Good afternoon, and welcome everybody here today, and also those of you who are linked to us by phone to this presentation of SKF's full year results, 2011. Let me present those of us present from SKF, our President and CEO, Tom Johnstone, our Executive Vice President and CFO, Tore Bertilsson, Ingalill Östman, Senior Vice President, Group Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by giving a presentation, and then we will have a Q&A session, and we will start with those of you who are here, and then we will continue with those of you who are linked to us by phone. So please, and all the presentation will last around one hour. So please, go ahead, Tom.
Thank you very much. So, good afternoon, everybody. Thank you for braving the weather to be here with us for this, full year result. I'll go through the result, in detail, what's happened in the marketplace. Then I'll go on and talk a little bit about our outlook, and then I'll finish up by a few words on the new organization we're putting in place to tackle, especially focused on the industrial marketplace. So if I start with this slide, these were the key focus areas that we put in place one year ago when we had this meeting for the full year result, 2010. We said there were certain areas we would focus on very much in our business, on profit and cash, on manufacturing, especially suppliers, to help us meet the demand.
Fast-growing geographies, segments, initiatives that we'd launched in October to support our growth, integrating Lincoln, and of course, Business Excellence and competence development. Let's go back and look a little bit and, and pick out from some of them, some of the things we've done during the year, which I think is important. First, from a customer dimension, I won't go through all of them, but I think you can see we've had a lot of good successes during the year in working with our customers. I mean, yes, we announced just before Christmas, the largest order we've taken in the SKF Group, with a big order from China National Heavy Truck, which is a very important order and a very good breakthrough for us in bringing new technology into the, the Chinese truck market.
But there's been lots of other good ones with Goldwind, with the railway industry in China. Business in, in magnetic bearings for subsea compressors, for helping them pump oil or gas out of it and operating subsea. The support from Sandvik and what we've done with Sandvik, et cetera. A number of important steps that we've been taking, and this is just a sample of some of the customer orders, and you'll see more of them when you get our annual report in a few weeks time, as well. Right at the bottom, there's one other very important thing, which is that, as you know, we've been driving this documented solutions program for our customers, so we can document the savings we deliver to our customers. And once again, this year, we got over SEK 3 billion, documented, signed off savings for our customers.
We can see that really is a major benefit in us working with our customers. Not only being able to say what we do, but document and prove what we do for our customers. In terms of investments, we've made a number of investments during the year. In September, we opened a second factory in Dalian, a medium bearing factory, which complements our existing large size bearing factory with two factories under construction. Our factory in India, in Mysore, that we announced at the end of 2010, which is for sales. Our Jinan factory, which we announced earlier last year, with taper roller bearings for truck components, and that is the factory where the products will be produced for CNHTC.
So we announced the factory, and we knew we had the business, but we had to tie up some things there with them before we could announce it publicly. We opened a new warehouse in Montevideo, in Uruguay. Very important for the southern part of Latin America to be able to support our business there. Our new technical center was opened in India, and it really is a fantastic operation that we've got down there, and it's worth seeing when one of you visits down there. It's a really big step up we're making there and being able to support our customers, not only in India, but in the Asian region. And last but not least, we expanded our production in Brazil by putting in the integrated hub unit manufacturing in Brazil. Some other highlights that we've got, Lincoln. Let's say a few words about Lincoln.
It was a year ago, we finalized the Lincoln deal, and I've got to say Lincoln went very well, has gone very, very well indeed. We really see that the integration, both in terms of combining product development but also how we go to the market, is working very well. Their sales are strong, and their sales growth has been strong, and they've kept and developed their operating margin. So we're very, very Lincoln. And the Lincoln brand, as you know, we keep in the marketplace, but we integrate together the full SKF offer and the Lincoln offer. A lot of conferences to bring our knowledge to our customer, and these asset management companies are very important. Here's where we bring customers, end user customers, to our conference, where we share best experience in maintenance, management, and how we can work with them, there.
Training for our distributor is important, and we've established two new university technology centers, both in Sweden. One in Chalmers, which is for sustainability, and one in Luleå, we announced just before the end of the year, which is very much work with asset management and condition monitoring. It's good because in Luleå, we have one of our major development centers for the group, for condition monitoring. So that will work together with them. We continue our work in sustainability, which I think is important. One other key we put in is to keep launching new products, and we give an example of some products there. We launched over 30 new products last year into the marketplace, which I think is a very important step up in our innovation in the group.
Down the bottom corner, you'll see 325 filings for patent applications accepted. That's a 30% increase on the previous year, which in itself was a big increase from the year before. So the additional investment we are putting in to research and development is coming through with more and more innovation. We spent roughly, in money terms, 20% more in research and development in 2011 versus 2010. And we see, as I say, we're seeing the benefit now of getting more and more patents there. We used to say we did a patent every second day. We're very close to saying we're doing a new patent every day there. So which I think is a good step forward.
So if you go back to these focus areas that we said we would do, I think we can tick off and say, yes, we set the objectives, we set the focus areas, and we achieved them during the year. Let's move on a little bit and talk about the figures then. How did the group develop from a financial viewpoint? I've actually said, and I don't—I know it doesn't come across so well in the slides, but it was a year of two halves, with two different halves in the year. Very, very strong first half, very broad-based growth, et cetera, ramping up our production, and a second half, where there was more uncertainty in the marketplace. If you look at the fourth quarter, then you see our sales grew in local currencies by 2.8%, but that was price mix.
Volume was flat year-on-year. I can say we had positive price mix in all regions, and we had positive price mix in all divisions as well. So you can factor back what happened to our volumes in each of these areas there as well. 2.8 on price mix. One factor in that price mix is the mix between industrial service and automotive. With automotive going down and industrial service going well, there's an intra-divisional mix factor within there as well. But you can see Latin America was strong for us. Asia and Europe didn't really grow from a volume term viewpoint for us. In Europe, very much driven by the Automotive Business, our Car Business being down in Europe, our Truck Business, our vehicle service market.
So automotive in Europe, that was the drive for the European Business, and that will continue into the first quarter. In Asia, it was primarily renewable energy in India, railway in India, but I've got to say also, the car business in India, China, I should say. Renewable Energy in China, railway in China, and the car business in China didn't grow so much in the fourth quarter. It wasn't growing with the rate it was growing overall in total for us. If you ask me, compared to our outlook, how do I see things? I'd say America, a little bit better, because America continued well. Car was good for us in America. We saw good growth in that business, very good growth in our industrial business.
Construction equipment, strong, renewable energy coming back in North America, and the other broad-based industries that we've had before, fluid power, et cetera, still performing well in America. So I'd say North America, a little bit better, Europe in line, Asia, a little bit less than we expected going into the quarter. Divisions broadly in line in total. One of the issues is clearly our profitability was down and our margin was down two points if you take year-on-year, and that was driven by our manufacturing. We took our manufacturing down as we said we would. Our manufacturing was lower in the fourth quarter, sequentially and lower than year-on-year as we worked to start to take inventory out. We said going into it, we're going to break manufacturing, and we did.
We took something between SEK 500 million-SEK 600 million out of our inventory. Not all of that, though, is finished goods. Roughly two-thirds of that is finished goods. One-third is raw material components, which doesn't have an impact on your result. It's an impact on your buying there. Remember, we said this going into the quarter, when you break manufacturing short term, you carry a lot of fixed costs. If you go back a year ago, we said as we went out of the fourth quarter, 2010, we were starting to bring up manufacturing, and we said, first quarter, second quarter, 2011, we were in our sweet spot. We really were. We were getting manufacturing coming up, but the costs were not there with it.
And when you ramp up manufacturing quickly, you get a real tailwind. Similarly, when you break it very, very quickly, you get a real headwind. After a couple of quarters, that equalizes, because you can take steps in both sides. But for a couple of quarters, you have that. We said we would have it for a couple of quarters, and we can see that, definitely that impact in the fourth quarter there. So manufacturing was lower, both sequentially and year on year, and we took our inventories down and started the journey to take our inventories down.
I said it was a year of two halves, and you can see that when you look at the full year figures, because the full year figures deliver record sales, record profit, record operating margin, and quite a good cash flow in total for the group. And if you look at the growth per region, you can see it's pretty well balanced there, but you can really see, as I say, the difference as you've gone through the year in total. I think what we can say is, as I showed earlier, we've invested in our initiatives. We've taken the steps to support the three initiatives we have in place. We've stepped up our R&D, and I can tell you, we've put about 600 new people on the road in SKF, salespeople, engineers, service people, to support our growth going forward.
We said we would invest in frontline resources. We've done that. So let's run through some tables fairly quickly. I won't go into them in too much detail. You see the quarterly bar chart for growth in local currency. It looks like we got some growth in the fourth quarter, and we did 2.8% organic growth. But when you click to the volume one, you see the volume line. We had to make that line a little bit thicker, so you could actually see it on the bar chart. There, no volume growth from an organic viewpoint. If you then look at it from a regional viewpoint, you've seen the figures before. Europe and Asia are flat, then North America, Latin America, the ones developing positive.
I say in Latin America, driven very much by the Service Division, really, because the Car Business, the vehicle service market, not good in Latin America and Brazil specifically. You got the full year. If we're going growth to local currency in a total, you see 16.3% for the full year, including the 4.8, which is predominantly the Lincoln Business in total there. In terms of the table on components and net sales, I think good steady price mix here. Yes, the 2.8 is influenced by the fact that we had better sales to industrial and service than we had to the Automotive Business in total.
Operating profit, you see it just at the, if we include the restructuring or let's exclude that from the figures, they have SEK 2.1 billion, including it SEK 2 billion in terms of operating profit, which gives us our operating margin 12.3% and 13%, excluding it there. And you can see after the few quarters of growth that we had in our sales and our volume as well, that we've got our operating margin still at strong and good level there, but came down a little bit due to the breaking we put into our manufacturing in total there. So full year, 14.5 or 14.7, excluding the restructuring we put in place.
The picture, when you look at the divisions, I think it, it shows the, the difference in the business that we're seeing there in total. Service Division continuing to develop very positively, 16% margin, in that business. Industrial, down to 11.5, including the, the, the SEK 60 million it got for, for one-offs, but automotive really dropping down quite a bit to 1.5. And that's because we of the breaking in production we made in automotive, and also because of the, the, the, the marketplace with the sales into the car industry being down, the truck industry being down, and the vehicle service market being weak, particularly in Europe. That affected their operating margin quite a bit, in the fourth quarter.
I would say, if you look in total at the inventory reduction as well, again, something like two-thirds of the inventory reduction was into the Automotive Business, one-third into the industrial business in total. You've seen the figures. I don't think we need to go through them for the full quarter and full year. Let's go on to inventories. Inventories, if you look at there, we broke the trend. I think the important thing is that we've been taking our inventories up for a number of quarters. If you look at the bar chart, you'll see the first quarter, 2011, looked like it went down, but that was currency. If you remember when we reported, we said in fixed currencies, it went up. We're, but in reported, it looked like it went down.
We've gone through a few steady quarters of increasing our inventories there. Also we've been increasing our production. We started to take it up in the fourth quarter of 2010, and then you saw it really through three quarters, the production there. Now we've been breaking the production, and we'll continue that into the first quarter 2012 as well. Cash flow was for the full year SEK 3.9, which was good, SEK 800-odd in the fourth quarter in total. Returning capital point, basically flat as a total for us in the group, there. Debt, we reduced a little bit net debt there. If you look at a debt structure, you can see that, we've no major repayments until 2013, so we've got a fairly balanced debt structure there.
Nothing to do in 2012, and I think this one is due towards the end of 2013. There, so nothing to pay for the next coming quarters that we need to do. Let's see how we manage that one as we go through the next few quarters of the things we can work on in total. I put a picture in to show our financial performance over a longer perspective there, because I wanted to make a couple of points on that. You can see with the 14.5%, and even with the 12.3% in the fourth quarter, we're still operating at a good level in total, as SKF.
But it's interesting when you look at how the margin has come up from 2005, from 10.8% to 14.5%, 2011, that we haven't clicked up as much the return on capital employed. That's an interesting one, too. What does it basically mean? It means we put capital into our business. We, and remember, in that time, we've been divesting some of our component manufacturing there. And that you can see in the next part, that's been part of the steps that we've been making to invest in the business for the future. We've opened seven new factories in that same timeframe, nine, if you go back a little bit longer than that. Five of them in Asia, one in Russia, one in North America, with two under development for Asia.
And of course, we've stepped up investment in a lot of our existing operations. Over the last eight years, we've made 21 acquisitions. Over the last six years, 18 acquisitions across all platforms. And I think one very important thing is with the acquisitions we've made, the six acquisitions we've made in lubrication systems, we now have a clear leadership position in that business, which I think is very important. And we've stepped up a lot of spend on research and development, and we, as you saw earlier, we've taken up the innovation rate in SKF. More patents getting put in place, launching more products, over 30 new products in the last year, and more and more of them with a focus on energy efficiency.
Over that timeframe, we've invested about SEK 34 billion, and of course, for acquisitions in organic, you see that in the capital employed very much in our business there. That's giving us a foundation to grow and develop going forward. Based on that, and based on the I'd say, based on the, what we've been doing, based on how we see the outlook for the business, which I'll come on to the outlook in a second or two, I can say that the board has, has looked at it, looked at our performance, and then we will make a recommendation to the shareholders meeting in April to increase the dividend by 10% to, 5.50, five Swedish krona, 50 öre. That still keeps us with a strong position to take advantage of opportunities in the market.
We believe there will be opportunities going through in the coming one-two years, and this gives us a strong position to not only give a good return to our shareholders, but give us advantage to take opportunities in the marketplace. So, with that, let's move on to the outlook that we see from a group viewpoint. I'll move probably to the arrows. I think this is probably a little bit better. Let's walk you through each of the regions. What do we see in Europe? We see that sequentially, Europe will be down a little bit. First quarter versus the fourth quarter, and down and lower year-on-year. That is driven by our Automotive Business. Again, the fourth quarter was automotive.
The first quarter is driven by our Automotive Business, and that we expect weaker cars, we expect weaker trucks, we expect still weaker, vehicle service market in that time frame. So that is very, very much the, the, the Automotive Business. The industrial business is holding up, very well. In Asia Pacific, we see the drop-off that we've seen due to the renewable, due to the Railways, has stabilized, so it'll be relatively stable, but we also think it'll be relatively stable year-on-year in our Asian, business. North America, we think, will continue to develop very positively for us. We see good, signs in our car business into North America. It was strong in the fourth quarter. We expect it to be good in the first quarter. We see in our industrial business very good signs.
Renewable Energy has improved a little bit for us as we're going through the fourth quarter in North America. That should continue. We see construction equipment, especially some of our big construction customers, agricultural customers, very optimistic and very positive, and we see that in our business with them for the start. So sequentially, we see North America up and also up quite a bit, and that's across the three divisions. Latin America, we expect to stay at the good level it's at just now, but to be up a little bit year-on-year. When you add all that together, it means that for the group, we expect sequential volume to be somewhat similar to the fourth quarter, but it'll mean it'll be down a little bit year-on-year. So we came down, and we expect it to be somewhat similar.
So volume shouldn't be so dramatically different, first quarter versus fourth quarter. If you look at the band outlook from a division viewpoint, it's a pretty boring picture from a sequential viewpoint. They're pretty flat, all of them there. And remember, I said automotive would be down in Europe, but we see automotive North America, as I mentioned earlier, good. Automotive Asia should be, should be, should be fine as well. But automotive will still be down significantly, year-on-year. The first quarter of 2011 was the strongest quarter for the Automotive Business in terms of sales. You could see it was strong in the first quarter.
Second quarter was influenced a little bit with the tsunami, which happened at the end in March, so it was difficult to see what was happening, but the Automotive Business has been coming down since then. So we're comparing against a tough, tough quarter for automotive in the first quarter here. Again, down a little bit for the group in total. When I go into the segments, what you see from a sequential development is two coming up. Aerospace, which has been like that for... Say, why energy there? I can say in the Energy Business, we see for our demand on us a somewhat better energy business in Europe, somewhat better in North-- in USA, somewhat better in India, but we still expect China to be very, very weak in the first quarter.
I think China, wind energy will stay weak for a couple more quarters, to be honest. The other one, I'll go to the other side, going down, the Truck Business, we expect to be down in the first quarter. And I've got to say, we spent a lot of time debating, is it slightly lower or lower within that one, and what should we do with that arrow? We've made it slightly lower, arrow sequentially. But if you look at it, we see that truck production in Europe is coming down in the first quarter there. Then it gets pretty boring again for all the other areas there. We see it relatively flat, sequentially in total.
I've got to say, if you look at it, basically, our business, what we're seeing, if you take away cars or the automotive in Europe, cars, trucks, and VSM in Europe, renewable energy, China, railway, China, if you take these away, so also cars in, in VSM in Latin America, the rest of the business is relatively flat, running at a good level and relatively flat in total there. What does it mean? What we'll do, if I click back, I'll show you. It means in manufacturing, we will be, have a manufacturing somewhat similar in the first quarter to what we had from a manufacturing output viewpoint in the fourth quarter, but it will be significantly down year-on-year. Again, go back, as I mentioned earlier, when I was looking at inventories, we started to take manufacturing up in the fourth quarter of 2010.
It was up in the first quarter, up in the second quarter. We built inventory in that time frame. We will run our manufacturing lower than sales, a little bit lower than sales in the first quarter, as we did in the fourth quarter. And so therefore, our objective is to take some inventory out in the first quarter. Not as much as the fourth quarter, because in the fourth quarter, we took inventory out, not just finished goods, but also raw material components, and you do that once. So that has an impact there. It can even be in raw material components. We might need to have a little bit more inventory in the first quarter in order to support our production in the second quarter. But in terms of production for sales, we will run it lower than sales in total there.
What does that mean for us in total? If you actually say that we'll see that we've taken it down and we're running at this level, but it'll be down year-on-year as a group. What are we doing about it? Well, the 3C Program, I won't go through it in detail, is still very much in force in SKF, and we're working it. Strong focus in customers, get out there, spend time with the customers, use the new feet we've got in the ground to be working out there with the customers. On cost, how can we manage our cost base? Again, with a heavy cost hit due to the breaking of manufacturing in the fourth quarter, we'll have a similar situation in the first quarter. We're reducing people, though, I've got to say.
We took around 400 temporary workers out in the fourth quarter. That's on top of the 250 or so we took out in the third quarter. We took out roughly about 140, 150 full-time workers there in a variety of different areas, where we had the chance to do it at the end of contracts there as well. We'll continue to work to reduce, especially temporary workers, and use short-term working. A number of our operations in automotive, we're using all sorts of facilities to be able to have short days in them. They have agreements with the workers, using them for training, et cetera, et cetera, so we can close down production there.
But at the same time, as we look at it, we've got to see the picture is not clear, that everything has an issue to it. There's a lot of businesses still running very well. As I said, construction North America, agricultural North America, et cetera, et cetera, running well. We've got to keep working to support that growth in these businesses as well. Guidance for the first quarter. So I've given you the volume guidance, so I've said volume will be roughly similar to the fourth quarter, but down year on year. I've given you manufacturing, which will be roughly similar to the fourth quarter, but a lot down year- on- year. Tax, around 30%, financial net, SEK -175. We broadly run that as an average for the year.
In 2011, that will be similar in 2012. Tax also was a little bit higher in the fourth quarter, but that's because you close up all the tax things during the year, but it was broadly 30% for the year. So these are similar, 2012 to 2011. We see a positive at the moment on currency, about SEK 75 million first quarter, about SEK 400 million full year. But we're just looking as the -- if the krona keeps and the dollar keeps going, as it's going, maybe that will be different, but SEK 75 million for the first quarter, SEK 400 million for the full year. Addition to plant and property, something between where we finished this year, SEK 1.8 billion-SEK 2 billion. So if you look at SEK 2 billion there in total.
What's the focus areas for us for this year? Of course, managing what is an uncertain but a different demand situation. As I say, Europe, we see some issues there, and we need to be very well aware that there's risks in Europe, especially if they do not solve the Greek situation, particularly. So managing that's important. Of course, profit and cash flow is important for us, and we'll keep a high focus on inventory management. The initiatives we put in place, I'll remind you of them in a second, are still important for us. At Lincoln, you've not integrated in one year, not a company that size. That is a multi-year plan. That will continue. Business excellence will continue, competence development will continue, and I'll talk a little bit about the new organization and why we did that for the industrial market.
Just remind you of the initiatives, accelerate profitable growth, reduce cost, eliminate waste, invest in growth, key initiatives, they are still in focus for the group in total. Let's go on to the industrial organization and why we're doing what we're doing in industrial. The industrial market actually is quite a complex market. We talk about the industrial market, but it's made up of many, many markets there. That what's required in aerospace is very different to what's required in renewable energy, which is different to what's required in pulp and paper. But it is an industrial market in total. If you look at that industrial market, we've been focusing over the last years to develop new products and solutions that look at the asset life cycle, that look at how can we complete the circle for the asset life cycle.
That means when we work with OEMs to design a new products, what does it mean for end users? How can they improve the efficiency for end users? How to improve the productivity for end users? At the same time, when we work with the end users, we've been working and saying: How can we improve the uptime and then create a pull demand through? So we get customers... For example, we've been working with a food company for a while, where we developed solutions specifically for that food company, which helps them improve the efficiency. And then they come to us and say, "Great, can you implement them in all our plants?" Which we're doing. But how can you get that driven into the OEM, so the OEM will make sure all new equipment comes fitted with that new solution there.
So on one side, you've got a push, which is very much working with the OEM, focused on improving the efficiency of the end user, and on the other side, you've got to create the pull from the end user. But actually, when you look at what we were doing, and we looked at our divisions, we had the Industrial Division, which worked with one half of the cycle, the OEM, and the Service Division with the other half of the cycle, the end users. And what we felt very clearly, and we spent a long time, Henrik Lange and myself, looking at this, is that if we can complete the asset life cycle with specialists for these industries, we can have a much better grip in the business and help our customers much, much better.
So that's why we, what we've now done is we've looked at the business for the industrial market, and we've broken it much more into big industries and other industries. We've looked at in ways which have got much more an OEM-driven demand and ways which are much more an aftermarket pull for it there. And we formed the two businesses, strategic industries and regional sales and service. The reason behind that is we believe by doing this, by having teams that are focused on an industry all the way through, we'll be much faster, much better able to support customers in that industry. Because out there, people talk about them being in the paper industry. They don't talk about paper OEM or about paper aftermarket. So we'll have people that will be able to focus much more there and work with the industry.
It will drive our product development even better going forward. From an internal viewpoint, we'll step up the knowledge and expertise in our organization, so we'll have teams that are much more focused on each of the different industries there as well. We believe it will improve our ability to support our customers, take the satisfaction level up, and also help us improve our total R&D development, engineering work, and profitability in the business. If you look at the two businesses, how is it split up? Strategic Industries have seven end user, let's say seven industry businesses, plus the whole lubrication business. Aerospace, which they had before. Renewable Energy, Industrial Drives, which is gearboxes, electric motors, pumps, compressors, and material handling. Off-highway, Traditional Energy, which is oil and gas, et cetera, Precision medical machine tool and automation, and Railways, which they had before.
This team are responsible for all the OEMs and end users for each of these industries. That means if you want to follow them, by following what happens in aerospace, renewable energy, et cetera, as an industry, and industry figures, you have a better way to do it. In the past, you had some of the business here and some of the business in another division, some in industrial, some in service. It will help you follow it. The other industries, metals, pulp and paper, mining and cement, food and beverage, marine, et cetera, and our distributors will be handled by regional sales and service in total. So we think this, and we strongly believe from the discussions we've had with customers, because we talked to them as well before we do this, customers see this as a very positive way of us helping work with them much better.
We will become better partners for our customers, and we'll be able to drive, as I say, our product development and our satisfaction much better, and our intention is to drive the profitability as well. That means effective from the first of January, we run three operations, two for the Industrial Market as we did before, but one with Strategic Industries, these seven big industries, plus lubrication and one for Regional Sales and Services, the five other big industries, plus our distributors and of course, our Automotive. There is very little change in our Automotive. There's a little bit moving from the Industrial over, which is some Vehicle Service Market, customers over, et cetera. But the big issue movement is between Industrial, Strategic, and Industrial RSS. I can say that what we're working on before I wrap that up is, of course, this is a change.
The organization has been implemented. There are business unit heads for each of these business units that we've mentioned, who've got their teams together, and we in this week, next week, will finalize all the organization structure way down below, there, so everyone knows where they are. The factories have been put into each of the business units within the industry, the strategic industries area, and we will start reporting that full time from the end, from the first quarter report there. Now, of course, from your viewpoint, you look at that and say, "So what does it mean? How do I do my spreadsheets and analysts working there?" I think you've got to keep doing it as industrial Service Division, and then we will restate the history, at least one year's history, at the end of the quarter there.
Why does it take us a little bit of time? Because we're splitting up assets and moving people, et cetera. And to be quite honest, our focus so far has been in closing books and getting the first quarter, the annual report ready. Now the team will work in getting the financial reporting, but our team's already working to this organizational structure there. I believe this is. This will raise the performance of SKF in the industrial market one notch more going forward. What does it mean in terms of sales? I can give you a rough idea. It will mean that if you take ID and SD, it means we're moving something like SEK 3 billion to somewhere between SEK 3 billion and SEK 4 billion of net sales, which was in.
That, that ID will go down by around SEK 3-4 billion, and that becomes strategic industries, but it's not the same mix, and the other one will go up by about SEK 3-4 billion. The total hopefully keeps the same, or Tore's accounting doesn't work. The total should keep the same, but there'll be one that go up, the mix between the two will be up. RSS will be about SEK 3-4 billion bigger than it was as Service Division, and, and ID will be SEK 3-4 billion less than that, but then we'll finalize that going forward, yeah, in total. I believe this is a big, important change for us as well. So let me finish by saying, I think 2011 was a great year for SKF in total. It was a year when we delivered record sales, record operating profit, record operating margin.
Of course, as we went out of the year, we had to break our manufacturing, which had an effect on our results. I think, we went into a more operational mode in the summer, whereas in the first half of the year, we had the sweet spot of getting all the benefits, but not carrying the headwinds. Whereas in the fourth quarter, we carried all the headwinds, and I think that will continue also, quite tough in the first quarter as well for us. But I think we've taken the right steps in place to make SKF well-positioned for continuing to develop and grow and to meet our long-term targets going forward. With that, I'll stop just now and take questions here first, and then from the phone, I think, Marita, yeah?
Yes, that's right.
Sure
So we speak the time. So the first question comes here.
Hi, Joakim Höglund Carnegie. Three questions. The first one is, do you think you can reach the 18% inventory target this year? No? Okay. And then the one B is then Y. The second thing is, do you think you'll have to produce under sales in the second quarter? And also, can you please split up the price mix between the intra mix, product mix, and price?
Let's say that it's... No, I don't think we'll hit the 18% this year. I think it will take us two, three years to get to the 18%, because at the same time, we've got to. It's not just about what we do in manufacturing, it's how we work with our suppliers and our operations. There's a project underway, which we started this at the end of the summer to do that, and you're starting to see the benefit of it in the fourth quarter, and you'll see that going forward. I can also say that another reason is we want to manage the service level to our customers in doing this. I mean, if we want. If that was the sole target, then we could hit it quickly, but then we would screw up our sales to the market.
So we, I mean, it's the balance between taking inventories down and meeting the service to our market. One thing I'm pleased about is in the fourth quarter, as well as taking inventory down, we actually improved the service to our customers there. So the project is working there, but it'll also take us a little bit of time to get there. In the second quarter, will we underproduce compared to sales? Probably not. And the reason I say that is because we also need to realize in the third quarter, we go into the summer shutdown there with it. So at best, we'll be balanced roughly with sales. As we look just now, we will make a judgment call, depending on what happens with sales going forward.
But I don't expect to be significantly lower than the second quarter, maybe running line or a little bit up there. But let's see how we get to the second quarter there. In terms of a price mix, I've not done the quick calculation, how much is split between intra-divisional and the business there. At 1 point or so, probably fairly close to something like that. Then the line was probably more like a 1.7, 1.8-ish, and probably 1 point was the intra-divisional, is what I would feel roughly than that. Yeah, okay.
Hi, Fredrik here from UBS. Tom, could you talk a bit about the wind in China? I understand that installations were flat, maybe even up in China last year, while your sales collapsed. Could you yeah, explain that?
Yeah. Because what happened was that in the first half of the year, there was a big overproduction taking place in terms of wind turbines there. And what basically happened when you got to mid-year, around about July time, is that the big companies down there just hit the brakes in their production. And we can see that affect our sales to them, but also we can see the component producers. We've met a lot of them, just don't... 'Cause the thing is, first of all, have you lost business that they're just not telling you about? So you do some other checking, and we've gone to other suppliers who supply the wind industry, and we can see they've also been hit as well with the big companies there.
It's been, it's just been an inventory situation, too many things through the pipe, as you also know, we have a big issue on smart grid in the, in China. The, in 2010, 35% of all the installed wind turbines were not connected to the grid, there. That's being addressed. Actually, the smart grid problems exist not only in China, by the way, they exist in many places, but that is being addressed. My judgment is we'll probably see weak wind first, second quarter, and then it will start to blow again.
Thank you.
Yes. Peder Frölén, Handelsbanken. On the price issue, we have heard about some sort of distribution price increases from competitors. We know that you have a pretty long notice period. At the same time, it seems like you are working together with others more on a net price basis in that channel, and you've managed to squeeze out quite a high price component, or the mix was helpful. Could you sort of share with us your philosophy here a bit? Typically, SKF is the first one to announce price increases, but obviously, you're working with discounts, maybe more now. So that's my first question.
Yeah, it's clear that the... Well, firstly, we've not announced any price increases in the marketplace, and if we so choose to put a price increase in the market, then we'll let the market know first, then we'll let you know on that there. But at this moment, we have nothing in the pipe to make price, price moves there. As you rightly point out, that it's not just list prices. You've got to look at list price discounts and the different elements when you look at pricing and distribution there. But at this point, no, no price increase in the market.
Okay. You mentioned when you talked about reduction of terms and stuff like that, will you also in this call it recession or whatever take the opportunity to make some slightly larger steps? You, I mean, I'm not sort of trying to get some reduction.
No.
In cost. I wanted to hear you thinking about the opportunities-
Ah.
Still in the automotive, but maybe even more so in industrial, to be honest.
Yeah, I think that your second point is right there, maybe more so in industrial. I think there are two elements there. I would say, first of all, we see a downturn in demand in the European market in total there. The industrial is not heavily affected by that, but at the same time, we still have an imbalance in our manufacturing in Europe versus our sales in Europe there, and especially in industrial. The automotive have done quite a bit of work over the last few years to address that, but we still have that imbalance there in the industrial side. But that's not something you can look at short term. I think it's something we need to understand two things. One, how is the market going to develop over the next three, four years?
I.e., what do we think is the outlook for European business, not only 2012, but 2013, 2014, 2015? That's very, very important for us. And secondly, with the platform and segment approach, with a new organization that we have in place, especially industrial market, what opportunities does that create for us to gain business in the marketplace? And these are two inputs that will come in, and then we will match that to how we see our footprint, how we see the need for productivity in our operations, and therefore from that is the, a need to do additional things. The reason why we have more opportunity in industrial than automotive, and why automotive has done more than industrial, is actually automotive has a better footprint from a global manufacturing five years ago, 10 years ago, than the industrial business.
Basically, if you look at industrial, I would say with the exception of one factory in Asia, they never really had... No, two factories in Asia, which was also a joint venture. They basically, one was a joint venture. They never had a footprint in the Asian region. We've now put that in place there to support it. So now is the time for us to look at our industrial business and see can we get a better picture there. So yes, that's something that, that's on our agenda there.
It's not something I could say today, we're going to do something, but I think this, it's not just the market demand situation just now, it's the implications of what it could be in the next three-fou r years in terms of market demand, that should drive what your manufacturing footprint should be, and that is something, yes, we will look at.
I'll get back in line.
Okay, Anders Fagerlund, Swedbank. I have a question regarding China. How do you look upon the underlying demand, excluding wind power and railway?
Yeah, I'd say, again, as I mentioned earlier, wind power, railway is one thing. Let me just talk a little. Wind power, I think, as I said, as we go through the year, it will improve, especially second half. Railway, you go through phases within the railway business, and I think even maybe earlier than the second half, we will see railway improve because I believe we will see tenders coming out, if especially the freight car side. I'm not so sure about the passenger coming out there, so it may come a little bit better. Underlying demand in total, cars, as I said, wasn't as strong in the fourth quarter for us. Also because I understand there were some incentives that were in place for certain larger type vehicles that were lifted off in the fourth quarter, towards the end of the fourth quarter.
I think the general industry, it depends what industry you're into. If it's related to construction or building of that, I think softer. If it's general industry, the demand isn't as strong as it was. I mean, it's growing. It's demand, it's positive, but it's not the level of positive it was a year ago, two years ago, three years ago. So it's still positive, but it's not the same. And I think that is because the liquidity situation is hitting not just the new buildings, et cetera, but just the general flow of money there.
I understand that the Chinese government are now starting to take steps to ease off the reserve requirement on banks, et cetera, but, but I think it has slowed the overall level of growth, and I expect China growth to be less this year than it was last year.
Okay, but you expect the wind power market to recover quicker than the railway?
No, no, other way around. Railway before wind power. Sorry.
Okay.
Railway being freight car, to be clear. Yep. Other questions from here before... One more from Peder. Absolutely, there's one more.
50-51. But you mentioned that the inventory reduction was two-thirds of finished goods. And I just trying to grasp sort of the leverage on the inventory cuts. If we assume that you underproduce the same amount in SEK in the first quarter, I mean, you said you're not going to do that, but if you assume that, is it fair to assume that.
Let me say, I wouldn't, but just the same, I said I wouldn't... The inventory reduction would not be the same in the first quarter.
No, but, but okay. So the inventory reduction.
The raw material we've taken.
It's gonna be SEK 500 million as of Q4.
Right.
Is it fair to assume that the leverage on that particular reduction in SEK, hitting the EBIT, will be less, given one, it's more automotive now, maybe on ahead, two, it's also sort of the first phase? Or is that totally wrong?
I think we'll still see a fairly hefty leverage in the first quarter. I think it takes a couple of quarters for us to, to clear. The same way as if you go back, end of 2010, first half 2011, it took us time before we had the good tailwind, we had the sweet spot before we got the hit of, of, of needing to take up labor costs, other things, et cetera, to do things. I think it takes you a couple of quarters. And I said that in October, a couple of quarters before you can get adjust your cost base properly. So I think we'll still see an impact in the, in the first quarter. Will it be exactly the same as the fourth quarter? I cannot say, but it won't be a hell of a lot different, I don't think.
Thank you.
Sure.
Can I just follow up on the Chinese growth question? Given slower growth, do you see any change in competitive behavior in the Chinese market in terms of more aggressive pricing?
Not seen that. We've not seen that, no. It's quite a competitive market already, to be honest, because also it's a somewhat different market from other markets in that there are different market segmentations, performance related in that market. You've got a very lower performance market, the middle performance, and then the high performance area. So there is always a little bit of a gray area between these two there. So it's a slightly different market than what you see in Europe or North America, but we've not seen any more aggressive behavior there. Take the phone.
For question. Hello? Yeah, time for questions, from the phone, please. You can go ahead.
Thank you. If you do have a question at this time, it's star, then one. Okay, our first question comes from the line of Nico Dil from J.P. Morgan. Please go ahead with your question.
The first question is really around the destocking. Did I understand you correctly, that you intend to stop the destocking in Q2 of 2011, so we should start to get a clean margin there? If I, if I calculate the destocking impact on the automotive side, is that about 250 basis points negative this this quarter, Tom? Is, is that sort of in the right category? Second question is around the industrial division. You highlighted some restructuring about a couple of weeks ago, SEK 100 million. Could you, could you tell us what that's, what, what you intend to improve here with that restructuring expenditure? And then, last question here is around the industrial division. Effectively, manufacturing customers in Europe seem to be doing okay, despite IP being down quite a bit.
Could you sort of highlight to us whether you think that industrial division could deteriorate a little bit from here in Europe, let's say in Q2? Or do you think that we're roughly troughing there already, and we could actually improve a bit?
Let's take the inventory situation question first, and I hope I got all your questions. If I didn't, Nico, you come back to me. If I take the inventory situation, yeah, I believe we will run production below sales in the first quarter. In the second quarter, I think in order for us to be ready for the summer, I don't see us doing that. But as you say, it's more a clean area there, but maybe let's see where the level is, because remember, compared to the second quarter last year, second quarter 2011, we were running production well ahead of sales... So there will be an impact year-on-year, still within that there. In terms of the inventory reduction in automotive, I've not done the calculation.
I'm sure you can calculate it through there. I don't want to give a margin figure for that. But you can. I've given you the ingredients to be able to do that. As I said, roughly two-thirds of the inventory reduction was related to the automotive side, so you can do a quick calculation on that, and you see that impact. I think, actually, if you actually look at our results in the fourth quarter, and then look at that against your expectations or the average, the expectations, the one that was out was automotive, really. The other ones were broadly in line.
Uh-huh.
The, the, was out was automotive, and that was because of the, the breaking we did in manufacturing and the mix of business they had with VSM, et cetera, there. That was as say. The industrial business in Europe, I think the industrial businesss in total, if you actually look at our arrows, our industrial business in Europe isn't, as in another, isn't dropping off at all.
Exactly.
Our industrial business across all the major areas is holding up very, very well. We see some improvement in some segments, some, maybe lower than others, which are in the same segment in other areas. But generally, our industrial business, I think, is holding up very, very well in total there. And you can see that, as I say, from our sequential arrows, and that applies in Europe as it does in North America. What was another question?
Hundred.
Sorry. Oh, the 100 restructuring.
Yes.
40 of that was in impairment, if I remember correctly, and SEK 60 was small steps we were taking in different places. It's not enough to write home about. I actually think if it had only been SEK 50 or SEK 60 restructuring, we probably wouldn't even have mentioned it. It was because we also had the SEK 40 impairment. It became a SEK 100 that we came out with the figure.
Thank you.
It was small things. There wasn't any big thing there, Nico.
Okay.
Thank you, Nico. Next question, please.
Our next question from the line of Arnaud Brossard from BNP Paribas. Please go ahead.
Hello, everyone. Tom, can you please explain what's in the non-divisional EBIT? It contributed positively by SEK 120 million in Q3 and negatively by SEK 350 million in Q4. Correct me if I'm wrong. Can you explain what's in that?
Non-divisional EBIT, SEK -350 in Q4? I didn't see that figure.
I.
Let me look at it, Arnaud. I don't have that figure in the top of my head. What is in non-divisional EBIT is a couple of things. First of all, we have the sales to a peer, the sales within the peer business. The logistics business is outside of the three divisions. Secondly, we have the other costs which we carry in there, which are timing issues between the reporting of the divisions and the external reporting there. But I don't have that figure in my head there. I need to look at that, Arnaud, come back to you on that one.
Okay. Thank you. And one second question, please. How has the antitrust investigation changed the pricing behavior of your competitors so far, if at all?
Nothing. I've not seen anything of that at all.
All right.
Okay.
Thank you.
The next question, please.
Next question is from the line of Ben Maslen, from Bank of America. Please go ahead.
Yeah, thank you. Hi, everyone. Hi, Tom, Marita. Tom, just coming back to your investment that you talk about in the faster growth regions. If I look at Q3 for the fourth quarter, I think your SG&A is growing quite a bit faster than your revenues, which is dragging on the margin a little bit. Two questions on this. Firstly, for this year, is this investment something that you're kind of already committed to, or can you cut back on SG&A in line with the weaker demand environment? And then secondly, kind of bigger picture over the medium term, and if we get into and stay in a lower growth environment, now, I guess the risk is that a lot of companies will have to invest more to kind of drive the growth.
How do you compensate for that, in terms of the margin? Thank you.
Yeah. I think, yeah, if you take the SG&A, one of the steps we've been taking is increasing our sales resources. Our frontline, I mentioned earlier, about 600 new people we put on board during the year, in order to step up our sales activities. A lot of them have come in the faster-growing regions of the world, there, and I think it's important we keep that. So that's not something we would cut back so much on. Of course, there are other things that you can cut back on if you're into a lower demand situation. We see that at the start of this year, but we'd also seen many—it's very automotive driven. And as I mentioned earlier, the drive that we've seen in China, et cetera, I expect to improve as the year goes on.
Mm-hmm.
The industrial business still looks to be at a good level. For me, we will cut, let's say, non-discretionary costs quite a bit, but we will not touch our frontline sales resources. We will not cut back on our R&D because we really believe that drives our growth going forward, and we think that's extremely important for us to keep investing in these areas if we want to get our growth going forward. Remember, we're not into a big downturn that we see in total. We're just saying it's gonna be slightly down year-over-year, so it's not a big downturn.
If, however, you go into a situation where you saw, for example, the Greek situation, the Euro situation, getting even worse, which could then have a knock-on effect in other areas, then we would have to take other steps there. But let, that does—and that's something, of course, that's part of planning, but let's see what we do on that going forward. What... Was there another question? What was the other one?
Yeah, it was, it was more, it was more tied to that, more big picture, you know. I mean, beyond this year-
Yeah.
I f we end up being in an environment where there's less growth and you have to kind of push, push more costs to drive that growth, I mean, how, you know, how do you compensate for the drag you're gonna have on the margin from that?
You've got to be more efficient and effective in our operation. That's where the Business Excellence, Integrated Cost Reduction in our products, et cetera, become very important for us. We need to take some cost out, and we need to move our production to the areas which are faster growing, and move it away from the areas which are more anemic in growth. And I think that goes back also to Peder's question earlier on.
We look into how we can forecast it's going to be over the next three-four years to get a better per region and per industry, so that we can get a better picture as to say, what do we need to do to manage our cost base, and how do we make sure that on one side, 'cause it won't be, to be honest, from my viewpoint, I don't see it being both feet on the brake in all regions.
Yeah.
I see it being in some regions you're braking, and in other regions you're accelerating. Which means in some you've got to invest, while in others you've got to cut back a bit. And getting that picture is something that we're working on.
Just, so in terms of Peder's question, should we assume a few 100 million SEK of charges this year?
I think it's a good idea.
Okay, great. Thanks a lot, Tom.
Thank you. Next question, please.
Next question is from the line of James Moore from Redburn. Please go ahead.
Yeah. Hi, good afternoon, everyone. Hi, Tom. I've got three questions, one on automotive. I wondered if you could help us a little bit with the outlook for the margin. We understand the underproduction issues, but just wondering how you see that develop on a full-year 2012 basis. And another financial question, secondly, could you help us with what the rough decremental margin is on inventory reduction? Are we talking a normal 40-50%, or is it as much as 80% in this near-term breakeven? And then, thirdly, a bigger picture question on emerging market competition. Can I ask about the technology gap? How do you measure it against the emerging market peers? Is it microns of tolerance? Is it durability of working hours?
I'm really trying to get to where is the gap today, and how has it changed over time, over the last decade, to see what the advantage is, if any, at all, anymore.
Okay. If we take the first one in automotive, I think automotive had a tough hit in the fourth quarter, because what we did in braking there was quite hard there. And I think, as I said earlier, that's the area, especially the European business, that will be weakest in the first quarter as well. So I think automotive will still carry some issues. I don't expect it to deteriorate from where it is, but I don't expect it to get better as we go in, at least the start of this year, or significantly better at the start of this year. In terms of the going forward, let me... I don't want to give a margin forecast this year for them, because it depends how the demand will develop in the second part of this year.
But it's clear that, they're taking a short-term hit quite heavily just now, and it links also to your second question, because the other guys hitting it, they've been braking much, much more, and it is quite significant. I don't want to give the figure, but you're, but you are, significant, the drop through very short term, one, two months. In the same way as it's significant, the drop through in the upside when you get that, as well there with it. In terms of emerging margin competition, it depends where you are, I've got to say. The gap, the gap's different product to product and industry, there's still a gap, a clear gap.
It's not just to do with. It's to do with the microns, it's to do with the material, and what you do with the material, and it's to do with the interaction between the rings, the rolling elements, et cetera. That has an impact on how it works. But it is different depending on the different industries that you look at, different products you look at. Give an example. I talked a long time about the truck hub units and what we're doing in the truck industry, and we've been able to get into the industry in China with the big orders that we've got there. I mean, we've developed new units, which will significantly increase the life. We're talking something like five times the life of the existing solutions that they have got in China today.
And that, even that solution we've now put in is something like one third of the life of what you would do in Europe. So it shows the gap in performance between what they've been doing in China, in the truck industry, to what they're doing in Europe or America, in the truck industry. So we're going up by five times the life, but we're still only given with that, a third of the life of the, the, what we do in Europe. And a lot of that's to do with material design, manufacturing ability.
So there is still quite a gap , but the important thing is that we must keep working to realize that there are people who are trying to close that gap from the bottom, and we are trying to do it with our second brand strategy, with our application performance items like this truck hub Unit and our technology on the other end. We're trying to keep a gap there with it there. So I wouldn't say the gap is closed significantly as a broad area there, but I'd say in some areas the gap is closer than it is in others.
Just on that, do you get the sense that the Chinese and the Koreans are kind of doing well and progressing, or is the world thinking, "Actually, we're fed up with bearings that don't work?
No, I think, I think they are progressing. I think we, I am absolutely convinced that in a few years' time we will have a, a worldwide Chinese competitor.
Okay. Thanks, Tom.
Thank you, James. And now I would like to hand over to Tore Bertilsson concerning the question on operations outside the division.
Yeah, just to clear out that question, there's nothing strange in the fourth quarter on that line. Actually, the full year income or result from other operations outside the divisions is some SEK 300 million, and fourth quarter is some SEK 60 million out of these SEK 300 million. And as Tom mentioned, that's mainly peers, some logistics services, and some other minor services as well. So that's absolutely in line in the quarter.
Yep.
Thank you. Shall we take some more questions?
Absolutely.
Okay, good. Next question, please.
The next question is from the line of Colin Gibson from HSBC. Please go ahead.
Hi, good afternoon, everybody. A couple of questions, please. First of all, Tom, I know you touched on this in your comments earlier, but I just wanted to come back to the payout ratio, in fact. It's come down a little bit for 2011. I think it's 41% versus, I think it was 44% for 2010. You have a commitment to pay out 50% over a cycle. Should we interpret a couple of years now of sub 50% payout ratio as, A, caution regarding the outlook? Or, B, your view that it's early in the cycle and that you want to conserve cash for growth investments. So my first question. Second question, just on the European Commission investigation, do you have any update on the likely timeframe of further developments? Thanks.
On the second question, no, not at all. That's what we say in the report there. We don't know when and what we'll come out with there, so I can't give you anything at all on that there. On the first one, I think it's a combination of the fact that it's a combination of both the issues you've put there. One, it's the outlook. There is some uncertainty what will happen in Europe, but I think it's also to keep a stronger balance sheet, to give us the capability to take advantage of opportunities. Because if we go into a more difficult environment, having a strong balance sheet will enable us to take acquisitions and/or invest in the faster growth areas there. So it's a combination of both.
There if, for example, the outlook was much, much stronger, and we saw a growth similar to what we saw in the first part of, of last year, we saw that for this year, then I think then the, the board would have been more relaxed to have maybe increased the dividend even more because they knew that they're into a much more certain growth and Business Environment. So I think it's a combination of the both, the outlook, but also having the position, the capability to take advantage of opportunities, which will come in this type of business and will come if we go into a more anemic growth situation in Europe, for a number of years.
Great. Thanks.
Okay. Should we take one more question or two more?
Marita.
One more. One more question, please.
The next question is from the line of Guillermo Peigneux from Morgan Stanley. Please go ahead.
Hi, good afternoon. It's Guillermo Peigneux from Morgan Stanley. Maybe just a question on costs. Looking into the first half of 2012, any comment on headcount inflation or raw material component inflation into the first half? And basically, how would you think about offset as we move forward?
I think headcount inflation, yes, there will be some there. As you see, there has been the deals being made in different countries of, I don't know, 3%-3% in some markets, somewhat higher, and that especially the high inflation markets there. So, and that we need to offset with productivity. So, that type of inflation, we need to offset the headcount inflation salaries by productivity. We see higher input costs in terms of utilities into our operations this year than versus in last year. When I go into raw material, we've finalized a number of our contracts for this year. We still have a few big ones outstanding that we're working on, and it's a very mixed picture of what we see. We've had some fairly aggressive raw material suppliers, I've got to be honest, into us.
Especially in regions like, for example, North America, where there's a good demand situation, there's been fairly tough take it or leave it type increases that we've had there. In other areas, we've been able to manage a not so significant increase, so it varies from around zero in some areas to a little bit up in other areas, to significantly up. In terms of surcharges, the surcharge level at the moment is lower than it was at the start of last year, in the first half of last year, but a little bit higher than it was at the end of last year, lower than the average of last year. Let's see how that develops going forward.
That's a good point, though. I can say that one of the things that we felt in the fourth quarter, and we get a little bit still carry over in the first quarter, is we were hitting, we were still in the impact of the higher surcharges from the high level of the first half of last year, let's say second quarter of last year. Because surcharges went up a lot in the first two, three months, stayed high in the second quarter, then started to come down in the second half. We had an impact of that on our income statement in the fourth quarter, a little bit less of that in the first quarter, but still the impact of that in the first quarter, yeah.
So surcharges are a little bit up towards the end of last year, but lower than they were in the first part of last year. So let's see how we finalize all the raw material component increases. But for the specialist steel, we've had, as I said, some aggressive ones, other ones around the zero, other ones maybe just a little bit up.
Thank you. So.
What we do is we need to look at that—but that's, that's the base input. Then what do we do to offset it? We have a lot of activities underway on sourcing at the moment there-
Yeah.
T o combine volumes to try and offset things. We've activities underway on ICR, the cost reduction programs that we have to offset it there as well. And let's see if we do anything else on the more external market situation, going forward. We've not made any decision on that yet.
Oh, thanks, Tom. Maybe a follow-up. So is this meaning that if you have headcount inflation, still flowing in sequentially, during the first half of 2012, plus, some of your input costs and raw materials still sort of, well, increasing somewhat sequentially, with volumes flat, and taking out all the inventory effects and so on, that maybe, your, in a way, your operating leverage is still gonna be somewhat disappointed to what you want it to be?
I mean, it's clear our target is to operate at around the 15% operating margin level. We didn't do that in the fourth quarter due to what's happening there. And of course, the actions we put in place, in terms of working in the customers, seeing where we can capture more value from our customers and do more there, managing our costs, getting productivity through our operations, et cetera. All these things are designed to, not on a one-quarter basis, but over a few quarters, get ourselves back towards our 15% level.
Thank you very much.
Thank you, Guillermo.
Thank you, Guillermo, and thank you, Tom.
Thank you very much.
Thank you, everybody, for participating. If you have further questions, you are always welcome to call me.
Thank you. Thanks, everybody.
Thank you.
Thank you.