Good day, and welcome to the fourth quarter report 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrik Stenberg. Please go ahead, sir.
Thank you. Good afternoon, and welcome to this conference call on the fourth quarter results. This conference call will take about an hour. First of all, as you may have noticed, we had some problems with our web server initially, and we do apologize for that. Present today are President and CEO, Mr. Alrik Danielson , our Senior Vice President and CFO, Mr. Christian Johansson, Theo Kjellberg, Press and Media Relations Director, and myself, Patrik Stenberg, Head of Investor Relations. We will start by presenting the results, and after that, we'll continue with the Q&A session. With that, I leave the word to Alrik, please.
Thank you very much, ladies and gentlemen. Good afternoon, and thank you for listening in today. We will start by moving directly to slide three. Today, we release our report for the fourth quarter of 2015. Customer demand developed in line with our expectations during the quarter, with the exception of North America, which saw a sharper decline than anticipating, reflecting both lower demand and destocking in the supply chain. Sales in local currency declined by 5%, driven mainly by lower sales volume within the industrial market, which could not be counteracted by increased volumes within the automotive market. I'll talk a little bit more about regional performance when we get to slide three. The structural change implemented during the year have made us leaner and more focused on supporting our core business, bearings and solutions that support rotating shaft machinery efficiency.
Our cost reduction program has been delivered on time, with agreements reached with 2,100 employees. In addition, temporary and agency personnel were reduced by around 400. Activity-based cost reductions continue across the group, as do our efforts to divest non-core businesses. Notwithstanding these actions, the drop in market demand impacted our financial performance, with a resulting operating profit, excluding one-time items, of SEK 1.7 billion and an operating margin of 9.5%. Page number four. Faced with challenging market conditions, we focused significant efforts on strengthening our balance sheet and adjusting our organizational structure and the ways of working during the year. With that in mind, I'm pleased to report continued strong levels of cash flow, declining net working capital, and reduced net debt. We responded to the lower demand by reducing our production rates and have kept inventories under control.
As a result, net working capital reached 27.1% of sales, a historical low number. This contributed to the solid cash flow of SEK 2 billion in the quarter. Christian will go into this further, in further detail later. Net debt decreased by more than SEK 3 billion in the quarter and by more than SEK 4.6 billion during all of 2015. The board of directors has proposed an unchanged dividend of SEK 5.5 per share. We go to page five. And as mentioned, customer demand by market developed in line with our expectations during the quarter, with the exception of North America, which saw a sharper decline than anticipated, reflecting both lower underlying demand and destocking in the supply chain. We guided for a significantly lower demand for both North America and Asia in the report for the third quarter.
Results from the lower demand is reflected in our sales development in the quarter, with declines of 12.7% in North America, 8.7% in Asia. In Europe, on the other hand, demand was on a similar level as last year. Sales in Middle East and Africa continued to grow. Organic growth reached 10.8% in the fourth quarter. Turning to page six. Looking at the recent development within our customer industries, we note that within industrial markets, most of the main customer industries experienced lower demand in the quarter compared to the year ago. The industrial general segment, as well as industrial distribution, posted significantly lower volumes, impacted especially by weak underlying demand in North America and Asia, and by destocking in the distribution channel.
Sales to the railway industry were significantly lower in North America and in Asia, but significantly higher in Europe. In the energy sector, total sales were stable, but by market, we see a large variation, with significantly high volumes in Asia and Latin America, and significantly lower volumes in Europe and North America. In automotive market, sales to both car and trucks industries, as well as the sales to the vehicle service market, showed significantly higher volumes in Europe. In North America, on the other hand, we noted significantly lower volumes for the truck industry, while sales volumes to cars and light trucks, as well as the vehicle service market, were lower. Sales volume to aerospace industry picked up after the production shortfall early in the year, despite continued difficult marketing conditions in the helicopter segment. Sales to the agricultural segment continued to experience some headwind.
Moving on to the next slide, I would like to draw your attention to some interesting new businesses that we have secured across the group. SKF will supply China Oilfield Services Limited, one of China's largest ship owners, with propulsion shaft components and application engineering services for its new build fleet of offshore supply vessels. In total, 16 propulsion shafts and eight vessels will be equipped with SKF components. SKF will also supply magnetic bearings for use in the world's first subsea gas compression system at the Åsgard gas field off the Norwegian coast. As part of the subsea gas compression system, the bearings will contribute to recovering additional gas volumes from depleting gas fields, as well as extending the lifetime of those gas fields.
Another example, as was presented by Jan Schmidt on the Capital Markets Day in November, is the supply of an integrated seals, lubrication, and bearing solutions to US Steel for their hot strip mill table rolls in Granite City, Illinois. This solution helps to increase machine availability, while at the same time reducing energy and grease consumption. In addition to what is shown in this slide, we were also awarded interesting new businesses across different customer industries, such as a two-year supply contract with one of the main producers in the pulp and paper industry in Latin America, supply of wind turbine bearings for renewable energy in Europe, bearings for use in the mining industry in Latin America. Turning to the next slide, and some operational highlights. We continue to make progress in our efforts to strengthen our competitiveness.
One example is the consolidation of the vehicle service market distribution packaging business in the U.S. to ensure optimized delivery, flexibility, and superior customer service. The business in Hebron, Kentucky, will be transferred to the distribution and packaging facility in Crossville, Tennessee. This move will mean the eventual closure of Hebron distribution center and affect 145 employees. We issued a new EUR 500 million bond. The seven-year bond matures in December 2022 and carries a fixed coupon interest rate of 1.625%, an historical low rate for SKF. Christian will give you further details on the bond in a couple of minutes. We also introduced new application-specific products for customers in the agriculture as well as the food industry. I'll now hand things over to Christian to run through the financials in more detail.
Thank you, Alrik, and good morning and good afternoon to all of you. Turning to the next page, which is sales development. Total net sales decreased with 1.5% in the fourth quarter. The structure component in the quarter was -1% and relate to the three divestment transactions that we have completed earlier in the year, in the second and the third quarter. The currency effect year-over-year is still positive in the fourth quarter, but the positive effect is clearly lower than in, in previously in the year. In quarter four, the effect is primarily related to the US dollar and the Chinese renminbi. Turning to the next page, which is the trends of organic sales, and the decline that we have reported on, in the last quarters continue to follow a typical cyclical pattern for our industry in the fourth quarter.
The decline was -5% versus quarter four 2014, as you heard from Alrik. Turning to the next page, another trend slide, operating profit, excluding one-time items, was SEK 1.726 billion in the quarter, down from SEK 2.078 billion in the fourth quarter last year. The rolling 12-month trend is now at SEK 8.7 billion. Moving to the next page, we have the operating profit bridge. Starting off then with the one-time items that year-over-year was SEK 220 million higher or more negative, so to say, when calculated in last year's exchange rates. Main items relate to higher restructuring charges than in 2014.
We have also impairment costs in this quarter with some SEK 300 million, where we have adjusted the capitalized development cost for the Unite IT project, and we have also made an impairment of goodwill. Next, broad organic sales development was impacting the operating profit negatively by around SEK 410 million for the quarter. This includes volume and mix, and when it comes to mix, especially the lower share of sales to industrial distribution than in the year before. Currency impact was positive compared to last year, with SEK 230 million in the quarter, and mainly related to the strong dollar.
Savings from the ongoing cost reduction program were around SEK 200 million in the quarter, and then the other impacts, SEK 330 million -, where around half of it relates to lower production volumes than the previous year, causing negative absorption in manufacturing. The remaining half relates to higher costs for the Unite IT project, as well as cost inflation and to a negative year-over-year effect from 2014, where we had a settlement of the pension scheme with a one-off positive item. And as you can read in the annual report, that was +SEK 67 million in 2014. So turning to next page, performance per business area. Industrial market net sales declined with 8.6% in local currencies versus last year. European sales declined, and especially industrial general and energy had a weak quarter.
Sales to railway continued to grow, while industrial distribution declined. North American net sales declined significantly in all OEM segments, as well as in distribution. And in Asia as well, all segments except for energy had a weak quarter compared to the previous year. So industrial market operating margin, excluding one-time items, was 11.3% in the quarter compared to 14.7%, the year before. And the margin decrease is an effect of the lower organic sales, as we have described primarily in North America and in Asia, but also to negative mix effect related to the lower distribution sales share. Margin also impacted negatively by the, lower manufacturing volumes, not compensated by the ongoing cost reduction programs. Net sales in specialty business declined by 1.6%.
Aero sales picked up after the production shortfall in quarter three, despite still difficult condition in the helicopter segment. Net sales in our second brand, PEER GBC, and in the Kaydon businesses were slightly lower due to headwinds, especially in agriculture, heavy industry, and the defense segments. Specialty business operating margin, then excluding one-time items, of 13.6% in the quarter compared to 14.1%, the previous year. Good cost development in the quarter in the specialty business. Finally, then net sales in automotive market increased by 1.2% in local currencies. Sales in Europe were significantly higher, with strong performance for cars and trucks in both Germany and Sweden in particular. VSM sales in Europe showed a significant increase. In North America, those sales weakened with a significant decline in the sales to the truck industry.
Asia sales were relatively unchanged in automotive, and the operating margin, excluding one-time items, was 3.3% for the quarter compared to 1.5% the year before. This improvement is primarily due to favorable sales mix, but also to some extent to improved manufacturing loading. Turning to the next page, cost reduction program, as was commented by Alrik as well, were completed in the quarter. Agreements are made with 2,100 employees compared to the 1,500 initially targeted. And when fully implemented, the full year saving for these agreements is on target, so SEK 1.2 billion. Restructuring cost, SEK 1.2 as well, a bit lower than what we initially had estimated.
Savings in the quarter, as we saw in the bridge, SEK 200 million, and savings year to year from the program, SEK 430 million. In addition to this, we have reduced the number of temporary and agency personnel by around 400 as a consequence of the weak market demand. Overall, though, I would say we see a favorable trend on the cost development during the second half of the year, but due to the weak market demand, we have not been able to see the effects from this on the bottom line so far. So however, as commented by Alrik, the closure of Hebron distribution center is one of the activities initiated. We have a number of similar activities, and as said in previous conference calls, we will communicate this to you when decisions are taken.
So with this, we see then this cost reduction program completed, and we will, going forward, communicate only the effects of it as part of the profit bridge. Turning to next page, income statement for the quarter, some short comments. Gross margin dropped due to one-time items that were more negative than the year before, also under absorption of cost in manufacturing, and to some extent, to the mix, as already commented. Selling and admin on a comparable basis then, adjusting for the structural changes, we have also exchange rate effects and the separately reported cost for the Unite program. We see an underlying increase of the SMA expenses in the quarter of around SEK 80 million.
Financial net in the quarter was -SEK 386 million, and this includes a separately communicated one-time items of SEK 286 million related to the buyback of bonds. I will soon come to that. On the tax side, year to date, the tax rate 13.2%, and that was impacted by tax costs on divestments of businesses, as well as we have talked about in earlier quarters, some tax losses carried forward created during the year that we have not recognized as tax assets. Turning to next page, cash flow. We are focused on cash flow, as you've heard, and we have achieved the cash flow after investments before financing. Also, if we exclude the divestments that we have done during the year, we had SEK 2 billion in the quarter compared to SEK 2.2 billion in previous year.
Looking at the 12-month trend, the cash flow amounts to SEK 5.7 billion, which is historically at a very good level. Net working capital on next page as a percentage of sales, we have managed to reduce that during the quarter. Inventories were substantially reduced as were receivables, and as a ratio of sales, went to 7.1% in the end of the year. If we exclude FX effect, inventories were reduced by around SEK 850 million in the quarter. We have the, the ratio is positively impacted by currency. Turning to next page, our financial position, our net debt equity, ended the year at 100%, down from 114 in end of quarter three.
On the right-hand side of the slide, the peak, which was in the second quarter, 2014, we were at 144%. Pension liabilities decreased between the quarters with SEK 950 million due to high discount rates in the U.S., U.K., and in Sweden. Since the beginning of the year, net debt has been reduced by SEK 4.6 billion, including the dividend payment last spring. Moving to the next page on the debt structure. We have, as you've heard, issued a new EUR 500 million bond in early December. The bond matures in December 2022, and carries a fixed coupon interest rate of 1.625% at an historical low rate for SKF.
The proceeds of the issue was used for refinancing of existing debt through the buyback of parts of two outstanding bonds maturing in 2018 and 2019, with coupon rates of 3.875% and 1.875%, respectively. So turning to the next page then, I mean, to conclude, we are very pleased to have completed this transaction, which has achieved, in fact, the lowest coupon rate ever for a public seven-year euro bond for a Swedish corporate at that time. It also extends our maturity profile moving forward. And as commented, the buyback, that I commented, had a negative one time impact, in the finance net.
So next page, the guidance for 2016 quarter one, we expect the finance net to be negative, about SEK 250 million. Currency impact for the first quarter, based on the rates by end of the year, is limited compared to quarter one last year. And on the property, plant, and equipment, we expect the current pace of investments adding about SEK 2 billion for the full year of 2016. Next page, moving then to the demand outlook, and this is just the same slide as was showed in the previous quarterly conference. Just to repeat the definition of what we mean when we talk about the demand outlook. So in short, the outlook represent the expected volume development in the coming quarter. It's based on raw data, and the sequential outlook is not seasonalized.
With that, I leave the word to Alrik.
To look into it, demand compared to the first quarter, 2015, demand for SKF products and services is expected to be slightly lower for the group. Demand for the automotive market and specialty business is expected to be relatively unchanged, while demand for the industrial market is expected to be lower. Demand is expected to be relatively unchanged in Europe, slightly lower in Asia and Latin America, and significantly lower in North America. If we then take demand compared to the fourth quarter, 2015, the demand for SKF products and services is expected to be relatively unchanged for the group. Demand for the automotive markets is expected to be higher, demand for specialty business to be slightly higher, and demand for industrial markets is expected to be relatively unchanged.
Demand is expected to be higher in Europe, slightly lower in North America, and lower in Latin America and Asia. If we take the financial calendar, the full details of the performance for 2015 will be available on the annual report, published on the eighth of March. With that, I move to the next slide, which is number 27, where we talked about the new financial targets. In order to reflect the market conditions, competitive landscape, and industrial activity levels, we foresee, and the consequence of reshaping of the company, the group's financial targets have been adjusted. The new targets are to achieve, over a business cycle, an organic sales growth of 5% in local currency, and a reported operating margin of 12% according to IFRS.
On the capital side, we have increased our ambition to manage our working capital in an efficient manner, and the new targets is to reach a net working capital of 25% of sales. The target for return on capital employed has been adjusted to 16% as a consequence of the operating margin target. Our target of achieving a net debt to equity ratio of 80% remains unchanged. Although we have more hard work ahead of us, I believe these targets can be achieved. With those words, I hand back to you, Patrik.
Thank you, Alrik. With that, we are prepared to go to a question and answers. Operator, please.
Thank you. If you wish to ask a question today, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from Klas Bergelind from Citi. Your line is open. Please go ahead.
Yes. Hi, Alrik. Hi, Christian. It's Klas from Citi. First, on the cash flow ambition, you're already at the old target of 27% working capital sales. Looking at the net gearing now, 100% versus 80% target. Now, given no support from the cycle, I would assume that the strategy here is to improve the balance sheet, so you can start doing M&A again. At what gearing do you see that possible? Is that now, or do you need to come down to 80%? And in what geographies and end markets would the focus be?
Yeah, I mean, as, as you know, we don't comment on, on, mergers and acquisitions and the ambitions. And I would say, we have just communicated the new targets, and we have a debt equity target there of 80, and that we want to achieve, huh? And, and, I mean, whether we... And, and also opportunities on M&A, they come and, come and go. So I mean, your question on whether we, we, we are at the position now to act, I think you have seen from our, our focuses in the year that has passed, that, that our focus right now is to get our balance sheet in shape. Also, seeing where we are in the business cycle, our judgment is that that's the priority we are having.
But if you, if you reflect back to, to previous management, they obviously done, quite a lot of M&A in the past, and, you know, if the, if the cycle is not turning for SKF, this, this might be lower growth for longer, then obviously a stronger balance sheet, if there is M&A opportunities, would be a good way of sort of boosting earnings, I would have thought.
Yeah, you're absolutely right. I mean, when it looks to our strategy around bearings and rotating machinery efficiency, we're always looking for opportunity. But, you know, acquisitions are binary. It's so interesting, you know, you sort of look at a deal, you try to do something that's interesting. Sometimes you find with the seller, an understanding around the price and so forth, and sometimes you do not. And therefore, it's imprudent, I think, to go out with some kind of statements about businesses that you don't have in hand. So, the key thing for us right now is to get our balance sheet in order, just like Christian say. So if this is it, what we have to say about this at this moment.
All right. My second question is really on Asia. If we compare SKF with the rest of the sector, one can argue that you're a bit late cycle in Asia. Volumes are running quite a bit above the 2007 peak still. This is driven by high demand in wind and also a bit in rail. These are typically high-margin segments for you. Are these sectors not cyclical? Because I'm a little bit concerned that, particularly in wind, where we're starting to hear about concerns about overcapacity in China, there are now cuts to tariffs. How should we think about the outlook here for Energy? It's been a very strong segment for you.
Yeah. Well, when you talk to many of the actors in the Asian wind area, they're still quite bullish, I tell you. They're still looking at the—you know, these tariff changes in China are basically on the margin, and there's still a green agenda from the government. So of course, if I listen to—when we listen to the people, our customers and so forth, they're still quite bullish on it. But you're absolutely right. I mean, there's always when businesses are not driven basically on pure demand, but more of a government agenda basis, there can be rapid shifts, and you can be taken by surprise. So from that point of view, you're right.
At this moment, you know, when we talk to them, they still believe that there is business to come.
All right. My, my, my final question is on, on pricing dynamics. Another major bearing manufacturer in Europe is, is running a self-help initiative, where he tries to take back some market share in the volume business on the product side. Given the lower growth that we see quarter by quarter, I would assume that this is changing the competitive dynamics. So on top of the Asian players trying to take share, have you noticed any different pricing behavior in Europe?
Well, I think that the comment on this is basically the same we had last quarter, in the sense that ever since we saw a softening market. It's true, when the markets are softer, there's a more ready supply, bearings are more readily available, and there is an increased price pressure. On the other hand, that's really not anything new in the fourth quarter. This has been going on for quite a while, and if you look at the markets, they have been served. It's not for quite some time. There is actually excess capacity with many players around the world at this point. So there hasn't been for quite some time lack of bearings in the marketplace.
...So from that point of view, I can't see that I see any change more than normal dynamics. When markets are rallying, well, you know, it's more the seller's market, and when it's a softer market, well, it's more the buyer's market. And that's of course true, and that's what I think also what we have been saying in our report.
Perfect. Had to ask, sorry. Thank you, Alrik.
Oh, yeah, great, great, great. Very good.
We will now take our next question from Alistair Leslie, from Société Générale. Your line is open. Please go ahead.
Oh, hi. I was wondering, just first question maybe on guidance on the Unite costs for 2016. I think you said previously at the Capital Markets Day that you were kind of indicating cash outs in 2015 was gonna be SEK 600 million-SEK 700 million, rising to SEK 900 million in 2016. I was just wondering what the step up in the PNL would be, whether that's a similar delta. Obviously, we've had some write-offs now on the capitalized development costs, so maybe some color on the moving parts in terms of-
I mean, what we said at the Capital Markets Day is still valid, all of it. I mean, both the—our present estimate on the cost level and the P&L effect of it. I mean, the impairment that we have done that relates to, and I think that was also discussed at the Capital Markets Day, and you've heard it before, that we did a retake on the project early last year. And there has been some new solution decisions, I would say, or adjusted solution decisions taken during the year. And we have then looked through our capitalization of it and adjusted accordingly. So that doesn't change the project and the activities and the spend level we have going forward now.
Okay, just a follow-up question on Chinese auto as well. I was just wondering whether, obviously in the statement you talk about significantly lower vehicle service markets in Asia. Just maybe if you can elaborate on what's happening there. Is that just the market cleaning out inventory levels? And then maybe if you can just talk about the pricing environment in Chinese auto. Obviously, the market's normalizing to a certain extent. Are you seeing pricing pressure pick up? Thanks.
Well, if you take the Chinese car and light trucks, what we saw, you know, we saw during the spring, we saw quite a softening of the market, if you recall, and we felt that if we had concerns about a relatively softer market. But during the autumn and actually the OEM side of the business has, in China, has rebound quite well, and the order or and the business is quite sound. As far as the vehicle service market, it is, of course, a very competitive market, and it's -- there's always in the vehicle service market a service cost issue in Asia.
That is also for us, sometimes depending on the fact that, you know, traditionally in our home market, in Europe, well, you know, our—what we serve to the OEMs is also what we have for the aftermarket. In some of the Asian markets, well, a little bit more of our product portfolio is traded because we don't have it. And as we are trying to gear up now to have our own product portfolio, like we have indicated in our turnaround plan, well, you know, that takes time. And during that period, it is a little bit more of a difficult environment.
But as I have, as we have indicated before, as cars are going from taper solutions, because basically in the aftermarket, we're talking about wheel bearings and MacPherson strut bearings. And as they are going MacPherson strut bearings, we have a very good position, but as they are going more and more into hub bearings, there is actually a situation where you go from bearings that last 30,000 km to bearings that are now lasting up to 300,000 km-400,000 km. And the whole vehicle service market business is changing.
Maybe it could also be added there that our automotive sales in Asia is predominantly for the car and trucks and to a lesser extent to the VSM market, if you compare to other regions.
Yep.
Okay, thank you.
We will now take our next question from James Moore, from Redburn. Your line is open. Please go ahead.
Yeah, good morning, everyone. I've got three questions as well. Perhaps I should take them one by one. Firstly, on the 12% margin target, could you say what level of organic sales growth is needed to achieve the target? And when you say in the presentation, valid from 2016, do you mean for that target to be valid for individual years or over a period of time? That's the first.
I mean, the margin target relates to the ambition on the organic sales, huh? So you have a correlation there. I mean, if you see it, and I guess you know our historical numbers also quite well, and if you look at the organic part in the past, in fact, our organic growth is less historically than the five. So we are raising our ambition to take share and to grow in the market, huh, excluding structure. And with that, I mean, we believe we can grow at that rate and achieve a 12% operating margin, huh?
... But you don't expect for that to be achieved in every individual year? Do you mean it for a time frame? And if so, how long?
No, if you go to the second question, it's over a business cycle, and then you can, of course, discuss how long is a business cycle, and that you know as good as we do. And it depends. I mean, it can be five, seven or 10 years, and we cannot speculate on that, but it's an average over a business cycle.
You know what a business cycle is. It's sometimes shorter, sometimes it's longer. But these are targets now that we feel confident that they're realistic and achievable.
Okay. Thank you. My second question relates to production levels and the absorption impact that you could see in the first quarter. Will you underproduce in a similar magnitude again, this coming quarter?
I mean, we have targets on the ratio, on, on, on turnover, inventory turnover. And, I mean, the Q4, you have some seasonal effects with factory closures and so on, and we have a bit of ramp-up that coming in Q1, and, I mean, that's the balancing acts we have. I mean, we are not intending to build inventory, unnecessary inventory. So, I mean, we have still a priority to, you know, keep our balance sheet in good shape here. Of course not losing out in the other end, but, that's the targets we have set for our manufacturing system.
But having said that, of course, normally in the first quarter, we have to sort of produce to serve the customer, and normally there is a certain increased production rate in the first quarter.
Brilliant. And, just lastly, I saw the charges or the non-recurring items between EBIT and Adjusted EBIT were perhaps a bit bigger than we all expected. Could you give us some idea as to what those numbers might look like this year?
I'm not sure we can... I mean, we have taken the cost related to the cost reduction program that we are closing. At the same time, as we see the demand, and you see it in the outlook, I mean, it's not an upturn in the near term, yeah. So we will continue to trim our costs, and in case restructuring costs or one-timers are needed for that, I mean, we'll communicate that to you. But we are not, you know, holding back on cost reductions. We know we have more to do, huh?
Just sorry to follow up, but I just wonder whether the degree of charge will be comparable to the last couple of years, or a higher number, or a lower number?
I'm not sure I can give you any direction on that now. I have to come back to that.
Okay. Thank you very much.
Thank you very much.
We will now take our next question from Erik Golrang from Nordea. Please go ahead.
Thank you. I have a couple of questions on the new organic growth or the new targets there, and apologies if it's been answered. I've had a bad line. The first one is on the 5% organic ambition there. I was wondering if you could put a few details out on how you reason when achieving that, reaching that number. Why 5%?
I would say as if you start by seeing where we have been, that's one starting point that we have used. The other one is, I mean, looking into the market, and as we said, also, I mean, what are the conditions in the market? What's the competitive landscape we see now and the activity level? I mean, it's difficult to speculate on that. We know we are maybe on the low side in the business cycle now, but we want to gain share, we want to be on the growth path here. So we believe 5%, we are raising the ambition compared to where we have been on organic growth in past years.
So, I think, yeah, it, it's a bit of balancing of different views on that.
But it's clear, when you look at SKF, we need to grow in our bearing business and giving, the, how we are now focusing on, on getting, more cost competitive and getting our, our businesses focused on, on, on the core business, it's clear that we need to, to have this kind of, of, of growth over a business cycle. And we clearly believe that this is possible.
Okay, thank you. And the second question, the 12% EBIT ambition, if my numbers are correct, you would get there basically, if you would take automotive to 8% based on 15 numbers. Are we to see that there's no improvement targeted really for the industrial business?
Well, you know, again, it's about what are the competitive environment we see in the market going in current businesses. We need to be able to grow and take business going forward. And then that's that equation between operating margin and growth target is always interrelated in a way. And we think this is absolutely something that in the current environment can be achieved. And we're not there yet, but we are confident that with the activities we have in line, both as far as capturing the customer and getting our product portfolio and getting our streamlined manufacturing, world-class manufacturing, we're confident that we will reach this.
... Okay, thank you. One final question on destocking, you mentioned it a few times. What's your take there at the start of 2016 in the different regions, where are your customers' inventory levels compared to where they would like them to be?
Well, you know, it's always very difficult to say, but one clear view, if you take a macro figure that is known, is a general macro figure. But if you take the U.S. during the fourth quarter, we know that inventory in the US economy contributed with 1.2% - growth during the fourth quarter. And we have clearly felt that there's been a destocking sort of initiative going in the U.S. during the fourth quarter. Then you say, how long can that continue? Well, it could perhaps continue a little bit longer, but you know, eventually you come to inventory levels where the underlying demand becomes equal to the demand you see as a supplier.
As inventories are gradually driven out of the system, we are coming closer and closer to that point. When is that point? You know, that's again one of those questions that is difficult to answer, but hopefully it's coming nearer.
Thank you.
We will now take our next question from Andre Kukhnin from Credit Suisse. Your line is open. Please go ahead.
Yes, good afternoon. It's Andre from Credit Suisse. Thanks very much for taking my questions. I'll go one at a time. Can I just pick up on the industrial distribution development in Europe? You mentioned that as a kind of declining and being a reason for some negative mix. Could you just talk to us about what's happening there and why it's declining?
I would say the negative mix I commented was more related to, I would say, to North America and to Asia. It's somewhat declining in Europe as well, and, but not in the magnitude as what we've seen in the other two regions, huh?
Yeah, and-
Right.
Right now, what we see is more of a normal pattern in end-year pattern and so forth. So, I mean, basically, Europe is still a positive to us as far as business climate. And the question marks are in the U.S. and parts of Asia where we see the weaker demand.
Okay. And on the second question is just on raw materials for 2016. Do you anticipate a positive effect from that? And what sort of magnitude?
I mean, yes. I mean, commodity prices, raw materials are low, and, at least initially in the year, started to decline. I mean, contractually, we get, I mean, the adjustment comes, I mean, it, it's not a full year, it comes gradually. So, we will see some effects of that, but we have also seen effects of that in 2015. But at least in the beginning of the year, I expect us to see some more, yes. It's not a dramatically big numbers on that, but it's on the positive side, yes.
Thank you. And last question, much broader. You talk about sort of growing the core. And could you tell us what what is considered as very much core and kind of what is the outlook for the rest? Because from the way you described it, it sounds like that's spanning about 80% of the company in terms of product offerings. So how should we think about the rest and yeah, about the whole thing together as well?
Well, you can say that, of course, to us, everything that helps us to improve our ability to serve around the rotating shaft is core. And, because as you know, for instance, in the industrial aftermarket, it's making the bearing reach its full technical life that is the key to providing value to the end user. And they're all services, and related products around lubrication, sealing, greases, condition monitoring, services, remanufacturing, you name it, is what provides the value around the bearing and the rotating machinery. And, there's of course a continued possibility to grow within that. Then we have in the bearing business, the product business, so to speak, which is, of course, still, bearings is the biggest commodity we have.
It's about being competitive, and we're working hard to increase our competitiveness in the bearing markets going forward. And this is the way you have to do it.
Right. And how does-
And your question on what's not in the eighty, I mean, they stand on their own merits to a bigger extent than the rest, huh? I mean, they have to deliver their profitability, their contributions to the group targets, so we have to take some other measures.
So mechatronics and linear motion, that would be falling into that sort of category of standing on their own merits. Would that be right?
Yeah, you could say so. I mean, if you look at it, it's a very interesting business. It is clearly something that is adjacent to the rotating shaft, but it's not really linked into it. It's not sort of a direct link to the rotating shaft, as you can understand. And therefore, the ability to create value through combining the offers is not as obvious as with lubrication systems and bearings, sealing solutions and bearings, different kind of greasing technology and so forth, condition monitoring services around the rotating shaft. It's intuitive that it's adjacent, but it's not completely around the same offering.
But you can also add that linear and actuation, when it comes to stand on their own merits, they are—if you look in these times, I mean, their business is more towards somewhat other customer segments, like medical and so on, which is in these times, not bad, huh?
So in this framework of the new growth and margin targets, you see them as accretive to those margin, to those targets, in line or how should we think about them?
I mean, the targets are set for the group, and I mean, we have separated the automotive target, and I mean, the rest are covered by the group target. And I mean, we are not talking externally about individual businesses we have, but for sure, yes, we have to deliver.
Got it. Thank you for your time.
Thank you.
We will now take our next question from Andreas Koski from Deutsche Bank. Your line is open. Please go ahead.
Yes. Thank you. Can you hear me?
Yes.
Perfect. So three questions. Firstly, on your outlook, you expect demand to be flat sequentially, so that means that we might be, heading in, heading into the trough here at the bottom. So how confident are you that this is as bad as it gets in terms of demand? And what risk do you see that Europe starts to weaken due to its dependence on the, on the export business?
I mean, on the first one, I mean, we are sequentially. You should know also that we are not adjusting for seasonality there, and we have commented on the when we got the question on inventory levels for Q1 and so on. So, I mean, there is a seasonality between the quarters, but I-
Okay, so on a seasonally adjusted basis, you expect it to be down slightly.
And then to discuss whether we are bottomed out, I mean, we are not magicians as we have discussed in previous calls, huh? So we are not going into that debate.
Okay, but on a seasonally adjusted basis, you expect demand to be slightly down then?
On the raw data, that we have commented in the outlook is the base for the outlook. And then we are saying that we are sequentially relatively unchanged.
Okay. But you have a seasonality in Q1 to Q4?
Yes.
Yeah. Okay. And then coming back to restructuring costs, but maybe on a midterm basis, because you didn't want to answer on 2016. Do you think it's possible to run SKF without restructuring costs, or should we expect around SEK 300 million-SEK 500 million per year in restructuring costs going forward?
I mean, I think we've had some debates, and you raised the question yourself before also, what's the cost level we need to reach? And that's, of course, some kind of algorithm with the sales and what you have there, so it's difficult to get a target. But I think we've been clear on that we need to adjust our cost base downwards in order to be competitive and to be in the, I mean, the financial target mix of growth and margins and so on. So we... And as asked before, whether we could do that without restructuring charges, we can not do that without costs.
Then it's more of a reporting issue later on, whether we should report one-timers or restructuring separately, or if it should be seen as a running business cost, which it is, in fact, huh?
Yeah. Yeah. Okay, perfect. And then lastly, on coming back to how to gain market shares, because one discussion has been that you would like to go more into the mid-market segments, but you only have the, the SKF premium brand. Have you decided now how to attack the mid-market business and-
But-
and gain shares from the mid-market?
Yeah, but it's, it's, it's more complex than that. You know, sometimes we try to look at segment the market in mid-market, et cetera. And of course, many times it's, it's more about application specific, and it's not necessarily so that you cannot be competitive even making very, very high quality SKF bearings by, by actually lowering your cost over time. There's a lot of things you can do to be more competitive in your manufacturing making the excellent SKF bearings. So I think there are two trends. One is, of course, where you're looking at, like in the automotive, if you look at the hub units, they're very customer specific.
We have, as we showed in the Capital Markets Day, we now have a new spherical that's actually very, very high quality spherical for wind, which has a lower cost than the standard. And so that kind of trend, I'm sure that will continue. And then there's an issue of actually improving our cost base at large.
... And I think this is what we are aiming for.
Okay, thank you very much.
We will now take our next question from Jonathan Hanks from Goldman Sachs. Your line is open. Please go ahead.
Hi there, Alrik. Hi, Christian. Just one question less from me. The number of people that you lost as part of restructuring looks to be quite a bit ahead of what you were targeting, and yet obviously the savings are roughly in line. I'm just wondering what kind of offsets the maybe extra savings that you would have got, perhaps from extra people leaving?
I mean, the saving is of course related also to you know the cost levels you have in different countries and so forth, and what units that in the end got impacted versus where we were planning or where we were targeting it. And of course, we have adopted our activities also to you know how the business changed during the year. So it's a difficult question to answer in that. So
What you should read into what happened is I think that we have diligently executed on our ambition, and we haven't stopped until we reached what was according to the expectations we had. It happened to be then some more in numbers with a similar effect, maybe in a geographical distribution, a little bit different than we originally thought when we launched the program. But we were determined to carry it through and reach the target. And you should see now that even though we stopped it, and we will not report it separately going forward, our ambition to continue to streamline SKF is there, and that will not stop. But now, of course, it's more of a... It's not a program anymore.
It's more of actually looking through our processes in the group and the way we do business, and the way we are organized to see to it that we become gradually leaner and leaner and leaner and more competitive. I think that with today's market environment, I would believe that this is, it's not only SKF where you see this kind of behavior.
Okay, thank you. Very clear.
We will now take our next question from Alexander Virgo, from Nomura. Your line is open. Please go ahead.
Also, the very last question. Sorry, we're short of time, so.
Well, thanks very much for squeezing me in. I appreciate that. I was just gonna ask a couple of questions on market share. I think you talked on the last quarter about North America and North American market share and automotive in particular. Just wondering if you can update us on what you think about how that's developing, how it looks as we move into this year, and whether that's something you expect to catch up on as, I guess, as you launch more products in that industry. And then the second question, just with respect to Europe higher in terms of your guidance.
I'm guessing that most of that comes from auto, but I wonder if there's any comment you can make on the industrial side in Europe, in terms of any particular end markets. Thank you.
So, if you'd say... I think basically nothing has changed. As you know, in the OEM, automotive OEM, the cycles are a little bit longer. And right now, it's interesting to see how the mix in cars in the U.S. has changed, given the lower gasoline prices. And unfortunately, on some of these models that are today selling absolutely best, we're not on them at this moment. So that's still what's sort of key making us trade below market in the U.S. Having said that, you're absolutely right. We're still, I think with a good track record, and we have some good businesses gained, and looking forward, we are confident that we are on a good way coming back.
But as you know, in this business, you're rewarded things that will be launched, programs that are launched, sometimes six months, a year from where you're actually getting the business. So gradually, we have been doing this year. If you listened in on the Capital Markets Day, where we were showing the kind of businesses that we were gaining, that we are actually confident that this is gonna change. But it's not. It's, you know, it's a process that runs over time. So that is. That's true. So we are trading below market due to the fact that right now, the best-selling models in the U.S., we're not on them. Christian, the other question, would you?
Yes. On the industrial market guidance, you want—you had a question on Europe isolated?
Yeah, it was just whether you can give us any color on which particular end markets in Europe you... Or if there's any color that you can give us on European end markets?
I would say that the guidance for industrial market as a whole is valid also for Europe?
Okay.
Year-over-year, lower guidance.
All right. Thank you very much.
That's valid for Europe as well.
Okay.
Okay, with that, we conclude, and thank you for this conference call. And should you have any other questions, you are, of course, as usual, welcome to give us a call or contact us by email. Other than that, you will have the full details of the year-end in the annual report published within short. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.