Welcome to this conference call for the presentation of SKF's full year results, 2014. This teleconference will take an hour. Here from SKF are our President and CEO, Alrik Danielson, our Executive Vice President and CFO, Henrik Lange, Theo Kjellberg, Press and Media Relations Director, and myself, Marita Björk, Head of Investor Relations. We will start by presenting the results, and then after this, there will be a Q&A session. Over to you, Alrik, please.
Thank you, Marita. Ladies and gentlemen, hello. Today, we released our report for the fourth quarter of 2014. It is my first quarterly report as new CEO, although this fourth quarter was under Tom's tenure, albeit with my support. All in all, it was a challenging quarter with a lot of happening, both within SKF, with our customers and partners, and from a macro viewpoint. Growth for us in volume terms was just under 2%, and basically in line with the expectations we had entering the quarter. One positive highlight was a very good cash flow after investment, before financing of SEK 2 billion in the quarter, which we will, we will come back to a little bit later. As always, we were very busy in the quarter.
We took a lot of new businesses across many industries, as you can see in the report, in automotive, in rail, in renewable, in aerospace, to name a few. You can see the ones we mentioned in the report. Some are large in size, some are important because they mean technology breakthroughs. In our lubrication business, we signed an agreement to acquire a South Africa-based market leader in distribution of lubrication business, with sales of approximately SEK 100 million and 145 employees, mainly service engineers, significantly strengthening our coverage in Southern Africa. This will give us a much stronger capability to service companies in Sub-Saharan Africa. We also continue to receive several customer awards, which we see as a clear recognition of how we are supporting our customers, and interestingly enough, awards are normally linked to business.
We continue to launch several new products covering many customer segments, aimed at improving the performance of the important application for our customers. One example is the SKF motor encoder sensor bearing unit, which provides a smooth and accurate motor control for the next generation of electric and hybrid vehicles. The continued step up of relevant technical development, to be able to differentiate and create value to our customers, is something of high priority for all our businesses going forward. During the quarter, we announced several important changes within SKF, with a clear purpose to strengthen SKF in the future. First, we announced that we will bring our two industrial businesses, Strategic Industries and the Regional Sales and Service, into one Industrial Market as from January 1st, 2015 .
I've personally taken the lead of this new Industrial Market, representing some 60% of the group turnover. The purpose with this change is to even better drive the asset life cycle, cycle to all customers and industries, reduce complexity, clarify responsibilities, and for us to better drive productivity in the business. In addition to staff reductions in the industrial business, we've also decided to downsize our central staff functions and our A utomotive staff. In total, this will improve white-collar productivity with an estimated total reduction of 1,500 employees, representing a seventy-point-five percent of white-collar productivity. These changes have already begun, and the major part of the program should be finalized by year-end. Starting from Q1 2015, we will report the progress in the new structure in the new structuring program.
The estimated cost for this is approximately SEK 1.4 billion, and the full year saving is SEK 1.2 billion, and we aim to have this implemented fully during 2016. The restructuring costs are not included in the 2014 results. By doing all this, we will also close the separate reporting of the earlier announced restructuring program. In the presentation material, you will find more information about this, but let me just quickly explain the logic here. The previous program was built on three main activities. One, consolidation of manufacturing, mainly in the industrial side, where several of the planned projects have been finalized. Some have proven less attractive than we thought, and a few are still to be made. As and when something happens, we will let you know on a case-by-case basis. Two, optimization and productivity improvements.
This was targeted mainly in the S&A area, and here we have delivered according to plan. Three, reduction of purchasing costs. We have consolidated into a strengthened central purchasing function, and we have seen good results so far and continue to see improvements, opportunities going forward. As this has been measured as a gross saving with actual 2012 as a base, we feel it's time to close a separate reporting on this. But you should rest assured, we will drive our strength in purchasing to continue to save money, both on the direct and indirect, the indirect side. The net effect of this will, of course, be seen in our gross profit development. So from Q1 2015 and onwards, we will report the progress in the new structuring program only.
Just to clarify, the changes in the industrial business was a logical step forward, and it's being implemented. In the Automotive Market, we're also working on profit improvements, and we have initiated a review. Once this is done, and we have decided on our way forward, I will present this to the market. All in all, a very busy and successful quarter from an activity viewpoint. As you have all also seen by now, Henrik has decided to leave SKF and take up a position as CEO of Gunnebo AB. I have known Henrik for many years, and I was really looking forward to working together. Having said this, I knew that he wanted to run his own company, and it's not every day a good opportunity that you really want to take appears. So I'm both happy for Henrik and sad for SKF.
Anyway, Henrik will start latest in July in his new position, and until then, he will remain in his current role and help me with a smooth transition to his replacement. We have initiated a search process, and we will announce a replacement as soon as there is one. Now, I would like to hand over to Henrik, who will go through the financials. Please, Henrik.
Okay, thank you, Henrik. Then let me first start with the high-level figures before going into the detail and the demand development. Our sales in the fourth quarter were at SEK 18.5 billion, up 12.6% in the quarter in SEK, and some 30.7% in local currencies. Volume was up, as Henrik said, +1.8% year-on-year, and then we have a small positive additional structure, which is Kaydon. We also continue to have a positive price mix in the quarter, being up 1%, the third consecutive quarter with a positive price mix. From an organic sales development, Strategic Industries developed the strongest, being up 7.4%, with Asia continuing to drive that development. But we also had a good development for Strategic Industries in North America and Europe.
Regional Sales and Service gained some more momentum in this quarter, and was up around 2%, much driven by good development in North America, while Automotive continued their trend and was down by 0.5%. The positive development in Asia continued for Automotive, but sales were down in all other areas. Our Specialty Business was basically flat in the quarter in local currencies. First up, let us look in a little more detail at what happened to demand development, region by region. I will start in Asia, which once again, had the strongest growth. We saw the best development in the quarter in China and Korea, and while India was basically flat. For the Southeast Asian countries, we saw a mixed picture with growth in some countries, such as Thailand and the Philippines, while Malaysia and Australia were flat, and we saw sales decline in Indonesia.
Let me comment specifically on China. We continue to see a very positive development in our sales to industries such as renewable energy, railway, trucks, and the core business. Our sales within industrial distribution developed positively, whereas we still saw some weaknesses in the heavy industry segments such as metals and mining, and also lack of traction in our industrial drives, which is pumps, compressors, and gearboxes. In North America, our industrial business developed well overall, with railways, aerospace, and energy, and also industrial distribution developed positively. We believe that part of the good development in industrial distribution in the quarter was a pre-buy effect. We did not see any real change in areas like mining.
Our Automotive business was relatively unchanged in the quarter in total, as our sales to the car industry was down, while our light truck and business was up, and vehicle service market recovered somewhat also in the quarter. In Latin America, we grew overall, but we saw a weak Automotive business in total, which is mainly in Brazil. Also, our industrial distributor business, which has developed well despite the macro problems in the region, it showed a small decline in the quarter, whereas our direct industrial business was up. From a country viewpoint, Brazil was impacted by Automotive. Argentina was low, but showed positive signs, albeit from a low level. Turning to Europe, where sales were relatively unchanged for the quarter as a whole.
In West Europe, we did not see a positive development in the main markets such as Germany, Sweden, UK, whereas Italy and France seem to have stabilized, and Spain has a slight positive development. In Central East Europe, we have continued to see signs of weak demand in a number of markets in the quarter, particularly in Czech Republic, Poland, Hungary, and Ukraine, whereas Russia continued to develop well. From an industry viewpoint, we saw very good growth in renewable energy and railway, but generally, the two remained lackluster. In Automotive, our car and light vehicle was relatively unchanged, but heavy trucks and vehicle service markets were down. So overall, Europe was flat in sales, but was slightly down in volume. This is in line with all the signals in Europe just now and the geopolitical situation.
So in summary for the group, volume was broadly in line with expectation going into the quarter. We ran production in the quarter at the level to ensure that we take out stock as indicated during the previous quarter. In fact, we took some SEK 600 million inventory out in the quarter, if you exclude the currency effect, which of course strengthened the cash flow in the quarter. So let me turn now to our profit development. Our operating profit, excluding one-offs, was slightly below SEK 2.1 billion, and maybe I can use the bridge here to walk you through the profit development compared to the fourth quarter last year. You have here that the reported operating profit, excluding one-offs, of SEK 1.8 billion from quarter four last year. You can see that we had a number of positives compared to quarter four last year.
The sales volume increase of +1.8% gave us SEK 75 million. Price mix, positive with 1%, gave us some flat year-on-year, giving no effect. And then we have currency in translation, transaction were positive by SEK 300 million, better than we forecasted due to the stronger dollar. We have SEK 23 million from Specialty Business, and then cost savings from the current program of restructuring of SEK 110 million, coming mainly from purchasing. And then you see the negative of SEK 400 million. Now, let me try to shed some light on what this contains. Roughly half is general COGS inflation, and the other half is evenly split between increase in S&A and R&D on the one hand, and currency effect on the purchasing side on the other hand.
That gets due to our reported operating profit, excluding one-offs of SEK 2.78 billion for the fourth quarter this year. Our cash flow was very good, as Alrik said, at SEK 2 billion, which gave a solid 1.9% improvement in our net working capital to sales index, and we ended up at 30.5% compared to our target of 27. As we have mentioned before, we have sorted a number of actions addressing the three areas of inventory, accounts receivables, and accounts payable within the net working capital. Inventory, as said, was reduced by some SEK 600 million in the quarter and fixed currencies, which was likely higher than planned. And then the other effect seen this quarter is the fact that we now are up and running as planned with our pilot in Europe, with supply chain financing.
Now, back to Alrik for the outlook and conclusion.
Thank you, Henrik. So let me move on to the outlook for the first quarter, and I stress, this is the demand for SKF, not an outlook on the market. I think it's increasingly difficult to give an accurate outlook with such a macro environment and geopolitical environment that we operate in just now. But anyway, I will give you my best judgment at present. We expect demand to stay at the same level, sequentially and year on year for the group in total. In Europe, we expect demand to remain relatively unchanged, both sequentially and year on year, and the same is valid for Latin America. In Asia and North America, we expect the positive development to continue and sales to be slightly higher sequentially and year on year.
From a manufacturing viewpoint, we will increase the manufacturing level from the fourth quarter overall, and it will be slightly higher year-on-year, as well as sequentially, in order to be more in balance with the demand, as we took out some SEK 600 million inventory in quarter four. Turning now to look at raw materials, the scrap surcharges just now remain a little lower than the average last year, and they are at a similar level as the end of the year. In closing, I think we produced a result in line with our expectations and manage our working capital well to produce a strong cash flow. We took some very important new steps in the quarter to strengthen SKF with launching the merger of Strategic Industries and the RSS division into one strong customer and technology-focused organization.
We have launched a series of activities to drive white-collar productivity. We have launched a number of new products, gained important new businesses and awards. All in all, a busy first quarter for me and my team. Now, back to you, Marita, and over to questions.
Thank you very much, Alrik and Henrik. Let's go to the Q&A session. Operator, please, open the Q&A session.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. Again, please press star one on your telephone keypad to ask a question. We will now take the first question from Daniel Cunliffe, Liberum Capital. Please go ahead. Your line is open.
Hello. Thanks for taking the question. Just a quick question on the pricing. I noticed the EURIBID is up about SEK 275 million, but FX contributed SEK 300 million, so suggesting that the 2.8% organic volume and price has very little, if any, drop through. If you could sort of help me understand what's behind that drop through and whether that has to do with potential price being weak, and that's price, not price mix. Thank you.
It's Henrik here. I would say that the price mix is predominantly mixed in the sense that our Industrial Business has been growing and Automotive was going down this year or this quarter, sorry. It has, so it's a mixed effect rather than price.
Mm-hmm.
From a bridge point of view, as I alluded to when walking through the bridge, which is also in the support material, from the price mix effect, you see positive there of some SEK 165 million.
Right. But if you could perhaps help me understand in terms of the underlying sort of volumes on that, I mean, is it just seems like a more limited drop through than you would have expected.
That this is an option, which is the average drop through you would see in the business.
All right, I'll come back on that. Thanks, anyway.
Thank you.
Okay. Thank you, Daniel. The next question, please.
We will now take the next question from Lars Brorson from Barclays. Please go ahead. Your line is open.
Thanks very much. Hi, Alrik, hi, Marita, hi, Henrik. Can I just come back to the initial comments you made, Alrik, on the Automotive? I was a little late on the call, but I understand that you've initiated a review here. Can you elaborate on what that entails? I mean, we've heard your predecessor talk about getting the division back towards an 8% margin level. Can you give us a sense of whether you share this ambition, and if not, what you see as the key success criteria for the division and, ideally, what timescale you would expect the division to hit these?
Yeah. Of course, as you understand, if you look at the overall profitability of the Automotive business, it's below what is our expectations and what we want it to be. And we have initiated a review under my tenure now to look at the business portfolio, to see how we can drive productivity, et c., etc. . This is, of course, not something that is so quickly done, so I'm telling you, I have my team working on this. We have Stephane Le-Mounier , the new head of Automotive, who, as you know, comes out of our aerospace business, who's currently with his team, apart from, of course, focusing on everyday business, going through this. So when I'm ready to talk more in detail about this, I will.
At this point, I can just tell you that we are reviewing this, and we're looking at how we can improve the business. That's basically what I'm prepared to say at this point.
That's clear. Can I just clarify how much of the SEK 1.2 billion cost savings from the new savings, savings program come through in your Automotive division, please?
Well, I would say that the, as you understand, this first part is, the main possibility we have in the short term, which you see here, is that we've actually put two businesses together that are serving the same industry, and there, this is the main part, the main part of this. Another part, of course, of this, and I would say that's about two-thirds, probably, of the savings. Then you have a part which is on the general overhead of the group, and there, of course, this will be positive for the business at large. These are costs that, in a way, affect both, two or three of our businesses. And then you have a smaller effect, of course, on the Automotive business.
I would say that's probably not really so important, just for the fact that, as usual, there are here, the Automotive business is already quite lean and there is a you know, that which is typical for the Automotive business, that you're already running a quite tight ship. So, the main part is, as I say here.
Thanks.
Okay. Thank you, Lars. The next question, please.
We will now take the next question from James Moore from Redburn. Please go ahead. Your line is open.
Yes, good afternoon, everyone. Three questions, if I could. The first question I want to ask is on your savings, on the SEK 1.2 billion that you talked about. Could you just help us a little bit in terms of the phasing on the timing of the quarters as to when we should see those savings and the heads leave the business? Secondly, in terms of the inventory move you talked about in the quarter, the SEK 600 million, excluding the currency, could you say what that added to EBIT in the quarter, and which part of the bridge does it sit in? Is it in that volume number? And I think this goes back to Daniel's question earlier. If it is, then it seems like the remaining volume drop through is a bit light.
And then with respect to that, should we expect a similar magnitude of inventory build coming in the next quarter? And then just finally, on the currency, when you talk about the SEK 900 million, I'd expect it to be about SEK 1.3 billion of positive effect on the group unhedged, based on your disclosure. Is it fair to say that we're talking around a mid or low to mid triple-digit number for a hedge loss, and that that number is after hedge losses? Thank you.
Okay, I'll try to get through them. On the savings program that we announced, the SEK 1.2 billion savings, what we have done, we have then looked at merging the Strategic Industries and RSS into one, and looked at the other areas of opportunity in the big countries with country support organizations, and then also in the central staff. We boil that down to bucket by country, and then we have, as we announced here in Sweden, the announcement of a potential loss of 200 jobs in Sweden, and the ongoing discussions country by country. And as and when they are through, we will announce that to the market and follow that up, so exact timing I cannot give you, but what we say is that the major part of this, when we look at it, there's some two-thirds of it should be implemented this year. That's the plan.
Okay.
Then on the inventory move, yes, the inventory moved down SEK 600 million in the quarter. What we said is that we believe that production, which was run then lower than the demand in the quarter, should be on this level. So there might be some seasonality in inventory build, but not the major part in the plan. So we should rather try to run the production more in line with the demand for this quarter. The currency effect, when we look at the translation, transaction effect, as we say, we see a potential based on the business volumes that we have for this year of some SEK 900 for the year and SEK 300 for the first quarter.
And then we will announce this going forward, quarter by quarter, and who knows where the US dollar is going to be in one or two or three quarters from now?
Sure. But just to be clear on the currency, is that after hedging?
Yeah, that's the effect that we have in our books. Yeah.
Could you help us understand the magnitude of the hedge loss? So the two sides, the unhedged number and the hedged number that you think-
We have previously done more hedging, and we are down to fairly short hedging now, so we don't see any major impact from the hedging.
Okay. Thank you very much.
Okay. Thank you.
Thank you, James. Next question, please.
We will now take the next question from Guillermo Peigneux from UBS. Please go ahead. Your line is open.
Hi. Good afternoon, everyone. It's Guillermo Peigneux from UBS. Just a couple of questions, actually. First, on the savings again, and sorry to come back to the very same subject, but, 1.2 billion SEK, when I look actually to your, let's say, other line, in your bridges, is the same amount as around 1.2 billion SEK that you lost in 2014 in terms of costs. Is this something that, going forward, can actually mean that these savings are actually not top up to your operating profit, but actually rather than running costs for your business, because at the moment, actually, you're not able to generate enough traction?
That's the first question. And the second question is regarding the EBIT impact from, s o from currency, and I was wondering whether you could actually break the SEK 300 million in between translational and transactional. Maybe that's a bit too complex, but otherwise, I'm happy to accept any answer there. Thank you.
On the last one, Guillermo, we look at it from a transaction and translational point of view, but we only publicize the total. So, on total, it's SEK 300 million. On the savings, what we see is, I would say a sizable productivity in this step of taking out 1,500 white collar, and that goes to a saving of SEK 1.2 billion. And you're right, when you look into the bridge of the other, it happens to be the same amount for the full year. So of course, we need to drive productivity in our business going forward, and this is one important step in that direction.
Thank you.
Thank you.
Thank you, Guillermo. Next question, please.
We will now take the next question from Colin Gibson, HSBC. Please go ahead. Your line is open.
Hi, good afternoon, everybody. It's Colin from HSBC. A couple of questions, please. First of all, just following up from I think it was Lars's question about the strategic review in Automotive. When you're ready to talk about the Automotive business, would you also, at that time, anticipate wanting to talk about the 15% group margin target? I guess a lot of people have a bit of a question mark in their minds about whether SKF can achieve that for the longer term. And then just one very pedantic query, please. I think in the press release, you say that you expect higher, quote unquote, year-on-year level of manufacturing in Q1.
I'm sure I heard you say slightly higher on the call just now, and sadly, we get paid to work out the difference between higher and slightly higher. So if you could just clarify, that'd be great. Thank you.
If I start on the more pedantic side, it's slightly higher, and you can figure out, but it's slightly higher. And then I think, Alrik, you can say a few words on the other question.
Yeah, there, there are two questions in that. And, and again, I, I repeat what I said a little bit earlier, that, it's, it's clear that I have to review the Automotive business and the position we have there and, how to move that forward, and that takes, a little bit more work for me than, than just the, the first, time now that I'm sitting here. As far as the targets are concerned, we have the targets we have, and, and, and, and, and this is, this -- that's, that's the comment I have at, at this point.
Thank you.
Thank you, Colin. The next question, please.
We will now take our next question from Erik Golrang from Nordea. Please go ahead. Your line is open.
Thank you. I have three questions. First of all, on North America, 3% organic growth there last year. I think you could have expected that to be a bit higher, given where you had indicators and industry metrics throughout the year, knowing you've had some inventory issues there. But any thoughts on the growth for North America and why it wasn't higher in 2014?
I think that we have seen some growth, but it's in certain areas that we've seen growth and other areas where we have not grown than in the last quarter in North America. But overall, if you read the report, it's fairly broad-based. So I think the indications are there for it to continue up, and that's why we also guide for it to go up. Then you can always ask yourself, should it have been a little bit stronger or a little bit weaker? And that's a judgment. But what I think that we see traction in the North American business, which we believe and also guide that is gonna continue for the next quarter.
Okay. Then on the, you, you talked about effects and the impact on earnings, but any thoughts on the potential impact on the competitive landscape, knowing the Japanese were a bit more aggressive, both the yen depreciation, you've seen big movements in currencies. What's your thinking now on, on, on dynamic changes from, from the recent FX moves? And then the final question, a small one. You had 8% growth in Asia Pacific. What was that in, in, China, specifically in Q4? Thank you.
If you look at the currencies, of course, again, it depends a little bit where, how our competitors have their competitive landscape as far as their where they are producing geographically, in the geography. And I can tell you some of our American competitors, for instance, yes, then we see a stronger US dollar. But if you look, many of them have manufacturing also in Europe, and the same go for some of the Japanese. They're also producing in the U.S. and so forth. So it's a little bit case by case, and it's really difficult to see how that compare also to our own roadmap to tell you exactly what it's going to mean.
But it's interesting, with the big global players, we're all global, we're all in all currency zones, and of course, there will be some arbitrage of trying to put business in the areas where you own better money now. And sometimes in some businesses, it's possible. Sometimes you have factories that are dedicated to a certain market, and it's very difficult to move. So this is a—this was a tough question you came there, with there, and I can't give you a better answer than this one.
Knowing from-
Oh, continue.
Just thinking, I think, with your previous employer, Alrik, you had some, you felt the Japanese were more aggressive in SKF to be a bit more aggressive, where you don't have local manufacturing, and you export from Sweden-based manufacturing, as an example.
Yeah. Absolutely. Yeah, as I tried to say, you know, in some cases, you have you don't make all bearings in all factories. You have some dedicated factory for some certain bearings sometimes. Sometimes you make bearings in more areas. But the big thing is, of course, things like what we're doing, where we're going closer to the customers. You know, we have announced that we will continue to make spherical roller bearings, for instance, in China and so forth, moving more over to that region, to be closer to the market, to have short lead times. And overall, in the short term, that's more what actually makes the difference than just suddenly being able to switch and think you're gonna make a big difference.
Depends very much on the specific loads, on the different production lines, et cetera. But basically, of course, you're right, that with a very weak euro, our European production, in a way, could be more competitive than it would have been with a strong euro. That's of course, that's true.
On your last question, can you repeat that? Because I didn't pick it up.
It was the you had 8% organic growth in Asia-Pacific. Just wondering what that was for China, isolated.
We don't give it out for China isolated, but we saw good growth in China in the quarter, that's for sure.
If you split the industrial versus the Automotive businesses in China?
I think you saw a continuation of the previous trend, where we have grown, well, both in the, on the Automotive side, in the, cars and trucks businesses, as well as on the industrial side, predominantly driven by renewable and railways.
Thank you.
Thank you.
Thank you, Eric. Next question, please.
We will now take the next question from Alex White, J.P. Morgan. Please go ahead. Your line is open.
Yeah, good afternoon, everybody. I've got a few questions. I'll take them one at a time, please. Firstly, just could you quantify how the SEK 600 million Q4 inventory reduction was split between each business area? And perhaps just give us an idea of how much was finished goods versus components.
I would say that it was roughly a 60/40 split of components and finished goods. And then it was evenly split, maybe a bit more on the industrial side.
Great, thanks. And then, Alrik, I guess, question for you, just around how you think about the longer-term organic growth potential of SKF and how that impacts your plans for the level of SG&A and R&D and that type of thing going forward?
Technology is a key differentiator. Of course, we just as Tom had indicated before, that's absolutely key to us, that we have a customer application-focused R&D process. We will continue with that. There's no question about it. That's where in the long run, the battle is between product development and process development. On the other hand, when you look at the traction in the market, this bearings is a product which is everywhere, and even though we have an important share of the market, there is always market to take.
The possibility of organic growth will be, of course, depending on what happens now in the world economy, but it will also be, and then we're talking long term, our ability again to create those products and services that will actually make the difference. You know, from a short point of view, what we've said in our outlook is what we're saying. From a longer point of view, I am bullish on SKF, of course I am. That's why I came back.
Sure. And does that then, I mean, R&D has doubled since 2007. When you look at the results over the last couple of years, are you satisfied that the current R&D is being directed in the right places? And will you be keeping it around this sort of 3% level of sales going forward?
Yeah. I think that we will, for now, the plan is to keep it as it is. And, of course, it's especially in industrial market now, we are focusing on absolutely understanding where best we get the biggest effect for the money in how we direct our R&D. And you can, as you can understand, we've seen that there's a lot of new people coming in due to the fact that the old management retired. And I again I stress this was a natural sequence, and it was not really anything that had any specific was driven specifically by me. This was more of a natural process.
I want to stress that all of the new people coming in into the organization have been filled from within the company. We have not had any external recruits, so you can understand that the people are well familiar with our business and are continuing to driving these efforts going forward.
Maybe I can say something. Those of you who know Alrik from his previous job know that technology was the key part on his agenda in his previous job, and that is sure, I can say, as a colleague of his, in the discussions that we had, that this is key going forward in differentiating us for the longer term.
Okay, that's helpful. Thanks. And then lastly, my final question was a follow-up from Daniel's question at the beginning, just around price mix. Maybe I'll ask a little bit more directly. Was the price component of that neutral, positive, or negative in Q4?
I would say neutral. I would say that it's a mixed effect of a stronger industrial compared to Automotive. It's not that we have seen a positive price environment in the market in general.
But equally, it's not negative. Is that the message?
Yes, that's the message.
Okay, thanks very much for your answers.
Thank you.
Thank you, Alex. Next question, please.
We will now take the next question from Peder Frölén, Handelsbanken. Please go ahead. Your line is open.
Yes, thank you for that. Hi, Alrik. Hi, Henrik and Marita. A couple of questions, if I may. Have the currency flows changed significantly versus what we could read in the annual report from 2013 during 2014? Because I'm, as James, a bit puzzled about the rather low FX guidance. So that's the first question. My second question would be related to list prices and OE prices. You mentioned prices are washed in the quarter, very clear. Ahead, have you, are you planning to announce, have you announced any list price increases for distribution market in either of the markets?
In the price comment that that is sort of flat, that, that, does that mean that the OE prices are down and the aftermarket prices are up?
Well, let me start with the general pricing environment. I think that you know that at this moment, there's not really a pricing environment for a general hike of the prices. Prices is more of actually working the pricing like you do in all businesses all time. Whenever there's a new tender, when there's new possibility, you're looking to improve your pricing in the marketplace. Sometimes actually, you also have to give away prices. I wouldn't say that there's a positive pricing momentum in the marketplace at this point. The market is served.
There are maybe in some geographies, you could see that there is a lack of some niche products, where then you have a pricing opportunity, but it's nothing that you can sort of factor in as a general trend at this point.
As to the currency then, Peter, we look at the flows that we have. There's not a material difference, I would say. Then we have some short hedges, and the net effect is what we estimate it to be, and that's where we are.
Great. That's clear.
And then the US dollar go.
Yeah, that's clear. And my final question, then my third one. On the sort of old restructuring program, you mentioned, Alrik, you're gonna sort of quit reporting that, which is understandable. But could you share some light whether the ongoing actions so will continue. It has been a lot of talks about that program the last two years, but also on the European investment. So should we expect the action to be finalized? It is some restructuring charges and gains still to be captured, or should we think of that this program is basically taking on when the others is scrapped or finalized?
Let me start with a comment, and then maybe Henrik can be more specific on some areas, who was part of this program, going backwards. One of the things was, I think what we mentioned, that, of course, the activities that we have going forward with purchasing and trying to have a more efficient manufacturing footprint, et cetera, these, those activities will continue. I think it's obvious that any company in today's competitive landscape needs to work diligently with productivity, and we will continue to do that.
As far as the old, describing the old program, since we were going against a starting point of some gross position we had in 2012, going forward now, me coming in now and starting with a new program, it was a natural to give this a close. Having said what I said, we're still continuing to drive the productivity in the same way we indicated in the program, but the specific reporting to close that. And, Henrik, maybe you have some additional comments to that.
No, I think you covered it well, Alrik, and then it became increasingly difficult to sort of explain what was the gross saving versus an actual 2012. So from a reporting close down, but for sure, rest assured that we continue with activities of driving improvements in our centralized purchasing. And on the restructuring side, as we have done several of the big programs as announced in the last couple of years. And remaining in the portfolio, some programs we have not done because the actual paybacks were not in line with what we wanted to, and there are some still to come, and we will announce them on a case-by-case basis as to when they come.
So the underlying activities to your comment are continuing, but we will stop the separate reporting.
Okay. Just to make it very clear, the 1.4 actions will then be topped off by other actions from sort of parts of the old program, but you will not report it. Is that the conclusion?
You could say that the 1.4 is for the productivity improvement, and that is new, and then whatever is gonna come and will come going forward from the previously announced program will happen on top of that. Yes, correct.
Very clear. Thank you for that, Marita and the gentlemen. Thanks.
Thank you, Peter. Next question, please.
We will now take our next question from Graham Phillips from Jefferies. Please go ahead. Your line is open.
Hi, good afternoon. Thanks for taking my call. Yes, 3 questions, please. Firstly, on the Automotive division, could you give us a little bit more feel about the short to medium term? And I understand, obviously, you're looking at the longer-term review as part of your new process in taking over. But just looking at the organic growth, the split between, you know, price and volume and mix. Given that the sort of automotive markets are sort of showing signs of recovery, obviously, the U.S. is strong and China is strong, is there any particular customers or OEM manufacturers you're with that are sort of resulting in sort of underperformance versus the industry? And perhaps, you know, looking into 15, could you be, you know, give us some guidance on perhaps what if this rebounds a little bit?
Well, you know, when it comes to specifics in this, I would, if you don't mind, at this point, refrain from doing this. I am still reviewing this from a strategic point of view, and I don't think I should say anything about that.
So maybe-
Yeah.
Maybe, I mean, the guidance that we have is sequentially flat, and year on year is also flat for the Automotive, and that's how we see it. And it's a little bit balanced with probably slightly better in Asia, we have seen the traction and slightly lower elsewhere. And I think that's the guidance that we give. And then I think the review has started, and when there are more things to discuss with the market as to what that is and how that is, then that will be discussed. But one has to understand that underlying it is needed a hard work, and it will take some time.
Yeah. And then the dynamics in the OEM, side, as you know, with automotive, is that you are awarded a program, and you stay with that program. Sometimes there could be some phasing out, phasing in, but these are larger, longer cycles, normally in this sense.
Okay, I understand that. But perhaps just could you remind me and perhaps the audience who are the major manufacturers on the OE side that you're exposed to in Europe? Because that's clearly an area that perhaps is dragging the total down.
No, I wouldn't. I don't know. I don't think this is a kind of detailed level that we don't go into normally.
Okay.
But I would say that that's, I wouldn't think that that's relevant to what we see. It depends always, what programs are you, what platforms, what programs are you spec into, and how are these developing in a relative way? And I think that's the way it works.
Yeah, and I would say, generally, we are supplying most of the big gear players in the Western world. The only bias we have, and that you know from before, is that we are small in general, in all industries in Japan.
Okay. Well, could you perhaps contrast the aftermarket and the OE market, and whether there's been a sort of a shift in the mix there?
I think that maybe you could see that there is a change, a little bit of a change in the aftermarket if you look to how new generations of cars have different. If you look to our main product, which is wheel bearings, if you look at the previous models, some 10 years ago, they were using two tapers and a seal, while today's are using different kind of hub units. And of course, that's giving a different kind of dynamics in the car aftermarket and VSM market.
Making, you know, after just a few, four or five years, you could see before that you had taper bearing changes in the car market. When you look at one of these new Hub Three, they, they are larger, they last a long time. This is a trend that's been going on for some while and will go on, I think, going forward. That's one of the things we're looking into. In the short term, right now, that's not something that will have any effect.
Okay. Well, thank you. My second question is on the new divisional structure. If you'd look previously, the divisions, one was reported geographically, or was discussed geographically, and the other one was more on strategic business units around product areas. How should we think about this new division in terms of the sort of structure beneath it, and how you're going to manage it? And would you be giving us any sort of granularity going forward about how to think about the drivers in this business?
Of course, as we publicize the first quarter, it will be in this new structure. And basically, of course, what we're looking at is that we are sales is a geographical driven, sort of the actual P&L responsibility is in the sales dimension. We are unifying manufacturing into one unit to drive efficiency, the technology, flexibility. At the same time, within this, we have the value add part, where we're talking about segment, focusing key accounts, then working more over industry, and based to do what?
To simplify, more agile customer decisions closer to the customer, and also responsibilities within the organization to be more clearly, where accountability, empowerment and accountability is more obvious in the sense that you can give people a clearer target for what they're responsible for and what they should deliver. And this is basically what we're trying to do, but more will come during Q1 on this.
But I would say it's more of a bias towards the geography in order for it to simplify and clarify the responsibilities, but very much supported by good input from technical development and the segment support function in order to focus on the right application. But the simplification is more a copy of the previous RSS model than SI model from an organization structure point of view.
Okay, thank you. And then just finally, my last question is, just a little bit more comment in the text about mining, marine, oil and gas. And with the Kaydon acquisition, on a sort of a full year basis, could you just give us an idea of how much of SKF is exposed to, to mining, metals and mining, oil and gas?
Yeah, it is part of, if you look at the distribution, it's part of the general and heavy industry, and then a small part of the energy. Oil and gas is not a big segment for us, and that's part of the industrial distribution, which is also prone towards more the heavy segment.
Then we have to understand that even though sometimes you don't see it directly, that we are serving that market directly, but we are doing it also indirectly. I think you look today, you saw the Caterpillar talking about how their sales were affected by the oil and gas and mineral prices in the market. And of course, indirectly, that's also affecting us. So there is a linkage, of course, where there's bearings being used, that's where we are.
But you, but you haven't got a sort of a figure in mind about. Okay, so you're saying it's part of the 14% heavy industry, for instance, and then it's part of energy anyway, which you're saying separately was 6.
It's part of energy, but the bulk of the energy that we report is renewable energy. So it is a smaller part on a direct basis. And then what Andrew alluded to is that, of course, this has effect for some of our key customers who are or who have their product supplying to those industries.
Okay, and how much of Kaydon was presumably, if you look at the Kaydon website, it's, it's quite a bit more in that business overall?
There is some more, but it's not nothing that we have really disclosed separately for Kaydon. We disclosed it sort of the way we do it on the total pie, which is including Kaydon.
Okay, I know you have given organic growth. How are Kaydon performed organic growth-wise? Have you got an update of that?
Kaydon has performed well during the year, as we have reported previously, and they have developed profitability-wise in line with what we anticipated, and we have seen some good synergies as we have announced some of the big deals.
Okay, thank you.
Thank you very much.
Thank you very much, Graham. Now we have time for a few more questions. Please, next question.
We will now take the next question from Ben Maslen, Bank of America. Please go ahead. Your line is open.
Yeah, thank you. Hi, Alrik, Henrik, Marita. Firstly, just a couple of small questions. Firstly, on currency, where I guess there's a lot of debate, maybe currencies are moving around a lot. So if you can give us a sense of perhaps when you made that forecast or what, what rates you've assumed for krona against the US dollar or euro, that would perhaps help us. Secondly, on raw materials, we've seen input costs come down. I know it takes time to feed to your inventories, but is there any scope for a bigger tailwind as we go through the year? And then finally, for Alrik, just, you know, you said you were positive on the outlook for SKF, one of the reasons you came back.
Having been with the business for a few months, you know, what do you think are the areas or opportunities of improvement that excite you the most, and what are your priorities at the moment? Thank you.
Hi, Ben, it's Henrik here. If I start with the smaller questions on the currency, I will not go into the details of what the currency rates we have used. We have looked at the position where we are, what short hedges we do have, and how we see it going forward, trying to extrapolate that, and then we come to the SEK 300 and SEK 900. And as I said, where is the dollar gonna be in one or two quarters? Let's see. On the raw material side, as Alrik alluded to, that we've seen that the scrap rates have come down a little bit, and that's where it is right now, and that's how we see, but nothing major. And then, Alrik, maybe a few-
Yeah, and if you go on the, on the more soft side, this is, of course, difficult to give you anything that you could really touch on this. I can only say what I wanted to say is, you know, I grew up in this business. I think I understand how it works. I've been working in most areas of it. I've been working with Automotive, I've been working with VSM, Vehicle service market. I've been working with industrial distributors and industrial OEMs, and I am excited of the prospect that the bearing has as a value creator for customers. And SKF is a fantastic company. We have an incredible base of knowledge and people, and the opportunities are immense.
So going forward, in the long term, I am extremely bullish on SKF. Having said that, what we are looking at now is in the short term, and of course, a big company like this, which already has a fantastic development behind it, it will take time to realize some of these things that we're talking about.
Got it. Thanks. Thanks, Alrik.
Thank you, Ben. And then I think we have to take the last question now.
Okay, we will now take the last question from Alistair Leslie, Société Générale. Please go ahead. Your line is open.
Yeah, hi. Just wanted to circle back finally on autos. Appreciate we obviously have to wait for the complete review to get your conclusions on the business. But perhaps you can comment on what you see as SKF's competitive edge as it stands today in Automotive bearings, just the differentiating factor relative to your main competitors and what you can really build on here. Thank you.
Yeah. Well, if you look at SKF, and as you know, when you look into it, we have a lot of parts in the automotive, both in trucks and cars, where we are present and where what we can build on. In the car segment, which is a big part of it, of course, it's and also in trucks, it's about wheel end applications. That's where SKF has its forte. And then you can understand that a big part of our technology and engineering, this which I for a fact know that our customers are appreciating, will be around how can we improve tomorrow's wheel end solutions. And we're also strong on MacPherson struts and suspension parts.
We are in the gearbox applications. And of course, these are areas where there's a fantastic opportunity for us and our engineers and our R&D efforts to continue to add value. To be more specific at this point is something that in the end, you know, that's the eternal battle, isn't it? You know, hopefully, we will be more successful in doing this than many others, and this is how we're going to create value going forward. And I can assure you, I will do my utmost of seeing to it that we continue to be up there as a leader in this field of differentiating and creating value to our customers. A little bit of a fluffy answer, but at this point, still, I don't have a better one.
No problem. Thank you. Thank you very much.
Thank you very much, Alistair. That takes us to the end of this conference, so thank you very much for participating. I will come back to the questions that are still remaining, and you're welcome to contact both me and CEO, and media, or Theo Kjellberg. Thank you very much.
Thank you very much, everybody, and see you in a quarter, maybe.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.