. Yes. Then I you asked about working capital and you felt that we are nice with our suppliers and that's 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. 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 of days of payment than peers, but certainly there is always more to do when we you can trust on that push in this, it's very important KPI for our purchasing organization on that. And 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 have and you will, 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, it was IT, and that's one of the driver for our Unite S And P And S 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. So yes, inventories is the area to 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 have 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've said in previous meetings. But I mean, and I think if you calculate with the different pieces of information you get here, you will see that we what we are saying that we have gradually improve the bridge component on pricemix. And you will see that also for quarter too, and that's what we do, but we don't give you an absolute figure on that. We'll 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 on the inventory, our plans for Q3 versus what you did in Q3 last year? I've got from my notes that you build SEK 220,000,000 of inventory in Q3 2017 versus Q2 2017. Can you confirm that? Yes. Okay. And you expect the same drop through on that change as you had in Q2 2018 of 20%? I mean, I don't give you a number on that, but I give you the number that our ambition or ours is, of course, is to reduce inventories. And I mean, please remember to reduce inventories, something good. But obviously, it has an impact in the profit bridge. So I the forecast is that we would take it down sequentially in 300. So you get a delta of 500 roughly. Yes. That's a reduction. And then you can you can play with your your fixed cost coverage there. Okay, great. Thanks for the clarification. And a broader question for me is just on the pricing versus raw materials development that you envisage for second half, and in 2019. Firstly, do you expect your pricing to continue to kind of climb up sequentially during this year? Or in Q3 specifically. And also I was a bit surprised that you expect raw materials to ease off in Q3. We saw some pretty pronounced inflation and scrap prices in U. S. In particular, but also in Europe. So how do you see that moving to the end of the year? I would try even though I know you might not be But I mean, you're right, raw material is, I mean, gross wise, it is not easing in Q2 to Q3 sequentially. We talk about our compensating activities, and we're talking about the bridge effects, which is less. Mean, we had increases last year. So the bridge effect is improving in what we see right now, but the raw material itself is still there. Then when it comes to price mix in the bridge, if that's your question. I would say 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. So you aim to keep the bridge delta. So you aim to have the same increment on the profit bridge, this year as you were as you were seeing last year, is that the right interpretation? You're talking about Q3, yes? And we said that the proposed on the pricemix, delta, that you that you have that we had in Q2, the remaining in Q3. Okay. So the 50 basis points that we discussed before in previous quarters of kind of sequential improvement I'm not talking basic points, I have to calculate yourself, but whatever you conclude that should remain in Q3, that's what I'm trying to say. So we continue to push on pricing. You can bet on that. And since we increased pricing in Q3 last year, And in order to keep it, we expect to see some effects also in Q3 this year. Great. Thank you. And 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? So the segment's drag has the one that makes a difference, so to speak, is wind. You know that there's been, as we announced previously in Q1, during 2000, there's been a slump in the overall wind business globally, actually, during during last year. It's just starting to pick up now. And also, there's been some businesses in the U. S. That we decided not to follow love to take, which makes this kind of difference where you can see it sort of, 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 win between 1 year and the other, you didn't see it. Now this is coming through and we see again how we're growing in the U. S. Even though there's still a negative on the win but that is now being improved and solid growth in the rest of the business. Like we actually have had in Q1 as well. We'll take our next question from James Moore from Redburn. Please go ahead. 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? And secondly, your development comments suggest there's been a good wind performance in the quarter. But if you could, if you were to look at core short cycle side of China and I'm thinking industrial drives other industrial 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? And finally, on your outlook for Hire, the 4 to 8, I wonder if you could give us a sense 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, but making an assumption of to 2.5% on pricemix. I wonder whether you're feeling you're at the lower end of that range. So I'll start with the last question. And I think when you look at SKF, we have been quite accurate. We're looking into the future, right? And 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. And 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, at outlooks and I have no reason to believe that that should be different this time. As far as Asia, yes, it's true. It's all of Asia. We see the same. And if you take quarter on quarter, we're growing in almost all the segments, everything, broad based growth, during the quarter. And, and you know, how it is, it's, when you look 1 quarter between the other, etcetera, the overall trend that you see that you have to, to, to focus on, there's always a little bit between the quarters one there is more deliveries coming in 1 month 1 quarter and then another quarter is a little bit different now. You take the first half of the year, you see good development in China and Asia. And I think that's what you should focus on. And it's, from my point of view, extremely positive. Then 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 we will be able to 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're own. I mean, the whole, there is, we're living in a globalized world and the supply chain is globalized. And And 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. So that's clear. And there will be some possibility to resource from other regions, but in any case, also SKF as the possibility of picking up this business. So, and then let's just hope that we're for free trade. So let's hope that this rattling with the trade barriers and and import duties will soon abate and we come back to what the world should do is come together. We I tell you, we I'm so proud with the we're the key sponsor of something called Gauzy Acap, where young 1700 young key people from 9 to 17 are gathering here in Baltimore. It's going on right now. We at SKF, we take, apart from being the main sponsor, and all of your shareholders, you can feel proud when you all go our shares that you're part of this, We take also 20 eight teams from less favored places around the world to play here. And when you see these people, this young kids, from all around the world, playing together as 1, 1 big family, it makes you feel that we have a lot to learn from the young people. That's very helpful, Albert. Thank you. I appreciate it. But can 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 company sale. We're buying 5% of our supply base. We're trying to say 50%. It's not the big thing. It's not the thing that will change ASKF in China. I mean, it's not 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 as guests somewhere else, but it's not really the, without giving you any absolute figures, I don't think at this point, you should worry too much about that. So you're not buying more than a quarter of your purchases from China. So it's not to try and put a number. No way. No. No. Okay. Okay, somehow. Thank you very much. Next question from Rajee Sper from Exane. Your line is open. Please go ahead. 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? Because you talked about demand picking up. I think you've been quite clear there. You also flagged about this is something we've been discussing, I don't know if you've listed in on the previous calls. When the market changes, like it did in 2016, we start to speed. And when you start to speed, you build inventory. And then the induction 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 sort of 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 sort of ramped up already? I have my flexibility in my system, and I don't have to build inventory anymore to serve the customer. And this is where we are. And this is what we said in Q1 that now we're in a situation where we can deliver the customer at the same time as we can start looking at inventories and tweak them. And this is exactly what we're doing. And I think This is a normal, how you manage your business. This is I'm proud of my team of doing this in such a good way that we've been growing 9% We still kept our promises to our customers and we have an increased inventory. Well done. Okay. Do you think that's a I mean, have you done that efficiently? I mean, you flagged in the in the bridge, didn't you, with the cost inflation? You said part of that is sort of expensive over time. Just, I guess, is there nothing? So what we're saying is, you can imagine the bearings are in all products. It's our main product, the bearing is the world's most common industrial product. It's in everything. So in some parts of the value chain, there's still choke And in those parts of the value chain, we're still having excess over time in our factories and sometimes air freights to sell to the customer. But this is some kind of general situation in all our product lines that you see So yes, there are parts of our product lines where we reduced more our inventory and 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 So I think this is really to do this, to be able to keep the levels now grow 9% and looking forward to keep on growing and still manage to treat the inventory is an ambitious, and good development. Okay, thanks. Can I, we haven't touched on automotive yet? Can I just have a quick one on that? Just firstly, just the outperformance has been going on against the underlying production for a while going into Q3, even the affected bias of change in production schedules for WLTP? Well, it's going to it's, of course, like this, when you see We hope now that this will be solved and you will see the part of the card companies that are affected by this to be able to release their vehicles already now, coming online or But I mean, nobody really knows. And of course, if this doesn't develop as everybody hopes that it will be normalized very soon, of course. Just wanted to add. We don't have those indications presently. We will now take our next question from Johan Choburg from Deutsche 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 and would you say that this July price increase you announced last year, would you say that it's well, pretty much fully now in the figures in the second quarter? I don't understand the question. Well, the question is, you announced or you raised prices in July last year. And then you were raised or you're coming back to the OEMs. You raised those prices in in, especially at the beginning of the year, but would you say that there's still some impact from that to further further contracts will be renegotiated from that price increase in Q3 this year? I think you have we have seen is more holistically. We cannot talk about single price increases here and there. You've got the comments on how we see the bridge for Q3 I think it was a positive comment at least. But pricing is a daily activity. And we are it's still a good dynamic in the market place. And that gives, a still a good dynamic for discussion prices in the marketplace. So It's I think that what the main thing, 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. And there are price increases and price discussions going on every day. Got it. And also the second price increase to distributors, which was announced in, I think it was in April but thank you. Could you say something about the progress of those? Are they coming through? I think as we said, this is just as interactive and then it then it goes. That's how it works with distribution. Wonderful. And then could you say something about the the magnitude in or the second price increase? Is it around about the same levels as we saw in 4 in when it comes to the first price increase? No, we cannot say it. But, but, you know, things are going fine. It's going as we have been saying, you see it in our figures and you see you hear us saying this. So yes, good. Things are doing good. Thank you so much. We will take our next question Stanley. Please go ahead. Your line is open. 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 Arik, have you when you listen to customers, you have conversations around the world, do you do you sense that people are beginning to change behavior or is it too early? And the reason why I ask is, in the past, when these events have come through either 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 try to move forward deliveries to the U. S, for instance, of components before the deadline as much as possible and what the, the supply chain quota sort of permit. And 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 before the tariffs were put in place. And this is what you see. And so far, that's what I can see that I've seen, but that's just that's not material if you understand in the overall situation. Okay. But it's not like your sales guys or guys you talked to on the ground are saying that something is that people are adapting behavior right now? No, but this is going to be a discussion, of course, to see what are the opportunities. People who need to do what they what they can and escape 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 Acer Browden from Bank And Capital Markets. Please go ahead. On the demand again, Alrik, and your outlook, and I appreciate that you eased a bit by taking out a sequential one, but listen to your wording when describing the outlook here, would you say that we do you expect sort of demand called daily rates whatever to plateau on this level. It seems like some segments, some areas. So I have accelerated into Q2, but to get the math correctly, there's quite a bit of a seasonal effect here. So my question is, do you see demand plateauing now or do you actually see it growing sequentially? That's my first question. And the follow-up would be on another sort of reporting issue, which is fine that you take out the non recurring. I appreciate that again, but 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. So how should we think about this? If you were to do another program for another set of factories like you did in Gautenberg, Schweinfurt and so forth. Will you tell us the amount of that so we could exclude that in our numbers? And also, do you see something on that happening for the remainder part of 2018? Well, it's we're not talking sequentially. So we are the guidance is like it is. And then of course, in a dynamic business, you see some segments going up and some segments, the growth is is tapering off in some segments. I tell you right now, we have the record high order books, etcetera. So 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. And things are going well. Hi, Peter. Let's get down. When it comes to your question then on the shaping of costs and doing things in our factories, you know, the and I believe you've heard that before that the base guidance from us, I mean, to work with the cost and productivity is is 400,000,000 a year. That's where we are. And then if we have bigger stuff, I mean, that's communicate to you. And we don't have any such to communicate to you now. So 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. And 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. No,