Good afternoon, and welcome everybody here today, and everybody who are linked to us by phone, to this full year result of SKF. And from SKF, here today are our President and Chief Executive Officer, Tom Johnstone, our Executive Vice President and Chief Financial Officer, Tore Bertilsson, Inga-Lill Östman, Senior Vice President Group Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by giving a presentation of the result, and then we will be ready to take questions, first from the floor, and then from those of you who are linked to us by phone. Over to you, Tom.
Thank you. Thank you so much, Marita, and good afternoon, everybody, and welcome to this full year presentation of our results, and what was, from my view, a good and strong report from the SKF Group. Let me go through it. I'll go through some of the highlights of the report and how we see the business going forward, and talk a little bit also more on some of the actions that we're taking in order to reach our long-term financial targets, that we put in place there. If you look at the result and look at some of the key highlights from it, you will see with the operating profit at SEK 2.2 billion, including the SEK 100 million for the Lincoln acquisition, we had an operating margin of 14.3% reported.
If you take that out, it was some 14.9%, which is actually, if you look at the absolute figure and you look at the margin, was the same as we delivered in the third quarter. And if you remember, when we published the third quarter, we said in the third quarter we were operating in what we called a sweet spot, very much a sweet spot. We had the benefit of the higher volumes, but we hadn't seen the cost coming through of raw material, et cetera, and that would come into the fourth quarter, and we saw that in raw material. And of course, also, with a currency effect in the fourth quarter there. So a strong performance.
In terms of cash flow, if I exclude the acquisition of Lincoln, we had some SEK 800 million in cash flow, but of course, then with the acquisition of Lincoln, something like minus close to SEK 6 billion there. I think what was very good to look at, it was the growth that you actually see for the group, because it was quite broad-based in this quarter. If you look at it, it was broad-based geographically, it was broad-based across each of the divisions, coming down to a growth in local currencies of 17.2%. And that you can really see when I go further and look at the regions.
You can see how Europe and North America has started to come in much more to the growth mode, which wasn't the case earlier in the year for us in total. As you know, in the quarter, we completed the acquisition of Lincoln, which I'm very pleased about, and the integration activities are now started and underway with the operation there. Going forward, we expect to still see a positive volume development going forward. We expect it to be sequentially up quarter and quarter across all regions and businesses, but also we expect it to be significantly up year-over-year. To meet that, we will take our manufacturing up on a daily production rate a little bit in the first quarter compared to the fourth quarter, but of course, it will be significantly up year-over-year.
We can talk a little bit more about that, how I see the regions and the segments a little bit later on indeed. As I said, we completed the acquisition of Lincoln, which I think was a very important acquisition for SKF. It very much fits in and complements our lubrication systems business, and having it completed by the end of the year means we could start 2011 with that as part of our company. So really look to start to move ahead with the business there. The final net price that we paid was SEK 6.8 billion. That was what we paid plus, minus the cash that we received, and we've highlighted that very much in the report.
I think you'll see in the report, we put a lot of information in about, Lincoln and the preliminary balance sheet, opening balance sheet, et cetera, et cetera, in the report there. How do we finance it? SEK 3.2 billion in net cash and three point six billion in debt, which we've put into, at this stage, 2014. I'll show you that a little bit later. What else did we do during the year? I think it's important, we opened three new factories, one in Russia, two in India. We opened a new technical center in China. Many of you were there, for that opening, and nine Solution Factories, bringing a total number of Solution Factories up to 17. So quite an active year for the SKF Group.
We launched over 20 products, and you see some examples of these new products to the marketplace. I think what's also important is we're increasing our research and development activities, and you can see that in the number of patents. The number of patents we filed during the year was up by just a little bit more than 15% on the previous year, with the same spend that we had in 2010 versus 2009. Really working hard to bring new products, new solutions to our customers to help develop our business today and going forward, there. In terms of Six Sigma, it became a strong focus point a number of years ago for SKF and continued that way.
We finished the year closing over 1,100 projects, and the hard savings booked that, as they're implemented, will come into our results as something like SEK 470 million. So it's continued to be a very important part of how we're developing and running SKF going forward. We've moved Six Sigma, though, much more into supporting and working with our Manufacturing Excellence business, helping us improve our efficiency, our effectiveness, and make us lean in our manufacturing operations, but also working on our capital tied up in the business. And that will continue as we move Manufacturing Excellence into what we call Business Excellence, which means using the same lean thought process into our finance area, into our marketing area, into our engineering area, et cetera, et cetera. So let's go into some details of the business.
Volume growth, just over 16%, 6.3 in the quarter, very similar to the second quarter, and absolutely in line with the guidance that we gave. We said that the volume growth year-over-year in the fourth quarter would be slightly lower than what we saw in the third quarter. The third quarter was 19, 16.3 is very much in line with that guidance. So a good development there. In terms of sales and local currencies... Then, of course, we also had the positive effect of the price mix, and this also gives us up just over 17%, 17.2 in the quarter there.
And also, what I think is important is that even though when you. It's interesting, when you look at the figures of reported, the reported sales, SEK 15.45 billion, and compare it to the third quarter, it looks like the sales were lower in the fourth quarter than the third quarter, and of course, they were in Swedish krona because the number is lower. But in reality, sequentially, in terms of volume, when you take away the currency effect, we were up a few percent in the fourth quarter versus the third quarter, which again, is in line with our guidance there in total. So you're up 14.2% in total. And this is the picture I want to look at when I say you see the development changing around the world during the year.
If you look at the fourth quarter, and you look at the growth for each of the regions, you will see that basically there's quite a balanced growth around the world. 20% in Asia and around 17% Europe, North America, to 16% Latin America. So quite a balanced growth in all the regions around the world. And that's different if you look at the picture for the full year, where in the full year you see a sort of two-step world with Asia and Latin America up 31% and 20% respectively, and Europe down at only 7%. So as the year went on, Europe improved in terms of development, in terms of growth, and you saw it particularly in our industrial business, with aerospace starting to come through and the other industrial businesses coming through much more.
But also we saw automotive continue to develop very, very strong during the year. So a change in the mix in the picture when you see in terms of growth going out to the year and the fourth quarter, definitely a more balanced approach, both from a divisional viewpoint and from a geographical viewpoint in total there. If you look at the components in net sales, then you'll see that we had 0.9% in price mix in the quarter, which means the balance for the full year, we were slightly positive in price mix. So we can say, while we lost a couple of quarters in price mix into negative territory, in terms of years, we, we recorded another year with a positive price mix. Where did that come from?
To be quite honest, basically, mix between the different businesses within the division and, basically, between the divisions. That gave us the 0.9 in the quarter there, which was a good move and a good positive development in total. If I switch on to operating profit, as I said, right at the start, it was SEK 2.202 billion reported, SEK 2.302 billion if we take away the effect of Lincoln, very close to SEK 2.309 billion of the third quarter. I think it is important we delivered, despite the fact that in the fourth quarter, raw material for us was higher than it was in the third quarter and, of course, up a lot than the fourth quarter last year.
Currency was a headwind, fourth quarter versus third quarter, even it was only SEK 50 million versus the fourth quarter last year. In terms of operating margin, 14, 14.2, 14.3 and 14.9, excluding the effect of the one-off. What does it mean for the full year? It means 14.2 for the full year, 13.8 reported, in total there. In terms of the divisions, I think what's very positive is to see how automotive is continued after the first quarter, continued up at this level and finished the year, with an operating margin for the full year of 8.5%, you know, down to 8.2% in the fourth quarter. Of course, both industrial and services had good margins.
Industrial, of course, being affected by some currency and the higher raw material costs into its business, in total in the fourth quarter. So good performance, I think, from all the divisions during the year and raising the bar in terms of performance for the group in total, I think. So if we look at the figures, absolutely, you see the 15.4 for the fourth quarter there, and as I say, the operating profit, 2.2, and operating margins here. I can skip over these. In terms of inventories, inventories reported 21.1%, but of course, that includes Lincoln, where we have the inventories in but no sales in for them as well, because we took the balance sheet in, but of course no sales in yet.
If I exclude the effect of Lincoln, we were around 20% there. But I've got to say, helped a little bit by, by currency in that area, with the currency on the balance sheet there, with it, that brought it down a little bit there. In terms of absolute terms, we would have liked to have taken a little bit more inventory out in the fourth quarter, but due to the, the supply situation into our factories, and to be quite honest, the demand situation we saw, seeing the combination of both of them, we ran out with a little bit higher in fixed currency inventories, than we, we, planned at the start of the quarter, but it was due to supply and demand situations, but it finished reported at 20% in total.
Cash flow, we've highlighted already, of course, affected by the big acquisition of Lincoln, bringing it to minus, close to minus SEK 6 billion in total, or roughly SEK 800 million, excluding the acquisition of Lincoln. Return on capital employed, 24%, which was, if you remember, our old target there. Now we have to raise the bar in terms of 20%-27% going forward, which also bringing Lincoln's balance sheet in as well, is not a given. We have to work on that to, to, to move that up, going forward. Net debt increased due to the acquisition.
If I look at the debt structure, what you can see there is that we took of our credit facility, we took $400 million of our credit facility, that we had long-term credit facility, and used that in the financing of the Lincoln acquisition. Let's see how we manage that further as we go, as we go forward there, in total. Even with that though, we are still very much in line with our, our targets, our gearing target, equity debt, our net debt equity targets, et cetera. When we started here, when we met a year ago here, we set out some focus areas for SKF.
We said, "These are the areas we will focus on during the year: profit and cash, adjusting our manufacturing to the new demand levels, make sure we took full advantage of the growing regions, the growing segments in the business, strengthen our platforms and segments, both through organic investments, and also, as we said at that time, we were looking for acquisitions, competence development, and keep driving SKF Care and Six Sigma." And as we go out the year, we can put a tick against that. We believe that we've highlight and hit all the targets that we set ourselves as an operation, during the year there, which I think is very important. And of course, the big acquisition that we made of Lincoln, as that comes in and helps us, going forward, will really strengthen, especially our lubrication, platform in total there.
As a result of the performance of the SKF Group, as a result of the outlook that we see, which is for a continued positive development, as a result of our cash flow generation, the board will propose to the annual general meeting in April that we increase the dividend by 43% up to SEK 5, which for those of you who remember, was back to the 2008 level there. So I think that's a positive increase in dividend that we're bringing in there as well. And also, reflecting still gives us a strength to be able to continue to invest in our business going forward, which is very important for us to continue to positively develop the business, to enable us to achieve our long-term targets in total.
Let's talk a little bit about the outlook that we saw. I'll switch to this chart here, which is the arrows, our famous arrows, the sequential development here and the year-on-year development. You see in all regions, we expect to see a sequential continued positive development in our business in total, so to be slightly higher quarter on quarter, so continue that positive development and to be significantly higher year on year from a volume viewpoint. So when we report the figures after a quarter to be up quite a bit year on year. What do I expect from a volume growth first quarter this year versus first quarter last year? I expect a good growth, maybe...
If you go back to the fourth quarter, when I guided you for the fourth quarter, I said that I expected the growth to be slightly lower than what we'd seen in the third quarter. We had 19 in the third quarter, 16.3 in the fourth quarter. If you ask me here, I expect the volume growth in the first quarter to be slightly lower than what we saw in the fourth quarter in total, but still a very positive volume growth. Why slightly lower than that? Because, of course, the comparisons start to become somewhat tougher in total. In terms of development, though, from a divisional viewpoint, you will see that we expect the automotive division to be a little bit better into the sequential development. Why is that?
Because we can see car production continuing sequentially to positively develop, definitely in Europe, definitely in North America, the sequential development will still be the... So automotive, a little bit better in terms of sequential development than the other divisions as well, and all of them up significantly year on year. If I go to the segments now, we've got three blocks again of segments there, but basically one big block and two from a different viewpoint. The trucks, the heavy truck industry, we've seen a very positive development in 2010, and we expect that to continue in 2011 into the start of this year. We really can see good demand in that area, and one of the challenges we've got is meeting that demand from our operations, also due to our suppliers' ability to support us.
So we're working hard to meet that demand. We see a very, very, very positive development there. At the other end of the scheme, in the energy business, which is primarily a renewable energy for SKF, we expect India still to develop well, we expect China to develop well, but we don't see a positive development in the first quarter for our renewable energy business in Europe or in North America, which means when we add it all together, we believe it will stay about the level we had in the fourth quarter. It went up in the fourth quarter and will stay around that level. If I look at the other segments, right through all the industrial and other automotive segments, then yes, we will see sequential positive development in really all of our businesses there.
When we look at it, we see it regionally, and we see it very much in from a segment viewpoint there. What does it mean in total? As I say, slightly higher sequentially from a volume viewpoint. It means also that we will be significantly up year on year from a volume viewpoint, even if not quite as much as we saw in the fourth quarter, and we will take our manufacturing up a little bit to meet that demand as well. Some guidance of figures to put in for the quarter. Tax level, look at around 30%. It was a little bit higher, as you saw in the fourth quarter, but there was nothing strange in that.
It was around just under 30% for the full year, so keep it around that 30% level. Financial net will be around the SEK 200 million for the quarter. And then, of course, one of the big challenges that we're now facing, the development of the Swedish krona and strength of the Swedish krona, means that currency is becoming an increasing headwind for us. Last year, we had a headwind of SEK 400 million. This year, the headwind will be SEK 900 million. In the first quarter, it's around a SEK 150 million headwind. A lot more translation in that than transaction because of the hedging that we have in place in the quarter. So that's quite a significant headwind, and that's based on rates now.
That's how we see the rates just now and based on our current assumptions and plans going forward, is the effect that we see there as well. In order to support our long-term targets, as we mentioned in October, when we published our results, that we now are going to invest in growth so that we can move SKF to a new growth level, but also a new operating margin level. And one step in that is, plant and property, and we will raise that up to approximately SEK 2.3 billion during this year.
You've already seen the announcement of two plants, which we made last year, one in India for seals, one in China for medium bearings for the industrial markets, and I can tell you that I expect additional plants to be announced in the not-too-distant future, that we need to support the faster-growing regions, the faster-growing segments, of, of our business as well. The other guidance, which is not up here, I can say, is in terms of raw material. What are we seeing happening in the raw material market? What we saw as we went through 2010 is raw material increasingly becoming a headwind.
So in the fourth quarter, it was more of a headwind to us than we saw earlier in the year, due to higher scrap prices that worked its way into a PNL, very much, and so therefore, the surcharges were there. If I look now in the first quarter, we can see the surcharges are up again there. I think the current or a couple of days ago, the scrap rate in Rotterdam was something like EUR 345 a ton, which is up quite significantly, so the surcharges are up. But we also see that the raw material commodity suppliers are increasing prices and pushing hard to increase prices into the market. So we see higher base prices and of course, higher surcharges there.
It's clear that as in previous years, our focus will be to do what we've done, which is to offset these raw material costs through actions and cost reduction, through actions and sourcing, through actions and pricing in the marketplace, there, and we will do that this year as well. Let's move on and just close up by looking and reminding you the long-term targets that we set ourselves now to move to a 15% operating margin level, to grow by 8% and get up to a 27% return on capital employed in our business. These are the longer-term targets that we want to meet. It's not one that we should meet immediately, but longer-term targets that we focus on there. We put three initiatives in place: accelerated growth, reduce costs, eliminate waste in our business, and invest for growth.
We put in place a number of actions. I won't go through them all in detail, which we are using and acting on to support our growth going forward and to support our profit targets. One, which was not in the slide before, after the third quarter, which I want to highlight, is develop the other brands of SKF, and I think that's an important step. You will see, for example, with the Lincoln acquisition, they bring three brands to us, Lincoln, Alemite, Reelcraft. We will keep these brands, and we will use these brands in the marketplace and grow and develop these brands in the marketplace. In addition, we will put further investment and support into developing the Peer brand.
The Peer brand, as you know, is the—you could say, the normal performance bearing brand that we've got there, and we will put additional efforts into strengthening that brand in the marketplace to address that part of the market that we, with the SKF brand, do not, does not, and is not able, are not able to address there. So that will be a key point for us. In terms of the efficiency and operations, I've already mentioned, we're going to move much more into Business Excellence, and I will talk more about that, what it means by that at the Capital Markets Day when we go forward. But it's very much about looking at the lean way of thinking, looking at the flow in your business, and finding ways to eliminate waste in our business.
In manufacturing, we've done a lot of work in that, and we've had good, good developments there. We are now bringing that into all the other areas of SKF as well, because we really believe there is opportunity to make us more effective, more efficient in supporting the business. One other key action for us, that we highlight was to invest in growth. If we are going to take SKF, and as we are going to take SKF to operate at this new operating margin level, which means 15% over a period, sometimes above, sometimes below, around that level, it means to take the growth to consistently excluding major acquisitions of 8%. You don't do that just by sitting, doing nothing.
You have to invest in the business, and we will use 2011 as the first year of the next phase of investing in the business, which means increasing sales and engineering resources. By the end of this year, we should have some 800 more sales and engineering resources in place in SKF around the world to... A lot of focus on the faster developing regions of the world, but not only there. Some in Europe, some in North America, but a lot more in Latin America, Asia, East Europe, to support our growth in the business, to put more feet on the ground, to help support and work with our customers, to bring our knowledge to them. As I mentioned, two new factories have already been announced, and further ones will follow to support our growth going forward.
We'll continue to build up our solution factories during the year. Last year, we put nine more in place. We now have 17. They'll continue going forward, and this year, we will to both accelerate what we're doing in China and India and also strengthen our, our research and development. We'll increase our R&D spend by around 15% during this year, maybe a little bit more than 15%, in order to, to intensify our efforts to bring new products into the marketplace. I see these very much as investments. They're investments in the future in helping SKF develop and operate and, and be able to deliver profitable growth going forward. The focus... I'll, I'll finish with this one slide. The focus areas short term for SKF, first of all, clearly, we will keep a strong focus that we have in SKF in profit and cash flow.
And in doing that, it means managing very much the currency and the raw material headwinds and taking actions in place to offset them. Secondly, it's clear that as the demand is improving, as we're bringing our manufacturing up, we need to ensure that we keep a good service level to the market, and we need to work more closely with our suppliers. We can already see that some of our suppliers are struggling to meet the demand going up, and we're working closely with them to help them support us going forward in rings, in components, to our operations, and we must continue to work with that. At the moment, it means we carry somewhat more inventory than we should.
We will continue to focus in the growing segments and geographies, so that means Asia, high priority for us, and especially high priority for us. The initiatives, the actions I just mentioned to support the long-term targets are in place. Of course, having made such a big acquisition as Lincoln Industrial, the integration of Lincoln Industrial into SKF is very important. The integration team is in place. The integration actions are in place. At this moment in time, while we are talking here, our team are in North America doing what we call a meet-and-greet tour through all the facilities. We've already done the European, we've got the North American, and the Asian ones will follow there.
We've a very clear plan in place and a very clear team working on making sure, A, we don't lose what we've got in terms of customers, in terms of key people and key knowledge. But secondly, we exercise and get full advantage of the synergies as fast as we can going forward. Business Excellence I've mentioned and competence development, and of course, we keep on doing that, operating as a group as one SKF, but SKF Care, the demands of SKF Care are guiding lights for us in total. I skipped this question in the statement. You can read it. I would say that if I do in summary, I think 2010 was an excellent year for the SKF Group. If you look at it, we raised the bar in our performance in total.
We generated record operating profit, record operating margins. Many companies will do that, I think you will see, especially in good comparison to 2009. I think what's particularly important is we were able to do that when we're still operating at sales volumes very similar to the end of 2006. As we went out of 2010, our volumes were very similar to what we saw at the end of 2006. So I think it was, it shows that the actions that we have put in place to make us more robust, to make us able to, to manage the business, are paying off. The cost reduction actions we've put in place, the change in the mix in the business is paying off and enabling us to deliver strong results.
We had good cash flow during the year and we made important steps to strengthen SKF through the new factories, through the technical centers, through the new products that we put in place, and through the acquisition that we made of Lincoln Industrial. We have a good financial position also to build on into 2011. As I said, I expect to see a positive development in 2011, starting in the first quarter. Yeah, we've got the headwinds we've got to manage, currency and raw material, but that should be no surprise to any of you, looking at that these are headwinds, and these are things that we will manage as SKF, going forward there.
I will stop at that point, and I'll throw over to questions first from the floor here, and then we take from the telephone. Is that right?
Say your name and company name, and we have 15 minutes for the floor and 15 minutes for the phone.
Yes. Thank you. Peder Frölén, Handelsbanken Capital Markets. It seems that lead times on some of the industrial bearings are getting longer again. Would you see that as a advantage for you, given good control of distribution or a disadvantage, given your inventory? And please, in that answer, maybe draw a conclusion on the industrial volumes in the fourth quarter, at least to me, compared to other industrial companies operating in U.S. and North America, Europe, they might... could have been even higher.
Mm-hmm. I think if you look at it in total, what I would say is the lead times are not going out for us dramatically, really. You can see that there are some areas we need to improve the service on, but it's much more related to the supplier's ability to support us there. We have the capacity in place to be able to do that, and I think that what I can say is our service level in the fourth quarter actually improved to the marketplace, and especially in our industrial businesses there in total.
I think the volume development that we saw in the industrial business with the mix that we had there, and with the fact also that the energy business didn't really kick significantly, which I think is very important there for us, was a good volume development in total for the industrial business. What you saw was good growth in construction equipment for us, good growth agricultural, fluid power, et cetera. But that energy business, which is around 5% of the group, which makes it what? Around 15% of the industrial business, didn't grow significantly. And secondly, aerospace was growing, but not significantly in the fourth quarter. So that's what I think brought down the overall level of the industrial business in terms of growth.
On your, sort of guidance-
Mm-hmm.
For SKF, year-on-year volume growth, do you expect similar sort of broad-based growth, that all the divisions were pretty similar when it comes to volume in the fourth quarter?
Mm-hmm. I expect quite broad-based. There'll be differences, of course, but quite broad-based both geographically and division-wise as well. Yeah.
I get back in line.
Okay. Over to the back there.
Thank you, Peder. And...
Sorry about the delay. This is Martin Englund with SEB Asset Management. I'm just curious how you are planning on raising prices?
To mitigate the raw material- cost and, you know, how you- Mm
You've been raising prices for the last year or so, and-
- just curious to hear what-
What your plans are?
I mean, as, as we stand here today, the first of February, we have raised prices in the European industrial distribution market place by 5.8%. We announced that end of November there, and clearly, as we are now looking at the raw material costs and other ones, we will take additional actions. But I cannot say what we do, when we do it, where we do it, how we do it until we do it.
Okay. Thank you very much, and next question.
Yeah. Hi, Matt Liss, Swedbank. Just about raw material prices again, and maybe also FX. Should we expect that part of or that impact to be more front end or back end loaded here?
I would say-
Have you made sort of arrangements-
- securing-
FX during the start of the year?
I would say FX, you will see the 150 in the first quarter, and the reason it's not a little bit more than that is due to good work from Tore's team on hedging there. So the transactional is, is much less. It's more translational there. As we go through the year, Based on current assumptions just now, I state current rates and current assumptions just now, the peak of the effect will be in the third quarter. As we look just now, be a little bit more second, a little bit more, more in the third quarter, and then down in, from the peak in the fourth quarter as we stand just now.
Raw material, raw material will actually, assuming no change in surcharges, let's assume we see the surcharges where they are just now, then the step up in prices are hitting us in starting from the first quarter in raw material.
You get it all in the first quarter? You, you-
Yeah, that's a good question. No, no, let me say, we start to see it, and we see some effect of it, but it feeds in as the year goes gone already. We're starting to see. If you take last year, we saw scrap surcharges go up in the second quarter, and it took one or two quarters before it hits our P&L there. So that's what started to hit us end of last year and into this year. The changes that we see just now will start to hit us as we go forward in the year. But the raw material cost in the first quarter will be higher than the raw material cost in the fourth quarter, as we say just now. But with the changes that's taking place, it will have more of effect as we go through the year.
But we do have a higher level just now in the first quarter than we saw going out of last year. Okay. Marita is getting lots of exercise for those of you on the phone, running round about with a microphone at the moment.
Hi, Joe [audio distortion] . Another question regarding prices in the other divisions, automotive, and then, but most interesting, I think, in industrial. How is the contracts this time around-
Mm.
When we have gone through this situation just a couple of years ago? Are they more flexible now or not?
In terms of ability to move prices?
Yes.
The bulk of the contracts are based on our ability to negotiate the prices in the marketplace. I would not say they're more flexible now than they were in the past, but I think the team in both industrial and automotive in all the divisions did a great job in moving prices in the past. So as we see higher input costs, I think they will have the same success this time.
Is the longer lead times to move prices in the sort of more industrial OEM-exposed business than in service divisions?
Yeah, clear. In service division, normally what you have is between a 1- and 2-month lead time because you have to announce it in advance that you're going to do it. And then it's something that you do. It's, it's less of a, a negotiation. It's something you move the retail prices there within it. Whereas in the industrial side, you, it's more of a, a negotiation. There's a part of the business that's affected by the list prices, and there's part that's part of a negotiation, so it takes a little bit longer there.
How much is affected by list prices in the industrial division?
I don't have that at the top of my head, but I would say the majority is contracts, but there is the tail end of the smaller items and the customers, the small customers there.
Thank you.
Mm-hmm. Next question. Yeah.
Good afternoon, Martin Prozesky from Bernstein. Can you comment a bit on the broad-based growth that you saw in Q4? I mean, were you surprised by the strength out of Europe and also a bit out of the U.S., and is it more of a catch-up, or do you think it's more sustainable demand? I mean, is it-
Yeah, it's a good question. Very good question. I think part of it is a catch-up, clearly, because if you basically look at what we did in the industrial business was the one that came through, and it was against a lower comparison in the fourth quarter, 2009 there. So part of it was that, but it was quite broad-based there. But also, I think, just to be clear, you saw the European market strengthening, especially the German market, strengthening for us there. So I think it's a combination of two, but there was some catch-up as well.
So-
I expect that to, as I said, as I said to Peter earlier as well, to keep similar into the first quarter. Won't be exactly the same, but it is quite a broad base in the first quarter as well.
And on the U.S. improvement, was that also kind of similar effects or?
U.S. started to move a little bit earlier than the European market for us. I think we actually started to see that go in the third quarter, much better there, as well. I mean, we must remember also when we look at first quarter versus year-on-year, the first quarter is always we have more OEM business and less aftermarket. So first quarter is normally the weakest quarter for the service division. So by being broad-based, the service division won't go the same as you see the industrial and automotive division, but that's a normal pattern for them. Yep. No more here. Maybe we go to the phones then.
Yeah. No more questions.
No, okay, there was one. No problem.
Another one on raw material, sorry. Could you just try to give us some light on the raw material Q-on-Q in the fourth quarter hitting a little bit? I mean, between... Just a rough figure. And secondly, Lincoln was, is a rather profitable company-
Mm-hmm.
and you have announced some of the effects that we could expect ahead.
Yeah.
Apart from that, I mean, do you think it's likely that you will restructure the business during the first full quarter of this year?
Mm-hmm.
What type of profitability do you think is wise to expect-
Mm.
Gross and net in that sense?
Mm-hmm. I think you... It's a good point you raise, and I think what we've tried to do in the information in Lincoln is to show you, as best as we can, the effects that we expect. We've done a preliminary balance sheet, which means we've booked certain things in. We've shown you what we expect in terms of amortization, depreciation, additional, and that, of course, will affect the profitability of the business. The underlying business, I don't expect the profitability to go away. It was around the 24%, and I don't expect that, but it will be negatively affected due to PPA there with that.
In the first quarter, this is an important point, we will not really see much profit at all, if any, from Lincoln in the first quarter, due to the fact that you do the fair value adjustment of the inventories due to the current accounting rules, and I can have my opinion on the accounting rules. The accounting rules say that you have to value the inventories up, so therefore, as we sell these inventories, we get zero from it, basically, in that way there as well. Going forward, no, I don't expect it to go worse than what we've seen so far. Now, in terms of synergies, yes, clear. I think it's a little bit early to expect synergies in the first half.
year, because we're in the process of bringing things together and putting the operations in place there. And remember, we said $35 million in synergies, primarily in two elements of it: sales synergies and purchasing synergies there. They will come more as we go through the year, to the second half of the year, latter part of the year. These synergies will start to come, and we said it would take a few years before we get the full $35 million. Does that answer?
He's looking at you, Tony, for that one. Raw material there as well. I would say, let me give you. I can give you some guidance between the two. I would say if you look at the currency. I'll take two elements, currency fourth quarter versus currency third quarter, not year-on-year. The year-on-year, it was SEK -50 as we reported. It probably was closer to SEK 150 quarter-on-quarter there, and the raw material was not so dramatically different.
Okay.
Yes, sure.
You mentioned that the volumes at the end of 2010 were sort of on par with the volumes going out of 2006.
Yeah.
Would you just remind us kind of how much lower that is still compared to peak volumes, whenever that was? Second half of 2008.
Oh, I would say it's lower. I think 2007, we grew by 11%-12% in volume. 2008 was 3%-4%, so probably 15% or so, from the top of my head.
Sounds about right.
It's in that area, something like that. I can check that exact, get the exact figure, but just from the top of my head, in that area. Maybe we take the phone, Marita. Let's take from the phone.
So now, please, the questions by phone, please.
Once again, ladies and gentlemen, it's star followed by 1 to register for a question. Our first question comes from line of Nico Dill from JP Morgan in London.
Good afternoon, gentlemen. I'd like to ask three questions, please. The number one is on the sequential decline in margins in industrial. You've highlighted material costs, raw material costs, and currency. Are there any other structural sort of things taking place that we need to bear in mind going forward? And number two is on bottlenecks. Some of the auto manufacturers have been quite vocal about bottlenecks going forward. Is that hitting you at all in the supply chain? And number three, a bit of a cheeky question in terms of modeling. You've highlighted a slight decline in volume growth going forward, previous quarter and from 19 to 17. Can we expect 15 for Q1?
First of all, the previous quarter went 19 to 16.3, if I remember correctly. As I say, it'll be slightly lower, so that's where I'll stay. Go to the one in terms of bottlenecks there. I would say we have a tight supply into the automotive industry just now, but not, I mean... We're very tight in terms of demand into them. I'd say more into the truck industry is where we are really working hard to try and keep up with demand in the truck industry, due to our suppliers' ability to support us in total. In terms of the industrial division, Nico, no, there was no other things, no, no strange things beyond these two factors.
Thank you.
Welcome.
Thank you, Nico. The next question, please.
Our next question comes from the line of James Moore from Redburn Partners.
Hi, everybody. It's James at Redburn. Two questions, if I could. One on raw materials. Could you give us a bit more to analyze your thinking on 2011 raw material headwind? Can you say what the scrap or base cost inflation is going to be? Or, you mentioned that the fourth quarter impact of raw material versus the third was similar to the currency. So should we expect a SEK 900 million headwind for raw material, a similar number for 2011? Secondly, it looks like you sent a very clear message that SKF wants to invest in headcount. But I suspect that has a margin impact in the near term from extra headcount in sales, R&D, engineering.
Could you give us a bit of help on what you think the wage bill is going to do in 2011, whether number of employees or wage inflation, or whether it's really that you're trying to signal that consensus for margins in 2011 are just too high?
I would say, if I go back to the raw material thing, I don't think you can... I think it is coincidence what happened in the fourth quarter vis-a-vis raw material and not being so dissimilar to currency. I don't think you can take that automatically, that because we've said SEK 900 million for 2011, that that will be the effect in the raw material bill increase for us as well. But it will be significant for us here. In terms of the investment in people, et cetera. No, I mean, it's clear that if we're going to move to another level, then we will need to invest in people, we'll need to invest in some other areas there.
But, and that will take up, for example, our SNA as a percent of sales a little bit. I already indicated that, by the way, in October, that we'd go up a little bit in SNA as a % to sales. If I remember correctly, I said we were running around in the 13, low 13s, and we would go up to closer to the 14, and I think that's something that I still believe. Whether it'll come straight off, it'll, it'll be something that will come through going through the year.
But if I take to you in terms of of margins, yes, we are investing in terms of the people, in terms of R&D, et cetera, but it's not our intention for our margins to go backwards from where we were in 2000 and by doing that, because we see growth on the other side, and we have to offset the other factors.
But you think the expectations in the market are too high? Is that what you're trying to signal?
No comment on expectations in the market. I mean, that's up to you to calculate in, but it's clear that from my viewpoint, we have to, in order to move ourselves to a 15% level over a longer period of time, we have to do some investments in order to do that, and that we signaled back in October. Secondly, I think what's very important is that if you go back to what we said for the second and third quarter results, I did highlight repeatedly that we were in a sweet spot in terms of everything being in our favor in that period as well. But that I still believe we had the foundation to move ourselves up to a 15% operating margin level over a longer period of time, and I still believe we have that, there.
It's not something you do automatically in one year.
Thanks, Tom.
Thank you, James. Next question, please.
Our next question is from the line of Ben Maslen from Merrill Lynch.
Yeah, good afternoon, everyone. It's Ben from Merrill Lynch. Two questions, please. Firstly, Tom, were there any working day effects during the fourth quarter that may have you know, distorted growth at all? If you could maybe run through that in terms of different divisions. And secondly, just to come back on the input costs. I know we've labored the point, but just in terms of... You've always been very good over the medium term at passing through these cost increases to customers. But as you look at it, is there any mismatch in terms of the timing of those cost increases you face flowing in, you know, through your inventories and into the numbers, and then the price increases actually coming through and helping you at the top line?
I mean, do you think you're, you're ahead of the curve in terms of that dynamic, or do you think there could be a couple of quarters where, you know, perhaps the, the net effect works against you?
If I take the first one on working days, there was one working day less in the fourth quarter, officially less in the fourth quarter last year compared to the fourth quarter the year before. However, I would say that if you looked at elements of how customers went, especially some of the automotive customers, they continued to work longer. So I don't see from our viewpoint that that had any effect on our volume growth, organic volume growth, fourth quarter 2010 versus fourth quarter 2009. And if it was, it was marginal.
Yeah.
To be quite honest, it wasn't enough because, you know, it's always difficult in... I'd say two quarters. The fourth quarter and the third quarter are always very, very difficult because of depending on summer holidays or depending on Christmas holidays there. We don't see any major effect in the fourth quarter. In the first quarter, there is one day more this year than last year, and I'm not saying we'll see any positive effect from that as well because of the way the holidays came for New Year as well. So no big, no big effect in that.
In terms of costs coming into us and activities to offset that, we have a lot of activities already underway to offset that, which of course, as I say, we don't only take actions on pricing, we take actions on taking costs out in our operations. We take actions in sourcing with our sourcing activities. So I don't expect any lag in it there, but I don't expect us to be significantly ahead of the curve at the moment.
That's great. And maybe, Tom, just to follow if I could. On the cash flow for the year, there's a SEK 2 billion outflow for the line that's called other, including financial and non-cash cash items. I know that interest is some of that, but maybe is there any color you can throw in terms of what else goes in that line?
Could you take that one, Tore? That one there. That's, Tore's sitting just doing nothing here anyway, so he may as well take that one anyway. Yeah.
Yeah, there is, as you rightly pointed out, there's some 899 million of interest cost, and also you have payments on derivatives, et cetera, which doesn't normally flow exactly in line with interest payments, so to speak. And then you have various others. I can't specify that, unfortunately, right from the top of my head, but there's nothing unusual in that line.
Okay. Thank you very much.
Okay. Next question.
Our next question is from the line of Colin Gibson from HSBC in London.
Sorry, I've removed myself from the question. Or at least I thought I had. Everyone's asked all the permutations I could think of on the pricing and raw material questions, so nothing extra from me. Thanks a lot.
If you think of any more, Colin, later, give us a call.
I'll write you a postcard, Tom. Thank you.
Thank you.
Are there any other questions?
Our next question is from the line of Fredrik Stahl from UBS in Stockholm.
Good afternoon, gentlemen and ladies. It's Fredrik here at UBS. I just had a question on Lincoln now and relating to your balance sheet as well. You've had the business now for a couple of months, and you know, you had to spend you know, a bit more of your operational resources, I guess, to integrating them and welcoming them to your group. You will, you know, given your cash flow track record, you know, rebuild your balance sheet fairly soon. With the you know, experience you've had of Lincoln, do you think you're ready for another semi-large acquisition when you know, your cash balance is a bit stronger again?
I mean, first of all, we've had them four weeks, Frederick, because up until we got the authority approval, you couldn't do anything with them. So we've had them four weeks there. But clearly, we expect both positive EPS, positive cash from Lincoln and, of course, positive cash from our business as well, which therefore means when you look at also our targets, look at, for example, Gearing, we're very much in line with the long-term targets, even with the Lincoln acquisition. So from that viewpoint, we've not stopped looking for other steps that can of acquisitions, small, medium, and large, that can come in and strengthen SKF. So we still are very actively looking at other steps we can take.
Of course, as we go through this year, strengthen our balance sheet further, then, if the right opportunity comes up, then, and it fits in with strategically what we want to do, then, yes, we, we would like to do that, Frederick.
Very good. Thank you.
Thank you, Frederick. The next question, please.
Our next question is from the line of Guillermo Peigneux from Morgan Stanley.
Hi, good afternoon. Just one question regarding maybe utilization rates for the group and specifically for industrial. Would you know about those, and could you share them with us?
... Yeah, I think in the industrial side, we still have some room to utilize more or larger bearings. As I said, the areas that they are going into, like energy, et cetera, is not really grown and picked up to the same degree. So from that viewpoint, there still is room in there. In the smaller and medium ones, or let's say the medium ones, because they don't really do the small ones, in the medium ones there as well, then we're not, we're not fully, fully utilized. We've still got room that we could do things there. But it depends on the lead time within there, Guillermo, because it's also related to our supplier's ability to support us going forward.
But we have room to continue to grow in these areas with the current capacity we have installed. However, clearly, we're putting more capacity, and as you remember, we have a new Dalian facility coming on board later this year. So that will help support our growth in the Asian region going forward.
Okay, thank you. Typically, I can see that your margins tend to be lower in the first quarter than in any other quarter in the year. That would be the case again for 2011?
I think it's clear that the mix of the business is much tougher, Guillermo, as you rightly point out in the first quarter. The first quarter is normally a lower level, and the mix is more OEM than aftermarket, and that has historically had an effect in the margins. I think, and going forward, I think an important thing we must look at is that in 2009, we were in a year that was going down dramatically. 2010 was a year of recovery. So there was lots of strange things that happened between quarters, and you can see that very clearly in our third quarter result there, when, as I've said many times, we're in a sweet spot.
If you look now, I think we're back into a more normalized development, if I could put there. So a more normalized pattern in the business there, going forward, and that will affect growth and margins in a similar pattern, Guillermo.
Yep, thank you.
Thank you, Guillermo. Next question, please.
Our next question is from the line of Sam Edmonds from GS in London.
Hi there, Tom. Hello, everybody. It's Sam here from Goldman. Two questions, if I might. The first one is very irritating because it relates to raw materials, but I'm quite confused after all the questions that have come in. Just to clarify, over the medium term, you expect to be able to recover raw material pricing with the sort of various actions that you can take, partly pricing and cost, et cetera. So for the year as a whole, if I'm hearing you right, we shouldn't expect a massive impact, is the first question.
Then the second question is just I was wondering on competitive environment, particularly in Europe, with your major European competitor in FAG, whether given the sort of fall from and then recovery in financial terms of their parent company, whether you've seen any change in behavior from them over recent months? Thanks.
The answer to the second one is no, and the answer to the first one is yes.
Thank you very much.
No, but seriously, to be clear, the first one is right. I do expect that we are gonna be able, Sam, to with the actions we have in place on pricing and on the cost reduction and sourcing actions, et cetera, to be able to manage the current raw material costs, as we've done in the past, yeah. And we will put the number of actions in place. So, yeah, I expect to be able to offset that, and during the year, and not to see any major headwinds, let's say, not to see any lags quarter to quarter, but we'll need to offset it with the actions that we have in place. Regarding those, Schaeffler as well, you're absolutely correct.
If you look at the operating company, they've improved their financial position, and they're continuing to drive and develop their strategy. So I've not seen any major change in the competitive landscape, whether it be them or others in the marketplace.
That's brilliant. Thanks very much, Tom.
You're welcome.
Thank you, Sam. Are there any more questions?
Our next question is the line of Natalia Mila from Citi in London.
Good afternoon, everyone. This is Natalia Mila from Citi. I have two questions. You commented positively about development and construction equipment in the fourth quarter. I wonder if you could give us a bit more color, which areas, which regions surprised you the most? Or is it still very much driven by Asia? That's my first question. My second question, just to follow up on the competitive side, do you see any changes in behavior from your lowest competitors, particularly Chinese players, for the last couple of months? Thank you.
In terms of construction equipment, actually, it's quite broad-based. In terms of our supply into the customers. We see it in Europe, we see strong development. We see in North America, strong development in construction equipment. We must remember, though, that some of the end customer demand may be more driven by the faster-growing emerging markets, but from where we ship to, we see it in all these markets, going very, very positively. Regarding the Chinese suppliers, I wouldn't... I mean, they're active. They're in the key segments which they're in. They are taking some steps to continue to develop their business, but I would and invest in their business, but I would not say that it's anything more significant in this quarter than we'd seen in previous quarters from them.
Thank you.
You're welcome.
Thank you, Natalia. There is still room for a few more questions.
Our next question, on the line Arnaud Boussard from Exane BNP.
Hello, everyone. A question on exchange rates, please. Your SEK 900 million forecast for 2011 looks quite is a bit impressive compared to what we've seen in the last few years. I was wondering if something has changed in your currency sensitivity, currency exposure, and if there is a particular currency to explain this significant effect you expect in 2011?
I think one factor, I would say two factors in that. One factor is, of course, the fact that when you look at where the euro has gone to now as well, then it means that the translation impact of euro profits back in, it has more of effect than, say, for example, you were two, three years ago, where the dollar was compared to the where the euro was with us. I think the euro is weaker against the Swiss francs. I think that's one factor.
I think secondly, as we are growing our activities in areas like Asia, and Asia is becoming an increasing percentage of the group, and also areas like Latin America is becoming an increasing percentage of the group, then it means that the exposure more to, one could say, dollar-related currencies is there. Not so much in transactional, because we've been growing our manufacturing there, although it is there, but also in translational. I would say they are the two major reasons, there.
All right, thank you.
Thank you, Arnold. Are there any more questions?
We have a question from Johan Eliasson from SEB in Stockholm.
Yes, hello, this is Johan Eliasson, SEB Stockholm. Just a question regarding your price mix. You're obviously in your outlook becoming slightly more positive on the automotive, saying higher demand in Q1, whereas industrial and services is slightly higher. What should we read into the price mix for Q1 in terms of that, considering that you also are planning to do some price hikes, as I understand it?
I think the issue. Well, first of all, the price activities that we take in the market won't have a significant effect in the first quarter. Secondly, when you look at it, it's not even so much the sequential development you should look at also, it's the fact that the mix of the business normally is a somewhat lower service division as a percentage of total in the first quarter than it is later on in the year, and a somewhat higher automotive. So that always has some dimension of a somewhat negative inter-intradivisional mix. However, I've got to say, it's clearly our intention to continue the good work that we've done during 2010, to move back into a positive price mix, and we want to continue that work there.
So, we still expect to see that in the first quarter.
Okay. Thank you.
Thank you, Johann. Are there any more questions?
Our next question is from Sebastien Gruter from STL, Paris.
Hi, good afternoon. Two questions, if I may. The first one would be, one of your competitors mentioned some pricing pressure in the automotive segment, and that some bearing companies were willing to take a low margin contract. Could you give us some color on the pricing environment in the automotive division? And my second question would be on the FX impact of SEK 900 million. Could you give us a breakdown between translation and transaction? Thank you.
On the 900 million SEK translation, transaction, the first quarter, it's more translation than transaction due to the hedging. Over the full year, I don't have that at the top of my head. 50/50, is it? Okay, Tony says 50/50 over the full year. In terms of the pricing activities in automotive, I think our guys have done a very good job, and I think what's very important in our automotive business is we've had a positive price mix during 2010, and we've had a good development there. And that is due to the fact that our guys are working very hard, not only to get a better mix of the business with more VSM, et cetera, but also within the car business. The auto...
The core part of that, the car business, it's been their actions to take new products to the market, which have better average price than the products they're replacing there with us. So I think they've done a very good job, and that's one factor which has helped to move their operating margin up to the 8.5%. It's not just been the cost reduction they've done, it's been the new products that they've taken with that, level of, or better added value, so better average profitability.
Okay, thank you very much. I know there are two more questions.
Okay, two more questions.
Please, next question.
The next question is from Daniel Clark [audio distortion] from RBS in London.
It's Daniel coming up here. How are you doing? Just two quick questions. First, you mentioned suppliers are struggling to meet demand, bottlenecks, et cetera, so you're carrying more inventory than you should. I think that's what I heard. Could you just kind of briefly comment when that inventory situation will correct as we kind of progress through the year? And then the second question, you talked about the price mix, 0.9%. Can you sort of give us... is it possible to try and give us an understanding of how that price mix breaks down, and in particular, your 5.8%, November the first price increase, was that announced with immediate effects, or does that price increase come through in the first quarter? Thank you.
That, first of all, that price increase comes through, it's effective from today, there. But of course, you don't get the full effect immediately in the first quarter. So as we go through the year, you will get that, and it's about... We normally see it in the third of that affects us in total. And remember, it's for service division Europe there. There has been no other steps announced in other regions at this moment. If I look back to the price mix in total between the operations there, it is much more mix affected than price affected during the fourth quarter that we saw there. Mix within the divisions and also between the divisions there, that's helped us there. In terms of your first question, the raw material components, you understood correctly.
We're running a little bit higher there due to the supply situation there as well. When I look forward the first couple of quarters, I think we will still have a tight supply situation from our suppliers, although I think we'll manage it, but that means we'll run with a little bit higher in the first part of this year than we would normally like to run from our raw component suppliers.
Is that adding to the kind of cost inflation that you're seeing, or is that just still?
No, no, it doesn't add to the cost inflation. It adds to the capital employed, tied up in that. It doesn't add to the cost inflation, Daniel.
Okay, perfect. Thank you very much.
You're welcome.
Thank you, Daniel. Shall we take the last question now?
Yeah, sure. Sure.
Okay, please.
Our last question is a follow-up question from Ben Maslen from Merrill Lynch.
Yeah, hi, sorry, just one more, if I can, Tom, on, just on-
Sure.
On your customer inventories. You know, with demand in a lot of these segments like autos and trucks very strong, and your prices going up 4-5% or so, I mean, do you think you've seen any kind of over ordering or inventory building or pull forward of demand, ahead of those price increases, from some of your key customers?
First of all, we're not increasing the prices to the automotive, car and truck by that level. The 5.8% is list price increases affected primarily the service division. Secondly, I don't expect that you've seen a significant or any inventory buildup from the automotive industry in total. In terms of the service division or industrial business, I don't think there's big inventory buildup by the customers. I still think, as we've highlighted many times, that the North American industrial distributor's inventory is still a little bit high. And hopefully by the end of this year, I'll get to the end of saying that as an excuse for what's happening in North America, because the plan looks that that should be fixed during this year with us.
But I don't think there's any significant inventory buildup due to what's happening in the prices. I cannot say there's not little bits, but there's nothing that's important to influence, I don't think.
Great. Thanks, Tom.
Thank you.
Okay. Thank you very much. That brings us to the end of this.
Well, thank you, everybody, for your questions, both here and in the phone there, and I look forward to seeing you after the first quarter. Thank you very much.
Thank you. If you want, you are welcome to call me after.
Yep.