Good day, ladies and gentlemen, and welcome to the fourth quarter report 2016 conference call. Today's conference is being recorded, and at this time, I'd like to turn the conference over to Mr. Alrik Danielson, President and CEO. Please go ahead.
Thank you. Thank you very much, everybody, for listening in today. And, of course, today we released our report for the fourth quarter of 2016, and we saw a gradual strengthening in demand during the quarter and less of a seasonal pre-buying, which we sometimes see towards the end of the year. In total, net sales in the quarter was SEK 18.8 billion, three percentage points higher than last year. Organic sales increased with 1.2% during the fourth quarter compared with last year. Our automotive business grew organically by 3.3% in the quarter, while the industrial operation grew a little bit more than flat organically.
Operating profits, excluding one-time items, was SEK 1,741 million, which is slightly higher than last year, and operating margin, excluding one-time items, was 9.3%. The cost in the quarter for our new ERP system amounted to SEK 280 million and impacted the margin negatively with 1.5 percentage points, meaning that excluding the Unite project, we would have had almost 11%. As you see, we also had SEK 533 million less of one-time items in the fourth quarter compared to last year.
Cash flow from operating activities was a strong SEK 1.4 billion in the quarter, and we reduced our net debt by more than SEK 3 billion in the quarter, bringing the net debt to equity ratio down to 84%, close to our target of 80%. Early today, the board decided to propose an unchanged dividend of SEK 5.50 per share, which based on yesterday's share price, translates to a dividend yield of 3.1%. Turning to the next slide. I apologize, I actually left the first slide uncommented, but it was more of a little bit of a summary of last year, and I leave it for you to read.
Turning to the next slide, which is slide number 5, I will comment a little bit on the sales, sales development per geography. It is encouraging to see that we are growing organically again, both within the industrial and the automotive businesses. In Europe, organic sales increased by 1%. In Asia, we experienced strong growth in automotive segments, and in total, our organic sales grew by 8% in the quarter. Industrial activity continued to be low in North America, even though the rate of decline is less than what we have experienced in the first half of the year. Our organic sales in North America were 4% lower than in the fourth quarter of last year.
Organic sales in Latin America were 4.5% lower, primarily due to low volumes in Argentina, while organic sales in Middle East and Africa grew by over almost 7% in the quarter. If we move to the next slide and the development by customer and industry. Sales to the automotive industries grew by 3.3% in the fourth quarter. We saw good sales growth both for cars and trucks, especially in Asia and in Europe, while sales to customers within the car and truck industries were significantly lower in the U.S., even though we saw higher sales to the vehicle aftermarket in the U.S. in the quarter. Sales within our industrial area turned into an organic growth in the quarter compared to the fourth quarter last year.
Sales to our industrial distributors in total were slightly higher, but with significantly higher volumes in Asia, slightly higher volumes in Europe, and slightly lower volumes in North America. On the other hand, we saw significantly higher volumes in North America to customers within the industries such as the heavy, special, and off-highway industries, as well as the energy industry. Sales to rail industry were good in Europe, but continued to be on a relatively low level in North America and in Asia. Sales to the aerospace industry, on the other hand, were slow across most markets. So, going to the next slide, I will just talk a little bit about one case. I think you remember from last quarter, we announced that we had made a deal, a joint venture together with GE for our magnetic bearing, a partnership.
Magnetic bearings, we have been struggling many, many years to get our sales and get the technology introduced. But in October, as we closed this deal, we see that there's a clear change. And of course, already then we talked about an ambition to increase the impact of these combined solutions that we have on the turbo machinery market. And I can happily say that this joint partnership has developed much better than we thought, and I think we can now clearly say that we have a breakthrough in the magnetic bearing business. And you will, I think you will hear more about this as the year goes on, but this is a good news.
And then I think you will see in the reports there are more highlights from business that we have done, and I will not comment on them at this point. So now, Christian, please take us through the figures.
Thank you, Alrik, and good afternoon to all of you. So if we turn page to sales development, total net sales increased with 3.1% in the quarter. Again, it's encouraging to see that we are growing organically again, both within industrial and automotive. In total, organic net, organic sales rose by 1.2% in the quarter. Both the U.S. dollar and the euro strengthened compared to the Swedish krona, and that we had positive currency effect in sales of 3.7% compared to the headwind we experienced in the first half of the year. As you know, we have done some divestments during the year, and adjusted for that, we have, we have a structure component in the quarter four of negative 1.8%.
So next slide, if we look at the quarterly pattern of organic sales growth, it continues to follow a typical cyclical pattern, and a business cycle of 5-7 quarters seems to be fairly accurate also for this present cycle. Turning to the next page, the quarterly development of our operating profit, excluding one-time items. In the quarter, the result was SEK 1,741 million, slightly higher than in the fourth quarter last year. The operating profit in the quarter included one-time items of SEK -155 million, whereof 117 related to restructuring and cost reduction activities, primarily in Americas and Europe, and the remainder related to impairment. A more detailed information about how these one-time items have affected the different lines in the income statement, you can find in the quarterly report on page 4.
If you look at the rolling twelve-month trend, we are now excluding one-time items at a rate, a yearly rate of SEK 7.5 billion. To turn page, we come to the profit bridge, and we have done some changes to the EBIT bridge. We have no other line anymore, and we disclose the cost of our ERP system, Unite, separately. We have also moved the effects from changes in production volume that was part of the other line to the bar that is now called organic sales and manufacturing volumes. This has been a wish from several of our analysts, and which we now have affected, and I truly hope that this will make things easier for you and clearer.
So looking at the profit bridge, I would like to start with the items that affect the comparability between the quarters. One-time items was SEK 533 million year-over-year, when we calculate in last year's exchange rates, and that relates mainly to the high restructuring charges and impairments we had last year. The two divested companies, this year, contributed last year with SEK 40 million to the result. Currency impact on the operating profit was SEK 130 million positive in the quarter compared to last year, and main effects from U.S. dollar and U.S. dollar-related currencies. So if you look at our operating performance, we have broken it up here, as you see on the slide. Organic sales, including manufacturing volumes, was positive by SEK 110 million for the quarter.
Positive contribution from increased organic sales in the quarter, in terms of sales and manufacturing volumes, was partially offset by a continued tough pricing in the market and negative mix. As Alrik mentioned earlier, we launched our new ERP system, Unite, the fourth of January. We have had a high activity level in the Unite program organization with testing and training ahead of the launch, and in total, we had SEK 150 million higher costs in the profit and loss for the Unite program in the quarter compared to last year. But together, we made this really a successful go live.
This is somewhat higher than what we talked about in the last quarterly conference, and this is both due to somewhat higher costs in the quarter than we forecasted at that time, but also that a larger share of the activities were for the go live and not for design and build coming releases that we usually capitalize. So I will come back, and I will give some more comments to Unite in a couple of minutes here. The savings from cost reduction program in 2015 were SEK 90 million in the quarter, and as we have talked about before, from 2017, we will not report this separately anymore. It will be part of the cost development line.
If you move to net cost development, that was negative in the quarter by SEK 126 million, partially due to continued high cost for parts of our logistics operations. Net of effects of the cost saving program, our cost increased with SEK 36 million compared to last year, which is on a cost base of SEK 16 billion, is about 0.2%. As we discussed in the phone conference last quarter, the effect of material cost saving, which is part of this, are coming down due to increased steel and other raw material. In the quarter four, material costs, though, was still lower than last year, so it was still positive, but just with some SEK 20 million. If you move to the next page, operating performance by customer group.
Industrial organic net sales increased by 0.3% in local currencies versus last year. Sales grew in Asia and were relatively unchanged in Europe, while sales in North America continued to be lower compared to the fourth quarter last year. Operating margin, excluding one-time items, was 11%. Positive contribution we had from the increased sales and manufacturing volumes in the quarter was more than offset by high costs for the Unite program and continued tough pricing in the market and the effects from divestment. Organic sales to the automotive industries grew by 3.3% in the fourth quarter. We saw good sales growth, both for cars and light trucks, as well as for trucks, and strongest automotives markets were in Asia and Europe.
The operating margin for automotive, excluding one-time items, was 5.3% for the quarter compared to 5.4% last year. We continue to make good progress on the profit improvement plan in automotive, although we had, of course, also for automotive, a high cost for Unite in the quarter. Next page, income statement for the group. Gross profit margin was 1.4 percentage point higher in the quarter compared to the year before, excluding one-time items, 0.6% lower than 2015 fourth quarter due to negative mix and price. Selling and administrative expenses, adjusted for one-time items and structure changes and currency, was some 2% lower than quarter four 2015. Financial net in the fourth quarter was SEK -210 million.
Exchange rate fluctuations had limited impact in the fourth quarter, while it had positive impact in 2015. Also into fourth quarter 2015, we had some one-timers there related to buyback of bonds. Taxes in the fourth quarter was -SEK 406 million, and the effective tax rate was 29.5%. Moving to the next page, cost management. First graph, number of employees, including agency workers and temporaries, from the start, year-end 2014. We have continued the trend of decreasing number of employees, and in the quarter was 265, and that was 282 permanents and some increase on the temporaries.
So excluding divestments, we are now 3,001 persons less than in the end of 2014. On fixed costs in the quarter, we increased index-wise to 103, mainly as a result of the higher costs for the Unite program. Excluding Unite, we increased with around 1% since the baseline in end of 2014. So we have almost offset two years of inflation. However, we are for sure not pleased with this, and we continue to work to reduce our fixed cost base by productivity, optimizing our footprint, and by further simplifying our organization. Moving to cash flow, we achieved a good cash flow after investment before financing, and excluding acquisitions and divestments, it was just about SEK 1.5 billion in the quarter compared to SEK 2 billion in quarter four, 2015.
Adjusted for structural changes, the twelve-month rolling basis has been on or above SEK 5 billion since end of 2014. Next page, net debt was reduced by SEK 3.1 billion in the quarter. We continue to make good progress in delevering our balance sheets, and if you take the net debt excluding pensions, we decreased SEK 1.5 billion, and was at the end of the year, 34% of equity. Provisions for post-employment benefits net decreased also by just above SEK 1.5 billion in the quarter, mainly as a result of increased discount rates in Germany, U.S., and mainly. Net debt equity was 84% at the end of the year, so we are now close to our target of 80%.
Next slide, net working capital was 29.9% of sales at the end of the quarter, which was higher compared to the year before, 27.1%. Currencies had a negative effect on this, of around 2.5 percentage points, and adjusted for currencies, we were up around 0.3% versus the year before. We are doing well on payables. We did not reduce our inventories in the quarter as much as the year before. Due to that, we wanted to have some leeway ahead of the Unite implementation in the beginning of January, and we are also in the situation with improved demand this quarter, as opposed to the situation a year ago. So some additional comments to the Unite then, our new ERP system.
This is a significant investment that we, as you know, have been working on for quite some years now. It's about replacing our old legacy IT systems across the board with a new ERP supplied by SAP. It covers all our business processes, such as sales, service, supply chain and logistics, purchasing, manufacturing, and finance. We have now had a first broad-based go live, 3 legal entities, 4 physical sites in Sweden and Finland, impacting 1,700 users. We are very pleased to see that this startup went according to plan without critical incidents or stoppages.
So even if this go live was a major step for us, the program will go on, as you see in the slide, for many more years, with additional functionality that will be built also for future releases, and with a global rollout with European market as our first priority. So, Unite, next slide, Unite, the financials then. In 2016, we have had a very intensive year, building and testing the templates, as well as training and preparing for the launch. And we have, cash-wise, spent SEK 940 million in 2016. This is fully in line with, if you remember, when we had this on the Capital Market Day in the autumn of 2015. So the full year, level, was according to plan.
If you look at it accounting-wise, most of this was expensed as a cost through the P&L, so in total, SEK 620 million impacted our results, and SEK 320 million was seen as investment then and capitalized in the balance sheet. Going forward, we will have an annual cash spend for Unite in the years up to and including 2022, of somewhere between SEK 800 million and SEK 1.2 billion a year. For this year, so for 2017, I expect a similar spend level as in last year, so SEK 950 million, and about SEK 800 million will be spent through the P&L, including amortization of what has been built.
For the first quarter, if you take that isolated, Q 1 2017, I expect a cost increase compared to the Q 1, year-over-year of around SEK 150 million. Next slide, the guidance on the remaining items. Financial net, around SEK 225 million negative for Q 1. And based on the exchange rates we had by end of last year, we expect a positive impact on currencies, on operating profit of around SEK 200 million, compared to the first quarter 2016. And we have done a more recent calculation here, also based on Tuesday, so January 31 exchange rates, and then we see a positive impact of SEK 150 million instead of the 200 for the first quarter.
Tax level, we believe we will be back to the 30% for the full year. And if you look at the additions to property, plant, and equipment, the guidance is somewhat higher than in the past years, so about SEK 2.2 billion, in line with our ambition to invest in new production technology and automation. So coming to our demand outlook then, and this is just to repeat the definition we have, it's no change. It represents the expected volume development in the coming quarters, adjusted for structure, and it's the raw data, so no sequential... So it's a sequential, and it's not seasonalized, the numbers we have. With that, I'll leave the word back to you, Alrik.
Okay, thank you very much. Well, you know, in 2016, we saw demand gradually improve, and during the Q4, SKF was growing again, and we expect to see growth in all major regions in the first quarters, as reflected in this new volume outlook that we have. Demand compared to the first quarter, 2016. The demand for SKF products and services is expected to be slightly higher for the group and for industrial. Demand for automotive is expected to be higher. Demand is expected to be slightly higher in Europe, North America, and in Latin America, and higher in Asia.
Demand compared to fourth quarter 2016, the demand for SKF products and services is expected to be relatively unchanged for the group, including and for the industrial market, demand for automotive is expected to be higher. Demand is expected to be higher in Europe and North America, slightly lower in Latin America, and significantly lower in Asia. So, when we go to the next page, I just want to briefly go through the financial calendar, and you are, of course, welcome to visit us in our Capital Market Day on the sixth of April. But you see it here on slide on page number 24, how it works out.
Tomorrow, Christian will meet the investors here in Stockholm, and next week, we will both be on the roadshow in Boston and New York, where hopefully we meet some of you. With those words, I'll move over to you, Theo.
Thank you, operator. We're ready to take questions now, and as always, we'd just like to ask everyone to please keep your questions concise, so that we can get through as many of you as possible.
And if you have additional questions, just get back into the queue, and we'll cover as many as we can. So I'll turn over to you, operator.
Thank you, sir. If you'd like to ask questions, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask questions. We'll pause just for a moment to allow everyone opportunity to signal for questions... We take a first question now from Klas Bergelind from Citi. Please go ahead. Your line is open.
Yeah. Yes, hi, Alrik and Christian. It's Klas from Citi. I, I've got three questions, please. Firstly, just on the bridge, can I ask you what happened to inventories ex currency, and how much the higher manufacturing volumes impacted EBIT in the bridge? And then, if the price mix was similar to the third quarter, I can see that industrial distribution is weaker, which should have weighed on the mix, and then we see automotive better growth than industrial again. Was the year-over-year price mix still perhaps a negative 1%? I will start there.
Hi there, it's Christian here. So, starting off with the production, we, we were slightly higher compared to Q4, so year-over-year, we are relatively unchanged, sequentially. If you look at the inventories, I mean, adjusted for currency and divestments, we have year-over-year, positive 250, and we have sequentially negative 150. When it comes to price mix, yes, relatively unchanged versus, quarter three, so no change there, I would say. That's the same picture we see. And what was the third one?
No, I just wonder, can you come back, Christian, to what was the absorption impact in the bridge, so we can look at what was the pure volume drop through versus price mix?
I think you can take that from what you have, I mean, in terms of sales volume, and with that, what I give you on inventories?
All right. My second question is on raw mats, still positive SEK 20 million in the quarter. I think there is typically a 2–3 quarter lag until it shows up in COGS. Does this mean that raw mats in the bridge will start to turn negative now in the first quarter or later, and roughly by how much? And could we talk about the levers to compensate? One could argue that the pricing power for anyone in your industry has got a little bit worse since the last commodity boom. So if you could compensate there or not?
Yeah. I mean, of course you have a time lag on raw material, and we started to see that comes down. And as we've talked about before, I mean, it's not pure raw material. We have also our activities on, on, you know, purchasing side and also re-specification and so on. So, yes, I think we will be slightly negative in Q1. In what extent we can compensate that going forward? Of course, we start to see, as you see in the guidance also, somewhat stronger market here. So of course, that give us at least some opportunity then to work on the pricing in a different way than what we have seen, let's say, in the past quarters of the cycle, yeah.
You know, this is Alrik here. I think that, when you look on, on the pricing, I think it's absolutely clear that we have now had a few years where, where it's been more of the, buyer's market, and then price pressure is, of course, tough. And, now, when we see volumes coming up, it becomes more the, the seller's market, and then the, of course, possibility of, compensating, a possible raw material, effect increases. So, we... And, as we said, you know, right now in Q4, we don't see any, the same kind of situation we had in Q3. We don't see that worsening, and, it, as volumes come up, and, availability becomes more of, the seller's, prerogative, well, then pricing, opportunity also rises, so.
My final one is on the charges you take in the quarter there. You don't have an official restructuring program, but can we just talk a little bit about payback on this one? Is it similar to under the previous program? We can see the split between COGS and OpEx, but would be good to get a bit more clarity on what kind of savings this can yield.
No, I mean, we have our internal guideline if we should, let's say, classify it as restructuring, that we should have a certain payback of this, and that is not changed, you know, just that we've had a program and we... So we have the same, let's say, expectations on business cases in this, so.
But the activities around efficiency and cost is, of course, as relevant even in an upturn as ever.
Hmm.
No change.
But I think what you see now, I mean, it's like we had talked about during the year. I mean, I mentioned U.S. as one part of it this quarter, where we are closing down a site in San Diego, which is affected. And we also have in Latin America some changes where we outsource some services and so on, which is executed. So no change in terms of attractiveness on these restructurings than the ones we'd had previously, yeah.
Thank you, guys.
We take next question from Daniel Schmidt from SEB. Please go ahead. Your line is open.
Yes, hello, good afternoon, Daniel from SEB. I just wanted to ask a couple of questions, starting off with your sort of forward-looking guidance. When you look at the sequential guidance, and of course, you had a very strong sort of Asia, Asian market in Q4, and maybe that's the main reason why you are guiding for significantly lower demand. Could you give us some more color on why that's the case?
Yes, I can. I mean, the main explanation is not that we had a strong Q4. The main explanation is that we have a Chinese New Year in Q1. So if you look at the sequential development in Q1 last year, you see a similar pattern, huh? When it comes to Asia, so that's the driver.
Okay. Is it possible-
Yeah. You see also year-over-year that you have, quite, I mean, our guidance is quite positive, huh?
So if you exclude the Chinese New Year, you would have most likely had a more positive sort of guidance for the group sequentially also.
Yeah, I mean-
That's correct, right?
Yeah, I mean, yes. I mean, in absolute numbers, for sure, yes.
Yeah. And can I just ask you also in a sort of more long-term question, when you, when you look at these investments that you've done in the Unite program, that's been sort of going on for quite some time, and now you're sort of going live in Sweden and Finland, is it possible in any way to quantify any benefits from that rollout in 2017, 2018?
I think we've discussed this question before, and I'm sure we will have a look on this when we meet in the Capital Markets Day. And I mean, we have quantified benefits, process by process here, what we expect to see in purchasing and in our logistics functions and so on. On your question, how much of that will we see by the fact that we have rolled out in Sweden and Finland out of the total rollout plan? I mean, that's limited. I mean, obviously, because we should also know that this is a substantial change in how people are working.
So I mean, right now, we are in the process of, you know, ramping that up to come up to pace and productivity, and which naturally has gone down now compared to, I mean, the old way of working, everyone knew by heart, yeah. So of course, we will see some effects from, you know, more modern tools and more efficient work processes as site by site when we roll it out. But the overall benefits by having integrated planning, better tools for, you know, doing things on across the group, that will not come, I mean, in short. I mean, it will take some time until we see that, huh.
Having said that, we are, of course, trying as we see the opportunities to streamline processes across this. So, but it's difficult for us to actually give you a quantification. But the whole, Unite, the program is, will be a fantastic step forward on productivity as far as our administrative processes and so forth. But we need a little bit more sites online before we can give you some meat on that.
Okay. So would you say, is it fair to assume that the level that you're running at now in terms of costs, given your experience from this rollout, is that the sort of the level that we'll see also into 2018 and 2019? Do you have any visibility on that?
I mean, you have the guidance on what I said, huh? So then what type of cost it will be the different years depends a little bit where we are. So the spend level I've indicated. So if we build new functionality that has a value, going forward, that will be capitalized. If it's we are more in the phase that we were now in Q4 of training and, you know, getting things into operations, that will be more of a P&L. But this is a big undertaking, huh? We will change the way of working for the large part of all 45,000 employees in SKF, huh.
But from my point of view, you're absolutely right. I think that the first time is always the toughest, and I think the big that we should be really happy with Christian and the team, and the whole Unite team, is that they've had now this a successful launch in Sweden. Of course, the first time you do it, there's a learning curve, and of course, many of these learnings from Gothenburg and Finland will now be capitalized when we go forward. So, you know, it's, it's, it's an improvement that we will see. It's too early for us to sort of give you any. So the guidance we have today is the one we have.
But of course, we will learn from what we're doing today, and it will help us as we roll this out.
All right. All right. Thank you so much.
Thank you.
We take next question from Peder Frölén, from Handelsbanken Capital Markets. Please go ahead. Your line is open.
Thank you, good afternoon, Alrik and Christian. If I may, we touched upon the different sort of items in the P&L going forward, and I appreciate that clarification. When we talk about savings, you mentioned the savings impact to the fourth quarter. Could you update us on the savings captured for 2017, and also taking into account then the automation and call it production investments done during last year? That's my first question. Thank you.
Now, I mean, of course, we have an underlying inflation there, and big organization that's a sizable amount, and to what extent we... As I said, I mean, we've been able to offset the inflation of two years here, and what we have done so far. Of course, we are all having the wishes that we would have seen more, more than that. I mean, it's a lot of hard work, and we will continue that. I cannot say here that we will be able to offset the inflation fully here in the nearest quarters. We have activities, yes. On the other hand, we start to see some cost pressure upon some raw material and so on.
But so, I cannot quantify that in the nearest quarter, but I would say that it'd be difficult to offset inflation. When it comes to, you know, the automation and the new channels and where, you know, we are very much focused, and we have very good business cases, we will obviously see some of that, for what we put into production now in Sweden. But it's of course, and that's good business case. But seen on the group level, this is of course, a small part, of the cost take or the SEK 16 billion a quarter.
But, having said that, in the complete equation, you have to also take into consideration that as the market improves, the possibility of adjusting prices also improves.
Yeah. Yeah, that's very clear. If we look at the trading conditions throughout the fourth quarter, you mentioned initially, Alrik, that gradual improvement, and I guess December was very strong. Could you help us understand what happens in North America during the quarter, where we see. It seems like the underlying demand is flat or even slightly worse. And should we expect that? Did you also see December in the U.S. being much stronger than October, November, and could we expect that then to continue?
Yeah, I would say that if you take the big difference this year, and I think we've announced that, we've been really trying hard to change the way we do business with our distributors to avoid this year-end buying pattern, you know, that in the end of the year, they were all reaching to reach their targets, to get the yearly bonus and work with more of a COGS kind of arrangement, where it's the bonuses, if any, they are based on what you sell of SKF products as opposed to what you buy. And we have been successful in doing that change, and that is partly what you see, of course, with industrial distribution. On the other hand, on the OEM business, you know, there is actually some positive signs.
If you look at the industrial in general in North America, compared to last year, it was a good quarter. Energy in the U.S. was a good quarter, and, you know, when we look at it, we think that we see a broad-based change in demand. So it's not. In the quarter, it was Europe and Asia that drove the increase as such. But when we look ahead in our outlook, we also see Americas coming.
And maybe I could add that also, Peder, that, if you take the automotive side, I would say, VSM aftermarket is, is good. Trucks, on the Class 8 trucks, still weak. Cars, we, we had, and, you know, we have had a, a negative trend here. If you take the fourth quarter year-over-year, we had in the end of 2015, I would call it a bit of a one-off transaction, where we sold off a sizable inventory to one of the OEMs that we don't have coming back this year. So I would say the underlying North America automotive is stronger than what you, what we show in, in quarter four.
Yeah. Yeah, that explains a bit. So thanks a lot for that.
We take next question from Erik.
Thank you. One question that's not answered, and it concerns your sort of push into more standardized bearings or product bearings and the development there. You've made a few comments during the year that you started to develop that offering. Is there a step change in terms of that offering and how it's positioned price-wise going into 2017?
You know, yeah. You know, when we say that we see, generally in the industry, growth, for instance, in Asia, that's one of those areas where you have these more standardized offers. So I think that definitely, of course, this is like always, it's a process, it's gradual, but of course, we are already seeing successes in this field.
On those, just to follow up there, then on those volumes coming through, do you see anything about the margin there relative to the group average or something currently?
Well, it's all over the place in the sense that there are segments where we're stretching ourselves more to sort of be present and push the way our offerings so that we are competitive. And there are some areas where we're taking some clear wins at very attractive margins. So it's like always in a global business with one of the most common industrial products in the world, which are bearings, there's unfortunately just not one picture, right? It's all over. But, you know, our ambition, of course, is especially now when demand is picking up, not to make bad business.
Thank you.
We take next question now from Graham Phillips, from Jefferies. Please go ahead. Your line is open.
Yes, good afternoon. Thanks for taking my call. A couple questions. Just looking at your share of the vehicle aftermarket, had been on a declining trend for a number of years, but I can see it actually rose during the year. Well, at the year-end figure, which you give us for the whole year. So I don't know what happened sequentially during the quarter. If you could talk a little bit about that. It's up actually in dollar terms and Swedish krona terms, and what that impact to margin should be, because just trying to understand the margin direction in the automotive segment.
... Yeah, I mean, if I take it, VSM is of course a positive mix within automotive when we have it, huh? So from that perspective, it's positive. I mean, you're talking when it comes—I'm not sure I have a comment to, I mean, the market share development trend there. I think we are broadening a little bit the channels. We are coming through and you know, working a little bit on the channel, let's say, the distribution network we have. I mean, trying to be present, also e-commerce wise and so on. So for rest of that, I don't have...
I mean, we don't have, I mean, we have filled some holes in our offerings, obviously, also, that helps. But I don't have any other, you know, comment to the trends, which of course, we are happy to that we are recognized.
And then, yeah, our turnaround plan is there, and we have our target, and we're working towards that, and we think that we will be able to deliver on that as we move forward. That has not changed.
I mean, it didn't have a positive impact on the margin than you would have otherwise expected. And as I say, I'm not sure the development during the quarter, were there any particular region that's driving that? And, but, you know, it actually has obviously risen as a share of the business.
Now, what I mean, if you take the automotive result, the absolute ones, and you would adjust it with, you can take just your the automotive volume share of the total of the Unite increase, you have a clear year-over-year improvement, huh? So, and that you will have there. And I mean, on the rest, marginally, I would add that, yes, we had somewhat negative some cost items coming in, in the end of the year that we didn't foreseen. But I mean, so, my answer is that if I dig into it, I expect that I could confirm that I see that positive margin effect we have.
But with those comments, I mean, I don't have anything in quarter four that changed, I mean, our direction and what we have communicated on our roadmap towards 8%, huh?
Okay, just sort of relating it to the pricing pressure comment that you made earlier, so one would imagine in the OE business, it is obviously greater. And just a bit, can you say anything about the announcement you made in November about the automotive companies looking to get some recompense from the bearings companies for the investigation from 2014? Is there anything you can add there with the price negotiations on OEs? Does that make it more difficult to get increases?
Well, you know, basically, I don't think at this point I don't have any specific comments on that. And, you know, I think as we said, we don't see any reason at this point to change anything in the way we look at our outlook.
Okay, Per, if I could just one final point then. On terms of the CapEx guidance, for the new year, it's down on last year. Is there anything particularly where you're savings, or is it more of a normalization number, that we're looking at for 2017?
You're talking about CapEx?
Yeah.
I mean, the guidance is up, huh?
Okay, well, look, I was looking at 2.7 in the accounts, and you're saying 2.2 for 2017.
Yeah, yeah. I mean, okay, sorry, because we give guidance on the property, plant, and equipment, and then on top of that, you have, I would say the delta is more or less the capitalization of Unite when we build things.
Okay.
So that's what you see in the balance sheet. So the 2.2 guidance is up from somewhere, I don't have it, but somewhere 1.9 or 2, huh?
Okay. So okay, it could be up about 10%. So again, what areas are that sort of in terms of new plant, facilities, distribution centers?
I mean, we have talked about that, and you see it. I mean, we have done a number of releases where we are clearly determined to upgrade technology, to invest in automation, invest in new production technology, and that's what we are executing on, huh? And that means that we will probably for 2017, 2018, move up a little bit in CapEx versus current levels, huh.
Okay, thank you.
We take next question now from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.
Yes, good afternoon. Thanks very much for taking my questions. Can we just go one at a time? Firstly, you mentioned a few times that with volume environment improving, it gives you more opportunities to increase price. Do you have price increases planned in the pipeline for Q1 or Q2, as we remember, historically, was the case for SKF?
Yes.
Could you give us any more color on this? Would that be along the usual lines of going into the industrial distribution and looking to increase prices there?
Yeah. We, I mean, as opportunities arise with this, as we see the demand changing, we will take the opportunities. I, at this point, you know, it, it would not be right for, for me giving you more detail than that, but, but the, the answer is yes.
Okay, that's great. Thank you. And, on the Unite cost ramp up, are you implying that there's going to be around SEK 180 million increase in 2017 versus 2016? Kind of, am I reading this right? And then secondly, did you say that there's going to be a SEK 150 million increase in Q1? So just want to double check that and whether that's all in P&L or partially capitalized.
The 150, I expect that to be in P&L. We are, we are now working through this, this launch and so on. And, and, as soon as, you know, things have stabilized, we will move into, let's say, build again for, for next releases. But I mean, to be, to be on the, on, on the conservative side, I would say that it's a P&L effect of that. And then you said for the-- your question was for the full year 2017, where.
Yes, just taking the delta. Uh-huh.
Yeah, I said about the same spend, and, and yes, our estimate today is that we are SEK 180 million up P&L-wise, yes. Which means that Q1 will be the main delta versus last year, clearly, yeah.
Got it. Thank you. And, just on the cost savings, thinking about that line in the bridge going forward and for 2017, could you give us some help on with what we can expect there? Or should we take, kind of the level of charges that you've taken during 2016, and then assume some payback on that, that is kind of in line with some of your peers or in line with what you've been, doing with your previous program, i.e., kind of take the level of charges and halve it, and that would be your kind of maybe forecast, savings for 2017?
Yes. I think that's the best I can give you today, yes.
Great. Thank you. Just, as we kind of just close the year, I want to take a step back and ask you more about where the business is in terms of things like new product introductions and vitality ratio. I don't know if you could share any of that, sort of how 2016 panned out for you on new product introductions or maybe the number of patents versus the 2015, 2014, and what the vitality ratio is in terms of kind of products, percentage of sales from products are less than three or less than five years old, just a broader picture.
But, you know, this is an interesting discussion always we have. This is very difficult in the sense, what is a new product and what is an adaptation? And this is if I give you a number of that, I tell you, there's still a lot to do around the bearing, I can tell you that. There's a when you go down to our in our exhibit hall, you see one shaft where you see how extremely we have been able to improve the product as far as its the ability to carry load, et cetera. So every bearing is sometimes customized to the to the customer, which is the case of automotive, where you have constant upgrades. Every new automotive platform has a new bearing that has the latest feature in it.
Then you have other, industrial OEMs also, where you have a fantastic opportunity, and we have increased our ability to do that kind of upgrades, as we talked about before, being more agile and actually working around the customer's application and giving the customer what they actually need as far as performance and so forth. And then you have another range where sometimes you take a general bearing distribution, where, of course, you're talking about ISO standards, and there, the changes around the bearings are slower and new features are sort of being brought in slower. So it's really difficult to give you any of these numbers.
But I tell you, there's still a lot to do in the bearings, and for us, it's absolutely crucial to be out there and be very close to the application and innovate. And not the least, not around the bearing only. I mean, lubrication system, new greases, condition monitoring, service opportunities. You would be a mad you would, you would be surprised to see how many opportunities you see in all, around the rotating equipment performance at all end users. And one of the big things that we are doing is that we are extending now through condition monitoring, that is becoming more and more available to also smaller customers, the ability to differentiate around the rotating shaft to increasingly smaller end users.
And so there's a lot of things happening right now, and there's fantastic opportunity and many new things coming in. Having said that, you know, don't ask me to give you a number on how big percent of our sales was large during the last-
Mm.
What is it? What is it that we're talking about? What is a new bearing, and what is an adaptation? What are you talking about? But as we said today, if you look at the papers, we're talking about a new grease, for instance, that we are introducing for the automotive market, that's a big differentiator. And that's.
Right
Only one thing coming this quarter.
I
I think I would also add, I mean, you know also that we have, we have talked a lot about how to use our, I mean, the competence on our, in our second brand organizations also to combine, you know, the offerings, towards an OEM with SKF and, and with PEER and GBC then in order to have a, clear, differentiated, product offerings for different, performance classes. And that there, we see very good, progress in how we are working, with those issues now.
Understood. Thank you. I appreciate it's quite hard to quantify. But would you say that your condition monitoring and seals business grew faster than bearings in 2016?
Well, you know, the interesting thing is, it's combined, you know? When we are launching a new, I don't know if you picked it up, we had this, we call Quick Collect, that we are launching right now, which is a very low-cost sensor that is available now for smaller end users to be able to also take advantage of what they can do with vibration analysis directly at their plants. And of course, the big thing here is, of course, not selling the sensor as such, is that through this, you can sell the whole offering of products around helping the end user making his machine reach its technical end of life, huh?
You have to see it as a way of selling the total company portfolio around providing rotation, if you understand.
Yep. I get it. Thanks so much for your time. I appreciate the elaborate answers.
Operator, I think we have time for, for one more question before we wrap up.
Thank you. We take the final question from Ben Maslen, from Morgan Stanley. Please go ahead. Your line is open.
Thank you. Hi, Alrik. Hi, Christian. Firstly, just a question on inventories. You took your production up year-on-year in the fourth quarter, as you said. I think at Q3, you said you were gonna build a little bit of buffer stock, you know, more inventory ahead of the implementation of Unite. I mean, if so, would you plan to reverse that inventory build as you go through the first half of 2017? I guess, just bigger picture, looking at inventories at 21% of annual sales. Over the course of this year, you know, would you expect that to be stable, or do you plan to take it down? Thank you.
You know, in a market, I mean, Unite first. Yes, and I think that was, you know, a wise decisions that we made. I mean, we have managed to keep our delivery schemes to our customers from the Swedish plant. So, I mean, I think that was a good decision. And obviously, it's now about ramping up the production pace in that plant because the demand is out there, huh? So, I mean, that isolated, that's already gone, I would say, that inventory. But, I mean, since we have an increased demand, I mean, we are generally having to take care of that by securing availability and service levels in...
When it comes to, I mean, the coverage of 21%, I mean, it's obviously our ambition to improve and to lower that and to get some leverage when volumes are improving here. But, I mean, I cannot... You can take the average. It goes a little bit up and down, you see. But, I mean, if you take a few quarters and make an average on that, that's what I would put in my forecast for the year.
Thank you. And then maybe just finally, Alrik, if you could just talk a bit about what you see on the ground in China at the moment. It sounds like it grew quite nicely, but there's a big divergence across, you know, energy, rail, were down, auto distribution, better. Just maybe just a bit, for some of the key segments in China, what you see, there at the moment. Thank you.
Well, if we talk about what we saw in between Q4 compared to Q4, 2015, we saw industrial distribution growing clearly. We saw this general industry, which we talked about before, growing clearly. We saw some actually starting to grow also in heavy industry and special industry. We saw energy still weak, aerospace, weak, railway, weak. We still have a really weak freight sector. I mean, it's really been down for a long, long time, and it's still depressed. We saw cars really growing fast. VSM, the aftermarket in Asia, not being so strong, but trucks also growing very, very strongly. So all in all, you know, it's...
When we talk about the energy, I think it's more of change of programs and a little bit increased. We see our—we used to have a very, very dominant, almost we were almost the only ones when we started for the wind industry, for instance, in China a few years ago. Now, we have more competition. I think this is also something that we've seen. But all in all, I mean, it's been really positive, and we feel still a positive development. I'm going out there now in spring and meeting directly with all our distributors, both in Southeast Asia and in China. And after that, I will be able to tell you even more of the current flavor.
Got it. Look forward to that. Thank you very much.
Thank you.
Okay, thank you very much to everyone for dialing in today and joining us. The IR team is available to take any further questions. I know there were a few questions we didn't have a chance to deal with. But once again, thank you very much from us here at SKF, and looking forward to speaking to you again next time.
This concludes today's call, ladies and gentlemen. Thank you for your participation. You may now all disconnect.