Good day, and welcome to the SKF Q3 Report 2017 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Patrik Stenberg, Head of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon, everyone, and welcome to this conference call on the Q3 results. As usual, the call will take about an hour. Present today are our President and CEO, Alrik Danielsson, our Senior Vice President and CFO, Christian Johansson. We've also got our Director of Group Controlling and Accounting, Carina Karlsson, Theo Kjellberg, heading up the Press and Media Relations, and myself, Patrik Stenberg of Investor Relations. As usual, we will start with a presentation of the results, and after that, we will continue with the Q&A session. With that, I welcome you once more and leave the word to Alrik. Please.
Thank you, Patrik. Let me start with some key events in the Q3. As you know, we work with our customer offerings, with our investments, and also on the structure of our company. We continue to make good progress in our rotating performance offering. One recent example is the IMx-8 remote condition monitoring solution, selected by Sirius Shipping, supporting its effort to improve reliability across the fleet of 10 oil and chemical tankers. This compact system is a plug-and-play solution that is compatible with Sirius Shipping's existing maintenance systems. Sensors detect machine parts and transmit signals online to SKF's certified remote diagnostic center in Hamburg, Germany, where specialists report machinery deviation. Another example is the addition to the shaft analysis tool, SKF SimPro Quick, to our software portfolio.
We're also investing for the future in terms of our own capabilities in research and product development, and we have just opened a new European aeronautical test center dedicated to high-speed aeronautical bearings in Valenciennes, France. It will enable full-scale, high-speed bearing testing under representative operating and environmental conditions. It will also make it possible to speed up the maturity ramp-up for advanced technology, such as those linked to sensors and signals processing. We're also continuing to invest in modern, flexible, and highly automated production with the ongoing investments in Flowery Branch in the U.S., with SRBs, and in Schweinfurt, Germany, CRBs, and that's cylindrical roller bearings and large-sized bearings, scheduled to be operational towards the end of next year. Last week, we announced the latest step in consolidating our manufacturing footprint where we intend to consolidate our North American industrial sales operations.
As part of the process, we intend to close the manufacturing site in Seneca, Kansas. Production will be transferred to other sites in North America, and investments are being made to increase the technical capabilities and capacity in our existing manufacturing facilities in Salt Lake City. The consolidation process supports our long-term ambition of integrated regional manufacturing, engineering, and technology efforts, adding more value to our customers. If we then move to our next slide, I just want to say a few words around the consequence of the integration of the new big large-size bearing test center in Schweinfurt, Germany, in June, that we announced. As you know, it's the first in the world that is able to test large-size bearings under actual operating conditions with dynamic load testing.
Among the very first bearings that is now mounted, that's what you see to the left on the picture there, how we mount this big bearing, is the new line of spherical roller bearings that the Gothenburg factory has developed, especially for the wind industry, using our application-specific development approach. Turning to the next page, and talk a little bit about more about the figures. Looking at the financial performance for the Q3, we saw continued good growth and improved operating margins. Sales development was positive in all regions, as underlying industrial activity and investments increased. Net sales at 18.6 billion SEK, increased organically by 8% compared to the Q3 last year. The industrial business grew by 9.5%, with strong growth in all regions. The automotive business grew by 4.9%.
The improved sales volumes and factory utilization rates contributed to an adjusted operating profit of SEK 2.2 billion, SEK 400 million higher than last year, an adjusted operating margin of almost 12%, 11.9%, which is an improvement of 1.8 percentage points compared to last year. The automotive business has continued to strengthen, and the adjusted operating margins was 7.6%, driven by increased volumes and cost control. The industrial business delivered a significantly improved adjusted operating margin of 13.8%, driven by higher sales volumes, improved factory utilization rates. During the quarter, we reduced our net debt by another SEK 1.3 billion, taking us below our net debt to equity target of 80%.
During the quarter, we continued to see positive effects from the price increases we have implemented, and we have established a sequential improvement trend over the last couple of quarters. On the next slides, I will discuss this in a little bit more detail. In industrial distribution, we announced price increases in the Q1. They were implemented during the Q2, and now in the Q3, we see the results coming through. The industrial OEM business is different to the distribution business in the sense that prices generally are agreed for longer time periods. Where contractual terms allow, we have also increased prices to OEMs. Where they don't, we are in discussion for the next term of renewal. All in all, raising prices in the own OEM business takes a little longer time compared to industrial distribution.
On the automotive side, we have been able to raise prices in the aftermarket, while OEM prices have been relatively unchanged. To summarize, we have seen a sequential, sequential improvement in pricing over the last couple of quarters, and we expect that slow but gradual improvement to continue. With that, I move to the next slide, and our sales development by region. The last nine months, we have grown both within industrial and automotive in all regions. When we look at the quarter, the organic sales rose by 6.3% in Europe, with strong sales to heavy, special, and off-highway industries, as well as to the truck industry, and to the energy in industrial general industries. In North America, sales grew by 3.3%.
By industry, we saw strong sales to the energy industry, as well as the heavy special off-highway industries, industrial and general industries, and to industrial distribution, while sales to the car and light trucks industries were lower. In Asia, we experienced strong growth in most industries, with exception of energy, where we continue to see low volumes. In total, organic sales in Asia grew by 11.8% in the quarter. Our organic sales in Latin America grew by 14.1% compared to the Q3 of last year, and we saw good growth for both industrial and automotive. In the Middle East and Africa region, organic sales grew by 23.3% in the quarter. With those comments, I leave the word to you, Christian.
Thank you, Alrik, and good afternoon to all of you. If we start with the sales development, which increased 4.3% in the Q3, and as already mentioned, we experienced a broad-based recovery in most markets and across most customer industries, both within industrial and automotive. In total, organic sales increased by 8% in the quarter. And since quarter three 2016, we have had positive currency effects on the sales quarter-over-quarter, which now changed in the Q3, where we see that the currency components were negative by 3%. And the main effects come from the dollar and the Chinese RMB.
The structural component was negative 0.7% in the quarter, and that relates to the divestment of Reelcraft that we announced to you, a transaction that was closed on the last day of June. Turning to the next slide, the organic sales development by quarter, which usually form a typical business cycle, sine curve. This year, we are happy to see that the quarters so far form a different pattern, with three quarters in a row at or just below 8% growth. The quarterly development is to some extent impacted by working days. We had a Q1 with about 1.5 days more than previous year, and the second and the Q3 now has about a half working day less in each quarter.
Looking forward to quarter four, we will also have about a half working day less than last year in quarter four. Turning to the next page, adjusted operating profit in the quarter was SEK 2,211 million, some SEK 400 million higher than in the Q3 last year, and seen as a 12-month rolling, it was SEK 8.7 billion. Spending some time then at the operating profit bridge, and we start on the left side with the items that affect the comparability between the quarters. Items affecting comparability was -SEK 641 million quarter-over-quarter when calculated in last year's exchange rates.
As you might remember, last year, we had a positive IAC of SEK 380 million, mainly as an effect of curtailment gain, due to that we changed conditions in the defined benefit retirement plan in the U.S. This year, we have items affecting comparability, which is negative SEK 246 million, whereof SEK 52 million relates to ongoing restructuring programs, and mainly in Americas and Europe, and SEK 190 million relates to settlements with customers. Reelcraft that was mentioned, was that, and that was divested, contributed last year with a profit of SEK 24 million. Currency impact in the quarter was negative SEK 105 million, and as mentioned, it's mainly an effect from the dollar and the CNY. The operational performance increased quarter-over-quarter with SEK 544 million.
Organic sales was positive by SEK 778 million, and this, as you know now, include fixed cost contribution in manufacturing from increased production volume. Price mix was flat compared to last year, which is an improvement from quarter two, and as Alrik mentioned, we do see positive effects from our pricing activities. Our SAP ERP implementation program, Unite, continues. The Unite activities were also in the Q3, more related to support users and operational improvement than to build new functionalities. This means that even if the cash spend in the quarter was reduced versus starting last year, we had SEK 33 million higher cost in the P&L compared to last year for Unite. And the delta is, as you understand, related to that we have less capitalization this year of the Unite cost than last year.
For quarter four, related to Unite, we expect to have a lower cost, so a positive P&L effect in the bridge from Unite compared to last year by some SEK 50 million. When it comes to cost development, and we're starting on the material side, the Q3 came out in line with our expectations, and in total, material cost was -SEK 100 million versus last year. We continued to see positive effects from commercial activities, from what we do on design and specification changes, and from material consumption. And to some extent, this compensate then to what we have discussed before, the raw material increases that we see.
For the Q4, we expect the negative effects from raw material price to be at the same level as in quarter three, and then again, considering the compensating activities and where we were in the Q4 last year, the quarter-over-quarter effect in quarter four we expect to be -SEK 100 million. If we talk about the cost development, raw material costs, I would say quarter three was quite good. We do see salary inflation, we see extra cost due to the upturn and due to temporaries and agency workers, and some other cost increases. However, we also have managed to compensate partially these with productivity. And I will come back to some more comments on the cost development in a later slide.
And finally, then related to our operational performance, I also would like to comment on the inventory development in the Q3. In fixed exchange rates, our finished goods inventory increased in quarter three versus quarter two, with SEK 220 million. And last year, the same delta, so between quarter two and quarter three, we lowered our finished goods inventories in quarter three with SEK 250 million. And as we all know, in this part of the business cycle, availability and service level is key, and we have decided to do what we can to serve our customers. If we look at quarter four, we estimate that our finished goods inventories will remain on the same level as we now end in quarter three, or somewhat lower.
Last year, finished goods inventories remained unchanged between quarter three and quarter four. With that, I move to the next slide, performance by customer group, starting with industrial organic net sales increased by 9.5% in local currency versus last year. Significantly higher in Asia, North America, and higher in Europe and Latin America compared to last year. Adjusted operating margin, 13.8%, compared to 11.7% previous year. Contribution from increased sales and manufacturing volumes was clearly positive, and price mix was relatively unchanged compared to previous year. Automotive organic sales grew by 4.9% in the quarter. We saw good sales growth both for cars and light trucks, as well as for trucks. Strongest automotive markets continue to be in Asia.
However, we saw good development also in Latin America in the quarter. In North America, sales were lower in the vehicle of the market, due to, if you remember, we had a difficult comparison figure in the last year, where we had a strong quarter three sales. After that, we had done a warehouse move in the Q2, which pushed shipments over to quarter three. And if we say, look at these sales to cars and light trucks, now this year in Q3, we were also somewhat lower, which mainly is a timing issue, due to the phase out for some business and the phase in of new business. And this is, of course, steered by the customers ramp up of their programs.
Operating performance continued to strengthen, and the adjusted margin was 7.6%, compared to 6.6% last year. Turning page to the P&L of the group, just some comments to the margins. Gross profit in the P&L was zero, gross margin was 0.6% lower in this quarter three than last year. But since we've had, and as I've commented, large changes quarter-over-quarter in the one-timers, if we adjust for one-timers, as we have done in the upper right graph there, gross margin improved 2% versus last year. Since most of the one-timers, both last year, and this year, relates to costs. SG&A, as a percentage of sales, increased with 1% in the reported.
But same there, if you adjust it for items affecting comparability, we were flat on 3%-13%-7% versus last year. Financial net, negative SEK 273 million versus negative SEK 142 million, and it's the exchange rate fluctuations that was negative this year and had a positive effect last year. Taxes as well, we had SEK 586 million in tax costs this year, resulting in an effective tax rate of 34.6%, which is somewhat high. And this relates to some adjustments in the quarter related to previous periods. If we adjust, I'm talking full year now, for the tax on the Reelcraft divestment, which in the graph there, in the mid graph, is marked in a different color in the Q2.
So if we adjust for the tax on the Reelcraft divestment, the full year tax rate is expected to be around 30%. Cost management, fixed cost index, we have used this for some quarters now. For the Q3 was 99 versus our baseline in end of 2014, including high cost for Unite. Excluding Unite, fixed cost index was 95 in the Q3. As mentioned, we do see salary inflation and other cost increases, but we have managed to achieve some productivity. And of course, our ambition is to compensate by continuing to work on productivity, by optimizing our footprint and simplify our organization, as we talked about before. And as Alrik mentioned earlier, for example, our latest announcement about manufacturing consolidation of seals in North America is one such activity.
The growth we have had so far this year requires some additional resources, and during the Q3, we have increased number of employees by 680, adjusted for divestment. If you compare our resources, again, then to in quarter three, where we were in end of 2014, we are still about 2,000 full-time equivalents less now. And if you take the permanent employees only, we are about 2,400 less, which means that we do still manage the upturn to large extent with temps and agency workers. We turn page. We are at cash flow. We achieve the cash flow after investments before financing, excluding M&A of SEK 880 million in the quarter, compared to SEK 1.8 billion in quarter three last year.
Working capital increased by SEK 750 million, while investments were at SEK 580 million, some SEK 40 million higher than last year. If you take the twelve-month period out, it's, we are at the same definition at SEK 3.9 billion now. Next page, Net Working Capital was at 29.4% of sales at the end of the quarter, which is 0.9 percentage point lower than in the Q3 last year. If we adjust it as we used to do in fixed currencies, Net Working Capital increased with 1.1 percentage points versus last year. We see good progress when it comes to payables. Receivables remain at around 18%, while inventories increased to 21.6%, and I have commented before that these are conscious decisions than to be able to serve our customers.
I turn page to net debt, where we decreased in the quarter about SEK 1.3 billion, and our net debt equity ratio was at 79% at the end of the quarter, and excluding pensions, we are now at 37% versus equity. And you can also see on the left, in the left graph, that since the peak or the bottom rather, we have now reduced our net debt with close to 10 billion SEK. And then next slide, we have the guidance for 2017, quarter four, financial net, around SEK 225 million negative currency impact, is expected, with the exchange rates by end of September, to impact the operating profit around SEK 300 million negative compared to last year.
Based on the exchange rates from Friday, October 27, the currency effect is, will be about SEK -250 million. And as I said, tax level, tax rate at about 30%, excluding the investment effects and the addition to property, plant, and equipment, same as before, about SEK 2.2 billion for the full year. And with that, I give the word back to you, Alrik.
Thank you, Christian. Well, looking at the demand outlook for Q4, since the beginning of the year, we have seen a broad-based recovery in most markets, and we grew by 8%, as we have said, organically in the Q3. Entering the Q4, we expect to see continued growth in all major regions, as reflected in our new market outlook. Demand compared to the Q4 2016, the demand for SKF's products and services is expected to be higher for the group, including industrial and automotive. Demand is expected to be higher in Europe, North America, and in Asia, and significantly higher in Latin America.
... demand compared to the Q3, 2017, demand for SKF products and services is expected to be relatively unchanged for the group, including industrial and automotive. Demand is expected to be slightly higher in Europe, but relatively unchanged in North America, Asia, and in Latin America. With those words, Patrik, I leave the floor to you.
Thank you, Albert. Just before we go into the Q&A session, let me just briefly remind you of some of the upcoming events. Next week, we hope to meet with some of you in London and Paris, and the next opportunity after that will be the Goldman Sachs conference at the end of November. Then we've got some activities in Asia also for you to attend, if you want. With that, we move into the Q&A session. Operator, please go ahead.
Thank you. If you would like to ask a question at this time, please press the star or asterisks key followed by the digit one on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, ladies and gentlemen, star one to ask a question, and we'll pause for a moment to allow everyone an opportunity to signal. We'll take our first question from Daniel Kolev from Liberum. Please go ahead.
Hello, everyone. Thanks for the question. First question on price mix. It was expected to be negative, and you commented it was flat for this quarter. We've just seen a 4.5 stronger industrial organic sales growth than auto growth. I think the last time we saw this was sort of Q2 to Q4, 2014, I think when the published price mix was over 1%. So I guess the question really here is, how do you think about sort of the price mix going forward, from the current sort of zero position? And then secondly, how should we think about the splits between mix and price? Obviously, given the significant gap between auto versus industrial currently. Thank you.
If I take the second question first about the mix, I mean, you're right. We have, in that perspective, a positive mix, seeing the stronger growth in industrial versus automotive. But you should also consider that if you look in the other dimension, which is the structure we have in the pricing slide, where you have aftermarket and you have OEM, you also see a mix change there, where you see stronger growth now on OEM business versus the aftermarket. So that's what I would like to add on that question. I mean, if you see... I think we said that on the pricing, on your first question then, on the pricing, we've seen that we have a positive trend on pricing.
It's a slow, gradual improvement, and we expect to see that also going forward.
Great. Perhaps just one quick follow-up. You mentioned you've got a SEK 10 billion sort of change from the bottom in terms of your net debt, and you're now below 80%, sort of your, your sort of net debt, including pension targets. Should we start to think about sort of buybacks, like sort of other sort of Swedish industrials? I don't know what your thoughts are with regards to the balance sheet. Thank you.
I think, I mean, we were clear, I think now in the message that we have, I mean, coming to balance sheets, we are taking on some more working capital in order to be there for our customers. That needs cash. We also, as you know, we have ramped up or we have stepped up our ambitions to invest in world-class manufacturing and in upgrading our production technology, which needs cash. And, I mean, this continues. So, and then if there will be any other financial engineering or other thoughts around dividends or buybacks and so on, it's a board issue, and then I can comment on, I cannot comment on that today.
Okay, very clear. Thanks very much.
Our next question comes from Alexander Virgo from Bank of America. Please go ahead.
Hi, gentlemen. Good afternoon. Thanks for taking my questions. I wondered if you could talk about two things, please. One, can you just discuss the automotive growth and particularly North America and the sort of trends you are seeing there? Is any of that, I think, a little bit surprising on the weak side, I suppose, although I appreciate the comp may be a little bit tougher, as you alluded to. So any color you can give around that and looking forward, because we've obviously seen a above-market growth trend for you, as you sort of catch up through model cycles there in the U.S. in particular. And then second question, just on ERP costs.
I think you'd originally guided for those to be pretty flat quarter-over-quarter, as well as positive in Q4. So just wondering what you're seeing in terms of shift in phasing there. Perhaps how you, if you can give us any color on what that might be into 2018, that would be super helpful. Thank you.
Alexander, I'll start by answering your first question and trying to answer your first question. You know, there are basically two issues here in the U.S.
One is that we had a very strong push in the aftermarket last year, which makes the comparability in the U.S. unfavorable quarter-over-quarter, because we had, as you remember, we changed the warehouse and we had some disruption in our deliveries during the beginning, the mid-year, and by Q3, we were fully recovering our backlog, and we had then a very, very strong sales. As far as the OEM,
... You know, it's always difficult to plan when one platform is coming in and one platform is coming out. And to me, it's definitely so that where we missed a little bit in the quarter was that we didn't anticipate that they were going to ramp down certain platforms, and it was a slower ramp up on the new business. I still can maintain that we are in a good position, and we're growing compared to the market in the U.S., and we see this is coming back now in Q4. Christian, for the other question?
For the Unite stuff there, I mean, I would say, and it's boring for you to hear this, but, I mean, the spend rate we have taken down, but the content of it, I mean, if you go back to last year, we were building a lot of functionality and, you know, capitalizing what we did to a large extent in Unite, and that's what we compare it to. I mean, in the guidance, I had hoped for that we would have also a change in the mix there towards more bill activity, which is not the case. We have a strict definition on what we capitalize and what we have over the P&L.
I mean, yeah, we are somewhat worse off versus guidance, you're right there. I mean, quarter four, on the other hand, we expect to catch that back. So, I mean, we are well on the right side of the full year guidance for 2017, for Unite, both when it comes to cash spend and what it comes to P&L effect, and that you will see if you add the four quarters together. Moving into 2018, you are somewhat early on that, and I can understand why we are. But if you should have just some direction on it, and I will, of course, have to come back when we know more, I expect us to, cash-wise, spend somewhat less in 2018 than 2017, and P&L-wise, also see a somewhat less P&L impact than this year.
Very helpful. Thank you very much.
The next question comes from Klas Bergelund, from Citi.
Yes, hi, Alrik and Christian, it's Klas from Citi. I've got three questions, please. First of all, I want to come back to pricing. So price mix was largely flattish in the quarter. Am I right to assume that spot pricing or distribution has a 1% positive impact in the bridge, but still offset by legacy contracts, maybe down by the same amount? And when you look at pricing on new quotations, your discussions with the OEMs, what level is pricing running at, and when can we see this showing up in the P&L? Already by the Q4, or do we have to wait until the Q1 of next year?
No, I have a full understanding, Klas, that you would like to have an answer on these questions, and I cannot comment on your calculations on percentages, but obviously, and as you've heard Alrik saying, is that what we have done in terms of pricing on the aftermarket side, also automotive and industrial, we see effects from quarter-over-quarter. And I mean, on OEM side, it takes longer. We see effects for contracts that we've been through the renegotiation or renewal or what to call it. For the other ones, of course, we are preparing in the discussions for a preparedness with our customers that prices will go up when contracts expire.
Mm.
You should see that gradually. I mean, we are not able to, you know, with the customer base we have and the amounts of contracts we have to slot that into quarterly development with that precision that you ask for, but we work on it.
There's clearly so also that there are more contracts being renewed at the end of the year, beginning of the year, so that is a positive for next year. And also, as we have seen, we've seen more of our competitors now coming up with active decisions on pricing as well, and this should help the development.
But just to follow up on spot, I think, I mean, I get it, too, the distribution pricing was increased by around 3% globally, and that's a third of your business. You should have, from distribution, at least a percentage point in the P&L. I mean, that you can help us with, right?
No, I don't help you with your calculation. We cannot, we cannot, say more than what we do. I think we are, we are very clear on what our aim is.
Yes.
Klas-
And I think we are, we're delivering on what we're saying that we should do, that we are doing.
My second one is on general cost inflation. We got Unite, thank you for that, and reflecting a bit on next year. If you could talk, Christian, about raw material impact into the H1, given that we've seen steel going higher again since the summer, and you have this 3-6-month lag. And whether you think wage inflation will accelerate upwards looking at 2018, that would be very helpful.
Yes, I'm sure. No, I think raw material prices, and if you talk steel, it usually goes in steps, huh?
Mm.
We saw price increases in the last year and beginning of this year. Then it was a bit calmer, and now we've seen another step up, let's say, during the summer and autumn here, due to bottlenecks in steel production, due to different things happening in China and so on, where, you know, we have a big supply base of steel. Yes, we have a time lag, so we are not into the calculations of it. I do expect to see somewhat more negative effects in Q1 than what we have seen during the autumn here. Then we have to see what we can compensate on. We work very hard with purchase organizations and other things. We have to find cost savings and you know, to offset that. So it's difficult.
But I mean, raw material isolated, yes, it will probably be somewhat worse in Q1. Then for the rest of the year, we never know. On the rest, salary inflation and so on, I mean, you know, when the season of the you know contract renewals are on the labor side, and it's a bit too early to speculate in what that will... I guess the positionings have started, but I mean, we don't know where that will end up.
My very final one is on China. Can you talk a little bit about what you've seen on the industrial side in October? There is a crackdown on pollution. There are more widespread shutdowns outside steel this winter. Has that all weighed on the industrial business in the beginning of the Q4?
Well, basically, what you see in China is part of this, part of the rally on steel is created by the fact that the Chinese government has closed some foundries and some steelmakers that have been polluting. Another thing that has affected the steel market is that the graphite electrodes, you know, for arc furnaces, that is necessary for all scrap-related steel production. There's also been some closure for environmental reasons, which has created a temporary, you could say, rally on graphite electrodes. That is what you see. Otherwise, you look at the Chinese development, it's very strong.
We had a weaker manufacturing PMI coming out this morning.
Yeah.
So I was, yeah, I was just wondering whether-
Yeah. It's probably... But so far, it's been very strong.
Mm.
And the feeling we have still is that the underlying recovery is good. The government is taking, it seems like they're taking the opportunity now with the good development, to crack down on some of the most polluting industries, so.
Mm. Thank you.
The next question comes from Ben Uglow from Morgan Stanley.
Oh, good afternoon, gentlemen. Thank you for taking the question. Two quick ones. On pricing, and I appreciate probably everybody's gonna ask you the same question every which way, but on the industrial, OEMs, where prices have been increased, as you say, where contractual terms allow, is there any way you could give us a sense of just how far you are along that process? So in terms of where contractual terms allow, is that 10% of your portfolio, 50% or 90%? So where are we in terms of that sort of contract renegotiation phase? And then secondly, can you just... When we look at automotive in general terms, looking into next year, we see some sort of mixed signals in terms of production.
Could you just give us a general sense, and in your kind of customer conversations, how do you feel that automotive is shaping up in a broad context, for 2018? Do we expect this to be another reasonable growth year?
Yeah, if I take your first, I think we have, we have done our utmost to say what we can say on pricing. I don't have more to add on that. And if you imagine the customer portfolio you have in SKF, and if I should somehow give you where we are on each of those negotiations, it's, it's not possible, and, and we don't have an interest to collect that ourselves. So sorry to say, we cannot help you more on pricing, yeah. And with the other one, on automotive.
Yeah, well, you know, there is still, in our feeling, a strong, a lot of programs being launched, a lot of things happening. But of course, there is still always an issue in, especially on the car side, that there is still a lot of purchase of cars that's debt-related. And of course, depending on interest rates, how they will go, this can swing, of course, quickly. And that is something that's beyond my vision at this point. But the discussions are still good, so to speak.
That's very helpful. Thank you very much.
The next question comes from Andrew Wilson, from JP Morgan.
Hi, good afternoon, everyone. Just a couple of quick ones from me. On the working capital development, you've talked a couple of times about sort of being prepared to expand that a little bit to make sure that you're meeting the demand. Can you just give us an idea of kind of what sort of quantum we're talking to there? Because obviously, working capital has been a pretty good job in terms of keeping it around the level you ended the Q3 at. And just how much kind of additional are you anticipating having to build over the next sort of three to six months?
Well, you know, this is a very interesting question, and very difficult to answer, because there's always an industrial dynamics in the figures. And I think if you recall, we touched that last call, and we cross-touched the call before, that in these times of accelerating growth that we've had, there's always an effect of industrial dynamics, meaning the customer feels that maybe they need a little bit more safety stock than they had before, and that drives additional growth. How, where is that in a global perspective? How much more do we have to ramp up to start meeting the demand fully?
It's very difficult for me to say, but I still feel that there is an additional demand to be covered by further production.
But I think also when it comes to the inventory build-up in quarter three, yeah, I think you were at more asking going forward. But if you look at it in quarter three, and if you've heard some of the comments related to supply chain and steel, potential speed bottlenecks in the steel supply chain. You know, to succeed in this kind of market, you need also to know some steps backwards in your value chain. So you have to foresee this, and I think we have at least sensed that there will be some of these kind of bottlenecks, that which meant that we pre-ordered some material and components here as part of the increase in Q3, yeah? So, if you understand what I mean.
So you have, you have, of course, both the, what we call the channel stock material, and, and so on, and then you have the finished one, yeah, as I recommended.
Yeah. My comment was more on the stock at the customer and demand from the demand point of view, and Christian is commenting on SKF stock.
Oh, that's very helpful. Maybe just a second and hopefully a very quick one. Just on the customer settlements, I think it's SEK 190 million or so of kind of charges in the quarter. Can you just give us a bit more detail on what they relate to, and if we should be expecting anything additional to that?
I mean, if you do a settlement with a customer in general, you do that in order to enable us and the customer to continue our relationships and to continue to do business, huh? I cannot give more comments on which customers and so on, and I cannot neither comment on whether we how this looks going forward. I mean, this is part of doing business.
Okay, no problems. Thank you.
The next question comes from Andre Kukhnin from Credit Suisse.
Yes, good afternoon. Thanks very much for taking my questions. And also thank you for clarifying on the inventory movement, from quarter to quarter, and also like-for-like impact. Can I just double-check on that first? The Q3 2017 saw a SEK 220 million ramp up sequentially, versus last year, Q3 2016, having a SEK 250 million reduction in kind of like-for-like terms. Is that... Did I hear that right?
Yes, you did.
Thank you. And so on the bridge, if I'm thinking about sort of SEK 100 million-SEK 150 million impact, positive on EBIT from that swing from under to overproduction, would that be in the right ballpark?
No, you have to know yourself. I mean, that calculation, but I will not give you numbers on this. But,
Sure.
I can just say that you, you're high.
Right. Thank you. And can I just double-check on the cost guidance that, in the other cost line, you mentioned SEK 100 million. I couldn't hear quite right. Was that SEK 200 from Q3 going to SEK 100, or is this SEK 100 incremental?
No. What, what I commented on the 100 was related to material.
Right.
So we were on material net effect quarter-over-quarter, Q3, SEK -100 million versus last year, and our expectations in Q4 is also to have a SEK -100 million quarter-over-quarter on material.
Right. So implicitly, that other cost line, you don't expect it to change much, on the bridge in Q4 versus Q3?
The only thing I'll say there is, and if you heard, I think we had quite a good quarter in terms of being able to compensate salary inflation and so on, and we continue with that ambition. I don't have more precise judgment on that for you.
Got it.
Yeah.
Thank you. And just, one more clarification is, on the, on the price mix. So in Q3, it sounds like you had a, a small positive price that was offset by small negative mix. And then for Q4, you expect price to become a slightly bigger positive? And can you comment on what you expect for mix, if possible?
No. We cannot... Sorry to say, I mean, we cannot give you more than what we've done now in terms of guidance on price mix and the comments we've given. So I hope you can-
Okay
... can survive with that, huh?
We continue to positively work on our pricing, and as we have said before, you know, gradually expecting an improvement, huh?
Got it. Got it. Thank you. Can I just finish with a sort of a much broader question, just, in this experience of firstly changing your pricing structure, from kind of special prices and discounts to kind of one price list for everyone, in industrial distribution, and then pushing through this price increase in an environment where distributors have consolidated at least somewhat in Europe as well with Brammer and IPH under one umbrella now? Have you found it kind of generally easier, or if you found it different, then how would this sort of this pricing mechanism working now? And I appreciate you were not there when the old mechanism was working, but I'm sure you see a lot of a lot of numbers.
Oh, yeah.
If you could talk about that more broadly, how that mechanism works now?
Oh, we have been with this business a long time. I started in 1987. I think that the situation, which I've said so many times, is not so different from previous situations. The only major difference, of course, is that there's been a long time before due to the business climate. But what is very encouraging, I think, is that we see our competitors coming on more and more and also announcing price increases in a similar fashion to us, and that's really encouraging.
... Got it. Thank you very much for your time.
The next question comes from James Moore from Redburn.
Oh, yeah. Hi, everyone. Alrik, Christian, thanks for taking my questions. I've got three. Perhaps we could go one at a time. China, I guess it's growing very well. Are we talking high teens organic growth within the twelve at Asia Pac? Is that the right sort of area? And could you perhaps say how the big four buckets are differing versus the average Chinese number? And I'm thinking wind, rail, general industrial, and automotive, and what the trends are.
Well, the only disappointment, as you know, is wind, where there is a lower commissioning of windmills going on in China at this point. Otherwise, there has been a very good growth.
I would have thought that rail freight was starting to slow a little. You're not, you're not seeing that?
Yeah. But so far it's been really good. We've been doing, having a really good quarter.
Brilliant. Thanks. And maybe I could try on pricing there, and perhaps the answer is no, but in rough language-
This time, this time, I think, you know, you've got all the answers, didn't you?
Well, there's maybe one I'd like to try on, but in rough language, perhaps, rather than precise numbers, should we expect the price realization in the OE channel that's sort of kicking in next year to be of a similar magnitude to the price realization that you're achieving in the distribution channel today, or would it be above that or below that?
I think we are not commenting on that, James. I'm sorry.
We will always do our best, and there's pricing power in the market. And, the good thing, James, is that our competitors are now starting to show good initiatives on this side. So, it's positive for that.
Thank you. And, okay, on the cost development, it looks like we're heading to SEK 800-900 for this year. Would it be possible to say within that, what sort of productivity or saving number you see and how that productivity or saving number might develop next year? Not, not precisely, but do you anticipate a similar level of productivity in the business next year, or do you think it'll be higher or lower for any specific reason? And if there is a reason, that'd be helpful to understand.
Oh, I can give you some words. So, I mean, I think if you take productivity as compensation activities on material side, I think we commented every quarter, so I don't have more to say on that. We try to offset raw material and other material cost increases by different activities. If you take the other part of the cost cake, so our organization, and other indirect costs, SG&A, and so on, I mean, we have. I think we, and you have followed that. We have taken quite decisive decisions on footprints. We have taken decisions to move things. We are simplifying organization. We are restructuring. What you have when you are in this part of the cycle, you have, of course, a resource conflict to manage the upturn or conflict.
At least you have to manage both. You have to manage the upturn, which demands more from your management structure, and at the same time, to stay focused on the more long-term, the structural things. I mean, it's not cheese slicing, it's targeted activities that are well prepared and well executed. So sometimes you have to move them in time, due to simply that it doesn't fit when you are in an upturn mode. But, I mean, we have managed that, I think, reasonably well this year, and I don't see any reason why we should not manage it as well next year.
Okay, thanks. One quick qualification. When you mentioned on raw material that the Q1 could be higher, were you talking about that the headwind would be higher than the SEK 100 million you're talking about in the Q4, or just on a year-on-year basis, it's gonna be higher?
The sequential line, I haven't read in the Q1 reference, so the sequential raw material development, I would expect to be somewhat worse in Q1 versus what we've seen here during the autumn. We will come back next time on what it means in terms of a quarter-over-quarter effect, so.
Thank you very much.
The next question comes from Peder Frölén, from Handelsbanken.
Yes, good afternoon. Thanks for taking my question. You mentioned the competitors making initiatives. I've heard about price increases in the Q4 from some of your competitors. Is that something that you also are conducting, given the over-the-summer raw material price hike?
Yeah.
That's the first question. Maybe I can come back to one later.
Yeah, I think we've already answered this. What I see is that if you look at what's happening in the marketplace, there's more of our competitors now coming out and announcing price increases. And of course, as with the turn of the year, you get a new opportunity in many cases to renegotiate yearly contracts with customers. And of course, we will do our absolute utmost, and it looks positive.
Yeah. Okay, that's fine. I was thinking of a biannual sort of move on distribution, but I hear you. On your guidance, Alrik, and thanks for giving us the day effect here, but I guess the relatively flat demand is including any seasonality. And could you also just confirm that higher means 5%-8% on SKF language?
... I mean, it's four-eight. Higher is four-eight, huh?
Yeah, okay. Yeah.
Yeah, yeah, but what can you say? I mean, we, as we ever had a discussion some years ago about what it means, we talk raw data, absolute demand. We don't do any adjustments for days or for customers closure or factories over Christmas or what have you. So you have to see it as just an absolute assessment, huh?
Yeah. And normally, you do have a slight improvement sequentially into the Q4, and those seasonality effect during the course of the year has diminished over time, but could you please help us out?
Exactly. We're working hard. As you remember, we used to have this year-end buy, where they were, where we were very keen on, on... The customer were keen on getting their bonuses for the end of the year. And we have been gradually going over to a more, you buy what you sell, arrangement, which has gradually and substantially eliminated some of those year-end, buy, buying, patterns.
Mm. Okay.
There's still some, but that's what we have to say.
Yeah. Okay, finally, thanks for giving on the ratio on temporary and sort of permanent employees. And I guess, Alrik, you mentioned that you expect sort of production out there to be able to create some additional demand for you. And if you look at the eventual add-ons to your personnel ahead, is it likely to see the same ratio between temps and permanent, or do you need to go more in either direction?
Well, you know, I think that these will be minor adjustments going forward. It will not be any big differences.
Okay. Okay, great. Just a final one, since I have you on the line. Sorry, Alrik, the 25% Net Working Capital goal, what type of inventory does that imply, given sort of where we are in the cycle?
Well, you know, the key to... First of all, you know, we need to come out of this rapid growth situation where you, by default, just by shipping more products out to the different regions and to before they reach the customer, you get an automatic increase of the capital. And then we need to work on some of the things that we announced, you know, the footprints and the way we're working with logistics, et cetera, needs to change for us to really be able to reach our target.
First, we need to come into a stable situation, and then we need to continue a little bit more on our footprint realization of slimming our footprint, and then we will be able to reach it.
Okay. Thanks a lot.
One more question, please.
The last comes from Erik Paulsson from Pareto Securities.
Yeah. Hi, this is Erik Paulsson at Pareto. I stick to Peder's question relating to personnel, and given that you were growing by a higher percentage organically in the quarter, did you have any potential bottlenecks or capacity issues in the quarter? And how is your capacity utilization at the moment? Thanks.
Well, you know, it's all over. There is, of course, some areas where we have backlogs, and there are other areas in our production where we have still capacity. The main issue now is that we need, and this is one of the reasons why we increased the material in process, because we want to ensure that we get enough raw material to be able to produce what we need. But we are gradually ramping up and getting a better utilization, as you have seen.
Okay, great. Thank you.
After no further questions in the queue, that will conclude today's Q&A session, and I'd now like to turn the call back to our host for any additional or closing remarks.
Thank you for listening in. As mentioned in the presentation, we will be in London, Paris next week, and look forward to meet with some of you. Other than that, we are available on the phone for you. Thank you.
Thank you very much!
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.