Welcome everyone to SKF's Capital Markets Day 2022, coming to you live from the Smith Centre here at the London Science Museum. My name is Stephanie Johansen, I'll be your moderator throughout today's session. It's been 10 years since SKF was here last time at this venue, 2 years since the last Capital Markets Day, which was fully digital. It's very nice to have a live audience and see you all sitting here in front of me today. Today, I will be joined by SKF management and other members of the leadership team who will be enlightening us, giving us their insights into what's happening on the strategy they launched back in February. Just some times for today, a short agenda.
We'll be breaking for lunch at about 1:00 P.M., take a 1-hour lunch break, and we'll be wrapping things up probably around 4:00 P.M. this afternoon. We'll hear from all of our presenters, and then at the end of the day we'll have a joint Q&A session. Since February, since the Intelligent and Clean Growth strategy was launched, so much has happened, both behind the walls of SKF and of course far beyond those walls. SKF has forged on, accelerating on its strategy, moving from long-term planning and targets to really bringing that strategy to life. Let's get a progress report, and now I'd like to invite up SKF's President and CEO, Rickard Gustafson. Welcome. Rickard-
Yep.
Before we actually talk about the strategy, let's talk about why we're here, and maybe with this amazing painting behind us.
Painting is fantastic. First and foremost, warm welcome, everyone, and also warm welcome to those of you who follow us online. I'm really pleased that we are actually gathered here in this particular building, and I agree with you. This kind of painting is from the GE factory up in Birmingham from the fifties, and I think it tells a pretty powerful story. That plant wouldn't be much without bearings, as you can see. It's a natural space for us to be today, so I hope that frames it pretty nicely.
As we heard in the introduction film, 20% of global energy consumption goes to overcoming friction. That's a pretty staggering number, and as a company that was founded back in 1907 with the purpose to reduce friction, I think you can really play a key role in this. How so?
Right. No, I agree with you, Stephanie. It's, it's really mind-blowing to me that 20% of the world's energy is actually wasted through friction. With that said, though, from an SKF point of view, it's great news because truly, you know, our reason to be is to help our customers to drive energy efficiency, reduce friction, and also then reduce energy waste. That's what we do. That's the value that we provide to our customers. I. It's also clear that when we look into this and also our capabilities, how that can help and will help new emerging industries in clean tech also to evolve and grow. We do have a very important role to play in many different industries, and that is also very evident when we reach out to our customers and ask them for feedback. How do they view us?
In a recent and independent customer survey, a clear message came through. As you can see here on this chart, our customers, they truly rate us highly, and from a Net Promoter Score, we outperform the market average. What customer tells us, it's clear that they value what, you know, our product and the performance from our products, our reliability, our geographical reach, our technology breadth, and also our innovative spirit. That's what they say, and that's why they, you know, wanna do business with us. I think these values, they are also the reason why we have such a strong position in so many different industries that we're gonna share with you today.
If we focus then on the strategy progress that's been made, tell us how you are bringing it to life.
I'd be happy to. You all recall that we launched the strategic framework, Intelligent and Clean Growth, back in February this year. Since then we have worked extremely hard and diligent to deploy this strategy across our business areas. Before we go into more details what we've done and how we intend to drive this forward, I'd like to reflect a bit, because clearly the world did not play out as we anticipated when we launched this in beginning of this year. Actually, just after we launched this, we were facing a significant, you know, new challenge that we were not expecting. We're facing a war in Europe. Of course, our first and foremost focus has been the well-being and safety of our people, that's still our main emphasis and focus.
Clearly, we have worked hard to ensure that our customers have not been impacted by this, and I'm really proud to say that our factory in the Ukraine, in Lutsk, has been operational throughout this period. A rather astonishing performance from number of people across SKF. It didn't stop there. We also have to face the situation with Russia and our business there. Rather quickly, we took a necessary but regretful decision to exit Russia, and the team did that in a controlled way within less than 6 months with minimal impact on customers outside Russia. Also a rather strong performance. I can't ignore the ongoing pan-pandemic. Most of us live now in countries where we're back to more normal type of living again. But that's not true across the globe.
We all know what's going on in China, where there's still significant restrictions. This spring was really, really problematic with a solid and big closedown in both April and May, having massive impact on supply chains, on our customers, and also on our employees. Again, I think, you know, we have managed well in those circumstances, and I give a lot of praise to all my colleagues in China for managing through this in a very, very difficult time. Then, of course, we also have to talk about the ongoing inflation environment, where we're now facing an inflation that we haven't seen in decades that we need to manage. Of course, you know, our focus, again, has always been how do we, you know, make sure that supply chain constraints does not harm our customers?
Yes, we have to push price, we have to go after price and compensate for this ongoing cost inflation. We have done a lot. I will talk about that. We also acknowledge that we continue, and we need to do even more. With all of this said, though, I'm still firmly believe that the strategic framework, the Intelligent and Clean Growth framework, is still as valid and relevant as it was when we launched it, and maybe even more important now to stay firm on our course to deliver on our financial targets and also in the future to unlock the full potential of our company. The key is rather how do we accelerate the implementation on this? We have not been standing still since February. We've done quite a bit.
Just to, you know, summarize it a bit, after the launch, really already in March, we made a significant reorganization of the company, followed that up by putting in new operating model in place, having all of a sudden six kind of autonomous business areas with full end-to-end responsibility for their entire value chains, their balance sheet, and their P&Ls, a significant change. Throughout, we had also worked to, you know, develop our management team. We're coming to a kind of a, to an end to this, or we start to be complete, with two recent additions. One being Annika Ölme, who joined in October as our new CTO, and you will see her on stage shortly. The other one being, also joining in October, Henry Wang, heading up our China Northeast Asia region.
Henry's not here today, I'm sure you will have a chance to meet him in future event like this in the near future. We've done all of this for a number of clear reasons. We really wanna make sure that we get closer to our customers, that we get more customer centricity. We wanna build transparency and accountability across our business areas. We wanna drive speed in our decision-making. Of course, we want to drive further efficiencies. I'm absolutely convinced that by having these business entities as well, with full end-to-end accountability, we'd further develop more leaders within SKF with strong business acumen that can help us to take our Intelligent and Clean Growth framework forward.
Rick, you mentioned the operating model that you introduced back in the spring and these six new business areas. Maybe tell us a little bit more about those changes that have been made.
I'd love to. I'm gonna touch on a number of things today. But first, I'd like to stress that we have worked hard to deploy the strategy in all these different business areas across our different geographies. Today you're gonna hear from Manish Bhatnagar, who heads up India and Southeast Asia, and also from Jon, who heads up Americas, how they have deployed this framework into their respective business areas. We wanna bring this, you know, framework to life today to you and give you some more insights. We're gonna touch on 3 or 5 main levers, how we see we're gonna drive profitable growth. I'm gonna cover 3 in my kind of introduction here. I'm gonna talk about our targeted growth areas.
I'm gonna talk to you how we think about our portfolio management, which is key to our strategic framework, and also how we think about commercial excellence. There are other dimensions to profitable growth and, of course, one being technology and innovation, and that's where Annika will come on stage and share how she aligns her efforts and her focus to support our growth objectives within the framework. Of course, we cannot be, and we cannot grow if we're not competitive and efficient. You're gonna hear from Niclas later on today how we drive efficiency in our business in terms of regionalization, in terms of cost efficiency, and also on inventories and how we aim to reduce those to increase our net working capital. Let me start by the targeted growth areas.
Already when we, you know, were in the makings of this strategic framework, we really worked hard to identify significant areas where we think they're of sustainable size for a bearing industry, where we see strong growth trajectories and growth potential, and where we as SKF clearly have a value add, where we are a clear number one or number two. You can see some of that on this chart and to, you know, the industrial distribution drives agriculture, rail, just to mention a few. Those are the areas where we believe that we can play, and we can add significant value and grow hand-in-hand with our customers.
If we then look into how do we then perform in the first 9 month of this year, on average, we have reported, as you probably know, a core growth of around 8% so far. In these targeted segments, for the majority of them being with one exception, we have demonstrated strong double-digit growth, clearly ahead of the market. I think our focus and our emphasis and our value add really pays dividend in those segments. This is how we think. This is what you should expect from SKF going forward, that our capacity, our resources, our capital, and also future potential bolt-on acquisitions will be aimed to further support growth in these targeted segment of ours.
As I also mentioned, touched upon that there is one other key mega-trend that will further amplify our growth opportunities, and that is sustainability. Sustainability for us is really becoming a competitive advantage. I like to bring that to life also in this kind of context. Of course, all of our customers, they strive to reduce their CO2 footprint, and they put pressure on their suppliers. Of course, they put pressure on us. We are willing to accept that challenge because sustainability has been core to what we've done for many, many years. We have set aggressive targets. We want to be net zero in our own operations, i.e., Scope 1 and Scope 2, already by 2030. We're making strong progress there.
In many of our factories, we're already there due to the fact that we have access to clean energy to a large extent. What we have done to make and create a competitive advantage is that we have breaking down our entire CO2 footprint across the entire value chain by bearing in a very trustworthy and transparent way. We share that with our customers. Today, we win business because we are better than our competitors to explain what footprint our bearings bring to their applications. A clear competitive advantage today.
Rick, you mentioned earlier portfolio management is also going to be a key driver in this. It's both, from what I understand, on the high strategic level, but also more of a tactical level. Can you take us through what you mean by that?
Yeah, I'd love to. Before I go into the details there, clearly, you know, portfolio management is a fundamental part of our Intelligent and Clean Growth framework. It's somewhat new to SKF, quite honestly. Now we view our portfolio as, or our business as a rather exciting set of businesses, the portfolio of businesses, some dependent and sort of dependent on each other and integrated on each other, but also as strong individual contributors. This is the way we operate. When you slice and dice the, our portfolio, now, you know, I refer to our kind of giant Rubik's Cube many times. I'm gonna share 3 dimensions with you today in terms of portfolio management, two more being more strategic and one more tactical. Starting with 2 strategic. Firstly, I'm gonna share how we slice this on an industry level.
Secondly, how we do it by, you know, business area or business unit. On the tactical point of view, I'm gonna share some details on what it looks like when you slice it by customer. Let's start by the industry. I'm gonna use this chart to illustrate how we do this by industry. Each bubble here on this chart represents a industry of ours, and where we plot it on two dimensions, growth and profitability. As you can see, you know, the vast majority of our industries, they are pretty well-positioned in these two dimensions. There are also a few where you see a, you know, need for improvement and where you can further move things into different, in different directions.
You can rest assured that for each and every bubble on this chart, we have tangible plans and tactics in play on how to move these across these two dimensions. Today, we're gonna bring four to life to you. We're gonna talk about, you know, tangible activities on how we're gonna move these four industries on these two dimensions. You're gonna hear Brian. Sorry, Stefan. Start with Stefan. start Stefan share, you know, the insights on what we do with these four industries on these two dimensions. You're gonna hear Brian. Sorry, Stefan. Start with Stefan. start Stefan share, you know, the insights on what we do within the rail industry and our strong position there and use that to further accelerate growth.
You will hear from Brian on our extremely strong position that were built over the years in agriculture or ag business, a new innovation coming into play that will really help us to further accelerate also profitable growth in that particular segment. You're gonna hear Jon shed some light on a relatively small segment of ours, the food and bev, but an extremely exciting segment where we have capabilities and opportunities to really accelerate strong, profitable growth. I think that's gonna be a powerful story that we'll hear from Jon. You're also gonna hear from David, where he's gonna explain his journey to transform a sub performing combustion powertrain business into a high-performing EV powertrain business. These kind of tactics and strategies by industry segments is a vital cornerstone to our Intelligent and Clean Growth framework.
Let's move into the other strategic dimension then, the business area or business unit dimension. Within Thomas' business, the what we call Independent and Emerging Business businesses, we find a broad set of autonomous businesses. Being lubrication, being seals, being marine, RecondOil and magnetics. Thomas and Aldara will bring you the magnetics business and the RecondOil business into more details and share more insights there and our exciting opportunities there shortly. I would like to stay a little bit more focused on the aerospace business for a second. As you probably know, we have a very, very strong aerospace position and an exciting business in this area. We are covering both aircrafts and helicopters. We have within what we call aerospace, there are three kind of distinct business areas within aerospace as being, you know, engines, airframes, and more advanced seals.
Collectively, they make up a sizable business, just shy of SEK 5 billion, some 2,600 colleagues of ours, and 12 distinct or dedicated manufacturing sites scattered across the globe, primarily here in the U.K., Italy, France, U.S., and China. A sizable and exciting business. It's also a business that has been extremely impacted by the pandemic and experienced significant volatility. Trust me, I've seen that volatility from the inside in my previous life, and that's painful. Also now you can see that there's a big bounce back in this industry. We also recognize that here there's an active, ongoing consolidation in this industry. We believe that there is significant potential for additional shareholder value to actively participate in this ongoing consolidation.
That's why we today announced that we have initiated what we call a strategic review of our aerospace business with the aim to further enhance the performance or its position within the aerospace industry. You should see this as the clear evidence that we are serious about our performance management activities. We will constantly look for opportunities to improve our performance or drive shareholder value through portfolio optimization. This particular one with aerospace that we now embarked upon has been something that really come as a clear result of our focus and our strategic work through solid analytics within the company and discussions within group management and our board of directors naturally, and has not been imposed on us from the outside as some of you may have read in recent news. It's clearly part of our strategic framework.
Again, what will be the timeline for this strategic review?
Right. I don't want to commit to a certain timeline because it is the strategic review, which means that we have not concluded which way we want to go. It can be either, you know, we can play in the game for actually acquiring more to strengthen your business or actually exit some or sell parts of your business in order to drive the shareholder value we discussed. Time will tell, but, you know, the journey is on. You should be absolutely sure that the aerospace team, they are working very, very hard and they are still committed to really deliver and, you know, maximize the potential of this business. They stay focused on leveraging on those growth opportunities that we're now seeing in this bounce back in this industry.
If we shift to the last dimension of portfolio management focused on customers, can you maybe talk about that, this pruning aspect?
Of course. I'd love to. To do this, I like to share this kind of illustration with you. It's, it shows, our operating margin by customer. Clearly you can see that, you know, vast majority of our customer, our contracts contribute nicely to our profitability. Not surprisingly, there are also a tail of sub, you know, sub-performing contracts with customers that needs to be addressed. That's why our new operating model also come into play.
Each of the six business areas are now charged to, on a regular basis, constantly review their bottom-performing accounts and define clear action plans at how they either gonna, you know, move it into profitability or a, you know, a profitability level of our desire within a reasonable timeframe or actually exit that business. We follow this up with our operating rhythm, where we meet and discuss the business performance of our business areas every single quarter, and also keep an eye on how we're doing in this pruning of the portfolios.
I'm absolutely convinced that over time, as we get this new operating model and operating rhythm to work, you will see that that's going to help to lift our underlying operating margin for the group.
I know price is also one of these operational levers. What's being done there, and is it enough?
No, that's a good question. I like to put pricing into certain different type of context. I see it as part of a commercial excellence, commercial capabilities that we as a business need to develop. Price is of course an important fundamental piece of driving profitable growth, especially in the environment that we experience right now with high, high inflation. We do believe that we have pricing power, and we have demonstrated quarter-over-quarter that our price mix and the trajectory of our price mix is moving in the right direction. For those of you who remember and recall when we announced our Q3 numbers, we draw your attention to that in that particular quarter, price mix contributed SEK 1.8 billion positively to our results.
However, we do acknowledge that, you know, the headwinds were even harder, and we had a deteriorating margin development. We are not happy, and we know that we need to do more, and we continue to drive this aggressively. It's not just price, but it's part of it, but also commercial excellence, I think, is key. We know that we need to do more also to build strong commercial capabilities in our businesses to be resilient in a volatile environment. There are four areas where we put a lot of emphasis at the moment. Firstly, we're looking into how do we improve our processes and governance in terms of sales processes and governance. We need strong governance in all our business areas to ensure that we minimize or most preferably eliminate any leakage, price leakage in our businesses.
We need to continue to upgrade our analytical capabilities and our tools to ensure that we have equipped our sales reps with facts and figures and data as they engage in the conversation with our customers, and that we also have more forward-leaning indicators so that we can be more proactive in those discussions than we have been in the past. We gotta be faster there. We also need to look into our sales structures, and here I'm gonna primarily focus on Europe because we have a heritage in our business that each country in Europe or in MEA has built its own kind of sales structure, and that is now being changed. You're gonna hear a little bit more about that when we get back to Niclas' session.
Last absolutely not least is what do we do in terms of our sales incentives? How do we align them so they actually are driving the right behavior and the right performance that we want to see? We wanna make sure that we drive profitable growth, not just growth. We wanna make sure that our sales reps feel that they have skin in the game and a reason to also actively participate in the pruning activities that I described before. Sales incentives also be key to this. I believe that, you know, strong commercial excellence and capabilities are key to any, you know, profitable growth journey that you need to embark upon. I believe also if we're now facing a recession, to build, you know, these capabilities they might be even more important.
You mentioned driving profitable growth there. All these building blocks that you've mentioned now, how will they concretely do that? Why do you believe this will succeed?
There are a number of reasons for that. To me, you know, this framework that we do and this operating model that we put in place is more than just an organizational change or a strategic framework. It's actually cultural transformation of SKF that we are embarked upon. Really by driving this, as I said, you know, we wanna make sure that we get more transparency, more accountability, get closer to our customers. Those are key. That we continue to drive efficiency, it's absolutely vital. This thing with portfolio management, it's so key because it's gonna force us to also deselect where we should not play, and redeploy our efforts and focus on the areas where we truly have significant value add and strong growth opportunities, as you have seen in a number of these examples.
I think you will hear more about that and bring that to life from my colleagues just shortly.
Thank you very much, Rickard. We'll see you later on this afternoon.
Yeah. Thank you so much.
...for the Q&A. Thank you. Let's shift focus now and hear how innovation and technology development are enabling this Intelligent and Clean Growth Strategy. I'd like to welcome up SKF's new CTO, Annika Ölme. Welcome.
This is just a teaser of something to come later on, right? You have to have some good stuff up with you on stage as well. I'm really happy to be here actually. This venue is great. You know, it has an industrial heritage. I've spent 50 years at SKF, and then now I've been out of SKF for about 5.5 years, and I'm 2 months back in. It's really, really exciting to see all of the opportunities that we have in front of us. Of course, being passionate about technology, this is what I will talk about now today.
The Intelligent and Clean Growth, I will speak about that from a technology perspective. What are we really doing in our R&D investments to ensure that we innovate and move forward and connect to that growth? What I will mention here has two themes. First of all, focus, and second of all, partnership. It's about how we focus and how we actually partner with others to become stronger. Really listening to the words that Rickard mentioned, 20% of the world's energy is used to overcome friction. That's a staggering number, right? We are at the core of that. This is our core. I would like to share a little bit more on how actually development and innovation plays a really big part of this.
In a recent EU study, it was concluded that 80% of the eco-footprint or the environmental impact of a product is actually determined in the design stage of that product, so when you actually make the product or design the product. That means that technology and innovation is really at the heart of this challenge that we have.
We are doing a couple of different things to actually address this, to make sure that we and our customers are able to do the right thing here. We're looking at a couple of pictures on the screens, as you can see, and you can also look a little bit more down here in the exhibition later on some ways that we actually work with ourselves and with our customers to ensure that we capture those 80% of opportunity to have the right eco footprint of our products. One way that we tackle this is through improved design tools. One of the design tools that are on display over here is actually our CO2 calculator. With digital means, we let our customers actually know how do our products in their particular industry and application affect the CO2 emissions for them.
How much comes from our product, how much comes from their operations to enable them to make the right choices. The other part also, if you want to dig a little bit deeper, we have an application that we share with our customers, SKF Bearing Select. It used to be really, you know, looking at the reliability and the life of the product and optimizing that in the application. Now you can also look at the CO2 impact of your different choices of design that you make when our customers design their applications. Really bringing our knowledge to our customers' fingertips in making these choices. It's also about people and awareness and how we put requirements on our products when we design them. We're really working on awareness of sustainability and how we put requirements on the products that we make.
Please make sure that you take a look over there a little bit later on during lunch. Intelligent and clean. Let's stay a little bit with those two words and what they mean in terms of technology. Intelligent is really one part is really about data-driven intelligent products that are able to provide our customers with insights from data, from sensors, but also combined with our knowledge, which is unique for SKF. The other part is really about making intelligent offers to our customers. Specific customers and specific industries have different needs, so we need to make sure that we are application-specific and smart and intelligent in our offers. Clean. That's all about an environmentally sound business where we are transparent and responsible when we do business.
Transparency is also about being able to tell our customers what is the impact on the environment for this product, data-driven and through numbers. The second part is also, of course, how we help our customers to save energy, reduce friction, but also how we support the clean and green industries, like railway, like wind, like the electrification area. How do we manage and how do we look at this growth? Where do we expect it to come from? We're looking at 75% of the growth that we are projecting until 2030 to come from existing products, existing markets and new markets. That requires a lot from us, and I will come back to that. 25% of our projected growth until 2030 is expected to come from new product.
Here, technology, innovation, bringing new things onto the market is, of course, core. How do we then do that? Our R&D investment allocation today, we are spending about 62% of our R&D investments on sustain. That means really to keep our core products number one. How do we stay number one? How do we make sure that this 75% growth that we are expecting to come from existing products really happens in existing markets, in new markets? We are spending some 25% of our R&D investment on creating new products, application-specific offers for specific customer groups where we add value. Some 13% is spent on innovation or innovate.
This is about making these bold innovations, new technologies that will keep us competitive in the long run. For the future, you can see the arrows here. We are expecting to increase our R&D spend and our efforts, especially on the extend and the innovate part, to ensure this 25% growth coming from new products. I would like to dive into those areas a little bit more to share some examples with you on what is it actually that we do in these areas. A great example of the sustain, so an existing product that we've had for a number of years that really has high growth potential. It's the hybrid bearings or the ceramic bearings.
If you look at it, a ceramic bearing or a hybrid bearing is really a bearing which has steel rings, but the rolling elements are made of a ceramic material. It's much lighter than steel, so that's one part. It looks something like this. Nice color. I actually have a pair of earrings with ceramic balls, so I will wear them next time. The ceramic, the ceramic bearings or our hybrid range, this one is really exciting because we are looking at some core customer value coming from doing this. One of the things that are really key in this is that this material is electrically insulating, and that means that there's no current, electrical current running through the bearing, and that actually saves the bearing's life itself when you have electricity in the surroundings of the bearing.
It also saves the application that the bearing sits in. This is a core value. Really looking at this, we are looking at a product that we've had for a while that has extensive growth potential, and we will talk about that later on in railway. It's also very much electrification in different areas, and my colleagues will share a little bit more on that later on. If we look into the extend area, I think a really good example of this extension of new products to application-specific areas is the agricultural industry and the AgriHub, where we have really a tiered offer to different levels of customer needs, and the AgriHub is a great example of that. We have the T100 offer that really caters to the agricultural industry, the agricultural machinery on a really good price point.
We also have the T-400 soon to be released, and that one is for those users within that industry that has harsher environments. They require more life, and we can actually charge a little bit more for that as well. It brings more value to the customer. That is what we're doing in agriculture, but it's also relevant for many other industries. Brian will be speaking a little bit more about this, and you will learn more about this later on. An exciting example in the innovate area is really looking a bit like this, and you could say this is just a bearing. What's the big deal? It is the big deal because actually, years and years of creating knowledge in SKF, creating a lot of different capabilities and knowledges have come together to this, and this is also when innovating with partnerships.
One way of partnering is to innovate with a customer. In this case, we have worked together with ABB. ABB has the goal of having really a low CO2 emission electrical motor, and this is a big part of that. Remember the friction targets, right? Also the CO2 impact. Through all of these capabilities and knowledge that we have, we've managed to lower the CO2 impact of this product by 75%. How did we then do that? Well, there were a couple of different things that we did, and actually, we adapted the design of the bearing with all of the knowledge we have on designing bearings, of course, reducing actually the steel usage, but also reducing the friction with some 30%. Another part that we brought into this was really the raw material sourcing.
This is then made by 100% scrap and recycled steel instead of using iron ore. That is also lowering the CO2 significantly. A couple of areas also interesting here is carbon-based into bio-based materials. We're using bio-based polyamide cage in here, and the shield that you can see here is also a bio-based polyamide, and also a bio-based grease inside this bearing to lubricate it. That is also based on years of knowledge about how do we actually use these types of lubricants with less, less oil content. That doesn't come overnight either. It all comes together in 75% less CO2 impact, and I think that's just amazing. 5% less CO2 impact, and I think that's just amazing. Partnerships is really, really important here. We cannot do everything ourselves.
We have entered in a partnership together with Combient Foundry. There was a release on LinkedIn yesterday. Some of you might have seen that. Combient Foundry gathers companies like Atlas Copco, Autoliv, KONE, Husqvarna Group, Scania, as well as Stora Enso. Within this partnership, we get access to, of course, the partners themselves, but also a network of more than 1,000 startups across the world, bringing in new technologies that are not traditionally in our core, but that we need to grow. We're looking forward to growing this partnership in the next years and announced yesterday, as I said. Another really exciting adjacent technology that we will also come back to both in railway and automotive later on is additive manufacturing or 3D printing, and there's some examples down here in the exhibition also of that.
This is of course an industry that we all need to care about, right? Being a manufacturing company, and we will comment on that a little bit later on, but it's also key for partnerships, right? A last example of partnerships is what we have done together with AWS or Amazon Web Services on the SKF Axios solution, bringing really, some abilities to our customers to get insights on their applications on all levels, and John will comment on that a little bit later on. All in all, we are investing in both exciting and clean growth, innovative and clean growth, and we are doing that through focusing our own efforts, but also through partnerships and really going for those high-growth segments where we can get the growth that we need.
Thank you, Annika.
Thank you.
I have a few questions?
Yeah
...for sharing all those great examples. You made it pretty clear that innovation and technology development are going to be crucial in enabling this strategy, but if you can pick kind of one thing, key factor-
Yeah
that's gonna get you there, what's that?
I'm actually gonna say two things.
Okay.
I get two. I think one thing is really core here, you know, for the 75% growth that we are looking for for our existing products, we have to be number one. We have to stay at number one with our competencies, capabilities, and knowledge, that's one core. The other thing I would really like to highlight again is for us to focus on the growth segments, to focus on where innovation and R&D actually has the best return of investment in growth, profitable growth for us. The focus is core.
A question about R&D spend, because back in February, it was announced that it would be increased by 50% by 2030. Will you do that?
We are on a trajectory to do that. We are increasing our investments, we are making sure that we know what we spend money on, that we are spending money on the right things at the right time to ensure that we get the growth we need. Focus, again, and really making sure that we get the return of investment of R&D.
Finally, when it comes to innovation, what would you say kind of sets SKF apart from the competition?
This was a discussion actually before with some of the audience. I think a core strength for us is around the sustainability area. We have worked with this for a long time. You see that it's not a section in this meeting, it's rather that we all talk about it, and we do have really some traction, both on products, our own operations, and all of those areas, and I think that sets us apart.
Okay, thank you very much, Annika.
Thank you.
We'll see you a little bit later. Now let's shift gears and now focus on SKF Industrial business, and two areas where SKF considers itself really a true market leader, and that's agriculture and railway. Let's kick things off with railway, and I'd like to welcome up Stefan Gladeck, who is SKF Director of EMEA Railway.
Hello. Good morning, everybody. I also brought a nice piece with me. It went through customs at the airport. At least I impressed the customs officer when I told her, it was a lady, that it's a 3D-printed piece. I impressed her obviously. It's a great pleasure for me to speak about railways and the ambitions we have in railways. I hear railways from you, Rikard, I hear it from Annika, I hear it all over the place, so that is kind of music to my ears, I have to say. I would like to start with the major drivers of this industry. Before I start speaking about urbanization, I would be curious, how did you get this morning to this place? Did you take the metro? Maybe you raise your hand. Who of you take the metro? Oh, that's a bad ratio.
Next time, there's a railway station just around the corner, please. If we talk about urbanization, think about a city like London, Shanghai, Mumbai, New York Citi, Rio de Janeiro, just around the world, Berlin, and I will come back to Berlin later on, without public transportation and without rolling stock from metro commute trains. Think about it. That explains why for the further ongoing urbanization, we need rolling stock for the next years to come. Digitalization is not by far not a trend anymore. It's one of the major building blocks of the transformation this industry, the railway industry, is going through, as we. Intelligent and clean. I associate very much intelligent with digitalization. I associate very much sustainability with clean.
There are tons of opportunities of taking data from rolling stock, for example, from our products, if it is a gearbox bearing, a traction motor bearing, a wheelset bearing, and then makes the best out of it, value for the operator, for the franchise takers, as you have a lot of them in the UK, for the maintainers, but also for us as the passengers riding on the train, and of course, for SKF as a supplier into this industry. Globalization, in short words, think global, act local. It's not a contradiction to regionalization and localization.
Regionalization and localization, it's going hand in hand with customer requirements and having, for example, engineering, production, customer service, and many other services for our customers close to them is key, as well as is very important for us to have suppliers close to us. Sustainability is already a reality with the shift to net zero emissions and the push from many governments across the world for what we call the road to rail shift. I would like to quote at this very moment the CPO of Deutsche Bahn. I'm a German, so I'm very close to Deutsche Bahn and of course, other global railway operators and customers. Mr. Grote was saying at the railway forum of Deutsche Bahn last year in September, "CO2 is," will not become, "it is the new currency." It happens.
We see it in specifications, I can tell you. Finally, talking about the modernization of fleet programs, many of the trains in service may be 5, 10 years old, have another 20 years to go, and they're not aligned with the new regulations and the new kind of trends in this industry in terms of digitalization and sustainability. They call, they cry for upgrades, and this is a fantastic opportunity for us as well. Looking at our kind of growth ambitions, the baseline is SEK 4.4 billion we will achieve this year with our global railway business. About the other numbers, let me explain a little bit. Most of the established and railway experienced research institutions are forecasting a sustainable growth in railways, actually not only until 2025, far beyond until 2030.
As rail is the most sustainable, the most sustainable way of transportation, me as a railway guy, I have to say it like this, it is seen as a backbone and a key contributor to the CO2 neutral mobility and operations. We concluded in our growth assessment three different studies from these railway expertise with 4% year over year until 2025. Actually, in some of the studies, some go to 2026, some to 2027 and 2028. This is kind of a continuous number, this 4%, you will see. By the way, this includes inflation. Well, before I start talking about the number you see on the screen, the 7%, well, we aim to generate substantial growth in areas where we have low market shares, and there are some where we have low market shares.
There is, of course, the digitalization and sustainability part, which is becoming, I repeat myself and refer to what Mr. Grote said from Deutsche Bahn and many other industry leaders from the big OEMs, it becomes a criteria award topic. Precisely what you were referring to, Rickard, when you showed this, the number on the screen that we are asked, okay, how much is this bearing Scope 1, Scope 2 CO2 emission? How is it, this bearing in use in terms of CO2 emission? We have to give numbers to our customers, not out of the air, not out of the blue, really concrete numbers. They are fixed in contracts. Let me come to freight transportation.
If we, if I would have the time to ask you all what you bet, how much freight cars we have in operation around the world. As we sit here, 5.2 million freight cars in operation, more than 90,000 freight locomotives. By the way, many of them diesel powered. I don't need to tell you that diesel doesn't have a bright future, huh? Looking for new drives. I just would like to come to the European freight market, which is undergoing heavy modernization, automatization, digitalization activities. I can tell you there's a huge demand over the next years, only in Europe, for new locomotives. It's not going to be diesel locomotives. For new shunting locos, and it's not going to be diesel shunting locos, and for 10,000s of freight cars.
Germany's governments across Europe are not only funding the road to rail shift with heavy budgets, they also define in laws the CO2 emission to be saved. I would like to refer again, sorry, Germany, the Klimaschutzgesetz, the climate protection law, which was set out by the new government in Germany, associated with a big budget. It was a clear target. You have to save 48% of CO2 by 2030. There is another topic. There are new high speed trains, very high speed trains, electrical multiple units. No diesel multiple units with alternative traction options, battery powered, hydrogen fuel cells, and so on and so on. They are on a continuous growth path. We have a strong position with our portfolio, wheel set bearings, drives portfolio for gearboxes and motors for the propulsion part with our bearings in this area.
I believe with our product portfolio and the extraordinary measures we set bearings, drives portfolio for gearboxes and motors for the propulsion part with our bearings in this area. I believe with our product portfolio and the extraordinary measures we are taking in terms of sustainability, as it was described by you, Annika, and also by you, Rickard, we have excellent opportunities and also in the area of digitalization to outperform the growth. That's how we come to the number of 7% year-over-year until 2025. I tend to say beyond up to 2030. Would like to tell you how we want to get there. I only have 10 minutes to speak about it, so I picked three cases. One thing is about the life cycle partnership we are entering with customers.
For me, our top leaders in the industry, the OEMs, but also the operators and also some tier one suppliers, are for me, technical partners. We entered with one into a life cycle partnership. Trains are designed for an operational life of 30 years and more, 32, 33, 35 years. For this reason, our OEM customers are entering into life cycle commitments with their customers. We did actually the same thing. In 2021 for the first time we signed also into such a long and life cycle commitment with our customer. The operator in this case is Berliner Verkehrsbetriebe, you might recognize BVG, yellow trains. We signed for a contract of 606 coaches. We have various products in this train.
Our contract was mainly focused, the performance key was mainly focused on wheel set bearings, and we're talking 10,000 wheel set bearings. We committed ourself on 32 year of life cycle cost commitment. By the way, this train has, on the traction motor side, hybrid bearings 100%, 100 delivered by SKF. Under this contract, very important to say, we do the refurbishment services in our newly operate, inaugurated refurbishment center in Schweinfurt. We have some 20 refurbishment centers around the world. I would claim in the key railway hotspots. One of them, Schweinfurt, yes, but not so far away from here, we have also one, Luton, we lately announced we will have one in Kiruna. You might say Kiruna, hotspot for railway. There is a very important customer who needs our help to be serviced with its railway bearings.
What I try to say with this slide, and what I try to say where we make the difference, is our customers don't need us only for today and tomorrow. They need us also for the day after tomorrow. Well, digitalization, turning data into action. I just would like to start right away with the summary of the slide, and I hope I get the message over to you. A more digital railway is driving sustainability, this is done via data acquisition. We have quite some experience here. More than 20 years, we are supplying equipment for condition monitoring and predictive maintenance into rolling stock equipment. We have experience here. What we are doing different now, the data is processed into our cloud and turned into actionable information via SKF algorithms. All this to enable and improve and to make, at the end, decisions.
Customers to make decisions, also we to help our customer to make a decision. Such a decision could be, for example, to extend the maintenance interval, which is really a significant cost improver for our customer and helps them to reduce cost of all, of course. Another element too is also if you do the extension of the maintenance interval, you have a sustainability effect in terms of improved carbon footprint balance sheet. Another aspect on this is that we have, since two years, what we call a rail digital transformation program. We have developed for our customer interfaces. This is not PowerPoint. You can actually visit customers here in the U.K., widely used with OES customers, where they use digital platforms, where they have real-time data coming from the trains and they see precisely the condition of our products in service.
They use it for their maintenance fleet programs as well. Digital transformation drives sustainability, and I hope I could transform this message to you guys. Talking about customer-centric innovation. We heard about reducing friction, reducing weight. The same applies of course, for railways. We have the situation that we announced during InnoTrans 2022 in Berlin, for example, talking about weight, a new developed Y25 axlebox, and it's, to my knowledge, one of the lightest axleboxes in the marketplace for freight applications. And of course, we are working in many other fields to support friction reduction, weight reduction, for all kind of railway applications. But I would like to come to the sample case, the one which impressed the customs officer at London Heathrow Airport.
I believe here we see the combination of digitalization and sustainability in one little piece from my perspective. 3D-printed additive manufacturing. We started to work in this field quite some time ago. We have actually stolen with pride, if I may say so, from our automotive colleagues. David will definitely touch on it, and learned quite a lot. This one is in a wheel set bearing, and we test it under true conditions. We call it EN conditions, European Norm conditions. European Norm defines more or less the operational pattern, and we tested it, and we found it was excellent European Norm conditions. European Norm defines more or less the operational pattern, and we tested it, and we found it was excellent characteristics after the test. The issue is you might ask yourself, why is it not in operation? Very simple.
There is no standard and norm to it. We don't want to wait that somebody comes up with a standard and norm. We try to set the scene. By the way, we are not only printing this type of material, we also print cast material for axle boxes. Coming to the slide. Of course you have this advantage of the build to print, which means you don't have inventory. You push the button on your computer, and here you have the piece within short. No problem on lead times. The other thing is, prototyping, but not only top prototyping. We really try to aim for going into a serial production, but I believe that requires a little bit more time. Let me come to the end.
Railway industry is globally on a steady growth path, and we want to outperform this with the number I've shown to you. With innovation, innovative products, further drive the journey on friction reduction, weight reduction, sustainability, and digitalization, and of course, don't relax on our strong position we have in the railway market. I thank you for your attention, and I would like to hand over to Brian to talk about agri. Please, Brian.
Thank you, Stefan. Let me be the first to say good afternoon, since it is afternoon now. Thank you for joining. It's really a privilege to be here, to talk about SKF's global agricultural business. As Rickard presented, ag is one of our key strategic segments in our long-term plan. I think it's important to start with a look back on our results in order to set the stage for why we are so confident that we'll be able to double this business by 2030. Our mission is absolutely clear, to drive profitable and sustainable growth above the market. As you can see, looking back the previous seven years, we've achieved this with a compounded annual growth rate of greater than 13.5%, doubling our business since 2016, versus the market's growth of roughly 5%.
We are clearly winning share and positioning ourselves as the brand of choice going forward with ambition to clearly continue strong compounded annual growth rates. Of course, we cannot predict the ag market will do over the next seven or eight years, but we are confident on an annual basis we'll be able to outperform. Ag is a cyclical business, and when the market cools, that's when our ag customers and companies often focus on new product development and redesign of existing. We, SKF, double down during this time to get closer to our customers, connecting even closer on these new opportunities. When the market bounces back, we actually get an exponential bump in our business. This is exactly what happened during the last slowdown and is reflected in our historical growth rates since 2016.
With this growth over the past seven years, SKF is now arguably the leader in market share in ag. In addition, we have the widest and broadest ag bearing and seal portfolio to the industry with reach to OE and aftermarket channels. What sets us apart, what truly sets us apart, is our deep knowledge around ag and our global way of working, which I'll walk through now. Our strategic approach is to drive that outside-in engagement with global and regional leaders to develop industry-leading solutions based on their voice and their market needs. Acting borderless, as many of our customers are global, with an entrepreneurial spirit and a can-do attitude. Everything we do revolves around the customer. A truly customer-centric approach to the business.
Our frontline team of sales and application engineers, they connect and are the main connectors to the customer, as I mentioned, engage early in the development process. This is very, very important. You need to be present early on. These teams leverage and apply our deep knowledge and technical competency, depending on the customer's application and machine. Agri has many different industries or sub-industries, may I say, that are significantly different knowledge is needed. For example, seeding, tillage, and harvesting, it's a rather harsh environment, obviously. Bearings running close to the ground. Deep sealing knowledge is required, as contamination is the failure point. When you look at tractors, transmission, and drivetrains in ag, it's a relatively clean environment, a heavier loaded in compound loads. This requires extensive knowledge around fatigue and metallurgy.
While our lawn and garden, which targets light commercial and even consumer products, requires knowledge around reducing friction and actually reducing cost, given the competitive nature of this business. With the customer's requirements fully understood, our application team seamlessly and quickly connects to our regional competency centers spread throughout the world. These competency centers have the responsibility to connect the full value chain. They play a pivotal role in prioritizing projects. The funnel is quite large, but prioritizing, focusing on those have the greatest impact to SKF's top line, but actually, more importantly, to our bottom line. They act as a bridge to our R&D, bringing those customer requirements forward, and they coordinate the timing and action for everything, from finalizing the designs, prototypes, and testing and validation.
Finally, they leverage our extensive manufacturing footprint and steer the opportunity to the factory that's in the best position to industrialize the opportunity. This all adds up to a fully connected value chain that enables us to be quick and responsive to the market opportunity. Ag, of course, is a very seasonal business, and meeting these tight testing windows is critical to be gaining those awards. This way of working, we believe, is clearly the best in class and a significant differentiator from our competitors. As we visualize and position the ag business into the future, we're also guided by the global industry macro trends. In the broadest context, global population is growing. Today, it sits at 8 billion. It's estimated to be 9 billion by 2030, some 6% increase. In other words, there are more people to feed.
Limited land, at least limit of plantable land, and the difficulty securing labor, along with the drive to reduce greenhouse gases by 2030. In turn, this leads to the trends in machines and equipment, the drive for faster, more reliable equipment for greater productivity, precision farming, maximize the yield per acre, improve crop yields, and a greater push towards electrification and autonomous. I'd like to now show an example of this new innovation guided from the market drivers I just discussed. As Annika mentioned, we're getting ready to launch our second generation T400 tillage hub. We set out to improve on the original design, something that checked all the boxes. We have improved sealing and a capability with lighter drag, which reduces fuel and energy needed to drive the implement.
A better seal also contributes to greater uptime, something that's very critical in a farmer's very compressed schedule. A more robust solution designed for higher speeds and larger commercial farms, where productivity again and yield are critical. This all added up in our initial lab test to a 4 times greater life than our T100. 4 times better life with this solution. We're truly a truly industry-leading solution. We're really excited about this launch. We have great expectations. I'd like to wrap up now with this. We are confident ag is positioned to deliver profitable and sustainable growth for SKF from these 3 perspectives. Number 1, the market. Ag continues to show really strong long-term fundamentals. With population growth, feeding the world will continue to be a challenge.
Our position, by leveraging our strength and competencies with those relationships with the global leaders, we're positioned to be the development partner of choice as those customers embark on the future of farming. Our solutions, we will continue to invest, we will continue to innovate in order to deliver value solutions that our customer and their end users value, allowing SKF to win, and very importantly, get paid for this step-up in performance. Clearly, we're excited. That's a sunrise, not a sunset. We think the future is quite bright, in agricultural and again, thank you all for your time.
Maybe we can bring up Stefan again. I have a couple questions for you as follow-ups. Brian, as you mentioned, SKF, you said, is a true market share leader here in agri. Do you see any other areas where there's untapped potential for you?
No, it's a great question. Thank you, Stephanie. The profile of ag is I'd roughly say 70% OEM and 30% aftermarket. Our profile, our SKF's business is more like 87%. With only 13% market share, let's say, or 13% of our profile of our business in aftermarket, we see this as a great opportunity for growth. We're gonna be focusing more on the aftermarket. It's also extremely profitable, as you all know. A great opportunity to grow share but, again, focus on growing our profitability. The other area that I would say is a growth area is when you look geographically. We're extremely strong in Europe and extremely strong in North America. Latin America's a very rich farm area as well, and we see that as a great opportunity.
We do well there. We can do more. We look at India, and we look at China as great opportunities for additional growth.
Stefan, the contract you mentioned.
Yeah.
The 32-year-long life cycle.
Yeah
... contract. That's pretty impressive. How unique is that, and is it profitable?
First of all, for us, it is indeed unique, but for our customers, OEMs, it's quite the common way of working with the end users, huh? The tricky part here is, of course we're taking kind of a risk, but we do the risk mitigation to a very thorough design work but also testing. As we speak, we are testing the application. It's kind of a subsystem with the wheel set bearing and the axle box. We are testing beyond what is required from the standards to be really on the safe side. Coming to the second part of your question, it's about the profitability. It's very much on us.
With the combination of the refurbishment services we are doing, it's on us how we can drive the profitability, from a medium to a very high profitability. The other part is what I believe is very important. We are for 32 years of the life of the train with our product on the wheel set.
You talked a lot about digitalization, so I'm curious when it comes to data and diagnostics.
Yeah
Where are you in compared to what the competitors are doing?
Well, there are many out there which are collecting data, and they're doing not a bad job, I would say, yeah? The difference is, and that is where we have a strong point, we know the algorithms, we know the behavior, we know the firmware of our product. We know what is healthy and what is not healthy. When it comes to the condition of the product bearing, we know precisely when to do what in terms of a maintenance. There's another nice thing which I forgot to mention earlier when we are talking about refurbishment. We are equipping our bearings with a DMC code, Data Matrix code. It's a QR code, and we do that in, for example, in Moncalieri, our Italian railway service center, but also now in Schweinfurt with this particular contract.
Customer has full traceability for the whole lifetime. It's like a fingerprint, on the bearing QR code on inner and outer ring.
Interesting. To finish off then, Brian, we'll finish off with you. You both talked about customer value. I'm thinking, well, you also talked about testing. How important is that in the process with your customers?
Thanks for the question, Stephanie. Actually, we work, obviously collaborate with our customers, but we spend a lot of time in the field. Over the years, we've developed, you know, very specific test methods and test rigs, with the whole goal to simulate what really goes on out in a field. We use this primarily for our own design, our own R&D, and to validate before we bring the solution to the customer. More and more, we're working with these customers. They're using our data and our insights in order to model it into their systems.
In some cases, it actually speeds up the release to market because they're able to do lab testing, rely on our lab testing, as a forward approach for their validation. We get to market quicker and more effective.
Great. Thank you to both of you very much.
Thank you.
Thank you.
Thanks a lot. Now we're going to shift to the regions, where SKF is winning in the regions, and we're going to start off with the Americas, and I'd like to invite up John Schmidt, who is President of the Industrial Region Americas.
Thank you, Stephanie. Again, good afternoon, everybody. Today, I wanna talk about how we're creating customer value that delivers sustainable, profitable growth. To do that, I wanna go through two examples to illustrate a few aspects of the strategy that Rickard highlighted in the beginning. One of those is having a regionalized competitive supply chain, and for the Americas, that's very important, as we are a net importer. 40% of what we sell is made in our region. Secondly, we're gonna talk about this new operating model and how that really works, having the end-to-end responsibility in the region and how that results in us acting with greater speed and more efficiency. The third aspect we'll talk about, and you've heard from Rickard, portfolio management, a few different dimensions. We're gonna talk about an example in our services business around portfolio management.
Lastly, I'll touch on the power of leveraging partnerships to accelerate our growth. We talk about that there's a focus area for us that's agriculture and food and beverage. You've heard Brian talk about our agricultural business. The example I'm gonna cover is the other side of that. I'll talk about a food and beverage example, and then we'll talk service. If we go to this customer that's called Heat and Control, and you can see the equipment that we'll talk about. The blue ring in the upper left-hand corner is the bearing solution that we'll highlight here. Heat and Control is a company that makes unique high-performance equipment for processing. In this case here, I'm gonna talk about the value proposition in action. How do we actually do this and highlight a few aspects of our strategy in that?
First and foremost, we're guided by the voice of the customer, and as Brian talked about, it's this leveraging the deep application knowledge. What's very important here is about collaborating with the customer, and the last bullet's critical. It's about having a local, fully connected team in the region, accountable. That's how we work with speed with the customer. I wanna walk through an example that illustrates that. This starts with a customer saying, "I have a seal problem. Help me." Right? They know we're experts in this, and they bring us in. Now we don't launch right into the seal issue. We take a step back and say, "Wait a minute here. What are you using this in? What are you ultimately trying to accomplish?" In that discussion, we bring our two engineering teams together.
With the team, very quickly, one of the first things we realize is it's not a seal problem. That's a symptom. What we have is a structural rigidity issue. The good news is that we have a solution for that. We have a flying bearing that we can put in there that will solve that, but there's even better news. That bearing can be manufactured in our uncertain facility, which is where we recently did a world-class manufacturing investment that allows us to have state-of-the-art technology for manufacturing the solution in the region with the customer. We kept going down this journey with them, trying to understand what they really wanna accomplish in the application. The other thing we did was we brought in some mating parts that helped simplify their assembly process, so the gearing gets incorporated into the bearing.
Again, this technology we invested in Mexico makes that quite easy to, in an automated way, incorporate into the design. Let's talk about the what's the end solution? What did it deliver? It's backward compatible. We get longer service life. We get maintenance-free. As I talked about, we bring components into the design. The last part's really important, speed to market. The way of working and leveraging what we have is how we move much quicker with this customer on this. This process worked so well that we weren't even through this one and the customer brought another application on the table, completely different. Same process, different outcome, different solution.
After doing two of those, the customer was very excited about this, and this had a big impact on a product they're launching, so they actually wanted to leverage SKF in marketing this. They wanted to explicitly highlight working with SKF and the value of working with us to create this solution. You can see a quote here from Blake Svejkovsky at Heat and Control, and he highlights a couple key aspects of how we work together on this. It's that we develop in partnership. That's key, and it did create a customized solution. Really it's the last part. It's transforming the horizontal motion conveying key aspects of how we work together in this. It's that we develop in partnership. That's key, and it did create a customized solution. Really it's the last part. It's transforming the horizontal motion conveying category.
Working with the customer, leveraging our technology, bringing all the components in the region, so we had product development, application engineering. We had the solution. We had the factory in Lecea involved. We leveraged technical specialists and seals out of our Salt Lake Citi facility. That whole team helped create a technical step-up in the application with the customer. We talk about sales growth. This helped the customer grow their business. What did it do for SKF? This is a relatively small customer for us. With the solution you see on the screen there, our sales this year have increased 20x what they were last year.
With the second solution I talked to you about that kinda got kicked in right after this, that will take our sales next year with this customer to 2 to 3x off of this year. You can see the value creation and how we've generated significant growth, and we've helped the customer in growing their business. This just illustrates the strategy in action in food and beverage. Rickard talked about how this is a relatively small area now, and you can see now how we're quite excited about the opportunity in food and beverage. Let's switch gears and talk about services and then touch on another couple aspects of the strategy. Here I wanna talk about portfolio management, and we'll talk about partnerships.
If we look at our service business, what we're trying to accomplish here in the Americas is. For those who've followed us for a number of years, you know, you've heard of our Latin American service business. It's a very large business. Creates tremendous value, improving reliability. It's also actually an area where we've done a lot with sustainability and creating, putting the circular economy, bringing it to life in the contracts. Naturally, the goal was to transplant that into the North American team and leverage those capabilities. Truth be told, over the last few years, we haven't been satisfied with the level of growth and traction on that.
What we did here is we looked at the portfolio, took a deep dive on it, and really trimmed it a bit and refined the portfolio that we offer in the North American market. We also did something else. We needed to speed up sales. We looked at the sales cycle and looked at how the portfolio was positioned with the customer. The net result of those two things resulted in the North American service business now growing above our average and growing profitably. This is the impact of that. While that's good, there's another step we need because that focus is on critical assets. We're typically focused on things like paper, mining, steel, big process industries, and there we focus on the critical assets. The solutions we typically offer hit that spot.
We needed to address something that hit the, quote unquote, "non-critical assets," which is really the big universe of assets. To that, as we've talked about, we wanted to look at partnerships. Anik talked about the power of partnerships and that being important to us. Here we partner with AWS. The net result is we're piloting this first in North America, we're launching SKF Axios. What this does is it really hits the mark on that other part of for non-critical assets, we're giving customers something that will allow us to monitor much more assets because it gives. It's automated, has AI-driven analytics in your hand. It's giving people actionable insights, but very importantly, at a very good inter-cost level and basically easy to implement.
You need this to be seamless, out of the box, really easy to use. Whether it's 5 sensors, 500 or 1,000, it needs to be easy to implement. There's different challenges for the non-critical assets than the critical, which we normally look at. If we step back at our portfolio and say now and then we have it covered. On the left side, you see the advanced portfolio. Whether it's wired, wireless, and that's where we focus our portfolio management, addressing that. We had a hole in our portfolio on the right there, and through a partnership, we quickly addressed what we need for the non-critical assets. Whether you're a customer that needs the state-of-the-art technology for the most critical assets, or whether you're entry-level, now the portfolio covers the full breadth.
To put in perspective what that means in terms of growth potential, the attainable number of assets that we can now measure is some 50 to 100 times greater than when we were only focused on a sliver of the most critical assets in a specific area of the big process industries. With this technology, you can apply it just about anything. It just creates a much bigger universe for us to start making an impact and connect with more customers. In summary, when we talk through this, I think you can hear that we've made some significant traction in some key areas of the strategy.
Whether it's having a regionalized footprint that's competitive, combining that with this different way of working, of having end-to-end accountability in the region, so you have all the resources at the customer, bringing your very best with speed. That you can see in our Heat and Control example in the growth. If you look at portfolio management, which has been talked about, and you'll hear more about that, how that's transformed our North American service business. Lastly, if you look at partnerships. The power of looking outside when you need to leverage an external partner, in this case, to fill a key hole in the portfolio and allow us to accelerate our growth. With these examples, we see good traction already early on with the way we're driving the strategy. Frankly, we're very excited about the future.
With that, I thank you for your time, and I'd like to turn it over to my colleague, Manish Bhatnagar.
Thank you, John. I'm the second person after Brian to wish you good afternoon. More importantly, Brian mentioned population growth in the world. He said we'll grow from by 8 billion to 9 billion by 2030. Guess where the additional 1 billion will be living? India or Southeast Asia. Today, we'll talk about how we are, I believe, certainly we are punching way below our weight in SKF's global business. SKF India operations is about 4% or 5% of what we do globally. Of course, we can do and we must do much more. India is today the world's fifth largest economy, with expectations it will become the third largest economy by 2030, behind just the U.S., and China.
GDP growth of 6.5%-7% every year, the rest of this decade. We have to play a much bigger role in India. We think, and you'll hear the story today, we think we can double our business in India in the next five years, growing at about 15% CAGR versus market growth of only about 7%. When I say only, still a large enough number, but 7% CAGR. We plan to double our business in India in five years. How we get there is through regionalization. You heard Rickard talk about in his opening remarks about how regionalization is a key part of this new strategic framework. Today, we'll share with you three examples of regionalization in India. Of course, when we think of regionalization, we think mainly of manufacturing. How can we make more locally?
We'll talk to you more today about regionalization across the entire value chain. An example from technology, an example, of course, from manufacturing, an example from sourcing, and how it's good for our customers, and it's of course good for us. For customers, it helps them become closer to their customers, cuts their lead times, allows them to develop product and solutions locally. Of course, it's great for us. We become more sticky with them. We also become much more cost competitive and improving our margins. The first example we have is around technology or application development, which goes hand in hand with that. How we can work very closely with customers in bringing to life new products and solutions more adapted for that market.
Some of you may know, many of you may not know, we have a very large engineering center in India. We call it the Global Technology Center India, GTCI. We employ more than 200 engineers there who really work on cutting-edge technology development. It's product design, simulation, predictive diagnostics, lifecycle, et cetera, et cetera. A few months ago, we had a power transmission customer called Premium Transmission. They came to us and said, can SKF help partner with them to develop a solar tracking system? If you don't know what that is, it's a tracking system which allows the PV panels to follow the sun. When the sun moves east to west, this panel also moves along with the sun. It allows the panel to absorb most of the radiation during the sunlight hours, and that's good for creating more energy. You see an example here.
This is from, this picture here is from Bhadla Solar Park. It's the world's solar plant. It's the world's largest solar plant in the world. Up north near Rajasthan. The average temperatures here are 46 to 48 degrees Celsius. That's average, not peak time. Really important to us. These folks came to us and our engineers raced around the clock to work with them. We adapted the ISO standards. The tracking systems are a combination of actuators, gearboxes, and motors.
What they wanted differently this time was they wanted this tracking system to work not just with 1 panel, they wanted it to work with 4 or 6 panels at 1 time, which meant they wanted the bearings to have a higher power density, a much higher load-carrying capacity, and of course, given the conditions, at many of these solar farms, want it to be absolutely low-maintenance. Our engineers at GTCI worked with the customer, adapting the ISO standards, working with race wears, changing contact angles. Within 2 and a half months, not only had we built, designed a new kind of bearing, we'd also made a pilot production of 5,000 bearings at our plant in Pune. These 5,000 bearings are now in field testing right now. We think they're going well.
We think we'll get to about 200,000 bearings with just this customer. Why this is important, India gets a lot of sunlight, as you know. 4 of the 10 largest solar farms are in India. There are 2 in China, 1 in Egypt, I think, John, 1 in the U.S., couple in the Middle East. 4 of the 10 largest solar farms are in India. The potential here is so much more than with just this 1 customer. We think while the market will grow at about only 7% CAGR, we want to grow 10 times that revenue in just this market and gain share of about 10% there.
That's an example of 7% CAGR, we want to grow 10 times that revenue in just this market and gain share of about 10% there. That's an example of regionalization of technology. The next one we have is regionalization of manufacturing. How can we cut lead times to make our customers more competitive? KHD Humboldt Wedag is a German company. They came to us in India. These guys, by the way, are the world's largest supplier of OEM machinery to cement plants. When you think infrastructure, you have to think cement. These guys have been in India for many, many years. Our share with them, zero. Why? Because we were importing. Well, these guys make roller presses, which go into cement plants.
They are the world's largest installed base of roller presses, which, if you don't know what that is, that's okay. The presses grind clinker, which goes into cement. Those presses need four-row cylindrical roller bearings. Our share with them, zero. Why? Because we were importing these rollers and the bearings from China and Europe. Lead times of 13 months if you're lucky. 18 months, 15 months, the norm. Of course, which customer wants to wait that long? Therefore, our share was zero. In the last few months, we have now developed local manufacturing capability. We are now manufacturing rollers in Rajkot and using those rollers to manufacture bearings in our Ahmedabad factory. Our share with this guy now, 45%.
Again, if you're looking at doubling our business in India, we have to be in the infra space because most of the CapEx in India, and in fact, Southeast Asia, will be driven by infra builds, new infra builds. We have to be in cement. If we did not do this manufacturing locally, we really would have no chance to grow our business to where we want to be. That's manufacturing regionalization. The third example we have is around again, renewables, but this time wind, around sourcing. We spoke of technology in the first example, manufacturing in the second, and now sourcing in this example. Wind turbines rotate very, very slowly. There's a gearbox which converts or, that or corrects rotational speed, so we can generate electricity at the right frequency needed by the grid.
This gearbox sits in between the blade shaft, the main shaft, and the generator shaft. In this case, we have a reasonable share in the gearbox business in India, but not good enough. While we manufacture the bearings in India, the steel for those bearings comes from Sweden. If you thought the lead times on the previous example were bad, you should hear these lead times here. 18 months minimum. Now, given that wind is a long cycle business, we get that. Nevertheless, 18 months minimum to import the steel, then turn that into a bearing, clearly not a great place for us to be gaining share. Over the last 1 year, we have now localized that steel in India. 2 grades of steel, grade 255 and grade 170, have gone through all the testing internally and externally, localized, approved.
It's cut lead times to half where we were earlier, made us much more cost competitive. We really hope to grow much higher than market CAGR here. Today, our share is about 20% in the gearbox industry. We want to get to 32% in this space. We're well on our way to get there. Hopefully you saw good examples today of regionalization. These were India examples. You could apply the same to many of our regions around the world. Absolutely. You saw good examples on technology, manufacturing, sourcing, helping us get closer to our customers, gain more share with them, become more sticky with them, become more cost competitive, be more profitable. 5 years' time, I hope to come back and see all of you and say, "Yes, we have now doubled our India business." Thank you.
Thank you, Manish Bhatnagar. You can actually stay on stage, and maybe we can invite Jon up as well. Amazing to hear those cases on how speed, how fast you've been in really, a lot of these cases. Jon, maybe we'll start with you. You mentioned the Axios case, and I know we have it on display here too. Maybe you can talk a little bit about that, kind of what the status is on it.
Yes. Thanks. First of all, it is on display in the back corner there. There's a video you can watch on it. We're piloting this in North America, as I said, and so right now we're in the mode of putting the infrastructure and processes in place. The part that we're really excited about is we're doing customer pilots, and the customer pilots are really validating aspects of the ease of installation, to get these things out of the box and get running. That's actually fueling a lot of creativity on how you can deploy it from a typical maybe the more critical asset-type solution. Early stages as we're putting this together, and putting everything we need to rev this up, we're really excited about what we're seeing in all the pilots that we're running.
If we maybe talk about sustainability, which everyone has talked about it, I know Rickard talked about it being a competitive advantage for SKF, what is it like in your region, Jon? Do you kind of see it as being almost a way to win contracts? Is it important for your customers?
Yeah, it is absolutely important, and I can tell you there's some specific examples recently if I look particularly in Latin America, we have some service contracts we've won recently that the qualification or the criteria for deciding who wins the contract had a very significant component that was related to how we impact on sustainability. Now, the good thing for that for us is that that plays to our strength because we've been piloting, we have an offer that's whether it's RecondOil, remanufacturing bearings, and the various other things we've been driving that are quite measurable, and as Rickard talked about, we can actually quantify what the impact is.
There's a much bigger push for this to be part of the decision criteria. We actually think this actually is something we're excited about because it's a differentiator, there's no question, when you look at what we, what we bring to offer here.
Manish Bhatnagar, would you agree that kind of the same in your region? Are customers more demanding it today?
Well, they were requesting a few years ago, but nice choice of words, Stephanie. They're demanding it now. They're demanding, and not just PowerPoint slides. That's a big change. They're asking us specifically, "Tell us what are your net zero goals? What are your carbon disclosure norms, and how will you get there? Share with us the progress." Granted that not everyone is in the same place, Jon, where your customers are in the Americas, but I think the journey has begun. If we have to win more in India and Southeast Asia, we have to become more cognizant of these customer demands.
Okay, thank you so much to both of you.
Thank you.
Thank you. Let's move on to our last session before lunch, turn to emerging technologies and growth bets within SKF, and I'd like to now welcome up Thomas Fröst, who is President of Independent and Emerging Business. Welcome, Tomas.
Thank you.
Good to see you.
Thank you. Good to be here.
I know your colleague, Aldara Suarez.
Aldada
... will be up shortly to talk about RecondOil. We'll start with you, if you can kind of give us an overall picture of this business. I know it's a very wide and varied portfolio.
Absolutely. Let's go to the first slide. Well, I have the pleasure to lead this part of SKF's business for the past couple of years, and what we did actually in addition to renaming it, I think, earlier this year to Independent and Emerging Business, I think the other part of this was really clarify a more end-to-end responsibility, full value chain to ensure that we continue to even accelerate the focus on these different businesses. There are now seven businesses all in all, where you have four of them being more established, so to say, seals, lubrication, aero, and marine, where three are more of the emerging kind. We have RecondOil. We see it over there on the left side. We have magnetic bearings, we see some examples down there.
We also have a technology we call laser cladding we have in this business. It's quite a exciting portfolio of businesses, but quite sizable as well. Just shy of SEK 20 billion in sales, outlook for 2022. Good growth rates. We are some 9,000 people all over the world with around 43 sites we are operating from.
Today we're going to focus on two of those areas where you see real potential. Tell us about those two.
Yeah. You know, when we did the strategic review here end of last year, ending up to the strategy we concluded earlier this year, we selected two areas to pressure test, so to say, in terms of what we see in terms of future opportunities. Magnetic bearings and the RecondOil. I thought I'll talk a little more about these two today.
Okay. If we start off with magnetic bearings. Tell us a little bit about how this can really enable industrial development, green industrial development?
Yeah. Magnetic bearings is a journey for SKF over the last 20 years. We did the first acquisition back in 2000. We acquired a company in Canada, in Calgary. A few years later we did an additional acquisition in France, a company called STREM, and this is today the backbone of this business. We are some 250 people and been growing double digits here for the past couple of years. What we saw when we did the strategy work, we are actually proving now in real life, we are actually growing at the pace, maybe even slightly ahead. We will be passing SEK 1 billion here shortly in sales. When you look at this technology, what does it actually do? You know, it's not lower, just lower friction, there is no friction, eh?
Imagine yourself a shaft is hovering on a magnetic field. It's pretty cool, huh?
We see one levitating bearing back there at the back we can look at after.
And, um-
Yeah
...it's not just lesser greener lubricant, there is no lubricant in this technology. We talk about condition monitoring. You heard John talk about condition monitoring. Traditionally with this technology, you listen to the bearing and say, "Is the bearing in the right state here," huh? You can determine then when it's time to replace the bearing, huh, in good time. Here we don't have to monitor the bearing because there's no wear, huh? There's no friction. The interesting thing, to position the shaft in the magnetic field, you have sensor in the non-rotating part, huh? We position the shaft around 15,000 times per second.
Wow.
You have a gap which is fractions of a millimeter, huh? You better keep it right, huh? What we see now, based on much higher computational powers, we can also listen to the entire machine. If you imagine yourself a process running in perfect condition, you can take a footprint of that. Now it runs perfectly. Then you can listen to that footprint versus the actual, huh? This you can hear through the bearing. A lot of our R&D here going forward will be around building those digital twins where you actually can use the bearings as a sensor of the whole machine.
I know actually digital twins are one of the things, in use or in the works at one of your customers, at Tamturbo, who builds air compressors in Finland. Let's actually have a look at that case and see this technology at work.
Air compression is very inefficient process. Only 15%, 12% of the total energy supplied converted into compression of the air, the rest is wasting of heat. Tamturbo was established with the idea that we should look at the possibilities, how to change, how to modify the compression technology to waste less energy in the process of the compression.
It has been a very, very close collaboration because they came to us where they were still launching or developing the product by themselves, and we were on board together with them from day one, from the start phase of a product development. We have been teaming up in order to design and to produce the best compressor on the market.
What I see in our cooperation, it's not a vendor-customer cooperation, it's not supplier-buyer, relations, it's really coworking, it's really deep, mutual understanding between the teams.
The beauty in SKF magnetic mechatronic technology is that it rotates at very, very high speed with no oil, no wear, and no contact. The most importantly is that we can also have a direct monitoring of the application in rotation. That's really something quite unique in terms of a product offering.
It gives possibility to levitate the rotating components and use no oil in the design. From that perspective, that difference in our machines and difference in our technology is that compressor is totally oil-free, and then mechanically frictionless. From that perspective, we can say it's also virtually maintenance-free.
Thanks to both our magnetic bearing and also the electrical high-speed motors, we are able to provide to our customers, both the OEM and the end user, with a CO2 emission, avoidance which is, counted in several hundred of tons of CO2 per year.
Pretty powerful illustration, huh?
Yeah.
I think we have on the side here, I mean, basically, we can talk about this technology in all areas of compression, huh? We talked about this sort of example of air here. You have the chillers, which is, you know, cooling in every shape and form. This is, of course, in relation then to the demands we have, the sustainability requirements we see going forward, where we believe very much in a fantastic future for this technology. Actually, up on the left-hand side there is a quite interesting technologies related to gas compression. The unique thing with this is that this compressor stands on the seabed 500 meters below sea level. Why do you wanna put it there? You know how it is in a gas well, at certain point it loses its pressures.
You need to put more pressure in there to get the gas up. You have, of course, a pressure drop the further away the compressor is. If you can put the compressor close to the well, you can get more gas up. This we did a couple of years ago. It's in the North Sea. It was a kind of R&D project, and now it's been running for close to 7 years, I think, with 100% availability. The gas industry is looking now very, very closely to this for going forward to explore this technology across the world. I'd say that we are probably the only one who can master this technology in this field. It's very, very advanced.
A lot of possibility-
Also maybe worthwhile mentioning is you see here on the side, hydrogen. Actually quite some technologies used in hydrogen compression is technologies coming from the oil and gas industry. We can see here we have actually one example where we know it's coming. We didn't just know at what pace it would be coming. Already this year we see a quite significant part of the mag bearing business is related to hydrogen liquefaction.
Big potential there.
Yeah.
Let's move over to the other focus area we were going to talk about today, lubrication management. Tell us a little bit about that business before we go to RecondOil.
Well, lubrication is, of course, is a critical element of any tribological system, so if you are a bearing company, you better know a lot about lubrication. What we have done over the past 20 years, we have acquired ourself into an absolute leading position in lubrication systems. For you who have followed SKF, you know we have done a number of acquisitions in this area. As you saw before, it's quite a sizable business today, over SEK 7 billion in sales. Where do we see the opportunities there? Of course, the vast majority of the world's applications are still manually lubricated, so can you do it in a more automatic ways is, of course, a way to reduce waste.
We also know that a lot of bearings failure because of lack of lubrication or poor lubrication or wrong lubrication, so everything you can do there to improve that, our bearings will work better. Lubrication management, that is what you do, for example, in a factory, the process around lubrication management. It's around 2-3% of a typical maintenance budget. In terms of the actual indirect cost of not doing this in a proper way, it's 40%-50%. It's becoming absolutely mission critical for our end customers. John was talking earlier about our service business and how we are trying to grow that, and of course, lubrication management and all the capabilities we have there is a very, very critical element of accelerating our service business going forward.
Let's actually hear now about the SKF RecondOil offer.
Let's do that, maybe before Aldara joins me here, which you might have read about this small acquisition we did 3 years ago, Swedish startup. Of course, it goes into the lubrication management total offer, but we have been managing separately here because it was a startup and to make sure that we kept the right focus and drive in terms of development. Quite exciting. Aldara.
Welcome, Aldara. Now, you can talk a little bit maybe about what the overall benefits are of this, and tell us a little bit about the SKF RecondOil technology.
Yeah. Thanks, Stephanie. Of course, if we think a little bit about the lubricant market business, we have mostly an industry that has a linear use of a limited natural resource. It's a steel base, we extract, we refine, we use, and we dispose. We can all agree that this is not the path for the future. Even the lubricant manufacturers recognize this reality, as Thomas will tell you a little bit later. With the acquisition of RecondOil, what SKF has found is the actual key to enable circularity in this industry. How do we do that? Actually, with our unique technology what we do is eliminate contaminants down to the nano level from the oil, we make it possible to use it over and over and over again.
What this means in terms of environmental impact is that every time we don't need to extract a cubic meter of oil and we can regenerate it, we reduce the CO2 emissions by 96%. To put that a little bit in numbers, we talk from 3.8 tons down to 8 kilograms of CO2.
Wow
... when we do this. I think furthermore, when we generate and we continue using the oil, also when we continue scaling the oil, we maintain it at an optimal lubrication performance, and that will have a clear impact on reliability, on friction, and it will be quite critical for both SKF's products and processes actually.
I know you started off by implementing it in your own factories. Why did you do that?
Well, it was a twofold reason, I would say. First of all, as Thomas said, RecondOil was acquired slightly less than three years ago. This was the best way for us to truly accelerate the development, validation, and optimization of our technology. We've basically gone from innovative concept to fully proven, globally, deployed industrial solution in under three years, it's quite remarkable. That is the RecondOil side of things. Of course for SKF we have heard a lot about Intelligent and Clean during the day, this is, I think, the very definition of Intelligent and Clean for manufacturing. How do we actually support our net zero ambitions within SKF? What we have done is to install these solutions in two of the most critical manufacturing processes for SKF.
Quenching, that is the very beginning, let's say, of the life of a bearing, is where we define the structure that will determine the life of this bearing, but also on the very, very last manufacturing processes, that is honing. That will have a direct impact on the surface finishing of our products. I think you have heard from Annika, of course, and Rickard, 20% of the energy in the world lost to friction. Here, what we have seen with the installation of the RecondOil technology, is that we make our surfaces simply by using them in this process, 20% smoother. That will have a clear impact on the friction of wherever that bearing goes into application. We have two cases where we have implemented this in auto...
our automotive manufacturing for hub bearing units, where we reduce 20% of the wherever that bearing goes into application. We have two cases where we have implemented this in our automotive manufacturing for hub bearing units, where we reduce 20% of the final roughness of this product. Of course, it will have an impact on friction, but it will also have a clear impact on the noise and vibration of this component. This is not very critical today because we have the combustion engine to cover all of this noise, but it will be a clear differentiator further on our electrification journey that David will tell you all about after lunch.
Also the last step that we did with our manufacturing is we installed two systems in SKF Schweinfurt and SKF Tudela, where we offer this oil regeneration service to our customers as well. For example, in SKF in Tudela, in Spain, where I'm from we have one of the factories for the Volkswagen Group as a recurring customer, where they send one of their critical oils to our factory for regeneration.
I know we see some of the systems there on the screen, but you actually brought a display of the SKF RecondOil Box. Let's see it here.
Yeah.
If we-
I did-
Join me here.
I did not bring it in my Hand luggage like Stefan.
You didn't fit it in your suitcase?
I think we could, probably could have.
Tell us what role this is going to play in the next phase of RecondOil?
Well, as I was saying before, the main path of RecondOil up to now has been development and validation of this technology. Our next challenge is to scale this up. As you can see a bit here, we are doing that by literally scaling down. What you can see here is, yeah, our RecondOil Box, and you can see the footprint is around maybe one square meter. That if you compare to our standalone solutions, those are around 50 square meters. With the RecondOil Box, we're basically reducing all barriers of entry to bring this technology to our customers. We're reducing the footprint, obviously, the complexity, the cost, at the same time that we're increasing flexibility. I mean, what you see here is a one-chamber system.
Basically, with the same control system that you have in this part, we can add different numbers of liters depending on the demands of the lubrication system at the customer.
It's modular?
Mm-hmm. Very modular indeed.
Mm-hmm.
Compact and modular.
Yes. Okay. If we go back then...
Yeah
tell me what are then the overall value drivers for customers, if we boil it down to a few?
Well, I think we have established that sustainability, of course, is one of the key values. Reliability as well, as we have seen in our factories. I mean, we keep the oil constantly clean, your machine will run better and longer. What we're exploring now is what is actually the effect on efficiency. We have seen this in our manufacturing processes, but when we install this at the customer. We have worked very closely with our colleagues in technology and also with final end customers to validate this potential, and we have seen very, very good indications, for example, of the energy efficiency that this continuously clean oil can bring into an application.
We have done some testing for gearboxes, for example, when we can reduce the temperature by always having this optimal lubrication properties, and that could have an impact around 10% on the energy efficiency of that application. If you think actually about it with, particularly with lubricants, when we talk about sustainable technology, there's always a little bit of a stigma around it. It might be sustainable, but it's never quite as good as the traditional one. With the RecondOil solution, we're eliminating all those trade-offs. You reduce your environmental impact, you increase your reliability and your energy efficiency. That is true sustainability, if you think about it.
I imagine it must be kind of a door opener at customers to all of SKF. Maybe talk about a few customer cases?
Yeah. It's a bit interesting how this technology has been placed a little bit with customers. On the right-hand side, you have an aluminum manufacturer in France, where we actually don't provide any of the critical bearings. Of course they will have the very ambitious sustainability targets for themselves. The RecondOil Box was the door opener for SKF into this customer that has been followed from other offers on sealing and lubrication systems, for example. We have another customer on the energy sector, West Energy in Finland, where the installation of the RecondOil Box in some of their critical hydraulic systems has brought down their maintenance costs by 80%, so the reliability aspect of the technology.
Also, we have an example with a heavy vehicle parts we have here where we have installed the RecondOil Box in actually the manufacturing of the undercarriage for these of highway vehicles. Hopefully soon we will also be able to offer a mobile solution for the actual system. This is one of five Oil-as-a-Service contracts that we have signed in Italy recently, averaging two years and totaling 2 million SEK. What is different with this is that we have moved from a transactional sale to a performance-driven fee-based contract that link us to the customer for a much closer collaboration, of course. Lastly, I would like to mention Marine, one of our end-to-end technologies and very, very stringent demands on sustainability for the Marine applications.
One of the area of sorts of RecondOil, we have replaced the RecondOil Box in several stabilizer systems. Now we are working very, very closely with our colleagues in Marine to bring this to the next level, the energy efficiency part. What if we could put this in the propulsion system? There we provide bearings for the main shaft, we provide sealing, we provide lubrication systems. This seems just a perfect fit for that. It's a very, very exciting project that we are embarking ourselves on.
It'll be exciting to follow that. Let's invite Thomas back up. I have a question, a follow-up question for you then about the lubricant companies. What are they saying about this? Are they interested in this technology?
Yeah, they are very interested. Actually, you know, when we did it happened very fast. Of course, we set on to, as Aldara was saying here, developing very quickly and using our own factories. We're also a very big customer.
Mm-hmm.
Of the lubricants. We work with the big lubricant companies, and of course, this technology gained quite some interest. Let's say over the last couple of years, we have been engaging more and more and more. Also in addition to working together in our own factories, also look at how can we explore leveraging this technology in a closer partnership. A couple of months ago, we announced a collaboration with Quaker Houghton, one of the largest providers of process lubricant in the world.
If you follow SKF, you might see that yesterday we released a press release together with BP Castrol, pretty famous name in this industry, where we'll be looking then jointly to create end customer value. For me, you know, by the end of the day, it is to make this happen as what Aldara said before. You know, it's about an oil, and it's about the chemistry in this.
Mm-hmm.
To gain that level of cleanliness, so you can avoid the oxidation and by the end of the day, keep the oil or the lubricant for life. It becomes an asset, yeah?
Mm-hmm.
I think this. You can kind of say we are trying to enter into a new market, a circular economy market for lubricants. That's the market we are coming into, yeah. What I see in addition, of course, to that we open up the go-to-market channels for this technology, it plays hand in hand. We do a lot of development. Of course, can we then tune these oils.
Mm-hmm.
It is perfectly compatible? In addition to, you know, to keeping it alive, for life, so the asset life, you might have to, what you can say, re-additivate the oil. The additives are the part of the oil which actually give the functional properties, so it works in a certain application. Of course, it's not our knowledge what they have put in there, huh? What we also see here is that there will be incentive for the lubricant companies to actually provide that service. Then we can enter that market of full circular use of oil.
Mm-hmm.
The technology is there.
Exciting. Thank you so much.
It's so exciting.
To both of you. Thank you very much.
Thank you.
Now I'm sure everyone is hungry, so we're going to break for 1 hour for lunch, and we'll see you back in 1 hour, all of you online as well. Thank you very much.
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Can I get everyone's attention who is here in the room? We'd like to get started shortly, so if everyone could take their seats, please, that would be great. Thank you. It's good to see all the great discussions...
Okay?
Very well.
Ready? Welcome back everyone here at the Science Museum, and also to our audience online. Welcome to our afternoon session of SKF Capital Markets Day 2022. This afternoon, now we're going to focus on first the automotive business at SKF. To do that, I would like to invite up the President of SKF Automotive, David Johansson. Welcome up, David. Welcome.
Thank you, Stephanie.
Let's start off as we see here. In February, it was announced that SKF, as part of the strategy, would be one independent global automotive business. Tell us what you mean by that and what the ambitions are for the business.
Yes. Let's start a bit with the ambition. Twenty twenty-one, we were selling roughly SEK 21 billion to the automotive industry. If we look up to 2025, we are expecting average growth of 9% per year. Ending somewhere around SEK 29 billion. That's basically in line with the overall group, in line with the strategic framework as well, which was launched. More importantly, and I think that's the story also that we will talk about today, is more about the profitability. Early this year, we were down below 2% operating margin in our automotive business. When we look on the journey up to 2025, we are aiming at 8%.
The key expectation on me, on the team, on the automotive business is of course, how do we turn our business into sustainable profit generation? Now I will try to talk a bit about that story today. If we look on this bridge, let's say from 1.8% up to 8%, the operating model which we also launched, we call it an autonomous or independent automotive business. Basically, what that means is that we can take control of the value chain. I think automotive is about having control of your value chain, and you need to control the cost, you need to drive efficiency, you need to know where you are aiming, and you need to have transparency.
In this improvement up to 8% 2025, roughly 3%-4% of that operating margin improvement is coming from portfolio and on quick growth or rapid growth in selected segments. EV, you saw the percentage already. Another 2%-3% simply on cost. Cost in the value chain that we drive out cost. An additional 1% roughly coming from being more tight on our contractual agreements on annual cost downs or quick cash, whatever you call it.
Before we shift to the strategic growth areas you're going to be focusing on, let's start with where we are now in the financials. Maybe tell us the actions that are in place there?
Yeah. I think already in recap session, we spoke about the dynamics that we have had in the industry in general during the year, and perhaps automotive has been even worse. Adding to automotive was also the semiconductor crisis, which has really made also demand supply very dynamic. We had the Ukraine war situation. We have a manufacturing base in Ukraine. Of course, COVID lockdowns up and down in China has also impacted our business. Those are all external factors. I would say internally, we also came into this crisis with a quite weak business portfolio. Actually difficult to answer, who are we in automotive? You might have asked this question to SKF too. Who is SKF in automotive? I think we have been struggling a bit on that point. Who are we?
We had urgently, of course, to deal with pricing and compensation. How do we stop falling? We had a massive cost inflation hitting to us, not only driven by energy, but also of course resourcing of materials, resourcing of steel, also away from Russia, which also Rick had mentioned. Pricing and compensation with a high sense of urgency was of course key. Q2, Rick had mentioned 1.2 billion SEK in pruning, we started to attack also the existing business portfolio and start to take out what is no longer relevant for us, what is no longer attractive or meaningful for our journey ahead. What I mentioned, organizational efficiency.
I think in the new operating model, we have a chance to make it very clear what's the accountability of the colleagues and people in our organization, the factories involved and so on. We started to drive that. One key point mentioned here on this slide is the full transparency. I must say here we have been lacking. I came into Automotive 2019 when I was still based in China, and one key element for us to bring forward was the transparency to really know what's happening between your left hand in manufacturing and supply chain and your right hand sales customer.
If we turn to the growth areas that you're going to really focus on and reposition SKF's portfolio, tell us what those are?
Relatively simple. Three areas selected for profitable growth. That's it. One is join the electrification trend, which is obviously happening. Not only the electric powertrain, but also selected parts of where wheel end actually makes a difference. Electric vehicles, strong growth. Commercial vehicles, mainly Asia. I will talk a bit more about what's happening in Asia right now, but the upgrade of commercial vehicle fleets, buses and trucks in China and India predominantly, super interesting. We can lead the trend. Thirdly, the aftermarket potential. We have a strong brand, and we'll come back also to this one a bit later. The cultural change related to this is to dare to be selective. We also have two areas in the background of repositioning, shifting our portfolio.
One is the famous passenger vehicle, wheel ends, hub bearings, and the second area is the drive control, so suspension and steering basically, where portfolio we need to go quite hard on the portfolio management aspect and find where can we create value here so that we can also capture value in a more sustainable way. 2025, it will look roughly like this. 3 buckets. One third of our business will be related to powertrain. One third of the business will be related to wheel ends. That is both commercial vehicle wheel end, so truck hub unit, bus hub unit, and passenger vehicle hub units. The vehicle aftermarket, another third. Truck hub unit, bus hub unit, and passenger vehicle hub units, and the vehicle aftermarket, another third. Relatively balanced.
If we come back to the, to the famous part of the hub bearings, which is then only 1 part of the wheel ends, it will be less than 20% of the total business that we are turning. That's a quite big contrast to where SKF Automotive used to be in the past, where the hub bearings were the majority of our business and perhaps where we were pushing the hardest. Now powertrain is coming up strongly as a growth area for us due to electrification.
Yeah. We see there 1/3 of the business will be in powertrain. If we focus on electric powertrains, why is SKF so strong in this, in EVs?
I think you have heard it between the lines at least early on today, that with electrification comes higher speeds. That's music to our ears, and also comes stringent requirements on noise and vibration. Finally, also in the powertrain of a vehicle, of a passenger vehicle, you have the requirements suiting the core capabilities of SKF very well. Those are areas that we have been working on in industrial drives since the early days of electrification. Powertrain is coming our way, let's say, and becoming much more a part of our core capability. Another key aspect is that SKF has proactively invested, seeing that electrification is coming, mainly in China, but we should also recall that 60% of the EV business is today in China.
China is huge, and we have been proactively investing in having a full value chain capability, what Manish Bhatnagar is talking about in India. For EV, we have it in China all the way from advanced product development to the supply chain. We can also be a local partner to customers, and we are a clear market leader in the China EV market today, explaining some of that 66% that you see here in our growth.
How is the financial performance in EV powertrains? Is there a positive trend there?
Right. Let's again start with the volume. The overall powertrain business of ours is 6.5 billion SEK last year. This will grow despite the pruning that we do, despite the portfolio management activities I spoke about, up to 9.5 billion in 2025. What's that? Some 10% CAGR. That is overall powertrain. If you then look on the EV-related part, it will grow 45% per year. We had 66% this year. Coming into next year, it will somewhat slow down, but over this period, average 45% growth. The market is at 30%. Why we outperform the overall market is that we are really strong in China, but also now rapidly growing in the other markets too, and actually building up a similar full value chain capability in North Americas. Margin journey.
Again, coming from a very fragmented and diverse portfolio, we zoom in basically on three bearing types, the DGBB, so deep groove ball bearings, the cylindricals and the tapers, focus on the high speed shaft and the reducer, and of course, having a more simple approach, a more narrow range and creating better value for customers, we can also create better value for our shareholders. 3.2% was 2021. 9% will be our operating margin 2025.
You have a few key customer cases when it comes to electric powertrains, so tell us what SKF is doing with its partners in this area.
Right. We had a press release earlier this year with about our collaboration with NIO. Actually, since the founding of NIO, SKF has been the application development partner for the electric powertrain. NIO is playing more in the high-end EV, one of the newcomers, let's say, still in the China, in the booming China EV market, and now going global. I think you start to see some NIOs running here on the streets, and they are launching in Germany since a couple of months. High performance cars. Interesting here, what Annika referred to as a core capability with the hybrid bearings, NIO is one of the frontrunners in introducing ceramic balls, ceramic ball bearings in their drivetrains. Why? Run higher speeds. The higher you go in speeds, the better power density, meaning the smaller powertrain you can put into the car, huh?
You also have the quick charging capability, 800 volts. That is introducing an increased risk of having electric damage somewhere in your electric drive system. Like Annika explained also here, with a ceramic ball, you basically insulate the system and remove that risk. The hybrid revolution is not only pushed by NIO, but we really see this part of the business expanding quickly next year. We have a full value chain locally to serve NIO in China, and now we tag along for the European market launch. If we look on the, more conventional players or the long-established players, we also mentioned a case with Volvo Cars earlier this year. More conventional players or the long-established players, we also mentioned a case with Volvo Cars earlier this year.
Volvo is also pushing the electrification agenda quite ambitiously. Important differentiator for Volvo is also sustainability. Just like we have been, want to be, intend to be the frontrunner in sustainability, so is it with Volvo. We tag along on this journey, also connecting to Polestar, of course, in their drive systems and their wheel ends in really taking on the race towards carbon neutral passenger vehicle solutions.
Their carbon neutrality, sustainability, that constant strive to reduce friction is also really a part of your technical partnership with F1 team, Scuderia Ferrari, which you've had for 75 years. Tell us about that?
Yes. 75 years of constantly driving for reduced friction and, of course, power density and higher speeds, so we are proud of this partnership. We are not only in Ferrari cars, by the way, we are probably in all cars that you see racing, but Ferrari means something special for us. This year, we also took on the next level of challenge. For you following F1, you know that they are also heading down towards net zero 2030, just like we do. Together with Ferrari, we decided to take this challenge jointly. Let's have a quick look on that.
SKF and Scuderia Ferrari have the most successful and longest-running partnership in the history of Formula 1. For 75 years, SKF has been a technology partner in the development of fast and reliable race cars. Now, SKF is helping Scuderia Ferrari take on a new challenge, the drive to carbon neutrality by 2030. How can a 1,000 horsepower race car make sustainable impact on a global scale and greatly reduce CO2 emissions? Find out how at skf.com/scuderiaferrari.
You can actually see we have a longer version in the exhibit, a film explaining concretely what you're doing together with Ferrari to meet those goals. David, what are the other links between F1 and the overall automotive business at SKF?
1 we mentioned already, the ceramic balls actually started in Formula 1 years and years ago, huh? Lighter power density, again, having the chance for higher speeds. Now we see from this year massively growing next year, coming into mainstream applications. 1 example. 3D printing was up earlier, Stefan's famous cage. We are also starting 3D printing in F1. This year we have proven that for the powertrain bearings, you can actually achieve at least the same performance. What is interesting then is, of course, that you can disruptively work on new designs, and you can also make it net zero. 2 examples, I think, of how F1 and the race is helping us to bring innovation into mainstream applications.
F1 is really a test bed for innovation. We know sustainable innovation is in SKF's DNA. Can you share other examples of what your automotive team is doing in regards to innovation?
Let's come back to the second focus area, huh? We spoke a lot about electrification, but commercial vehicle is very interesting. What's happening in China and India right now is that the fleet owners and also governments are pushing the requirements up. Quality, comfort, but also total cost of ownership. This of course means that also the wheel ends and the powertrains need to perform better. Actually, I see many similarities to railway, which is my background, huh, where we were heading down the race to 2 million, 3 million kilometer bearings. Commercial vehicles are basically heading the same way, huh, strong links between the technology development in Stefan's business and what we are doing in Automotive. Commercial vehicle innovation, I would say, has shifted from Europe to China.
China is today the fast-moving country when it comes to extending maintenance interval, extending service life, and also trying new innovations. Similar again to the India story, where we also have now a full capability for commercial vehicle wheel ends. In China we are also, let's say, independent in how we can run with the local players a full value chain engagement, and those are big players. Another area, Intelligent and Clean, we have also introduced. What does this mean? We also start to sensorize more and more chassis and powertrains. Here, it's not what John mentioned in process industries or in general industry to sell and provide sensors. This is actually to learn more about the application, to master the application deeper together with the customer.
This is an area where we work with selected partners, selected customers, equipping their test benches or vehicles with advanced monitoring systems, and then plugging it into our simulation software and so on. Main driver, not only to have a more reliable powertrain, but predominantly to shorten the time to market. I think what China EV players are doing now is to challenge the whole status quo in time to market for vehicles and virtual validation, meaning the possibility to simulate is one key enabler in that. That's this co-investment then between us and selected OEMs, tier ones, to help to speed up time to market.
If we turn to the final portion here of the three different growth areas, vehicle aftermarket. It's always been a strong part of the automotive portfolio. What are the plans for that?
We are growing quite well the last couple of years. It's an important part of our business. We have expanded our range, we have expanded our reach, and we will continue to do that. Also in this area, actually some cleaning ongoing, also to simplify our range a bit, to be strong at core. You know, where can we differentiate? Where can our brand and our efforts add value? We have similar growth numbers as what we spoke in powertrain, so remember the three buckets. This journey is also from roughly SEK 6.5 billion to SEK 9.5 billion in 2025, with double-digit operating margin. Last point about vehicle aftermarket and why we put this as a third focus area is that it's also counter-cyclical, cyclical to the OE business.
In terms of making sustainable profit generation, we need a strong VA business. Personally, I believe we can push this area even stronger thanks to the strong brand heritage of SKF and also the engineering capability that we have.
David, to sum up, what are kind of your reflections about the overall journey forward for SKF Automotive?
I think the main journey so far since I joined this position February, March, has been to try to simplify. I think we need to simplify for the full value chain. You know, who are we in this business? Where can we add value so that we can capture value? Daring to challenge that old culture that we need to be everywhere. It's not true, huh? It's also really spending time with customers, not only on price increases, but also explaining what's our contribution in new mobility. Three growth areas, I think a high sense of urgency in the team, and finally, a more balanced portfolio that to me is much more linked to the core of SKF, as I know SKF, than what automotive used to be in the past. Not only railway, but imagine electrification, electric drive systems now finally coming into cars.
It's close to our core. Those are my main reflections, that finally I think we find a natural home and way forward for this business too inside SKF.
Thanks, David. Maybe we can bring up Rickard. Maybe you can comment, because I know there has been a discussion the last few years around SKF's automotive business. What do you wanna say around that?
No, it's true, I'm gonna reinforce what I said when we launched the strategy back in February. I think David articulated very, very clearly. The Automotive business is an integrated and important piece of our portfolio. You have found your home within this.
Right.
Clearly, there are, you know, synergies and dependencies and leverage between the industrial business and automotive business. We have not been pleased in the past with the pro-profitability of the of this business unit, and with the strategy that are now being deployed by David and the team, I'm absolutely convinced that we will deliver a, you know, a solid and sustainable business that will be a part of SKF long term. What I also said back in February was that I wanted to create more strategic flexibility, and I still stand for that.
When we hear about the investments that we do in terms of regionalization, in terms of world-class manufacturing, other things that I know Nick was gonna talk about, we're also gonna do that with the lens on our eyes saying that how can we use this to further create more autonomousness within automotive so that, you know, long-term strategic flexibility is something I think is a value add. You may not use that flexibility, but at least you have it.
Maybe we can bring up Annika also to comment here.
Mm-hmm.
Both David and Stefan mentioned 3D printing, additive manufacturing. Do you kind of see the potential here for SKF's future?
I definitely see the potential. I mean, there's a couple of different parts of additive manufacturing that are relevant, and part of that is for plastic materials, and the other one is for metallic materials. Of course metallic materials, we've seen an example here with the F1 collaboration. I see the really, the strengths of additive manufacturing when it comes to metals is really on serial production moving forward. That is really why it's interesting to any manufacturing company that manufactures something in metal to really look into this. That technology needs to move forward. Also we need to be better at designing for additive. It gives us a lot of design freedom. With our core competence and knowledge, actually, we can then actually do more. You can also ask yourself then, is this then a disruptor?
Is this then a risk for us? Is this a threat? You could say that, yes, of course it's disruptive in terms of manufacturing.
Mm.
You can't just manufacture a bearing without the core knowledge and the key competence that we have. It's an opportunity for us actually to have a more smart manufacturing and also, I would say, cost down actually.
Thank you very much, Annika.
Thank you.
... and Rickard and David.
Thank you.
Thank you.
Thank you for the session. Now let's switch over to the financial side of things, and to do that.
Cost down, actually.
Thank you very much, Annika.
Thank you.
and Rickard and David.
Thank you.
Thank you.
Thank you for the session. Now let's switch over to the financial side of things, and to do that, to talk about productivity and performance is SKF's CFO, Niclas Rosenlew. Welcome up. Welcome, Niclas. Earlier we heard Rickard talk about in his presentation about a few of these key operational levers. He talked about growth areas, price, portfolio management. I know there are many more key activities in place with the effort really to improve relevance, competitiveness and of course, drive financial performance. What are those?
Sure. Good afternoon, everyone, and hopefully you now have a picture from all of my colleagues of actually the fantastic potential and the fantastic current business that we have. What I will focus on is productivity and efficiency. Let's start off with just giving you a picture of how we work with efficiency and productivity. See it as part of our strategy, see it as part of our portfolio management. David was just talking about focus. Similarly here, we picked a couple of focus areas when it comes to efficiency and productivity. This is an overall framework for how we work with efficiency and productivity actually across SKF. Saying that, we've decided on an overall framework, but actually the work, the deliverables, the accountability sits in each and every business area.
Every business area is actually working within the same framework. We are looking at all of these six buckets within each and every business area. For some, something matters more. For some other business area, it matters maybe less, something less, there's maybe something that matters more. You've heard my colleagues, you've heard Rickard talk about the two first ones, so price excellence, where we have a clear target of essentially price exceeding inflation. That is something that we wanna have deeply ingrained in the organization, so price exceeding cost. Secondly, portfolio management. Again, you heard a lot about that, for instance, David talking about that. There it's very much about enabling profitable growth in general.
What I'll talk about is the other 4 areas, so the other 4 bubbles to the right. We have what we call operate more efficiently. That's how we work, how many we are, primarily in staff functions. There we have a target of SEK 2 billion cost out by end of next year, so end of 2023. World-class manufacturing, that's been a theme here throughout. All of my colleagues actually have talked about it. There we have a target of business benefits of SEK 5 billion or more by 2025. Purchasing is an area we haven't really talked about too much before. Similarly there, a clear target, clear ambition, how we work on it also, I'll come back to that, where we have a target of 2%-3% out, cost out, essentially gross.
Networking capital, last but not least, a big area for us. We tie up a lot of networking capital, where we have a target of getting to 25% of sales and hopefully beyond also. I'll talk about the four I just mentioned about, and I'll take them one by one. Operate more efficiently. This was something that we actually launched, communicated some months back, in connection with Q3 results. As said, we talk about SEK 2 billion cost out by the end of next year, end of 2023. It will have an effect on approximately 1,000 staff roles. Here we talk about staff, not manufacturing, but staff roles across the globe. It will come at an estimated restructuring cost of roughly SEK 1 billion over the next 12 months or so.
Just to give you a bit of flavor what this is, while we say that it's global, all of us in the room also are very familiar with this and are working on it. The main or a large part of it is actually related to our European operations. As an example, Rickard mentioned it here earlier, we've had a reasonably fragmented sales operation in Europe, quite focused on every country. What we are now doing is we are consolidating sales in Europe. We have nominated just 2 months back a sales head for Europe, Mattias Arstadius. Now the next wave is coming where we actually look at, okay, how many managers do we have? Do we need everything?
Are there certain functions within sales support, for instance, which we can shift more to call it service center, type of setups. Very similar approach to manufacturing, also across the globe, but in particularly focusing on Europe, where we have a new head of manufacturing, AJ, looking at overall European manufacturing and seeing what we can actually rationalize and what costs we can take out. Staying manufacturing, there's actually quite a lot of staff roles in manufacturing. IT, similar approach there. There it's actually more about having been quite central in IT and now moving out IT more closer to customers, so essentially to our business areas.
Then we are looking at stuff like, for instance, consultancy spend, where we also see some potential. Actually, the background to this is, yes, we need to take cost out. I mean, we are in a high inflation environment, and there's a lot of cost pressure. It's even more so back to the strategy and how we work the operating model with six business areas and a relatively lean corporate center. That's the main driver, that's the main reason for doing this, and that's also where we see the potential coming.
Yeah. World-class manufacturing is the next lever here. Can you tell us how that program is going?
Yeah. World-class manufacturing, we have some 80-plus manufacturing sites all across the world. World-class manufacturing is really to making the best out of our manufacturing. It comes in different shapes and forms, but you can categorize it. You can see it as automation and digitalization. You can see it as regionalization. Manish Bhatnagar talked about that quite a lot, other colleagues as well. You can see it as footprint, meaning footprint rationalization, where do we have, you know, sites which are in the wrong spot or are just not efficient. Those 3 buckets. 2 years ago in the CMD, you mentioned it was a fully virtual CMD.
That's where we said that we are gonna have SEK 5 billion of business benefits by 2025. We are now at approximately SEK 2 billion of business benefits, meaning that there's another SEK 3 billion to go for the next few years. Just to give you a picture where these business benefits are coming from, it's roughly two-thirds coming from regionalization and then one-third coming from automation, digitalization, roughly.
Where do we see the SEK 2 billion in the results?
As we are all aware, I mean, we have had in the last few quarters, quite significant headwinds from cost inflation, which we need to offset with pricing, and we aren't there yet. You see pressure coming from there, but underlying the SEK 2 billion is something that we very clearly see in the business.
With regards to world-class manufacturing, a lot of it is about automating your factories, and we have a really good example of the factory in Gothenburg, the D factory. What's been done there, that investment? Let's have a look.
The step that we inaugurate today is the larger SRB assortment. We are talking about 360 millimeters up to 600 millimeters. 245 kilo bearings, fully automized with the full material flow, components coming into the factory, full automatization all the way, assembly, packaging, and then out.
I would say in the first priority, it's the reliability to the customer, reliability and quality. We have seen these processes fully standardized from the moment material and components are coming into the factory, then there is a full control on the manufacturing process, customer will get for every bearing the same quality. We are eliminating all the risks connected to manual handling, all the nicks and dents and mixing with the components and so on. That, I would say is fully eliminated. Looking on the ergonomic side, we are eliminating all those risks, all the heavy turns on the swings, risks for injuries and so on. The next step is already ongoing actually, we are in the middle of that project, is the auto resetting channel that we are working on right now.
I hope that within 1.5, 2 years we can have inauguration again.
Hopefully that brought it a bit into kind of life what we are talking about when we talk about automation. Costa there, who you saw, talking, he's actually a pretty good padel player, so if you wanna know more, you better play padel and you're more than welcome to Gothenburg, and have a chat with Costa. That's just one example, Gothenburg. We have similar examples across the world.
If we shift to purchasing then, it's another lever to improve financial performance. What's being done there? I know you have a global program in place for this. Maybe explain that.
Yeah. Purchasing, we spend roughly 50 billion SEK per year on purchasing, so you can just imagine that even a small slice of efficiency, a small percentage point of savings, has quite a big impact on our bottom line. So you can just imagine that even a small slice of efficiency, a small percentage point of savings, has quite a big impact on our bottom line. Here we've actually in the, in the past month or so, past six months or so, actually taken a look at what we can do. I mean, purchasing is of course something that we've worked on forever. What can we do in a bit more structured way actually to get more efficiencies out of purchasing? At the bottom of this slide you see price and competition.
That's the nuts and bolts. That's what purchasing does every day, negotiations, competition between suppliers and so on. It's also stuff like looking at contract structures, clauses, inflation clauses, stuff like that. That's the nuts and bolts. The kind of new things or focus areas come from looking at direct materials and indirect materials separately. Regionalized supply base, here there's a very strong link, again back to, for instance, Manish Bhatnagar, what he talked about, regionalizing also supply. We do see good savings potentials there or efficiency. Design to value is something Annika was talking about, how do we make sure that we minimize the material content? How do we make sure that we pick the right sort of specifications? Not too much, not too little. Again, good potential there.
When it comes to indirect, it's for instance looking at our real estate footprint. So it's both how does a real estate footprint look like, more than 200 sites across the world. Are we paying the right rent or not the right rent? Owning or not. Facility management. Then we have staff which have become, quite for obvious reasons, quite relevant recently, energy management. And then we actually have logistics being part of the program as well.
We've heard now then purchasing. We have world-class manufacturing and operational efficiency. We know they're all levers to improve financial performance. What else are you doing to improve net working capital? What will the self-funding play?
Yeah. That's a very, very important part of what we do. I mean, the strategy needs to be self-funding. Essentially we need to generate enough cash flow to distribute to our shareholders, to do the investments that we are planning to do and have done, and then more. Self-funding is a very, very important cornerstone of the strategy. If you think about our cash flow, of course we've heard a lot about initiatives to further enhance the margin, increase the profitability, but as you know, the other big component is net working capital. Net working capital, looking back in time, for SKF, has been somewhere between 26% and 30% of sales, so not an insignificant amount of money tied up in net working capital.
If you look at the trend, you've seen a downward trend, so moving in the, so to say, right direction up until, say, 18 months ago or so. What happened 18 months ago? The supply chain bottlenecks in the world. That's then what's been driving up the net working capital in the last year and a half. If you zoom in on net working capital and what is net working capital for SKF, it's primarily about inventories. Yes, the rest has a meaning, receivables, payables. We can get better there as well, but it's really about inventories. To get to a 25% net working capital to sales, we really need to work on reducing our inventories.
Essentially this means to get to 25% net working capital of sales, we need to get to roughly 20% or less inventories to sales. That's what we are working on. This is again back to why will we do this or how will we do this? How credible is it? A key pillar here is actually again, the operating model, where each and every business area, of course has a profit and loss, P&L responsibility, but also a cash flow and net working capital responsibility. This is just since 6 months ago or so. We already see, and hopefully my colleagues can or will say the same 6 months ago or so.
We already see, and hopefully my colleagues can, or will say the same if you chat with them afterwards, we already do see a lot more focus on inventories and what, how we work on them and how we will drive down inventories.
Niclas, all these factors that you've talked about now, they're obviously behind the increased CapEx. What level can we expect going forward?
Yeah. I mean, CapEx, again, what's CapEx for SKF? It's in, at least, up until now, it's been about manufacturing, it's been about regionalization, it's been about automation, like we saw in the film, from Gothenburg, and digitalization. That's CapEx. Historically, if we go back a few years, CapEx was roughly 3% of sales. We've deliberately decided to take it up a few notches, quite a few notches, and this year will be somewhere around 5.5%. Why do we do this? Why do we think it makes sense? Well, first of all, we do see good returns. Roughly speaking, the average payback, 3-4 years. Again, it's very much now related to regionalization and then automation.
We see that these efforts, regio-regionalization and automation, will go on for some time. Say up until 2025, give or take, we'll be at roughly similar levels. After that, we do see that we can take it down a notch. That's kind of how we, how we think about CapEx.
What about green investments then? What's in the pipeline there, Niclas?
Yeah. That's a favorite area. Green, when it comes to CapEx, also very, very relevant. Essentially, we are investing in two types of sustainability initiatives. In our own manufacturing, we heard about it earlier, we have an ambition and are well on track there to be net zero in our own operations, in our own manufacturing by 2030. Investing, for instance, in the stuff that we just saw in the Gothenburg video. Also investing in applications for our customers, emerging industries, current industries. Here, for instance, the mag bearings for hydrogen is a relevant example.
SKF's strong financial position must be beneficial as we head into an even more challenging market going forward. How will you be able to leverage on your strong balance sheet?
Yeah. Again, back to kind of self-funding, very important principle for us. If you look back in time the last few years, how have we used our cash? How have we distributed the cash generation? We have a policy of paying roughly 50% of our net profit in dividend. That's been part of the usage. As discussed, we have continued to invest and actually invest more. That's been another chunk of the usage historically. Then there's been some more. With this some more, we've actually strengthened our balance sheet.
If you just look at the balance sheet or debt ratios, we've gone in 2016 from net debt EBITDA from 2.9 to one and a half. Then net debt equity, 65% to 22%. This is actually now, it's very helpful. Of course, in the last couple of turbulent years, it's anyway been a strength, but this is actually a very good foundation to stand on when we look forward into the future and all the exciting initiatives that we've heard about here earlier today. How we intend to use the cash going forward. Again, self-funding, super important. Shareholder distribution, very important. We'll continue to invest, and then there will actually be some incremental capacity for to support the strategy.
Niclas, two years ago, you launched quite ambitious financial targets, you've chosen to maintain those. Why?
are essentially reconfirming our long-term financial targets. And we are quite well on track here. So out of the 6 targets we have, 4 of them are there or thereabout, so, say, in green, while 2 are clearly not there yet. So there we have some work to be done. But if I just comment on a few of these. What comes to revenue growth, we reconfirm 5% over a cycle. So this is the hard number, and hopefully some of these examples that you've heard earlier today gives you some comfort that this is achievable. Of course, we are not going to stop by 5%. We see additional potential. As we talked about, we have an ambition to double the size of the business.
When we talk about hard-coded financial targets, it's 5% sales growth. When it comes to operating margin, where we clearly are not there today, hopefully some of these examples that we've discussed, some of these initiatives, again, give you comfort that this is well within reach, so the 14%. What comes to return on capital employed, it's very much about focusing on net working capital and getting it down to 25%... towards 25%. There's no quick fixes in this world, but towards 25% of sales. Dividend, that's what it is, 50% of net profit. The balance sheet is strong.
What comes to our net zero ambitions, sustainability ambitions, again, 2030, all our manufacturing, all Scope 1 and Scope 2 needs to be net zero. We have a longer-term ambition, 2050 also, everything in Scope 3 to be net zero. Here we are quite well on our way, and it's quite an exciting journey. We actually, it's not only an investment, we actually, as we've heard here earlier, it's also a business opportunity.
Thank you so much, Niclas.
Sure.
You can actually stay on stage, and we'll invite Rickard up for a short summary of this session.
Right. Thank you.
Yeah, right. We're coming now to the end of the formal part of our presentation. I will do a quick recapture and summary. I hope that we have been able to clearly articulate our reason to be, that there are significant value that we can provide to our customers to really help them grow, and also develop new exciting opportunities and new exciting industries. We have also been able to bring our strategic framework to life, that it's more than just a piece of paper, but actually a significant transformational or cultural transformation that we have embarked upon. We have clear ideas on how we're gonna drive... Oops.
Our business, and also where we see opportunities to further focus and quite honestly also deselect where we should not play, and I think that was also a clear message that I hope we were able to present today. We truly believe that this operating model that we have established is really gonna drive our business forward and drive our business acumen going forward that will help us to achieve our long-term financial goals, and quite honestly, also beyond that, unlock our full potential. Before we end, I also like to just reiterate what we said at the end of when we presented Q3, i.e., what is our forecast for the full year, and there is no change. We are sticking to the same message as we did back then, i.e., that for this full year, we are aiming for around four...
a range of 4%-8% of organic growth. We believe that we're gonna deliver some 10% or about 10% organic growth in the fourth quarter. Quite honestly, we are now also, as we said in Q3, we think that we're gonna end up in the upper end of this 4%-8% range. With that, I sincerely thank you all for your attention so far and also to the viewers online for your attention, for staying with us during these few hours. It's time for the interaction piece of this, the Q&A session. Stephanie, will you help facilitate this?
Yes. Let's open up for questions. Okay. We'll
Okay. Can I have the mic?
Yes.
The mic is coming. Yeah.
Yeah. Let's start in the front here. Go ahead.
Thank you. Lars from Barclays. Thank you all for a great set of presentations. Really enjoyed that. Thank you. Can I start with portfolio maybe, both on Aero and on Automotive? First, just maybe starting on Automotive, the SEK 1.2 billion sort of earmarked, it feels like a relatively small part of the overall Automotive. What's the scope beyond that? For the margin improvement potential associated with portfolio, I think you clubbed it together with higher growth or outgrowth in the high-margin businesses for combined 3%-4%. Maybe you can give us a sense of what can you achieve just purely from portfolio on that. If I can, sticking with portfolio aerospace, for me, it was a slightly confused message insofar as you are both a seller, a potential buyer.
I wonder whether you could drill down a little bit into that, and specifically maybe talk about the Seals business within aerospace and more broadly across the group. Is Seals a subscale business for you? Is that an area that you need to rethink? What are the implications more broadly, not just in aerospace, but across the group from that, please? Thank you.
All right. Thank you for those questions. I'll try to start with the aerospace question, and then I think gonna refer to David to look into and also the, you know, automotive part of this question. Well, I may disappoint you here because as I said, you know, we have initiated a strategic review of our aerospace business and yes, we do see there is a ongoing consolidation in this industry, and we are keen to explore how we can leverage that to drive further shareholder value. It's true that, as I said, there are three distinct business areas within our aerospace business, and we need now to do our thorough homework, see how can we best play in this space.
It could be or everything from a full divestment or partial divestments, also us acquiring something to further strengthen our position. I'm gonna leave you with that, you know, hanging out there and, you know, we will come back as we have drilled this down further. Also to your question, should you expect more? I think without being too bold, I think the answer is probably yes. We will constantly assess our portfolio. We will constantly see how can we drive further shareholder value, improve our profitability by optimizing our portfolio. Exactly what those are, you know, that is something that we will come back to. It's important to me that I also stress when we talk about portfolio management, it's not just these big strategic bets where you maybe, you know, do bolt-on acquisitions or divestments.
A clear and important part of this is, as we try to describe here, that we have very, very tangible and tactical plans on how we want to move our industrial industry segments in both terms of profitability and growth. The tactical activities that we work hard on to ensure that we constantly look into our portfolio, identify non-performing parts of the portfolio, and take action on those. That's gonna drive long-term profitability or enhance profitability in our business. We gotta be able to see both the strategic thing on the portfolio and the tactical part of the portfolio. With that, I think, David, would you
Yeah.
also share some lights to the automotive part of this?
A few comments on automotive.
Mm-hmm. You can comment.
These 1.2, 1.3, that's the active part, which was quite early on. Looking at the strategic framework, you know, what's clearly out of scope in terms of strategic attractiveness then. Active phase out. Of course, as you can also probably guess behind those numbers, there is quite a lot of passive phase out as well. We have a lot of contractual commitments, of course, and we have been analyzing all of them to see, you know, what business do we intend to prolong. Pricing becomes the main vehicle to be working on, huh, to make sure that the contractual commitments that we are having, that they are delivering the profitability that we're expecting.
You could say in reality, you know, if you look on the phase out, it's much more than what you see in the 1.2, but it's passively done over the cycle of a contract.
Okay. Thank you, David.
Yeah.
Next question here in the front row.
All right.
Yes.
Thank you for a great presentation, Niklas and Citi. My first one is on the performance-based contract, which is it's been around SEK 1 billion, mainly geared to LatAm, Pulp and Paper, and Metals. The critical asset has been there for quite some time. Now you talk about expanding this to non-critical assets. You talk about not value, but from a volume potential of 50 to 100 times in terms of where you can sort of expand this business in areas. We've heard a lot of examples around growth in, i.e., at the BA and at the regional level. I was just wondering whether you can help us with that SEK 1 billion, Rickard, in terms of 2030 ambition. If you ask companies, OEMs like ABB, they would say that they have their own condition monitoring. Also curious about how captive this opportunity is.
I'll start here.
Right. I'm not gonna give you an exact number of how big this, you know, might be. The way we view this, and I think that also came out pretty clearly from what John was presenting, is that we see this as an opportunity also to create stickiness with our customers. This is one way to get into their business and support them and help them to improve their business. Over time, we can then, you know, build relationships. We then open up new opportunities. Tours may be in part of some of the new applications that they are developing, or we find opportunities to go in with some, you know, lubrication solutions or even other areas for how we can sell our bearings and or other types of services.
I think that we may have shifted focus on saying that, you know, this whole thing with, you know, this condition monitoring and all of that should be as a separate, as a separate business model as such. We now think it more as an integrated part of our total offering to our customer to create stickiness and over time build relationships and value.
Thank you. My second one is around cash flow. I'm trying to think about the incentives. Rickard, you talked about-
Right
the sales incentives.
Mm-hmm
... given everyone P&L and cash flow responsibility. Working capital has been quite central within SKF before, and now you're decentralizing that as well, which is great to see. Can you talk about the incentive structure in terms of how it's weighted, the growth, the cash flow? You say, Niclas, that it's coming through, but I'm interested in really how this is, you know, incentivized. Thank you.
Right. I can start roughly, and then Niclas-
Mm
maybe you can follow up. When we talk about incentives, we need to also be clear what types of incentive we talk about, you know? There are most of the leaders and managers, they have a clear short-term incentive targets. They are basically, you know, divided both in terms of growth and profitability and net working capital and sustainability. Those are the four dimensions that we measure all our leaders on. They all have new targets to deliver in that regard. My comments on those other incentives primarily relate to the sales incentives so that we don't. Because we do have in, historically in SKF, have had areas where our sales reps have been incentivized on profitable growth with both dimensions, you know, margin improvement and growth. There are also been, you know, parts in our business where it primarily been growth.
That's maybe not where we wanna be anymore. Again, on profitable growth with both dimensions, you know, margin improvement and growth, but there are also been, you know, parts in our business where it primarily been growth, and that's maybe not where we wanna be anymore. Again, you know, this whole thing with portfolio management, which I'm trying to stress, is something kind of new to SKF. We also need to ensure that our sales feel that they have, you know, can be part of that, so they are not being penalized for actually pruning non-performing accounts. We have to, you know, manage this and think through, you know, the incentives we use for different parts of our business and different, you know, professions within SKF, so.
Mm.
Specifically, Rickard, just to add to. I mean, we have an annual bonus program, and Rickard mentioned the 4 elements of the bonus program, so it's sales growth, operating margin, net working capital, and then net zero. The balance this year has been 30, 30, and 10. That's one element. Now looking into next year, which we are, as we speak, looking into what should the balance be, do we shift things? Maybe more importantly, this year, we have had a bonus scheme which is the same for everyone across SKF. We have not had the BA element in the bonus scheme this year, and that was done deliberately. We wanted this to get up and running.
We didn't want people to start, you know, suboptimizing or competing or whatever. Is that here forever? Probably not. We're also looking into that. But it is quite an important thing that we have as a tool to kind of shift the focus. For instance, to put the spotlight on cash flow and net working capital.
Yep.
Mm.
I think we have-
I think over there.
Over there. Yeah. You've been patient.
Thank you very much. It's André from Credit Suisse. I wanted to ask about your targets and prioritization there. You've got obviously the 5% that you upheld. We talked about doubling the company potentially. At the same time, you've got a margin target that it sounds like you have to do quite a lot of pruning to achieve. Could you talk about how you balance these two? Is there a priority to one versus the other? Given that just automotive pruning is about 5% of the group, you've got, sounds like a lot more going under the surface there as well, plus potentially aerospace. Yeah.
Yeah. Well, thank you for bringing that question on. It's an important one. I'd like to be very, very clear. If we have to select between profitability and growth, we pick profitability every single day. That needs to be clear. We are in this game to drive profitable growth. With that said, though, we truly believe that there are opportunities, and I hope that we're able to bring that to life. There are a number of opportunities where we can do both, where we can further enhance our business and drive profitable growth, and that's what we're gonna go after. Yes, we will work with our portfolio. Yes, we will deselect. There are not just in automotive that we have embarked and started this.
This is also happening in all our business areas, where we now look very differently to this, and it's all about driving up the profitability and the growth. Then I'd like to take this opportunity as well, but I know I'm new loaded to it, Niclas, and I know that, you know, when we launched the strategy, we talked of doubling the size of our business. There were a lot of question marks and skepticism around this. I'd like to reinforce, you know, and try to clarify this, if it was, if it were unclear, and then I apologize. We believe that we have, and we are committed to our financial targets to grow this business of, you know, in the range of 5% organically. That's really, you know, the aim.
With this doubling the size of the business, again, I hope that you saw some light to that today. We believe that this business has magnificent potential, and I want to inspire, you know, my SKF colleagues to strive for something even bigger. We believe that the full potential should be, you know, longer term, something like double the size of the business. Now we internally need to aim for, but that's different from having, you know, a firm, hard target. I hope that helps to clarify why we, you know, said what we said.
Great. Thank you. If I may, just a couple of specific ones. One on automotive aftermarket growth. Just wanted to follow up on that. Is this something that you want to kind of go after quickly? Does that mean kind of more feet on the street, maybe more aggressive with the product offer or something like that? The second specific I had, if I may just load them straight away, was on agriculture, example, the T400 versus T100 with that four times life extension. Natural question to ask would come, do you get four times the price for that T400 versus 100, if I may ask?
All right.
We can maybe start with, David.
Yeah.
And then-
Yeah.
Brian, you can maybe. Go ahead.
Yes. It's actually also a lot happening on the.
Brian, you can maybe. Go ahead.
Yes. It's actually also a lot happening on the go-to market channels right now. We are quickly growing in digital sales, also launching, you know, through e-marketing and through e-sales more of our range. Indeed, we're also exploring new markets, new geographical markets, one being within Manish Bhatnagar geographical responsibility, Southeast Asia. Here, it's a very limited market for us today, where we see tremendous growth opportunities. Even in mature markets like North America, we can also add additional products. It's, I would say it's less about adding feet on the street and more about actually adding products to our portfolio.
Brian, maybe you can take the agri question.
Brian, please.
Thank you for the question. 4 times greater life in our life testing, so we're in field validation on that right now. We kind of think 25% to 30%-35% is gonna be the sweet spot. We'll be more profitable at that level, and it'll certainly be attractive given the improved yield and productivity that we'll get. We're kind of thinking in that range. We haven't finalized set the price, clearly it will not be at 4 times the price.
Thank you. Yes. Maybe should I take a couple on this side of the room? Yes, go ahead.
Thank you. It's Daniela from Goldman Sachs.
Hi.
Thank you. The first thing I wanted to ask was regarding, I think it was mentioned on the North America presentation that you produce 40% domestically or in America of what you have there. I think in the past you had mentioned in China you imported 40%. Can you recall us sort of what is the ultimate goal and balance in terms of regionalization that you can do maybe as a start? Then I wanted to come back to the 4-5 plant cut target that I don't think I saw in the slides today. If that is still the case, then maybe if it's backed by a +4 or 5, or how what's the balance of this whole regionalization?
Right. Thank you. Good to see you. I'll start by trying to address this regionalization, you know, targets that we have, or ambitions, I should say. Yes, it's true that we are not where we want to be from that point of view, and that we do have too much production in Europe, and we have not in the same, you know, level of localization or regionalization in Americas, in China, or in India, for that sake. That area is where we need working on. In China, we have, you know, come quite far, and there we aim to be at around, you know, 80% within the next few years. We won't get to reach to 100.
John in Americas also embarked upon a journey, and we are especially building out our capacity in Mexico at the moment. That's also gonna, you know, lift us, not to 80%, I would believe in the near future, but, you know, we're aiming in that direction. As you heard Manish Bhatnagar say that, you know, that's an area where I think we actually underinvested in quite a few year, and where we see significant potential. I think Manish Bhatnagar brought that to life in a brilliant way, that while doing this, we will see further profitable growth opportunities by doing it. It is an important piece of our equation, and we, a significant chunk of those investment that Niclas talked about for what we plan for the future will go into regionalization.
Yeah. On the plant closures, we do have and have had a goal to announce 4-5 plant closures every year on average. Since 2019, we have actually, we are now at 18 since 2019. Give or take 4-5 per year so far, and that's something we are intending to continue with as well.
Thank you. Very clear on the 80%. What was the timeline for that? Do you have a specific timeline or?
Now I was thinking what have we disclosed before, but, you know, look into, think about 2025-ish.
Okay.
Yeah. That's, Daniela, maybe just to add.
Mm-hmm.
I mean, that's I mean, the chart with the CapEx 2020 up until 2025, it's high, and then it goes down.
Yeah.
I mean, this is the driver, essentially.
Yeah.
Go ahead.
Yeah. It's Sebastian Kuenne, RBC. I have a question regarding the automotive business. You mentioned very high growth rates or expect high growth rates for BEV powertrain for that business. At the same time, you say we have to shift to hybrid bearings which.
Uh-huh.
have a price tag of factor 5, factor 10. I was wondering if that is already included in your growth outlook, that shift to hybrid? For hybrid, is there a significantly different profit profile for these type of bearings given that the competition is probably less intense?
First question, yes, it's included. In the growth to 9.5 billion SEK, the hybrid revolution is included from a, from a sales price perspective too. And the content in an electric drive system would typically be that the high speed shaft, so the motor shaft is where you would find 1 or 2 hybrid bearings.
The hub bearings inside the powertrain.
... inside the motor. You have the reducer side with 4-6 bearings in addition, huh. You have a high speed shaft, electric motor, and you have the reducer, totally 8, 6-8 bearings typically, huh. The hybrid would be on the, on the, um, on the high speed shaft, and typically just on 1 position, huh, and then you would have perhaps a brush on the other side. Hybrid complements nicely, and as you say, we have invested in this product range since decades, I would say, and we are leading in other application areas, in railway or in other industries.
Naturally, we would have a improved operating margin contribution from this. Put it in the perspective that it's still 1 out of 6 or 1 out of 8 bearings, it's not a phenomenal part of the growth that you see here, even though it will add nicely to our bottom line.
Understood. A question to Rickard. The discussions we heard today was on rail, agriculture, India, very nice growth opportunities.
Mm.
Could you give us maybe one or two examples?
Mm
... end markets where you think this is too difficult, it's too volatile, it's maybe not worth to assume further? Even products or product categories where you say competition is so intense, it's such a commoditized business or product for us that we actively want to reduce. Maybe one or two specific examples. Thank you.
I've got to be a bit careful how I express myself here, but so it's also a bit, you know, from, there are also competitors out there, I guess, listening to what we're saying here today. We want to keep some of this, you know, to ourselves. Clearly, I think I'm gonna refer back to, some of the examples you heard from David, where we have identified some areas where we recognize that this is a commodity, and we don't really see any significant value in continuing to try to push this commodity because we will not stand out. We will not. We don't have any unique value add that customers are willing to pay for. You see some of that, not largely, but in some other industrial aspects as well.
That's what we're trying to prune out. Today, I shared with you know, how we slice the portfolio from a customer point of view. I also need to, even though I didn't bring those two to your attention today, of course, we're also looking into our portfolio from a product point of view. We have, you know, a fairly sizable product portfolio. Again, when we share that, we will see roughly the same pattern as we saw from a customer point of view. The vast majority will contribute very nicely to our profitability. There is a tail of products that is underperforming.
Either because they are a commodity or maybe because they are more adding complexity and not really, you know, something that many customers, you know, really has a demand for on a more, on a regular basis. It becomes more of a sub-scale type of product for us and dragging us down a bit. Yes, we will attack those as well. I think we keep some of the details to ourselves.
What about wind? Wind market, wind.
Oh, sure. I'll be happy to talk about wind. You know, as you saw in our chart, wind was one of those focus areas where we do not see strong double-digit growth, but on the contrary, actually a contraction. For a number of reasons, and also somewhat because we compare to a period where there were strong incentives, especially in China, significant growth there. Some of that is a kind of natural explanations. It's true. Our wind business is not a business where we feel that we have the equally good profitability in all our geographies. In some, we are making very, very good returns, and we are excited to continue to invest there. In some of our business areas, we're not where we want to be.
We're actually rethinking if we even will continue to be there. The same kind of logic will apply. Do we believe that we have a plan to move this into profitability level that is acceptable within a reasonable timeframe? We will go for it. If not, we will rethink that. Again, you know, I'm keeping to myself where we make money and where we may not actually, you know, happy about our earnings. It's not a homogeneous business for us. That's for sure.
If you take one on the other side.
Yeah, back. Yeah.
Yes. I know we have at the back too, but maybe I know some people have been waiting there too, and then you can be up next. Mm?
Hi, it's Andréw Wilson from JP Morgan. I've got two. If I can start with, it's kind of a cultural question. You've talked a lot about the change in the operating model and also different parts of the business is trying to do very different things. Parts of the business trying to grow, parts of the business more focused on premium. Do you feel like you need different people in the business? I'm not so much talking about the people in this room. I'm talking about the people who have had more responsibility put onto them, and it seems to me that you are trying to run SKF in quite a different way than it's been run previously. Do you expect to see quite a lot of churn, or do you think you have that right level of capability within the business?
If I can start there.
Good question, I will try to answer it. I like to start by saying we are blessed with great people. In general terms, we have fantastic capabilities and great people across all our different business areas. Of course, we need to constantly evolve, and we need to bring in new capabilities and new talent. Just looking at my management team, there has been some churn there, and we built, you know, rebuilt a new team, but therefore for different reasons than, you know, to ensure that we have the right business acumen in our leadership team, in my leadership team.
Of course, that also will, you know, you will see similar things happen in other parts of our business. I truly hope that this operating model of ours will drive a different type of leadership capabilities over time. It won't happen overnight, but we come from an history where we had been more functional-oriented, and very few people have felt responsibility for the end to end of their business area. Now more and more people start to get that accountability and responsibility. That will drive a different type of leadership and a different type of what I call, I hope you understand the word, business acumen, if that makes sense. Yes, I'm sure that a number of our great people, they will evolve nicely into this. I think there are also some cases where we need to invoke some new talent as well.
Second question, apologies for pressing you on this.
No, no.
as you kind of acknowledged, it's been a big discussion. On the automotive business, I kind of took your comment to be at present you see it having a good future within SKF. Obviously, we've heard about a lot of the opportunity. It's interesting you on this.
No, no.
...as you kind of acknowledged, it's been a big discussion. On the automotive business, I kind of took your comment to be at present you see it having a good future within SKF. Obviously, we've heard about a lot of the opportunity. Essentially about it being part of SKF, i.e., SKF to have an automotive business. Almost in the next sentence, I thought you sort of talked about retain that flexibility.
Mm-hmm.
Kind of just wanted to make sure that I didn't get the wrong message. I mean, I sort of read that today, the best case is it stays. We'll continue to review that going forward. Is it a firmer, it will stay a part of SKF?
Right. Let me try to clarify that if I was unclear. Our automotive business is an important and integrated part of our portfolio. As I said, we have not been happy with the profitability of this part of our portfolio. I truly believe in the strategic direction that Dave and his team has built will take this business into a sustainable and structural business that will fit nicely into our portfolio. That's kind of the foundation. I don't have a crystal ball. Neither do you, I think. We never know what the world will look like in the future. Maybe, you know, five years down the road, maybe, you know, the paradigm has shifted completely.
That's what I mean when I say I think it's important to have strategic flexibility, because then you have a possibility to act if necessary. I don't see that need now, but again, you know, what will the world look like in five years? I couldn't foresee what's gonna happen in 2022.
Okay, here at the back of the room. Maybe you can stand up.
Oh.
Yeah.
I'll stand up if you like. It's James Moore from Redburn. I've got a few if I could. CapEx, Niclas, you mentioned, up to SEK 5.5, there to SEK 25, down a notch. Would you care to quantify whether we might go down to SEK 4.5 or SEK 3.5 at that point? That's the first one. We can go one at a time if you like.
Yeah, take it one at a time. Yeah.
Sure. Take the first one.
Your CapEx...
Yeah.
Your CapEx to sales.
Yep. Yeah.
Go up to five and a half, stay there for three years, and then you said it will go down a notch.
Yep.
What does that really mean? Three and a half? Four and a half?
Mm-hmm.
We are at 5.5 now. See it as ±0.5. I'll just stick my neck out. I know you will call me and complain immediately when it's 0.55. Plus/minus ±0.5. Very much related to regionalization, and these are no small initiatives, building up capacity in Mexico, in India, in China. We are well on our way towards becoming clearly more regional, towards 80%, not fully in all places, but towards those sort of levels. End of 2025, there's no magic December 31, 2025, we see that we have gotten at least quite significantly further.
We see we can take it down a notch. Exactly where it's going, 4 and a half, something like that maybe. As you saw from our history, we had 3%, but that's starting to be mainly just so to say maintenance CapEx. It's a bit. It's not right to go that down, but less than 5 and a half, more than 3, and that's where I get to 4 and a half.
Very helpful. On innovation, I think you mentioned by 2030, 25% of group sales, Anna-Karin, I think it was, will come from new products. I just wondered over 8 years whether if you would look back over 8 years, that pace of churn of innovation, is that a major step change, or is it broadly comparable to history?
Maybe if I start, and Annika, please jump in here and help out.
Mm.
Without being judging the past, so to say, I can say when I came into this business, I have not been pleased with the speed to market. I don't think that we have churned out enough innovation at speed over the last few years. I think we can do better there, and that's also what I, you know, envision that Annika and her team, by putting more emphasis and more focus and aligning our innovative initiatives with the overall strategic framework and the growth bets that we have in there, will help us to speed clock speed. 'Cause clock speed has not been where I want to see it.
Adding on to that, of course, that is one part that we need to address. 25% of the growth that we foresee would be coming from new products, so that was the statement that I made. Of course that will require us to do more investments and make some bets. Some of them will fail, so that means that we have to be bold and dare to really find the growth bets, if they fail, we should cherish that. That's what we need to do, right? To find a number of areas that will give us that 25% growth. As mentioned before, that also requires us to step up on the investment on that side.
Thanks.
Yeah.
The last one, if I could be so greedy, was just on automotive. You mentioned SEK 1.2 billion-SEK 1.3 billion of active sales exit.
Mm.
Then we talked about some additional passive exit, maybe using pricing and contracts. Your American friend did a similar job over 15 years, Timken, I'm thinking. Could you scale the passive exit potential? Is it bigger than the active? On the active, what is it exactly? Is it specific technologies or channels or customers or geographies?
Yep, I'll try to guide on this one. For the active ones, I would say more related to product assortment and to application areas, but you know it probably, and the two comes together quite nicely. We really focus our core capability on the bearing types I mentioned before, the deep groove and the cylindricals and tapers. Because in reality, that is what is needed in an electric powertrain. Focus on the core, and hybrids is part of that. Is the passive part larger? Naturally, yes, because of the ongoing transformation in the market as well.
Take the technological shift which is happening in the market, and of course, that is also guiding, let's say, our journey forward on where we phase out more quickly and where we stay. Between the passenger vehicle and commercial vehicle which we spoke about today, naturally in commercial vehicles, we will stay a bit longer on the combustion engine powertrains. Take automatic transmissions, take the Indian market. Naturally, we will be there a bit longer because there you have probably 10 years before you have full electrification while we can still create value for those customers, and so capture value. That's probably as detailed guidance I can give you right now.
Thank you.
Thanks.
Thank you. Any other questions?
Yep.
Yes. There you go.
Thank you. It's Daniela Costa from Soc Gen. Just a question on the timing of the net working capital and your guidance there. You talked about 25%. Given that you've gone from, I think, 26 to about 36 in the last 18 months or so, is this sort of a, more of a near-term target, or is that also 2025? And then just as a quick follow-up, the margin impact of that sort of net working capital or inventory reduction, how do you plan to offset that, and what roughly would you anticipate the, that kind of margin headwind would be, if any? Thanks.
Yeah. No, I mean, as I, as I mentioned, as I said, this is definitely a long-term target. It's, it's a journey. Exactly as you say, I mean, we are not gonna go down from current levels of 27%-28% inventories to 20 in a blink of an eye. We talk more about 2025. What we see now happening here and now, I mean, a driver for why it's gone up, the net working capital has gone up again is very much related to inventories, and inventories is related to the supply chain challenges. Of course, we do see that things are easing off gradually, not particularly quickly, but they are easing off. We do see that that will bring down our inventories.
We need to go to 25% per sales, we need to go beyond that. It will come down, driven by the market. That's the kind of first thing that you'll see. Where we can actually do something in addition and really work on it, that's what, where we, you know, should see, you know, a real reduction towards 20% and hopefully even less than 20%. This will be a gradual shift.
On your margin, how will it impact the margin? I mean, I would say that the best way or the way we see it, the way I see it, is that it, this is gonna be a gradual thing, so there's not gonna be, you know, a major impact on the margin or anything disruptive at least.
Okay. Thanks very much.
Thank you. More questions?
Oh, we got more?
Mm-hmm.
Hi, it's André again. Thank you for taking the follow-up, and thank you for the bubble chart. I was just trying to go through it with a bit more detail, as you appreciate, or try to name all these bubbles from now on. There seems to be two that kind of are below the margin line and they're quite substantial in size. I guess a couple of questions. Firstly, are the bubbles to scale in terms of the businesses' sizes? Secondly, on those two, have we discussed them today? Are they kind of in pruning of automotive? Are they in something else? 'Cause it looks like if you get these shifted to the average, then that takes you kind of three-quarters of the way there.
Well, thank you for scrutinizing our chart. They are an illustration, as I, as I said in my in my presentation, we have tangible plans and tactics for all the bubbles on that chart. We, we decided to bring four more clearly to your attention today, and, you know, with examples how we're really gonna drive that. There are tangible and equally nailed down to detailed plans for all of them. Actually not gonna share exactly with you what, you know, which bubble is what in that chart. It's actually, you know, a little bit of our secret here. Joking aside, but or maybe joking, but we had that discussion with all the charts that will this very challenging audience sit there with.
you know, measure the exact size and there's real facts behind, but not gonna reveal exactly the millimeters and so on and what scale it is, but.
Maybe just a second up that question. Have we discussed the bubbles that are below the line?
You saw, you know, the four where roughly where they are and where I'll leave you with that. Right? Yeah.
Thank you, Niklas. Is there two follow-ups? The inventory reduction, in terms of destocking and following on from Dan's question, I thought that this was linked to the regionalization. When you are moving out production from Europe and you're localizing more, you get less goods in transit between the regions. You are tying up too much working capital.
Correct.
It's clearly an effect from that, right? Going beyond 2025. That's my first one.
Yeah. Yeah. No, absolutely, you are right. Here and now, we've been the last 18 months increasing our inventories a lot, and that's been due to supply chain bottlenecks out in the world. That's what I was saying, that we see gradually, you know, normalizing, fading away. To go to the next level, which would take us to a better level than what we've been historically, actually, that's where the real effort comes in. Yes, the regionalization is a big, big driver for this. Manish Bhatnagar mentioned it here earlier, less time shipping stuff across the world, and so on. That's a big driver.
Great. My follow-up is on lubrications. The $60 billion is the industrial lubrication market, we have the RecondOil Box. We spoke about this before, Thomas, but I'm gonna try this again. The RecondOil Box, which is SEK 50 billion, we're talking about the hydraulic opportunity being roughly 10% of that $60 billion. I was just wondering, then we have automotive on top, of course. I was just wondering the growth between the RecondOil Box versus general U.S., the industrial lubrication would be super interesting to hear.
Thomas?
Of course, we, you know, the market we are talking about here, the $60 billion, that's the industrial lubricant market, and as you heard before, I mean, this has been a technology startup, and initially focusing very much on the further development and internally in SKF. It's just quite recently then we have started to engage in the external market. I think the $50 billion, to my understanding, was coming from discussion earlier this year, and that was more what we saw as an initial target market. Then we were looking at hydraulics and metalworks.
Yeah
... which is around 30% of the total 60. Mm-hmm.
Any growth?
No. Sorry?
growth or is that out year, TAM or?
Look, as I said during lunch when we spoke about this, of course, we have very, very ambitious target here for 2025 and onwards. I think, the, the initial focus here now, as you heard also Dara talking about, is, you know, to get it out to explore the, to open up for the channels to market, but also to build a model which is scalable. Let's see where we end up.
Right.
It's a tremendous opportunity.
Thank you.
I think there was a question. Yeah.
Mm-hmm.
Yeah.
Thank you so much. There you go.
Thank you very much. Andréas Koski from BNP Paribas.
On pricing strategies and this year's performance, because we have seen your margin coming down quite a long way, and looking at your both European competitor and US competitor, they've been able to improve margins year-over-year in the third quarter. Something went obviously wrong for you to be able to offset the cost for inflation. Maybe you can go through what has happened, why haven't you been able to offset the cost inflation, and what will you do to make sure that this will never happen again?
Mm-hmm.
Hmm.
Well, it's a very good question, of course. I hope that we've been clear that we are not happy with this performance. We know that we will do better. We have put a lot of emphasis on our pricing activities. I think it's, I think that regardless that we haven't been able to offset the cost inflation fully, I think that chart with a quarter-over-quarter improvement in terms of, you know, price mix, it's not that actually non-competitive. I'm not sure that our competitors are doing extremely better there. With that said, though, the margin deterioration is not acceptable. We are putting a lot of emphasis on this, and we truly believe and expect that this should be much better as we move forward.
We are determined to offset the cost inflation. We have said that before, and that determination remains.
I know you're normally hesitant, of giving this, but if you look at raw material prices today, freight rates today-
Yeah
... energy prices today.
Right
... can you shed some light on what we should expect in terms-
Yeah
... of cost inflation in 2023?
Yeah. Yeah. I mean, starting with material, which is kind of the biggest bucket, we've seen material prices, market prices come down already for some time. Just a reminder that we buy very little raw materials. We buy Most of what we buy is components. That means that there's a delay between the market price and then what you see in our P&L. Rule of thumb, six to nine months, but varies. Yes, we have seen those coming down, and that essentially should mean that our cost also, after some delay, will come, start to come down. What comes to logistics, again, referring back to supply chain bottlenecks, we have seen sea freight prices, costs, come down significantly.
Not only that, but also the bottlenecks opening up. Overall, yes, we've started to see logistics to come down. Saying that, as you know, I mean, road transport, slightly different story. Also within logistics, you have different types of stories. Overall, coming down. Energy, as you know, very volatile. It's mainly the main issue is in Europe, less so in the other regions.
The new thing, which we expect to have the opposite impact if we, you know, with what we know today and assuming today will continue, we do think inflation will start to moderate in these areas that I just covered. Personnel costs is gonna go the other way.
In total?
Hmm?
In total that turns into... I'm just kidding. I just had a last question on innovation as well.
Oh, sure. Of course.
Or if you want to follow up.
No, no. Fire away. All right.
On innovation, how many SKUs do you have? How many do you phase out every year, and how many new products do you launch every year?
Hmm.
Hmm.
Yeah. That's a good question because it's actually also, on the back of that question is also how do you define a new product, right? We define a new product with being a new part number, of course, then. If we do something that we haven't done before, that's a new product, and that can be an application-specific offer with some new content, or it can be a completely new product. I don't have really a good number for you to say that it's 5 or it's 55 or. Really what we're aiming for is to get the gross number in place, so the sales number is what we're aiming for here. We have been releasing a quite large number of new products actually over the past years.
We are measuring on those new part numbers how much sales comes from that, and that's 1 KPI that we're using. I have a hard time giving you a really clear number of how many. It's more that we're aiming for this growth of 25% that we're looking at.
On an SKU level, we have a very large number because, you know, sometimes we package a bearing in 1 box, sometimes you package 2 bearings in another box, that's a different SKU. Yes, we're talking about hundreds and thousands of SKUs.
Yeah. Then you can, of course, argue if that is a new product.
Yeah. Yeah.
Yeah.
Thank you very much.
Mm-hmm.
Thank you. Any other questions from the live audience here? I think we have a few online. Theo, did you have a few questions from the chat?
Yes. We have a question from UBS here for you, David.
Yeah.
If you can comment on SKF's market position and market share in powertrain for EVs and in particular on a regional basis in China.
Okay. I think I mentioned also in the presentation that we have a market-leading position in China, for the EV powertrain. We can add to that we started on the high-speed shaft. Coming back to the discussion we had here earlier, I'm meaning the ball bearing side, because that's where we had built up the capability most strongly first, and now we are following through on the more slow rotating part, meaning the reducer, meaning tapers and cylindricals. All in all, a clear market-leading position in China for what we do. No? Okay.
No other questions? Okay. No other questions from the audience then?
No.
Okay. We're pretty much out of time anyway.
Yeah.
That concludes SKF Capital Markets Day 2022. I want to thank you all for joining us here in London, and all of you joining online. The full session will be available shortly on SKF.com. Thanks again for watching.
Thank you so much.