Welcome, everybody. I would like to welcome everybody here today, and all of you who are linked to us by phone. For the next hour, we will have a presentation and also an opportunity to ask questions about SKF's full year results, 2012. I would like to introduce you to those 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 go on to the Q&A session. We will take you first from the floor here, and then we will go on for those of you who take part by phone. Tom, please.
Thank you very much, Marita. Good afternoon, everybody here. Good afternoon, everybody by phone, and welcome to our full year results presentation. As Marita says, I will go through a presentation, what happened during the year, of course, with focus specifically on the fourth quarter, and then I'll also close by looking at our outlook for 2013, at least the first part of two thousand... First quarter, 2013. If we go for the quarter, first of all, it was we had weaker sales in the quarter.
Volume was down, what, nearly 6% in the quarter, and that was due to the demand situation in the marketplace, but also, we've seen customer distributors destocking during the quarter, and that impacted our sales there, which also meant that we had to break our manufacturing, and we specifically broke our manufacturing heavily as we were in December, 'cause that's also when we saw a drop-off of our sales. During the quarter, we continued our journey to reduce inventories, and we reduced inventories more than planned in the quarter, over SEK 600 million out in inventories in fixed currencies, which was a big step out there, which then also helped us have a strong cash flow. And I think over SEK 1 billion cash flow was a good cash flow and a strong cash flow in the quarter.
As you saw at the start of the year, we also announced plans that we wanted to accelerate and expand our e-efforts to support our initiatives that we put in place in 2010. So e-efforts to reduce cost, but also put our manufacturing in the right place to support our longer term growth, and I'll come back to that in a second or two. And at the start of this year, we announced the acquisition of Blohm + Voss Industries, which again, I'll come back to as well. If you take the program there, the acceleration and expansion of our cost reduction efforts there, it covers a number of things. One, moving production together in Europe, consolidating production in Europe. Secondly, moving production out of Europe into, primarily out of Europe into the faster-growing regions and areas of the world.
We also see the opportunity to rationalize better in our manufacturing, to really get efficiencies in our manufacturing, and we've a big program underway for that as well. And not only in our manufacturing can we rationalize, we can also do it in our support functions. And last but not least, increased effort in purchasing. We see purchasing more opportunities in the purchasing arena for SKF, and so we're stepping up quite significantly our organization and activities in the purchasing area to really leverage the purchasing might that we've got in SKF and the purchasing volume we've got in SKF. In total, that will—this program, where we know what we want to do over the coming years, this program will enable us to take our total costs down by around SEK 3 billion.
And it's very focused, and we know what we need to work on, and we will follow that up and keep you informed as we go along. We need to take about SEK 1.5 billion in one-off costs for restructuring to support that, and you saw the first SEK 200 million of that taken in the fourth quarter. When we complete everything, it'll mean something around 2,500 people will leave the SKF Group as part of this program going forward there. We can maybe come back to that a little bit more in the questions and answers. When you switch to acquisitions, 2 acquisitions in the last 12 months. GBC, we've spoken about, supports our second brand strategy, targets that part of the market we cannot target with SKF. It's running well. We're happy with that.
Good team of people that's part of SKF now. And then, as we announced at the start of this year, the acquisition of BVI. BVI is a specialist in the marine area, and it supports very much our marine business in total. If I click to the next slide. Marine business has been a focused area for us in SKF. It's part of our RSS business. We have around SEK 1.5 billion worth of sales, both direct and indirect, to the marine industry just now, primarily in gearboxes, pods, propulsion systems, bearings, and seals. BVI complement that. Their technology they bring in complements the technology we already have, and with their service network that they've got globally, it also complements our activities.
They've got a good network of service centers in the Asian region that works well together with our network and brings it together in a good way. This acquisition is not completed yet, of course. We have to go through regulatory approval, but we expect to be able to do that during the first quarter, so hopefully, by the end of the first quarter, we can complete this. Good acquisition, strengthens us in a business that we see fits perfectly with our strategy, with our life cycle management focus for the industrial area. If I move on to orders, I'm not going through all the orders. We took a lot of good orders during the year, both in the industrial arena and in the automotive arena. Orders for renewable energy with both Siemens and Vestas.
Orders into the railway business, again, with companies like Siemens, but also good orders in China for the railway business. We strengthened our service business with the contracts with Fibria, LKAB, et cetera. So a good package of orders there. And last but not least, the big one we did for Caesars Palace, for the big wheel, the largest wheel, that will be there. So that's a, that's an excellent business as well. And then for the automotive side, we took some business as well. The bus door actuator, one of our Beyond Zero portfolio, which Volvo has now launched as part of their bus program there, and are out promising, based on the SKF actuator, even their advertising, that based on the SKF actuator, they can give improved fuel efficiency to their customers there.
A number of the other ones for Volvo, for Audi, on wheel bearings, et cetera. Although you see our automotive business being impacted this year, actually, it was probably one of the most successful years we've ever had in taking new orders in our automotive arena, and that will kick in much more in 2014 and 2015 from a business viewpoint. They've really been very successful taking good business during this year. If we look at some other highlights from 2012, our 100 years in China stands out. It's not many companies that can say they have celebrated 100 years in China.
We celebrated that our presence in China, and we did it with the opening of our Jinan factory, with the groundbreaking for a new warehouse, and with the announcement of our new campus that will be operational end of this year, end of 2013 and into 2014. And we'll house a new automotive factory, we'll house our GTCC, our technical center, and our SKF College and Solution Factory. We opened a new facility in Tver, a testing facility. We opened five solution factories. For the green and agenda and for the electric vehicles, the partnership that we've put in place with Protean Electric will be interesting, interesting development.
This is a wheel end motor, very unique wheel end motor that can actually fit into the existing wheel end assembly, but it needs a very rigid component bearing to go with it, and it's only the SKF technology that can support that, which is very good there. A number of other important ones, like our documented savings, et cetera. We also launched a number of new products. You know, we've been stepping up our investment in research and development. A number of new products came to the market, and products with very much a focus on how we can save energy for our customers. For example, the low friction hub bearing unit, which can save 0.3, 0.0, 0.3 grams of fuel for the customer. The bus door actuator I've already mentioned, et cetera, et cetera.
A good year for continuing to launch products to the market, and when I look at research and development as well, a good year for research and development. We spent 10% more in money terms in research and development, and we're up to something around 2.5% of sales in pure R&D now for the group, with a 30% increase in number of patents that we registered last year. I set a target a few years ago to the organization to double the number of patents we had, because we used to do one every second day, and I said, "I want one per day." And I gave them a target a little bit longer than 2012, but they've achieved it already. We are becoming more and more innovative with more and more customer-focused solutions.
That will give us benefits going forward as well. And we launched our new climate targets. We launched our BeyondZero portfolio, where we said we would quadruple our sales of the BeyondZero portfolio products, and you'll see us following that up going forward. We don't have the figures today, but we will follow that up and report that in our annual report. If I go back one year ago in this room when we, when we launched our focus areas for the year, I said, first of all, we have to manage the uncertain business environment. It proved to be more uncertain than we thought. We would focus on profit and on cash flow, and especially on inventory management. We will continue to take steps to strengthen our business through our initiatives, and that we've done.
Continued integration of Lincoln, which is going very well for us. We're really bringing more and more our lubrication system business, their business together and going to market under the two brands, which is being successful. We're bringing the R&D together in a good way. We focused on business excellence and a new organization for the industrial market. And if I look back, even if it's been a tough year, I would look back and say, "We can tick the boxes against the focus areas we put in place there." It was a tougher business environment, which meant we had to hit our brakes in our manufacturing much more, but we did that, and we were able to significantly reduce our inventories by doing that. Now, let's go on a little bit further and look at some of the figures that we presented today.
2012 full year results. Sales were down in local currencies, 2.5%, so only slightly down, but that doesn't really show the trend that really happened during the year. It really weakened as the year went on. It weakened in the industrial market. Automotive was weak at the start of the year, but it really weakened in our industrial business as the year went on. And you see a very different picture around the world with the Americas being strong, both North and South America and Latin America, but Europe and Asia have been weaker, and I'll come back to that a little bit more. We reduced our inventories down to under 20% of sales. I can tell you now, we took, during the year, something around 1.2 billion SEK out of our inventories during...
In fixed currencies, during 2012. And that really has put us absolutely on the right track of what we needed to do to make ourselves more efficient in serving our customers and do it with less capital tied up. It was a big step, and half of that, over half of that came out in the fourth quarter. Look at the organic sales growth, the chart there, when you see that. You can see basically the trend, where we changed actually in the middle of 2011, where the volume growth started to ease off quite a bit. And that came, first of all, from our automotive business. That was the first business that started to go down. Then, as you went through 2012, the industrial businesses eased off as well.
If you look at that from a geographical basis, and you look at the fourth quarter, first of all, and then I'll talk a little bit about what happened in the industries in the fourth quarter. Let's start with North America. North America, we were slightly up in the fourth quarter in local currencies. We had good sales and good sales growth in aerospace. There we still grew in our car business in North America, so these were positive, and our industrial distribution business held up very well in North America. But our other industrial businesses, our heavy truck business, vehicle service market, dropped off in the full year, but also particularly in the fourth quarter.
If I go down to Latin America, in Latin America, very good business for cars, very good business for the vehicle service market, and very from a Brazilian market viewpoint. We also, industrial distribution held up very well, and Latin America became the sort of star for us in terms of growth in the fourth quarter. Brazil was strong, Argentina, very strong for us. Chile and Peru held up very well also. If I switch over to the Asian marketplace, down 11%. I think Asia is the one that's been the... If you look at it from a regional viewpoint, a disappointment for us the whole year. But what you can see clear signs that that's leveling off now in a number of markets. You can see in China, it's leveled off for us. The decline has balanced out.
In India, it's leveled off for us. Malaysia, Thailand, we see some growth coming up. Taiwan, not yet. Taiwan's still going down, especially for the machine tool business. Indonesia, that was down at the start of the year for us, but started to improve at the end of the year, with two-wheelers particularly improving. If I go back to China, what was good at the end of the year in China? Our car business in China was good. Combination of two factors, incentives in place for some of the big customers, like, for example, Shanghai GM, they had incentives in place, so the car business was good for us. The railway business for the freight cars was good for us at the end of the year, and will continue good for us at the start of this year.
There's a big contract that came out, if you remember, during last year. Vehicle service market held up pretty well also in the China market. Industrial business, renewable energy, still very, very weak in China. There are some indications now that's starting to move ever so slowly, a little bit better at the moment there. It's too early to say a recovery, but there's some orders starting to come in renewable energy in China for us. Railway business will be good going forward in the quarter as well. General industry, drives, pumps, compressors, et cetera, industrial distribution was weak in China. In India, car business was good for us. Vehicle service market business was good for us. Actually, sales to the off-highway in India was good for us.
The other industrial areas, not, not so strong, not so strong at all. Let's close up by looking at Europe. I think it's easier to say what was good in Europe at the end of the year, which was basically aerospace was good, continued well for us, and the vehicle service market. If you remember, the vehicle service market has been one that's been disappointing for us in Europe for quite some time, showed signs of bottoming, just a little bit of growth in the fourth quarter. It's a lower level it's growing from, but a little bit of growth there. And I say aerospace continued well. Then outside of that, our industrial distributors were very cautious in the fourth quarter, not buying a lot, reducing inventories in their business. The industrial market went down quite a bit in the fourth quarter.
Metal, energy was weak, which had been good for us earlier in the year, was down a lot in the fourth quarter for us, but really quite broad-based across all of our industries. Car business, poor. Truck business, poor in the fourth quarter. And then you go to the full year figures, and again, the Americas, as I said earlier, were the star for us, growing well, and then Europe and Asia Pacific showing declines. If I look in the components in sales in the table here, you can see the volume down nearly 6% in the fourth quarter year-on-year. Price mix, now you can see the last two quarters at 0.5, 0.7. Maybe I can make a few comments on that for going forward.
I think we've got to get used to price mix in this sort of arena going forward now. At the moment, where we are not moving prices in the market, our price mix will come primarily from mix. New products that we launch to the marketplace and mix between the businesses. So I think that will be a tougher, tougher figure going forward at this moment with the business environment that we see just now. Structure was positive by 1%, which is the GBC coming in, offset a little bit with the distribution business in Australia and New Zealand, which we divested. So growth in local currencies from the year to here, down year-on-year by 2.1%, if I bring in the structure there, 2.5%, if I exclude it there. Operating profit dropped off a lot in...
As we went through the year, and especially in the fourth quarter. Basically, what hit our fourth quarter operating profit was the combination of lower sales, lower inventories, taking over SEK 600 million out in inventories, and basically, the both feet we put in our manufacturing, especially right at the end of the year. Our factories were closed very early in December, so we really had long shuts for many of our factories in December, and that really hit us from an absorption viewpoint in our manufacturing. And that's the big impact to get us down to before the one-time effects. They are really hitting the brakes in our manufacturing.
As I say, the combination of 6% lower volume in our sales, combined with over SEK 600 million out in inventory, was what impacted the margin in total there for us. For the full year operating margin, running around the 12% level, excluding the one-offs, with SEK 300 million one-offs in the fourth quarter, SEK 140 million one-offs in the second quarter, so around the 12% level, which in the long term perspective is not bad, but not the level we want to be at in SKF.
So it was for us that the 12% margin was, as I say, long term, pretty good, but things we need to work on to get back up again, to hit our longer-term margin target of 15%, which also explains why we're accelerating and expanding our cost reduction and efficiency efforts. Per business area, well, if you look around this picture, let me start with the better one of the one. Regional Sales and Service held up very, very well during the year, running around the 12.5%-ish margin for the year. Held up very well, and that's obvious. They don't sit with any manufacturing, so when you break the manufacturing heavily, it doesn't really impact their business. Strategic Industries went down quite considerably.
Over the year, we, we took, as I said, in fixed currency, something like SEK 1.2 billion out of inventories. Of that SEK 1.2 billion, something like, 70 plus, 70% or so came from Strategic Industries, so that's what hit them as well. The remainder came from our automotive business, which went down and went into negative figures in the fourth quarter due to the breaking we put in manufacturing, and particularly at the end of the year. Clearly, that level is not acceptable, and we need to get the, them, back up, going forward, and that's our intention during this year, to see automotive come back up and start their climb back up the operating margin trail, as it is, of course, for Strategic Industries. Inventories, yeah, down to 19.9% of sales.
You might have expected a little bit more when one considers the over 600 million that we took out in fixed currencies there, but of course, you've currency impact in the inventories and impact in the sales, et cetera, which did this. But it's a move in the next right direction, I think, and a right step for us going forward there. Return on capital employed down at 16.2%. That's something I'm going to come back to during this year. Yeah, it's well below our target level there, and clearly, that's something we need to turn around as well. But I think the 27% target figure is a tough target figure to get to with the acquisitions that we've been making.
So let me come back little, little bit later in the year, and also on how we see that going forward. Cash flow, I mentioned earlier, was strong, in the fourth quarter. Over SEK 3.5 billion for the year, if I exclude acquisitions and divestments, SEK 4.1 billion-SEK 4.2 billion. Sorry, if I exclude the impact of acquisitions and divestments, SEK 4.2 billion, include it, SEK 3.5 billion. So I think a good cash flow, and you get good cash conversion, from the group in total. Net debt, declines as well.
If I look at the debt structure, if I move to that slide, you will see those who've already looked into it in detail, that we. Remember, we launched these bonds in the third quarter, and we said we would take steps to repay some of our debt. We repaid EUR 131 million of our debt for 2013 in the quarter, and we repaid EUR 30 million of our 2014 debt in the quarter. So we started to repay that debt, and we've got a pretty good debt structure there in place. Of course, when we repaid this debt here in this, it had some impact in our financial net in the quarter as well.
So you look at the fourth quarter in total, yeah, 8.2% operating margin, 10.2%, if I take away the one-offs, in total. Over 1 billion SEK worth of cash flow, and for the full year, as I said, 3.5 billion SEK worth of cash flow, and earnings per share of around 10.37 SEK. Let's probably switch on to the thing that's of more interest to you. How do we see the market? Let's start with the arrows there. Actually, when you look at the arrows, it's a pretty boring picture, looking at that there. Everything looks relatively flat, and that's how we see that at the moment. If we look at our business now, we saw, as I say, a weak fourth quarter, and we saw a particularly weak December.
But if we now look into the start of this year, and we look forward what we see, we see for all of our regions that we're going to stay more or less on the same level, going forward sequentially. It will still be tough year-on-year, because we're going against a tough quarter last year. So we'll be significantly down in Europe, slightly down in Asia, Pacific year-on-year, and flat in North America and Latin America, which means the group will be lower. But sequentially, we're staying round about that level, both from a regional viewpoint, but also from the business area viewpoint. What does that tell you? It looks like we see some slight stabilization in our business. But I want to stress, that is our first quarter outlook, and that is our outlook on demand on SKF there.
How does it look going forward after the first quarter? Let us come back to that time. There's still a lot of uncertainty out there. A lot of positive news you read in the newspapers, but there's also some uncertainties out there. For the first quarter, though, we see that we expect it to be a relatively stable development sequentially, even if it's going to be lower year-on-year for the group in total. Lower in automotive and in strategic, a little bit lower in regional sales and service. If I look at it from the industry viewpoint, the sequential development, two areas up, aerospace and two wheelers. We've got a good trend underway in our two-wheeler business in Asia at the moment, and aerospace we think will continue up as well. Trucks, we think, will be down quite a bit.
Our truck business, as you know, is primarily a European business. We have an Indian business, but it's primarily European. We believe that will continue to go down there. And then for all the other areas, it's up and down there. And I'll pick one out from the other segments, the cars and light trucks. Behind that flat arrow is an interesting picture, because you really see a different picture if you look at USA, Latin America, Asia versus Europe from a development viewpoint. But you've seen a big drop-off that's taken place at the end of the year, and we don't think if you look sequentially, that drop-off will be much. Will continue. We think you'll stay around that level.
There'll still be a drop year-on-year, but it will stay around that level in total, and that's what we see for all the different industries. Guidance from a financial viewpoint, the tax level should be around 30%. Now, you may see we had a very positive tax in the fourth quarter, there. It was nice to have not a minus on the tax line. It's not very often you get that, but it was nice not to have that. And that was primarily due to the fact that we have brought back an intellectual property in the group and centralized that in Gothenburg. And due to that, and due to a deal there with the tax authorities or-...
agreement between tax authorities in Malaysia and Sweden, we've been able to register that as a positive there, which meant we had a positive tax in the fourth quarter. Going forward, around about 30% is sort of normal level we should run it. Financial net will be around about SEK 200 million. Currencies, minus SEK 50 million for the first quarter. It was minus SEK 50 million on our results, I should mention that, for the fourth quarter, minus SEK 50 million for the first quarter, SEK 250 million for the year. Plant and property, we think around SEK 1.7 billion for the year, which will mean it's running just a little bit below depreciation and amortization for the group, which I think is good. We're holding that fairly tight, just now.
Even if we are investing in new facilities, we're holding that pretty tight just now due to the uncertain business environment. If I put all that together and combine together the result for 2012 and the outlook that we've got, that's enabled the board to basically say that we will keep the dividend unchanged at SEK 5.50 per share. And that's what we will propose to the annual general meeting in April. One comment. One of the things we're focusing on just now, and I talked about this at the summer, and I said I'd come back to you at the start of this year, is our new IT systems.
We're putting in place a fairly comprehensive change to our IT systems for demand chain and finance, how we interface with customers, with suppliers, run our factories, how our finance systems work. It's a big undertaking. It's a multi-year project that, that we're running. In the fourth quarter, that had an impact of about SEK 50 million on SKF. Going forward, I would say this year, the cash flow impact on us this year, we estimate will be roughly SEK 500 million, cash flow impact, of which around SEK 300 million will be capitalized, so it will go on the balance sheet. Around SEK 200 million net will, will hit us.
You may say, "Why is that for the profit statement?" You may say, "Why is that not different to the fourth quarter?" That's because, because it's 50 a quarter still, even though we're ramping up the program, because we're saving money in other areas. So that's a net effect from us saving money in other areas. The first rollout we won't do until 2014, and then another big step in 2015. So this year, somewhere around SEK 500 from a cash flow effect, of which SEK 300 will be capitalized on the balance sheet, SEK 200 will hit the profit statement, roughly 50 a quarter there. Next year, it'll be a bit more than that, and the year after, a bit more than that there.
So you're going to see a higher figure in 2014 and a little bit higher in 2015 as we do the rollout on that. But this year, around SEK 500 million. Last but not least, focus areas for us, 2013. Of course, we have an uncertain business environment. It's relatively flat sequentially just now. It'll be down lower year-on-year, but it is still uncertain. There still is a lot of things to be corrected out there. What will be the decision on the debt ceiling in North America? How will the new government stimulate things in China? How will the European market develop? So there's still some uncertainty out there, and we will keep a strong focus on profit and cash flow.
I can say we will run manufacturing broadly in line with sales in the first quarter, so we're not looking to take further inventory out in the first quarter, but we still want to focus on profit and cash flow. We'll continue to work on the initiatives we put in place in 2010, the three initiatives to drive our growth and to drive our cost improvement. So we're working on building new factories in Mysore. The Mysore factory is built. We're in ramp-up mode, and we have a new factory in Bengaluru for lubrication systems. We will open a new warehouse in China. We have a new campus in China of the activities I mentioned earlier. Integration of GBC and BVI, very important. BVI, as I say, we hope to close in the first quarter.
The big program to accelerate cost reduction and efficiency is very important for us. We see new IT systems as being a key area. We have a tough step. I've read of so many stories of implementing IT systems, and you never normally hear lots of positive stories of putting IT systems in place. So trust me, we're trying not to repeat other people's mistakes. We'll make our own in doing this, and hopefully very few of them. And then business excellence is in focus and will continue to be in focus because that's a way of using this power of our people to really strengthen SKF in total. So in summary, I'd say a difficult end to the year because of a difficult market environment.
But overall, when you look at the year, if I take one off away, 12% operating margin with slightly lower sales by taking SEK 1.2 billion out of inventories, and a strong cash flow before acquisition, divestment of SEK 4.2 billion, I think was a reasonably good year for the SKF. Of course, we set our sights higher, and so we need to, to drive, our business going forward. But I really believe the organization got a very clear focus on our initiatives and how we can strengthen SKF, going forward. With that, just one comment on, on the first quarter.
Yep, flat business sequentially, down year-on-year, run manufacturing in line with sales, so we don't take inventory out, and let's see how the rest of the year goes, because there's still, as I say, some uncertainty out there. With that, I'll close and take questions.
Thank you very much, Tom. So now it's time for questions, and first from the floor, please.
Yes. Thank you. Peder Frölen, Handelsbanken. On the savings-
Yeah.
Maybe, to start with, could you reveal whether you have sort of saved something during the quarter on short-term working schemes, that type of capacity-driven savings, and what we could expect of this savings programs? Is it all structural or partly capacity driven? Secondly, more importantly, what is the real difference in this program compared to SEK 200 million per year?
Mm.
I mean, obviously, you need to restructure-
Mm.
- fine-tune your-
Mm
... your enormous production base,
Mm
every year. So, what's the difference? And maybe you could talk a bit-
Yes
- about how revealing and capture those savings?
Sure. I think, first of all, yes, there was some savings in the fourth quarter due to short time working. I don't have the figure in the top of my head, but there was some savings in that, but it was more than offset by the impact of really hitting the brakes in December, to be clear. We took some people out in the fourth quarter. You've seen that in our figures. We have, at the moment, something like 3,800, 3,900, in that area, temporary agency workers, still run good. So we still have some flexibility there. Yeah, what's different from this program? I think it's a much more broader program. We put together a complete program, and it doesn't just focus on manufacturing.
Of course, two elements are the consolidation in Europe and the move of production. That was something we planned over a longer period of time. We're really bringing that together as one program and driving that much harder. Secondly, we have looked at our whole structural support costs in SKF. That's the cost that support our business, whether it be in finance or HR or communication or all round about there, and that is something that was not part of the other program, and that we're looking to rationalize significantly. The third element is the purchasing bit. I mean, there are SEK 3 billion savings for a SEK 1.5 billion investment. That's a much heavier ratio than we've had in the past, and purchasing plays an important role in that.
That means centralizing our purchasing from around the world into one much stronger, much more professional purchasing organization. So these three elements, I think, put into a much more complete program than we've done before. Of the SEK 1.5 billion that's gonna cost us, we did SEK 200 million in the fourth quarter. Of the 1.3 left, I would expect this year. It's not finalized yet, but something like half, maybe a little bit more than half of that, to be taken this year, and a little bit more of the remainder in 2014 and a little bit less in 2015 there. And by putting it together as one program, I think we'll get a much, much, stronger drive in bringing it forward.
So it's not, it's not dramatically different from a manufacturing to what we would have done over maybe a five-year or six-year period, but it's much more focused and much more compact, what we're doing just now. In terms of how we see the savings kicking in, we'll come up with that as we launch each of the programs, 'cause it depends when we can do the steps that we're doing. When we can do the moves, we'll come out and give you an indication to when the savings go.
Just sorry about this follow-up.
No.
I mean, the cost savings ratio is a bit odd on a production company.
Yes.
I mean, this sort of retirement and all of that...
Mm
... would it be different if you would have sort of 2,500 people? Would the cost saving ratio be different, whether you should have a normal reduction of employees?
I think the cost saving ratio is influenced by the fact that within that the 3 billion SEK savings, there's also purchasing savings in there. So that influences the ratio quite a bit there, and that you get without people impact in it as well. So that's what affects it. Would have an impact if we went for, let's say, not early retirement or voluntary, versus just basically pushing people out? Yeah, the cost may be a little bit different, but I think it wouldn't be dramatically different. And, and I think it's right to use the proper tools that we've got. If you look at what we did in the fourth quarter, a lot of that was due to voluntary agreements, early retirement agreements, and I think that's the right way to do it.
Thank you.
Yeah.
Thank you, Peter. Any more questions?
Mm-hmm.
Yes, Anders Schüssen, Swedbank. I just need to understand a little bit about the fourth quarter development.
Yeah
... when it comes from the divisional breakup and one very big corporate item post, item. You had a positive-
Oh, yeah
... corporate line.
Yeah, yeah.
Also explain a little bit about the downturn in the automotive. What is under absorption and-
Mm, sure.
Yeah.
Let's take the first one. You, you're talking about the when you add the three business areas together-
Yeah
... you get one figure, and the group's got another figure.
Exactly.
Yeah.
You had a very big positive.
Yeah. Two things. Two things impact that. Firstly, we had about SEK 145 million outside of the business areas of profit from the other businesses that are outside the business area in the quarter. GBC, logistics, and the other things that are not part of the business areas. The second thing is, and I think it was something close to 120-ish, just a little less than that, I think, came from... When you go back over the last two years, you'll see we were building inventory. And as you build inventory, the way we account for that, we tell you, we take the inventory, we get the benefit, then we've got it - we only get the benefit from a group viewpoint when we sell the inventory, so we have big negatives. The opposite happened here.
Using the same principles, but the fact that we took out over SEK 600 million in fixed currency in the fourth quarter of inventory meant that we get that benefit there when we take it out there, 'cause we're selling goods that previously been produced at a different cost level there. When you put inventory in, you get the benefit in the business areas, but you have to take it away at the group level. You get a negative when you consolidate in group level, and you get the opposite here.
Oh.
That's the major factor. There's some currency impact in there, but that's the major factor. And if you need more details than that, Tore can go into it, but that's the...
Okay
... that's the layman's answer to, to what it is.
And then-
You see that last year, you see the opposite, if you actually look.
... and then a little bit about the automotive development.
Yeah.
the under absorption issue.
Both in automotive and SI, there was under absorption. If you take the over SEK 600 million that we reduced in inventory, something like two-thirds, 60% of that, a little bit more was finished goods, a little bit less was raw material and components. Remember, in the components, there still is some impact in our manufacturing because that's work in progress, so it's not just bought stuff there. And roughly 60%, from my memory, in the fourth quarter, was in the industrial businesses and 40% in automotive in the fourth quarter. So you had under absorption both in the automotive and the SI business. As I said earlier, you don't see that in RSS because they don't sit with the manufacturing. They take inventory down, but it impacts SI and automotive from a manufacturing viewpoint.
Do you have-
Okay.
Hm? Hm.
Yeah, so Lars here from Ålandsbanken . I was going to follow up on the inventory issues.
Mm-hmm.
I mean, you, you did a great job this year, obviously, but necessarily you, you're quite happy with the levels or-
No, no, no.
Not.
No, no.
You decided to run production-
Yeah
in line with sales.
Yeah.
Can you explain that, please?
Yeah, sure, sure, sure. What we feel is we've taken a step down. We took a big step in the fourth quarter. In the first quarter, we said, "Let's keep it in balance," 'cause it's uncertain if in the second quarter, the business is gonna go down further or gonna go up. We see it relatively flat just now. If it's gonna go down more, then we'll take further steps to take our manufacturing down, not only in line with sales, but a little bit more. If it's going up, it's better to be prepared for that going up, so we don't miss the business opportunity. So our judgment call in the first quarter is, let's run it more or less in balance because we don't know, is it gonna go up or down in the second quarter?
Going forward, we have programs in place, looking in our manufacturing, looking in how we order or how we forecast into our manufacturing to take our inventories down further going forward. So I'm not happy at 19.9, but at this stage, we think the right judgment call is, since we don't know second quarter, stay flat, go up or go down, and there's uncertainty, it's better to be prepared, and then we can always hit the brakes again if we need to.
Sure.
That's the logic. May we take some from the phone lines? Do we do that?
Yeah. Don't we have any more questions from phone, no?
We-
Okay, can we go on for the people that are connected on the phone, please?
Thank you. Your first question is from the line of Andreas Willi from JP Morgan. Please ask your question.
Yeah, good afternoon, everybody. My first question is on your, your auto business. If you look at the profitability development over the last two years, obviously, I understand and appreciate the, the destocking, particularly, this year. But still, if you look at auto production in 2012, globally, it's at an all-time peak. Q4 was probably the second highest quarter ever. Your sales are down about 5% from the peak underlying, but it's still a reasonably respectable level compared to 2009. But if I look at your, your profitability, it's kind of down 6%-7% since, since the peak in 2010. Maybe you could just help us to better understand, on top of the impacts from manufacturing and destocking, what's going on in terms of mix and pricing here?
Mm-hmm
and what needs to be fixed structurally.
Sure
... and whether this 8.5% of 2010 is ever attainable again?
Thank you.
Sure.
No, it's a very good question. I mean, I think there's two factors that, in addition to what you've mentioned, Andreas, that's impacted our automotive business. One is the vehicle service market business has gone through a tough period for them over the last 18 months, to 2 years. In North America, it still isn't doing what it should be doing. Europe, as I mentioned earlier, seems to have leveled, maybe slightly positive. So that's one factor that's impacted them, and that was a good part of their business. So that's one element there. Going forward, we have a number of activities underway in the vehicle service market to strengthen our position there. We've seen the first results of that in the Europe already.
Other activities underway in North America to try and turn that trend around about. Although even so, in North America, I think the underlying market is down in North America, we are impacted a little bit more. So that's one, there with it. The second factor that's impacted them is the fact that although the average level hasn't... As you said, has gone down for us in terms of sales, when you actually look at the split amongst the different regions, we've seen quite a big switch in the different regions. In that, you've seen the Asian business growing better, the North American growing, business growing better, which in time will be better for them. But as we've been ramping up the production in these facilities, for example, North America, we had good growth, very good growth.
I think if, if I remember correctly, North American light vehicle production was up, I think it was 18% or 19% this year. We were up much greater than that in North America, but we had to ramp the factory up very, very fast there, so we didn't get the type of profitability we should get out of that business, and it really under absorbed and caused us ramp-up issues. We also had some ramp-up issues in, we're ramping up new production in our Asian area. So that will get better as we go through 2013 into 2014. And then the third thing is the, the change in mix of the business they've got even in their OEM.
I mentioned earlier, we've taken a lot more new business with a lot more products, there, which have got better profitability than the business that they're leaving. So these three factors will mean that automotive will move, back in the right direction. This year, we've got to start to get back up into the, let's say, somewhere above the 3% area. We've got to start to take that turn, roundabout and move them up, step by step.
To get back up to the eight percent or so type level is not gonna be a one-year job, but it's something that clearly we need to deliver that type of result over the next two, three, four years within our automotive business to, for them to be an important or to stay an important part of our group.
... Thank you. And maybe a quick follow-up on when you guided for Q3 for Q4, and then we look at the top line in Q4 in terms of market demand, organic sales, it wasn't a whole lot worse. Did you just expect something to pick up into year-end, which didn't happen, that then triggered the destocking? Because the volume decline in Q4 didn't look a lot worse than probably a lot of people thought at the time of Q3.
I think, for me, it was a little bit worse than we expected going in, and it came a lot right at the end of the year. And also, as I say, with what we saw going into the start of this year, I think the biggest issue was we really hit our manufacturing down much more to get ourselves in better shape for the start of this year, in case the... For example, if the fiscal cliff had not been solved in USA, with uncertainty there, and some other issues, we needed to be in better shape going into 2013. So we took a much tougher step at the end of the year than manufacturing. So the bigger impact, yes, volume was somewhat worse than we expected at the start of the quarter.
It came a lot as we towards the end of the quarter, but we then decided to hit manufacturing much, much tougher in the quarter, and that's what impacted our profitability more.
Thank you very much.
Thanks, Andreas. Thanks.
Thank you, Andreas. And next question, please.
Your next question is from the line of Aron Ibbotson from Goldman Sachs. Please ask your question.
Yes. Hi there. I've just got one question. Good afternoon, gentlemen. And that is on this inventory reduction. And basically just trying to reconcile, using your balance sheet currency split, the numbers you are saying. So I get it's slightly higher than the SEK 300 reported, SEK 350 or so, if I take into the currencies, which is pretty similar to what I got from underproduction last year, adjusted for currency. So I'm trying to understand, you know, what is driving this big move in sort of year-over-year declining margins, 'cause you seem to suggest that the underproduction hurt you much more this year than it did last year.
I recall also in 2011, I believe you mentioned that you had to break production quite aggressively intra-quarter, which should have hurt a bit more. So a bit clarity on that would be great. And then also on a year-over-year basis, similarly, I find it difficult to reconcile the SEK 1.2 billion with how I look at inventory, how it's moved in FX, but maybe I've got your split of your way you keep your inventory wrong, so clarification would be great. Thank you.
Well, if you take the SEK 1.2 billion for this whole year, and actually, if you look at the balance sheet, I think the balance sheet's got somewhat different than that. But remember as well, that in the balance sheet, we've got the inventory that we brought in from the acquisition of GBC there, which is in the balance sheet for this year at the end of the year, but not in the balance sheet for the end of last year. Yeah. So that is one difference that you've got there with it. Regarding the fourth quarter, I mean, in the fourth quarter last year, you're absolutely correct. We took a roughly SEK 300 million out of inventory in the fourth quarter last year by running production lower than sales.
When you look at this year, compared, let's say, compared to last year, then you've got two factors. Firstly, you're running. Our sales volume was 5.9%, nearly 6% lower than the same quarter last year. And in addition, on top of that, you took inventory down in fixed currencies by over SEK 600 million there. So what hit the margin is the combination, if you do year-on-year comparison, of A, the fact that the volume in sales was down year-on-year, as in nearly 6%, and on top of that, the inventory was down even more than that. So you have to take the combination of the two-
Yeah.
together into that to look at the total reduction in our manufacturing volume, which was quite significant in the fourth quarter compared to the fourth quarter last year. Adjusted also for the fact that in the fourth quarter this year, we have GBC. We didn't have GBC last year.
Sorry, to follow up. Even if I, you know, factor in a sort of 300 or so, 350 maybe on sort of negative operating leverage, it still seems that this breaking of production is almost 100% operating leverage. You lose, you know, those SEK 300 million roughly, that you've, you know, additionally taken down inventory this quarter. You seem to have lost all of that on the operating level. Is there any other-
But you've got to take into account the lower volume as well, in sales.
Yeah.
So the lower, the sales are lower volume of around 6%. So if we only had run production in line with sales, you'd have taken production down by around 6%. Let's assume with that there. And on top of that, you take the inventory down compared to last year. So you've got to take the fixed cost absorption away from the manufacturing for the drop of sales, plus the drop of inventory.
Yeah, I, I do that, but I get a different number. But that's okay. Thank you.
Thank you.
Thank you, Aron. Next question, please.
The next question is from the line of Arnold Josset from Exane. Please ask your question.
Hi, everyone. I have a few questions. Hi, Tom.
Hi.
Macro indicators are improving, but you say the environment is more challenging. Can you please explain what's becoming more challenging? Can you please also tell us what you expect from the weakening yen and whether you expect your Japanese competitors to become more aggressive? By the way, is this why you expect prices to be flat? Could you also please tell us how much of your SEK 3 billion savings you expect to generate in 2013 and 2014, and what proportion you expect to keep, compared to what proportion you expect to give back to customers? Finally, a small technical question. Can you give us an estimate of your inventory cuts by division in Q4?
Yeah, I think-
Thank you.
Yeah. The inventory cuts by division I gave earlier is around 60% to the industrial businesses, which is a combination between SI and RSS, around 40% to automotive. Regarding the savings, how much we'll get this year, and how much we'll get next year of the SEK 3 billion second savings. No, I will give you that when we put the programs out. There, what we've already said is we'll get something like SEK 150 million from the program we've already announced, just now, and that you'll get from the second half of this year. So the other ones I'll give you then. The third one, regarding the yen, in terms of the yen, no, I mean, our Japanese competitors have manufacturing in many different areas around the world, not just in Japan, there.
So they manufacture in Europe, they manufacture in America, et cetera. So their cost base is not just the yen. Their cost base is in many different currencies, so I don't think that impacts the competitive. It didn't do it before, when the yen was also, let's say, favorable for them, and I don't think it will do it the same. And that's not got the bearing on why we say the price mix are tough. It's the fact that we've not increased prices in the marketplace. That's why I say that the price mix, we've got to get used to this more, this type of level, until such time as SKF changes prices in the marketplace.
On the first question of the challenging market environment, I mean, what we see just now, yes, you see lots of things in, in PMIs looking somewhat more positive, et cetera. You hear lots of things from the financial market talking more positively just now, but I've got to see that in our business yet, and I don't see it. So I still see a, a flat development quarter and quarter, which is what we're guided for, and say, "Let's go through this quarter." And if what you've seen in the PMIs and, and the other statistics translates into demand, then we'll see that as we look at the second quarter and third quarter, and going forward. But we don't see it just now, and that's why I say it's still, uncertain at this moment.
Okay, thank you.
Sure.
The proportion of savings you expect to retain compared to-
Oh, sorry.
the proportion you expect to-
Apologies.
Give back to customers?
Sorry, sorry, I missed that one. I mean, clearly there's always challenges in what we do with customers there, and that will come whether we make the savings or we don't make the savings; we will have that pressure in from our customers. From the SEK 3 billion, I think you've got to look at that as one step to say, "That's something that we're going to work on to save and bring in." And then you say, "Can you take that straight to the bottom line?" No, you can't, and you can't take it because there are other factors that come into play, which is irrelevant to the savings, but other factors that come into play, such as other cost pressures on you, other business pressures, et cetera. Other things you need to invest in.
You can't automatically take that SEK 3 billion and say, "That's the margin improvement you're going to get." It's not to do with giving something back to the customers, it's more to do with the other factors of other cost pressures that you will normally have in your business anyway.
Okay. Thank you.
Thank you.
Thank you, Arnold. Are there any more questions?
Yep. The next question is from the line of Ben Maslen from Bank of America. Please ask your question.
Yeah, thank you. Hi, Tom. Hi, Tor. Hi, Marita. Just a follow-up on the inventory reduction. Tom, I think post Q3, you said that you would normally, I think, plan to step up production in the first half of this year anyway, seasonally.
Mm.
But still aim to pull down your inventory to sales ratio over the course of 2013. Now, is that still the case? If we're at 20% now, where would you expect to be in a year's time? And does the introduction of the new IT system affect the kind of aggression with which you push that?
Yeah. Ben, hi. No, the IT system won't have any impact for what we're doing this year. The first implementation of the IT system will not be till mid-2014, so that won't implement it. Going forward, it will probably help us do things, but it won't impact this year. Yes, we still expect to take inventories down as a percentage sales during this year. What... As I said earlier, what we've chosen at this point is we're not going to, in the first quarter, we're not going to build inventories. We're trying to balance and run inventories in line with sales. And, let's be clear, that's not an exact science there. You're running the inventories, and sales can be very good or drop off, et cetera.
I think particularly, if I go back to the fourth quarter, I'm pleased that we took out that amount of inventories with the drop-off in sales we saw in December. Because we, we really, if sales had kept running longer in December, we'd have taken more out of inventory. So it is not an exact science, so we're running it broadly in line with sales, but it could be a little bit down, a little bit up, but broadly in line there at the start. What we do in the second quarter to prepare for the summer shutdowns, we will judge when we get to the second quarter. At the moment, we don't have any, any views as what we'll do right at this moment.
Normally, as I, as I said before, normally, we would take a little bit of inventory in, in the second quarter to enable us to manage the, the, the third quarter shutdown. Let us judge that a little bit when we get towards the start of the second quarter. But for the full year, yes, we still want to bring the inventories down as a percentage sales. It won't get us to our 18 yet, but we want to bring it down, a little bit more to the percentages. I don't want to give a figure, though.
Great. And maybe, Tom, just to follow up on your answer to Andreas earlier. I think you said, I may have misheard it, that on Auto, margins need to get back towards 8% to stay an important part of the group. I mean, does that... Firstly, was that what you said? And then secondly, is this like a, you know, an almost kind of performance automation for them, you know, over the medium term?
Yes. Well, that was what I said. Yes, that's a challenge.
... Okay. Okay, thank you.
To them, by the way.
To them?
Mm-hmm.
Yeah. Okay. Yeah, sure. Thanks, Tom.
Thank you, Ben. Are there any more questions, please?
Yep. The next question is from the line of Guillermo Peigneux from UBS. Please ask your question.
Hi, good afternoon. It's Guillermo Peigneux from UBS. I was wondering about pricing. You commented on this kind of level of pricing going forward, and I wanted to ask whether this is first structural, because you see increased competition in some of your markets you are playing, or secondly, structural, because demand is low and structurally low, therefore, it's more difficult to pass on price increases.
Mm.
Second is regarding China. Can you remind us how much of your sales are going to China and also a level of margins, within your Chinese business now, basically, compared to what you had at the peak, maybe on the first half of 2011?
Yep. Uh-
And then last, and I promise this is the last one, is in terms of the stocking, which is the region that has the stock most?
The region that stuck most, I would say is Europe, because that's where we have our main manufacturing. First, on the question regarding the China. I mean, as you look in our sales, I think Asia in total has dropped to 24% of our sales because of the drop it's seen there. And China probably is now... I must say, I've not looked at that exactly, probably 11, 12, I would imagine, from the top of my head, in that area, of our sales. Margin is still okay in China, and it's not dramatically seems different from what we see, from a group viewpoint, because, remember, it doesn't have such a big impact from the manufacturing. We have a bigger impact in manufacturing in Europe there. So margin in China is still okay for us.
The first point regarding pricing there, no, the reason I say we've got to get used to, at this moment in time, that sort of price mix, is because, in a business environment which is not growing dramatically, then it is tougher to move prices, poor price in the marketplace there. We can our price mix development going forward will come much more from our mix. That is, new products, mix of business, exiting loss-making businesses, mix between the businesses, there.
Thank you. Can I ask, in China, in terms of margins, is it higher than the group average?
The margins are okay in China.
Okay. Just okay, right?
Yeah. They're okay in China.
Thank you.
Thanks, Guillermo.
Thank you, Guillermo. Are there any more questions?
Yep. The next question is from the line of André Kukhnin, from Credit Suisse. Pl ease ask your question.
Good afternoon. It's André from Credit Suisse. A couple of quick questions. One is on the big restructuring program. We've got the target of SEK 3 billion for 2015 and the cost guide of SEK 1.5 billion. Are you planning to come off some of the short-term working schemes to implement this program in countries in Europe? And would that entail kind of extra costs up front? And is that in the SEK 1.5 billion guidance?
Yeah. It's a good question. Actually, it's what's different in different countries. Let me give you this. In Italy, the way to do the structural changes is through the short-time working schemes. That is, the encouragement is to use their, as a first step, the Cassa Integrazione scheme, which is a short-time working scheme. Then you go into Cassa Integrazione Straordinaria, which is the next step, and then you can do the restructuring. So in Italy, you have to go through the... Or the best route, the most favored route, is through that, where you get benefits up front when you do the short-time working, and then you get the full benefit when you do the scheme, or do the reduction.
Whereas if you go to somewhere like Germany, in a German operation, you cannot do restructuring and short-time working at the same time in that facility. You could maybe do it in other parts of the company, but not in that facility. So then you would have to come off short time or not use the short-time working. So we will do both. If it means that we need to come off the short-time working to do any change, then, yes, we will do that, and yes, it has a somewhat impact on us from an operational viewpoint, there, but I don't think that will be significant in the total picture, there. So it's, I've not calculated that in the SEK 1.5 billion, but I don't think it'll be significant.
Very clear. Just a quick follow-up question. Sorry to labor the margin of Q4, but looking at sequentially, sort of as a follow-up from Aaron's question, we've had 170 basis points deterioration, and I realize sales are lower, so we're knock, I think, SEK 120-odd million off for that, for operation gearing from that, and then high IT costs and extra underproduction of sort of run rate-
Mm-hmm.
Getting higher by now, SEK 300 million, so I guess another SEK 100 million for that, but that still doesn't quite get us down to 10.2. Was there anything else in there in Q4 with sort of temporary or unusual sort of nature, maybe some inventory write-downs or?
No. You, you're currency of 50. Remember, you had the one-off cost for the ERP. Both of them, is, roughly SEK 100 million, there. That's one factor that's impacted it. And if you look at it total, and I, if I remember correctly, the total margin decline was 3 percentage points clean, roughly, in the fourth quarter, if I remember correctly. There were clean-
Year-on-year, but I was thinking sequentially from Q3 to Q4, sort of from 11.9 to 10.2.
Yeah, I mean, the production was much, much lower and the sales, the sales mix. Was there some currency impact, Q4 to Q3? Not so much. Marginal, I would think, there was it.
Right.
But the ERP, I think, cost would be one cost there.
ERP, IT costs, I thought you said SEK 50 million.
Yeah, I did.
If I'm wrong.
I did, I did. But there was. I was giving for a 50 + 50, which was year-over-year. I was given the figure.
Oh.
If you compare year-on-year, there was a -50 for currency, 50 for the ERP. That's 100 for the year-on-year. It wasn't quarter-on-quarter, sorry.
... Got it. Thank you very much.
Thank you.
Thank you, Andrea. Next question, please.
Your next question comes from James Moore of Redburn. Please ask your question.
Yeah, hi. Good afternoon, everyone. Hi, Tom.
Hi.
A few questions. On the IT bill, is the SEK 200 million going to be SEK 50 million a quarter, and which line is it in? Of the SEK 600 million destocking, could you say how much is finished goods and WIP? Could you split the WIP out from the 40% with raw materials that you gave earlier? And, of the SEK 3 billion saving, could you say how much is procurement, roughly? Is it a third? How should we think about that?
The ERP cost, it will come in SNA, and you should put it per quarter. I think that's a fair balance. It will be a little bit more to the end, but put it per quarter, that's the easiest way.
I see.
And the reason why it's— Again, I want to stress, the reason why it's 50 this year, and you may say you're ramping up a program, why is it the same as the fourth quarter last year? Is because we have cut back IT in other areas in SKF, so that's the net impact that you're looking at there. So it will come in SNA there. In terms of breaking out from the 40% WIP in components, what was WIP... what was components? I don't have that in the top of my head, James. I'm sorry,
Okay.
When you go into the SEK 3 billion in terms of purchasing. No, purchasing is an important part of that. I don't want to split that out because that then tells my suppliers what I'm looking for from them there. But it is an important part of the savings as well. So it's not, it's not peanuts at the end. That's why it's specifically highlighted.
But I just-
But I don't want to spread it out, if you don't mind.
Just getting back to the IT.
Yeah, yeah.
When you said it's an SG&A-
Mm-hmm.
When we look at the EBIT structure divisionally, would it be in the unallocated line or spread across the three divisions?
Spread across the three, three divisions, three business areas.
And no particular-
No, no, no
-focus on automotive industry-
No, no, no.
and manufacturing hubs.
We'll treat them all equally and fairly.
Okay. Thank you.
Okay. Yep.
We have some questions, still. Is it okay if we go on for a while?
Is that to me or to someone else?
To you.
I'm okay. I'm okay, yes.
You're okay?
I'm okay.
Okay, we take next question, please.
The next question is from Alexander Sherwood of Berenberg Bank. Please ask your question.
Hi there. Yeah, good afternoon. Tom, you mentioned your concern or uncertainty, perhaps with the 27% midterm ROCE target, but didn't come back to it when you said that you might. Is that something you can come back to now and give us a little bit more feel for?
No.
I think you mentioned M&A.
No, I’ll come back to that a little bit. I want to look at that a little bit more once we see a better balance of how we see things in total. What I do know is, for example, if you take the acquisitions made over the last couple of years, they do have an impact on our ROCE, probably 3+ points in a ROCE, a little bit more than three points in a ROCE. And that probably we didn’t look at properly when we did the 27%. But I’m not ready to come up with a new figure. It’s something I’ll look at going forward. We’ll do a balance and maybe towards the end of the year be able to give you a view on that.
It's not one that's high on my agenda at the moment, but it's something I realize that... that we're getting a bigger gap on that compared to the gaps on the other two targets there. And when I start to look into it, it is much more related to the type of M&As and the type of investments we need to make for growth and taking account of that. But I've not done a final calculation on that. It's something we'll come back to.
Okay, thank you.
Yeah.
and then two other, just sort of quick-
Sure.
I guess, housekeeping questions. The reference point for the SEK 3 billion of costs, is that the sort of SEK 57-odd billion in 2012?
Yes.
Okay. And then the IT benefit costs are excluded from the SEK 3 billion, SEK 1.5 billion?
Oh, yeah. IT, IT is outside of that. IT is outside of that, and of course, it'll be more costs in the first few years, and then we'll start to see the benefits going forward. And there is the projection going forward, a crossover, when the benefits become greater than the cost. But, I'd like to get my arms around the program a little bit more and see the first installations to see that that really, really runs properly before I come forward with that. But it's excluded, to be clear.
Okay, cool. And then last one, just quickly, the underlying tax rate into that in Q4, excluding the benefit.
Oh, was close to the thirty, was it?
It was about 30.
Absolutely. Absolutely.
Great.
The benefit was a good benefit, as I said, but it was close to 30.
Great. Thank you.
Thank you.
Thank you, Alexander. We try to take the few questions that still remain.
Sure.
Next question, please.
Your next question is from Sebastian Growe of SocGen. Please ask your question.
Hi, good afternoon, and thank you for taking my questions. First question is just coming back, I mean, to your guidance and the your guidance for Q1 demand. I'm just wondering if there is any seasonality for the group or in particular for the automotive business, as some of your customers may have destocked at the end of the quarter and may restock in Q1. So in other words, should we see the revenue stable in Q1 versus Q4? And my second question would be, I mean, when, when you look at your documented savings, they have gone up by more than 30% year-on-year-
Mm.
But the group operating profit is down more than 20% year-on-year. And just wondering, what is your strategy to better monetize these savings?
Yeah. That's. I think the second one's an excellent question, and that's one of the discussions I've got with my team in RSS, is to say: Yeah, you've said SEK 4.1 billion, but where do I see my share of that there? So that is, that is part of our strategy, and the team is working on it, so that we can, of course, give to our customers the savings, but capture some more of that savings for us, for ourselves. And there is work with our programs that we've got, both the documented solutions program, but also the documented value program we have for our distributors for us to capture more. So there is a strategy for us to capture more there, and I think as you go forward, you will see us capturing more and more of these savings.
But it's a good point. It has gone up quite a bit, and we're giving good savings, and we need to, I think, sharing that somewhat. I'd like the customers to get the benefit, but we need to share somewhat more of that than we do today. What was the first one again?
Just wondering about the seasonality-
Yeah, yeah, sure. Seasonality.
Q1 compared to Q4, does your guidance mean that you expect revenues to be stable quarter on quarter?
I don't think there'll be big differences in the revenues quarter and quarter. It won't be dramatically different in revenues.
Okay, thank you.
Mm-hmm.
Thank you, Sebastian. And next question, please.
The next question is from the line of Eric Göransson of ABG. Please ask your question.
Yes, good afternoon. Only one question that isn't answered. Regarding the Sinovel you mentioned there are renewables in China, Tom. Remind me, have you been able to use that capacity for products to any extent, any other products, or has it been sitting sort of idle completely on the wind side, as an example?
It's not been sitting idle completely, but it's not been utilized as it should be. We can use that equipment for other areas like steel, and paper and that. So it has been used to some degree, but it's not been utilized the way it should have been utilized.
Okay. Thank you.
You're welcome.
Thank you, Eric. If I'm not wrong, we have one last question.
The last question is from Martin Prozesky of Bernstein. Please ask your question.
Good afternoon, everyone. Tom, three questions, please. The first on just following up on China, the guidance for Asia being flat, is that a mix of markets, or do you expect China as a whole to be up, given what we're seeing in rail and wind?
Mm-hmm.
If that's up, does it mean the other industrial businesses fall down?
Yeah.
Can you give us a bit more color on China?
Mm-hmm.
On the Strategic Industries, we obviously don't have a long margin history there, but the margin falloff in Q4 was quite big.
Mm-hmm.
Obviously, there was destock, but the top line was also quite weak.
Yeah.
But given that, I think aerospace is in there, can you give us a bit more color on, you know, why it's trending so, you know, so weakly? Is it due to, you know, the restructuring you've done in terms of the go-to market? You know, is it a loss of focus, maybe, given that-
Mm-hmm
... you're reorganizing that, you know, in that unit?
Mm-hmm.
A bit more color just on that.
Sure.
And then finally on the program, obviously, a lot of discussion already on that. In terms of procurement, how would you characterize your procurement capability today? I mean, I imagine on steel, that's pretty good. So is a lot of the procurement then around less important-
Mm-hmm
... purchases or more central-
Mm-hmm
... kind of non-core raw materials?
Mm-hmm.
Can you give us a bit more color, please?
Yeah. I take the last one first. Yeah. I mean, you're absolutely right. On steel, finished components, et cetera, within our core bearing and seals business, we've got a good focus there. Where you see, though, is quite a bit of our purchases are outside in indirect areas. I mean, we spend, off of memory, something like SEK 35 billion in SG&A, and quite a bit is on, let's say, smaller components or components for other platforms, not our bearings and seals platforms or indirect materials, capital equipment, et cetera. There's a potential, quite significant potential we've already identified, there, to work on. So it's that area we will focus much more on.
Of course, with the strategy we've got within our raw material components, even for bearings and seals, to bring together and reduce the number of suppliers and standardize a bit more, that will give us some benefit, but there's a lot more benefit in the other areas in total. Take your first question on China. I think if I look going forward, I still think China. Yes, railway will be good in the first quarter, but sequentially, compared to the fourth quarter, it won't be much better there. With it, it could be a very good fourth quarter in railway in China. If you look at renewable, yes, a little bit better, but not enough to make a big difference there.
We still think China will be relatively flat, fourth quarter versus first quarter versus fourth quarter. And the reason for that being is the new government is not in place yet. There still is. Even though you're getting positive signs out of China, you look at industrial production statistics or PMI statistics, et cetera, et cetera, we've not seen that really driving through fully into our business yet. So, that's why we see it being relatively flat. We see India, by the way, being relatively flat sequentially as well, and they are the two big dominant forces in our Asian business. If I go to your last question or your second question, but the last one to answer, is on the industrial business there. No, I think it's the mix of business that's impacted them much more.
Have we lost focus? No, I don't believe so. In fact, I actually think we've increased our focus in that business, but the mix of business and we've been heavier hit, especially in the fourth quarter. Renewable Europe dropped off quite considerably to what we'd seen in the first part of the year. Railway China was good, but it wasn't brilliant in the European market. The general industrial business is off high, was down in Europe and North America. The drives business, which is pumps, compressors, and gearbox, that was down for us. So these general business were somewhat weaker in that quarter. But I don't think it's, I really don't believe it's due to the organization. I think it's more due to just the underlying market.
I expect that going forward, not to go down further. I think it's relatively stable going forward, and with the new organization, we should start to leverage somewhat better as we go through 2013 into 2014. 2012 was very much a transition year of getting the new organization working. We will get benefits of that as we go forward, second half 2013 and 2014.
Thank you very much.
Thank you.
Thank you. Thank you, Tom, and thank you, everybody, for participating in this meeting teleconference. If you have further questions, you're welcome to call me after this. I thank you very much.
Thank you.
And goodbye.
Thank you.