Welcome to the Q3 report 2016 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrik Stenberg. Please go ahead, sir.
Thank you. Good afternoon, and welcome to this conference call on the Q3 results. This conference call will take about an hour, as usual. Present today are our President and CEO, Mr. Alrik Danielson, our Senior Vice President and CFO, Christian Johansson, Theo Kjellberg , heading up the Press and Media Relations Department, and myself, Patrik Stenberg, Head of Investor Relations. As usual, we will start by presenting the results, and after that, we'll continue with the Q&A session. With that, I leave the word to Alrik. Please.
Thank you, Patrik. Ladies and gentlemen, good afternoon, and thank you for listening in. I start with the slide number 3 and take you through that. Today, we released a report for the Q3, 2016. The Q3 developed in line with our expectations on volume. Net sales in the quarter were SEK 17.9 billion. And all in all, organic sales were relatively unchanged compared to last year. As expected, according to seasonality, organic sales were lower compared with the Q2. By segment, our automotive business grew organically by 4.4% in the quarter, while our industrial operations had 2.8% lower sales organically. Although the rate of decline in demand from the industrial customers in North America and Asia has diminished, market conditions continued to be challenging during the Q3.
I'll talk a little bit more about regional performance when we get to the next slide. Operating profit in the Q3 was SEK 2.2 billion, and our operating margins was 12.2%. In the quarter, we had net positive one-time items of SEK 380 million, most of which was related to the change in our U.S. Pension Plans that Christian will talk more about in a couple of minutes. Excluding these positive one-time items, operating profit was SEK 1.8 billion, and operating margin was 10.1%. Cash flow generation was a solid SEK 1.8 billion in the quarter, excluding the tax effects from the recent divestments of Kaydon Velocity and Control. Turning to the next slide, and our sales development by region compared to last year.
In Europe, organic sales decreased by 0.6%. Industrial activity continued to be low in North America, even though the rate of decline is less than what we had experienced in the first half of the year. Our organic sales in North America were 3.5% lower than in the Q3 of last year. In Asia, we experienced strong growth in the automotive segment, and in total, our organic sales grew by 3.8% in the quarter. Organic sales in Latin America were 6.5% lower, primarily due to low volumes in Argentina, while organic sales in Middle East and Africa grew by 0.3% in the quarter. If we move to the next slide, and the development by customer industry. Sales to the automotive industry grew by 4.4% in the Q3.
We saw good sales growth, both of cars and light trucks, as well as for trucks. The strongest automotive markets were in Asia and in Europe. Sales within our industrial business were 2.8% lower compared with Q3 last year. Sales to the rail industry were good in Europe, but continued to be on a relatively low level in North America and in Asia. Sales to the aerospace industry, on the other hand, developed well in both North America and Asia, where we saw higher volumes compared to a year ago, while sales in Europe were significantly lower. Both the marine and energy industries saw significantly lower volumes in the quarter. Sales to our industrial distributors in total were relatively unchanged, but with significantly lower volumes in North and South America, relatively unchanged volumes in Europe, and higher volumes in Asia.
Now to some examples of new business. SKF is supplying a range of bearings, seals, and linear actuating technologies for Scania's new generation of trucks. The result of over 10 years of development, during which time SKF has worked in conjunction with Scania on developing tailored solutions to improve fuel efficiency and drive comfort. SKF delivers gearbox bearings, prop shaft bearings, and engine bearings, and seals. The tailor-made wind deflector, which uses linear actuating technology to allow for ease of adjustment, is also being supplied by SKF. SKF is also supplying updated front and rear wheel truck HBU units, which reduce friction by up to 30% compared to standard wheel bearing sets. Deliveries to Scania have already started, with the first new generation long-haul trucks currently being assembled in Södertälje. Next slide.
SKF's active magnetic bearing technology has already enabled a number of breakthroughs within the Oil & Gas sector. Through this agreement, we are strengthening our technology leadership, enhancing our relationship with GE Oil & Gas. We are also implementing a new business model, which will ensure that we widen the scope of applications for these technologies. Next slide. SKF Technology in Metsä Group, pioneering bioproduct mill, SKF's Lubrication Technology and system engineering support, is being used to help ensure optimal operational performance and the world's first next-generation bioproduct mill. The groundbreaking mill will use 100% of the raw materials and run solely on renewable energy. SKF has manufactured and supplied its largest-ever spherical roller bearing, with an outer diameter of about 2 m , to be used within the mining industry. The bearing was manufactured out of our factory here in Gothenburg.
SKF signed a two-year contract to supply a wide range of bearings and support services to CMPC, one of the world's leading manufacturer of pulp, tissue, forestry, and paper and packaging products. SKF has signed an agreement with Czech Railway engineering company, Bonatrans Group, to supply 1,840 axle box sets and journal bearings. The components will be used as part of a major order for freight cars for Ferrovial Algeria. The SKF HBU 3 units are becoming the industry standard for high-end cars and was selected by FCA's recently launched Alfa Romeo Giulia, offer a range of compelling advantages over conventional wheel bearings designs. These include faster and more straightforward assembly and a longer service life, as well as exceptionally low levels of noise and vibrations. Next slide. I would also like to mention some of our new products offers.
For the wind industry, we have launched the newest Spherical Roller Bearings for wind turbine main shafts. Manufactured to deliver outstanding reliability, these self-aligning bearings provide exceptional performance and meet self-service needs for more than 25 years. For the marine industry, we have a few new offers, like the Simplex Intermediate Shaft Bearing, that provides superior durability, reliability, and ease of installation and maintenance for vessels, builders, and operators. Overall, it offers significantly shorter payback time and total life cycle cost benefits, from fast installation at the shipyard to a long operating life and easy maintenance. There is also a new one-box kit version of the proven Vibracon technology for the quick, accurate, and clean alignment and chocking of resilient mounts.
It is particularly quick and easy to use in the maritime industry, for example, under engines, generators, and skids, and is both adjustable and reusable. SKF Dynamic Stabilizer Cover is a flexible, pneumatically operated cover system that offers significant fuel savings with minimal complexity and low maintenance requirements. It reduces drag and improves the efficiency of passenger vessels equipped with SKF retractable fin stabilizers, Type S and Z. And finally, SKF Centrifugal Lip Seals, designed to save energy, improve performance, and extend maintenance intervals in high-speed rail applications, have been launched.
Thank you, Alrik, and good afternoon to all of you. If we turn to the next page on the sales development, I will take you through the financials here. Starting off, then, the total net sales decreased with 2.5% in the Q3. The structural component in quarter three was -2%, and it relates to the divestments of Fly-by-wire and Kaydon Velocity Control completed earlier this year. We had a small currency effect of +0.1% year-over-year in the quarter, compared to the headwind we experienced in the first half year. So if we turn to next page, organic sales growth. Organic sales development continues to follow a cyclical pattern. As you see in the slide, decline in the Q3 was -0.6% versus Q3 last year.
I would say the historical pattern on the business cycle of 5 quarters-7 quarters seems to be fairly accurate also for this present cycle. Next page, operating profit, excluding one-time items in the quarter, was SEK 1,811 million, down from SEK 1,976 million in the Q3 last year. Operating profit in the Q3 included then, as we've heard from Alrik, one-time items net of SEK 380 million, whereof SEK 680 million positive relates to the curtailment gain due to the closure of the U.S. Defined Benefit Retirement Plan. We had negative SEK 211 million related to restructuring costs, primarily in the U.S., but also in Europe and South America. The remainder relates to impairments.
More details, information about how these one-time items have affected the different lines in the income statement, you can find in the quarterly report on page 4. Operating income, excluding one-time items for the last twelve months rolling, was SEK 7.5 billion. We go to the next page on the operating profit bridge. One-time items year-over-year was then positive SEK 520 million, when calculated in last year's exchange rates, then mainly related then to this year's change in the U.S. Pension Plan, and to higher restructuring charges last year, compared to this year related to cost reduction activities. Organic sales development impacted negatively by around SEK 175 million for the quarter, and that includes the volume, price, and mix. Currency impact compared to last year's currency exchange rates was negative by SEK 50 million in the quarter.
As before, we report this year the cost reduction program from last year and the savings, we estimated a quarter to SEK 120 million year-over-year. Then we have other impacts with SEK 3 million in the quarter. Finally, the divested companies representing -52 year-over-year. So moving to the next page, operating performance by segment. We start with industrial organic net sales within industrial decline with 2.8% in local currency versus last year. Although the rate of decline in demand in North America and Asia has diminished, market conditions continue to be challenging during the quarter.
The operating margin, excluding one-time items, was 11.7%, and the lower margin primarily due to lower organic sales, together with a negative price mix effect, and to a small extent, also to the divestments earlier this year. Automotive organic sales grew by 4.4% in the Q3. We saw very good sales, both for cars and light trucks, as well as trucks. The strongest automotive markets were in Asia and in Europe, where I would say in some countries, we outperformed the general market growth. Operating margin for automotive, excluding one-time items, was 6.6% in the quarter, compared to 5.8% last year.
I would say we continue to make good progress on improving our margins, both as an effect of higher sales volumes, but also through reduced cost and a positive mix. Next page, income statement for the group, some comments, gross profit, and then we have these adjustments then for the one-timers in both directions. You can say gross margin was about one percentage point lower in quarter three versus Q3 last year. I would say the drop was caused to the largest extent to price mix. Selling and administrative expenses, adjusted for one-time items, were some 3% lower, or around SEK 75 million than last year, and the ongoing cost reduction programs has a positive effect also this quarter. Financial net was SEK -142 million, compared to SEK -177 million last year.
This year, it was positively impacted by exchange rate effects compared to last year. Additionally, last year, we had a one-time item of SEK 130 million related to negative revaluation effects due to currencies in mainly Latin America. On the tax line, in the Q3, we were SEK -660 million, given an effective tax rate of 32.2%. And we were last year negatively impacted here by divestments of business as well as tax losses carried forward. In this quarter, this year, we have somewhat a high tax rate, negatively impacted by a dividend tax in India, and also capital gain tax related to transfer of assets in a legal merger that we have done, that will be tax deductible only during the coming five years, so it's time difference.
Next page, cost management. We continue to see positive effects from our fixed cost development here. These slides, same as before, show the development since Q4 , 2014, excluding one-time effects and excluding acquisitions and divestment in a fixed currency, so as an index. Second graph, number of employees, including agency workers and temporaries from the same time period, we had an increase in this quarter of 203 employees, mainly related to temporary employees and hired agency personnel in our factories and warehouses. Fixed cost index was 97 in the quarter, a slight improvement compared to last. If we move to the next page, cash flow after investments before financing.
I think we achieved a good cash flow in the quarter, SEK 1.816 billion, sorry, compared to SEK 1.860 billion last year. Here we have then adjusted for core effects related to divestments, which in this quarter was taxes paid on the two divestments that we have done this year. Next page, net debt was reduced in the quarter by SEK 1.4 billion. And I would say we continue to make good progress in deleveraging the balance sheet. Net debt, excluding pensions, improved to 44% of equity. Provisions for post-employment benefits was reduced this quarter by about SEK 900 million as a result of the changes in the U.S. Pension Plan, which I will comment on in the next slide.
So total net debt equity ratio was 105 in the end of September. So the change to the U.S. Pension Plan. We have in U.S., we have both DC plan and we have a DB plan. And we have now communicated that the defined benefit plan will be fully closed by end of the year for new accruals. And instead, the employees that today are part of the DB plan will be offered an attractive defined contribution plan, which means that almost all of our U.S. employees from January onwards will be in a defined contribution plan. And the financial effect from this plan closure is then a one-time gain of SEK 680 million, so curtailment gain.
We have also, in the quarter, done a $100 million financing payment into the Pension Plan, which net of tax then gives a negative cash flow on the financing activities of SEK 613 million. So there are two different events related to U.S. Pension Plan in the quarter. We will see a positive effect when it comes to cost, so pension cost, over the P&L next year, and we estimate that operational and financially be reduced with around $10 million in 2017 versus 2016. So next page. Net working capital was 13.3% of sales at the end of Q3, slightly higher compared to last year.
We should note that currencies had a negative effect on net working capital of 1.1 percentage points in the quarter, and I would say adjusted currencies, then we see a small improvement versus last year. Next page, the guidance for the year. We expect for the Q4, a financial net of about SEK -225 million. And based on the exchange rates we have by end of September, we expect to have no impact on the operating profit from currency. Tax level for the full year, we expect to be about 32%, excluding the effects from divestment, which is at the pace that we have year- to- date. Investments, addition to property, plant, and equipment of around SEK 2 billion for the full year.
Next page, we move over to the demand outlook, and this definition is unchanged since before. So, with that, I leave the word to you, Alrik.
Thank you very much. Regarding the guidance for Q4, we expect. I am reading from my October 2016 with demand outlook for Q4 2016. Demand compared to Q4 2015. The demand for SKF Products and Services is expected to be relatively unchanged for the group and for industrial. Demand for automotive is expected to be slightly higher. Demand is expected to be relatively unchanged in Europe, lower in North America, slightly higher in Asia, and higher in Latin America. Demand compared to the Q3 2016, where we see the demand for SKF Products and Services is expected to be relatively unchanged for the group, including both industrial and automotive.
Demand is expected to be slightly higher in Europe, lower in North America, and relatively unchanged in Asia and in Latin America. Before we end, I would like to just bring your attention to the next slide, and before we go to the Q&A session, a few words about our upcoming events. Next week, Christian and Patrik will be on a roadshow in London and Paris, where we hope to meet with some of you. We've been informed that many investors were unable to attend our Capital Market Day due to other events, so therefore, we have decided to reschedule the Capital Market Day to April 6th . The Capital Market Day will be held in Gothenburg, and I hope to see you there, as we did in the last Capital Market Day.
Until then, we will be, as usual, available to meet with you here in Gothenburg and elsewhere in the world, and you will also be able to meet us at some of the upcoming investor conferences. So with that, I will go over to you, Patrik.
Thank you, Alrik. Operator, Dan, I think we are ready to go to the Q&A session, please.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Please limit the questions to one at a time to allow everyone in the queue to ask a question. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Klas Bergelind from Citi. Please go ahead, your line is open.
Yes. Hi, Alrik and Christian, it's Klas from Citi. I have three questions, please. Firstly, on the price mix, when I look in the bridge, the drop-through is pretty big, despite organic sales only down 60 basis points. I appreciate that you get a negative mix when autos is growing like this versus industrial, but yeah, I just wanted to get a sort of a clarification. What happened to pure pricing in the quarter? Was pricing worse, or is it just mix? Because you also say that you had a negative price mix effect in the industrial division, so it can't only be between the divisions.
No, that's correct. Christian here. Hi, Klas. You have, as you correctly say also, you have one mix effect of the mix between automotive and industrial. But if you take that aside, you still have a price mix of, depending on how you calculate it, you know, somewhere half a point. And I would say that that is, if you take, for example, North America, you have a mix effect still with a relatively weak distributor sales, but it's also pure price, yes.
Okay. Then moving on to the other line, when you say inventory here, when we look at inventory X currency, how do we- how did we move in the quarter, and what impact did it have on the other line? I'm talking pure under absorption, and if there are any revaluation effects.
Yeah, if you take absorption, our production, deliveries from production was about the level of quarter two, some was higher. So a small positive contribution when it comes to fixed cost average in the quarter.
How much?
I would say, I mean, if you take in the EBIT bridge, it's in the range of SEK 30- SEK 30 million.
Okay. Great. And how do you plan to run production in the Q4, in a similar level? I mean, you're guiding sort of flat year-over-year.
Yeah. Yeah, I think production level will be slightly higher, quarter to quarter versus this Q3. I expect it to be slightly higher, you never know, but I mean, that's how we see it now, slightly higher in Q4. We will not see the same, the usual inventory reduction by end of the year, this year. I mean, for example, in North America, as you have followed, we are determined to get out of this bouncing around the year-end pattern. We don't expect that to happen this year, so clearly less inventory adjustments reductions in Q4.
You took out, quite a lot of inventory in the Q4 of last year, so year-over-year, under absorption reversing could be quite big, correct?
Yeah.
All right. Then my final question is on North America. Can we get clarity here, both on autos and industrial? You have lost sales to one of the big threes in the past in automotive, and then you had the change with distribution last quarter. I just want to understand the improvement in automotive, number one, was that due to an easier comp and some of the sales from distribution coming back? Just to understand the underlying improvement, because you're guiding for lower demand in the Q4, quarter- on- quarter in North America, so it seems like it's sort of not underlying improvement.
Yeah, I mean, you talk automotive North America, yes, you're right. I mean, we had that issue with the logistics, you remember, in the Q2 that pushed over some volumes to Q3. We had also, I would say, I mean, maybe an even stronger VSM market in North America in the Q3 than what we usually have. That is not anything we see in Q4. And then you usually have also a seasonality there, negative seasonality in Q4. So I would say that you're right. It's not a strong underlying performance that are behind the Q3 figures on automotive.
Thank you.
Thank you. We will now take our next question from Peder Frölén from Handelsbanken. Please go ahead, your line is open.
Thank you, good afternoon, Alrik and Christian and Patrik. Yeah, if I limit myself to one question, I would like to talk about the cost development going forward and maybe touch base from this specific quarter. You talked about the savings, Christian. Maybe we could talk a bit about how the current program will save for the coming period? And also look at a bit on the Unite cost. And finally, my third element of the one single question is on the raw material, how that helped you or not in the quarter, and what you expect to have. Thank you.
Yeah, there was a few under the same headline. But I would say that I got the question last quarter about material cost, and I would say that we in this quarter we still see a good development on material cost. If we look at it into the Q4, as you also say here, when it comes to raw materials, this uptick on raw material prices will have an impact. So I would foresee that the positive effects on material costs will come down a bit. It's difficult to say exactly quarter- by- quarter, but that will happen. I would say overall, when it comes to and then you said Unite. Unite program is very intensive. We have a go live in January.
We are for the full year, I would say, our cost for Unite is in line with what we have forecasted for the year and what we have communicated. We have a tweak towards Q4 . So we will see a cost increase in Q4 versus Q3 related to Unite. So sizable, I cannot say exactly, but somewhere SEK 70 million-SEK 100 million quarter- to- quarter, huh?
And then I would say in cost, the cost reduction activities, I mean, we continue to focus this. If I would make some assessment, I would say we are the effect coming somewhat slower than we expected and hoped, huh?
But the original plan, just to remind us, Christian, was that sort of SEK 1.2 billion in savings or something like that? That's the old plan, and then we enter a new plan. And I just want to get a feel for, I mean, the magnitude now we run at SEK 120 million per quarter, and that's, yeah, that's SEK 700 million this year since the Q1 was much stronger. I mean, that adds up to SEK 1.2 billion. So are there additional savings of any sort of magnitude coming into next year?
I mean, we have the full cost activities that we have communicated to you, and, I mean, they are a bit long shots, but they, as I say, we are. We don't have, when we complete the restructuring that we, that took off last year, we don't have big saving programs, when it comes to, let's say, productivity on that side. I mean, it's smaller effects than what we've seen, so far after nine-
Yeah. So the SEK 120 that you talk about, or was it something like that, that specific sort of line that is coming down according to the plan, so to speak?
Yeah.
Yes. Thank you so much for answering my questions, I get answers. I get back in line.
Thank you. We will now take our next question from Erik Golrang from Nordea. Please go ahead. Your line is open.
Thank you. I have two questions. The first one is a follow-up on the previous discussion on gross margin and price mix. I struggle a bit to square the drop in gross margin by more than a percentage point to 2.5% in price mix. Is there something more to it there explaining the gross margin drop?
No, more to it? No, it's mainly, as I said, it's predominantly related to mixed price, which is natural, and it's in line with what we have said before. I mean, there is a price pressure in a market like the one we are in on the industrial side, particularly now.
Okay. Thank you. And then the second question in the employee count, the small increase quarter-on-quarter, you said that related to temporary employees and some agency personnel. How do you expect headcount to develop in the Q4?
I wouldn't say so much flat, if I would... Yes, it's not a planning item for us. We are more on the cost, but I mean, if, if you ask me, I would say flat.
Thank you. That's it.
Thank you. We will now take our next question from Daniel Schmidt from SEB. Please go ahead. Your line is open.
Yes, hello, Alrik and Christian. Can I just ask you, on the guidance that you gave, for FX, for instance, I think you said the thirtieth of September, and I just wanted to check if there's any sort of changes to your way of hedging or anything particular with the sterling or anything, because what would you think that the guidance would be if you would look at it, look at it again today, with the current FX rates? Start with that one.
I'm not in the market on that frequency that I can give you any value add on that question. I don't know.
Okay. Can I just ask you then, on the tax rate, I think you said something regarding India. I must have sort of missed the rest. Is that the main reason why it moves up from 30%-32%?
I mean, when you come to that granularity, of course, you come into small numbers there. And if there is a withholding tax in India, which of course is, we can call it a one-off, when we have taken dividends from that subsidiary. So that's one explanation, yes.
It's not going to be extrapolated into 2017, this tax rate guidance?
No. It's a guidance for this year.
Okay.
Taking into account where we are after the quarter, and yeah.
All right. And then finally, I think, Alrik, I think you guys have talked about during the quarter, when it comes to the U.S. business, that you renegotiated with some of your largest distributors to have a more sort of smoothening out of the restocking situation over rather Q4 into Q1 than the historical Q4, if I'm correct. Is that in any way affecting the way you're guiding for the last quarter?
Of course it is. Oh, yeah,
Can you quantify that in any sense?
Yeah, of course it is. I mean, when you look at it, we have already finalized the discussions with the main partners, customers, distributor customers in the U.S., for us to have a different kind of arrangement, where we don't suboptimize by trying to reach sort of a target in the end of the year, and you stock up, and then you use the first three months of the year, subsequent year, to burn out that inventory. We started that immediately when I came in, and we're starting to come to fruition with that.
That means that we don't foresee in the U.S. at all the pre-buy that usually comes as distributors want to reach their industrial distributors want to reach their target volumes to get the rebate. So that is definitely. And it's a good thing for the whole value chain, you know? If we don't have to speed production just to cope with the deliveries, and then we don't have the breaking in the beginning of next year, it's an all through good thing. And it's the same, basically, for the customers for our distributors. They can work in a much more professional way. And I think this is a lot what we have seen now also with some of this destocking that has been much more than I could imagine.
I tell you, when we started, that it was going to take this long, but this is a way also what happens then, when this comes in, and our distributors are working in a more professional way.
And is it possible for you to quantify that effect, that we see less pre-buy in Q4, and then I assume that you're basically-
No, but-
-more, more in Q1 then instead?
Yeah, well, you know, it's I don't want to give a complete figure, because in the end, it's up to the way they look at their markets and how they do it. But, I mean, that it will have an effect on Q4, that's for sure, in the U.S.
It's, in effect, big enough for you to be considering in the outlook that you gave for Q4. That, that's, sort of, that's fair to say?
Yes, that's fair to say.
Thank you.
Thank you. We will now take our next question from Andre Kukhnin from Credit Suisse. Please go ahead, your line is open.
Yes, good afternoon. It's Andre from CS. Thanks very much for taking my questions. Firstly, can I just understand what's, what are the moving parts on the other line in Q3? I understand there was about SEK 100 million of kind of normal inflation, and it sounds like there was only about SEK 30-odd million of Unite costs expensed in P&L. And this was all offset by, the year-on-year change, in factory level, of production, i.e., less under absorption. Would that be kind of right ballpark figures, or could you correct me on that?
I mean, the figure I gave was a + 30 related to production rates? And I-
Sequentially or year-on-year?
Year- on- year. And,
Okay.
Then the net of the rest is the cost management, yeah.
In the other line?
Yes, in the other line.
Okay. So just to get, how much was Unite in the P&L?
That's separated for you.
Okay, got it. Thank you. And, more broader question, it sounds like you overproduced slightly in Q3, given that your sales were down sequentially and production wasn't, and then you're planning to overproduce again in Q4, as you're guiding for flat demand and production level slightly up. What's the logic behind that? Are you anticipating a volume pickup in H1-17?
No, I think you can. It's fair also to say that we are building some inventories related to the Unite go live. And we are also reviewing our service levels, our stock service levels.
Got it. Thank you. And do you think that could lead to an improvement in pricing situation in 2017?
Well, you know, as we have said, we have, since the business climate turned in 2014, there has been sort of a, more of a buyer's market, which I think I have constantly reported, ever since then, since I came in. And I don't see any change in that for the moment. But of course, I believe that the kind of situation we are in now is, as volume starts leveling off and the market hopefully becomes more, even more stable going forward, that we will have a relatively stable pricing environment for next year.
I don't see that there's gonna be a radical pickup that will enable us to have a seller's market. I don't see - I mean, even though I hope for a better 2017, we don't see really a drastic turnaround in the underlying demand as yet.
Got it. Thank you very much for your time.
Thank you. We will now take our next question from Andrew Wilson, from JP Morgan. Please go ahead. Your line is open.
Hi, good afternoon, everyone. Just a couple of quick questions. Can you talk about how demand in North America trended sequentially through the quarter, please?
Yeah, well, sequentially during the quarter, you know, we- I think that the way, the way you see North America, what if you, if you mean we, we, we have been trending positively in the heavy and special industries. We have compared to last year, our aerospace has been doing okay. VSM, as we talked, was doing very well as we recovered out of this. Otherwise, I think that the underlying demand we see has relatively stable, and we don't see any big changes during the quarter. And our perception is still that there's been a certain destocking at our industrial distributors.
Okay, thanks. And can I just ask around the planning assumptions on the Chinese automotive market, and just what flexibility you've got to react to any changes in the market? Clearly, there's sort of subsidy-led demand, and that might change around?
Yeah, I think you mean, I think you know a lot of these programs that you are awarded, they are accompanied with a clear plan how to ramp up your production as well. So I think we're well poised to be able to supply these contracts that we have in Asia going forward. If there should be a surge of demand, which would be, of course, very positive, there are always possibilities for us in the short term before we ramp up to use other facilities to circumvent that. And so I don't perceive that our flexibility on the upside is any problem.
And on the downside, you know, let's hope that that will not happen, but I think we have proven in the past that we're relatively good at adapting our, ourselves also in the downturn. So I feel that our manufacturing people are on the ball.
Okay, perfect. Thank you.
Thank you. We will now take our next question from Graham Phillips, from Jefferies. Please go ahead. Your line is open.
Yes, good afternoon, Graham Phillips from Jefferies. My question is around the automotive, the 4.4% organic growth. And you're reading through the text, it seems to imply a little bit more about service being a stronger market. I had got the impression that service, because of longer life bearings and so on, hadn't been a growth area. So what is happening on the service aftermarket side in automotive, and do you expect the organic growth to continue strongly in that sector?
Well, you know, yeah, I think in some areas, you are, of course, right in the sense that as the longevity of bearings increase and roads improve, there is a situation where you can foresee that over a very, very long horizon, there's gonna be a different kind of overall market for vehicle service market going forward. But on the other hand, I think that right now, there's cars rolling around, and there is a market. And I would say that I think what you see here is us defending our position in the vehicle service market during this quarter.
So there's a short term, which you see here, what you see here, and then you arrive. I mean, as we have said before, when a hub three and a hub two last 400,000 Km, of course, long term, there will be less of a need. I was just coming back from Japan. I think it's quite interesting in Japan. Now, our market share for hub units to the domestic Japanese car makers is not that big. But it's interesting, there's almost very, very little aftermarket in Japan. The roads are good, and people drive carefully, and the bearings don't break.
Okay, so it's been partly market share gain in service and-
Yeah, this is not market dynamics, and I think we're holding our term.
Okay. And so do you think that share gain has got more to run? So i.e., we should punch above that 4.4%. I mean, we know auto production was down slightly in the U.S. in the quarter, and I think sort of flattish a bit in Europe. So, I mean-
Again, you don't forget also that, as we said before, all in, particularly in the U.S., we have been, we've had a transfer of our inventories to Crossville, where we in the Q2 were lagging, and part of what you see is, of course, during this quarter, recovery of that. So it's more the year-to-date figure that I think is slightly positive, that is what we should look at.
Okay. And so just one final thing. In the quarterly numbers for the EBIT, were there any restructuring charges, as a result of the program from last year that have hung over into this year, that are more one-off?
Within the-
Division
Restructuring charges, whether some belong to last year's program?
Yeah, like in, yeah, the EBIT number for auto, clean number before the one-offs and similarly for industry. Were there any restructuring charges coming through on personnel reductions, et cetera?
Yeah, I don't have it split out to industrial, but I mean, for some countries, we had an overhang into 2016. I mean, some of the long lead time countries in Europe. And I'm sure there are some individuals in automotive that was part of that, but it should not be a substantial number. But-
But the group-
Sorry
But you know, at the group level, what that charge was?
No, I don't have the split up of the SEK 211 in, let's say, old program and new activities, unfortunately. But we can find that out for you if you would like to have it, and you'll get it through Patrik afterwards on.
Okay. Thank you very much.
Thank you. We will now take our next question from Markus Almerud, from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, Markus Almerud here from Kepler Cheuvreux. Can I come back to pricing, please? And just to clarify. So yes, there's still pricing pressure. I understand that, and you have a year-on-year effect. In the Q2, you were talking about, you saw modest increases in pricing sequentially. Can you talk a little bit about how it looks through the quarters, please? Or through the quarter, or in Q3 versus Q2 in terms of pricing? And then I can just ask if you can talk a little bit more, just give us more color on the destocking and restocking cycles, where you think you are, if you see that end, and what in North America, and what the mood among your customers are, what kind of talk you hear on the ground? Thank you.
Well, I think that I don't see any deterioration in that sense, when it comes to the pricing environment during Q3 compared to Q2. I don't see the change. I think that, as you understand, when demand is still a little bit oppressed, there's always it becomes a little bit more of a buyer's market than a seller's market, and I think that that has no change. When we look at our distributors, I think one of the positive things, if you take, we talk about the U.S., yes, we still believe that there is a we would not have a pre-buy, which would then be giving a comparison to last year, which would be less fair, favorable.
But we see a stable demand from our distributors. The ones that have already with their destocking, we see now volumes or business coming as expected. So, I mean, business is tough in the U.S., but it's basically where it was before, and we don't see any big difference. If you take Europe, actually, one of the positive things, of course, for us during the quarter in Europe is that we grew, even albeit very slightly in the industrial distribution.
Okay. Thank you. So, no acceleration of any kind in pricing pressure, just the same-
I mean, any kind, you know, you know how it works in reality. The millions of different discussions, and you have sometimes annual contracts, and of course, they are not being discussed for deliveries this year. And sometimes there are spot business and there are especially when it comes to certain bigger bearings, you know, they are spot, so the negotiation is coming and as the demand occurs, and it's not sort of a contract, and then you have in the automotive business, as you know, we are taking contracts today that will be start to be delivered in a year. And so it's a mixed bag.
And then you have certain areas where, of course, like we said, marine, you can imagine marine is really difficult and down, and of course, that gives a certain environment. While, for instance, tunnel boring machines, right now, there's a veritable boom as to tunnel boring machines. Seems like all major cities in the world will convert themselves to Swiss cheese. And there's a really an interesting where metros and underground tunnels and so forth are being built in many, many areas. And there, in that particular business, it's actually quite positive at this point. So what I'm trying to say is that- a ll in all, it's the same as we've seen before. There's no change.
Okay. Thank you very much.
Thank you. We will now take our next question from James Moore from Redburn. Please go ahead. Your line is open.
Yes. Hi, everyone. Thanks, all right, Christian. I've got lots of operational questions, but sadly, I think my priority has to be to go back to the bridge, because I remain unclear. Would it be possible to help us with the number for the year-on-year effect in SEK for raw materials and Unite in the quarter? And what's the price mix, 100 basis points, and are you saying that 50 is interdivisional mix, 50 is intradivisional and pure price? And can we assume 25 basis points for each of pure price and intradivisional?
You want a clarification on the bridge that end up in a zero, which had a positive,
+3 within it.
Effect of 30.
Yes, I'm trying to get- w ell, you mentioned the absorption, so I'm just trying to get some of the other pieces and to think about how they might move going forward, if possible, please. On Unite, how much is that in the year-on-year effect?
Yeah.
Zero. And when we look at the Q4, what will the year-on-year effect be? You mentioned the Q-on-Q effect, but will that also be the same for the year-on-year effect?
Yes.
Thank you. On raw materials, can you give us a rough indication of the positive in the quarter?
Yeah, I mean, you have the mathematics there. So, I would say that you are. We have a sizable positive material cost effect in the quarter, not only related to raw material, but other things that we do. So, as a net of that, that's in the size of SEK 60 million-SEK 70 million, I would say.
Okay. And that plus SEK 60 million-SEK 70 million on raw mats, do you think that will go to SEK -10 million or SEK -100 million next quarter? Just trying to understand how much it will swing.
I'm not, I'm not on that granularity in the forecast. I cannot give you that.
Thank you. And just back to price mix, are you saying it's 100 bips all in, of which half is intra and pure price, or is it 50 bips all in?
I mean, you have around 50, somewhere related to the segment mix of the motor industrial.
I get you. And of the other 50, is pure price roughly half of that, or is it, is it the bulk of it?
I would say that it's more price than mix, but it's, I cannot be honest either on that details.
That's, that's very helpful. And my last one was just to say, on the auto margin, are we going to stick around the 5%-7% level in the next quarter, or will we drop quite a lot, given your comments?
The automotive outlook, I mean, usually Q4 is somewhat weaker. I guess you-
Yes, it's often been weak, but sometimes it isn't. And I, and your comments on the RS, the VSM mix, made me wonder if specifically it's going to be weak, materially weak this year.
No, I mean, we have a good traction in the turnaround plan in automotive. Q4 is a weak quarter. Q3 is supported by a stronger aftermarket, seasonality-wise, and also with the logistic things we have, but I don't expect us to fall through.
Okay, brilliant. Thank you very much.
Thank you. At this time, I'd like to hand the call back over to the speakers for any additional closing remarks.
Thank you very much for listening in, and thank you for all the good questions. I hope we have been able to answer them as to your satisfaction. And of course, Christian and Patrik will be available for more questions afterwards. I hope we will meet again next quarter, and that we will continue, and then that we will be smiling when we meet next time. Thank you very much.
This will conclude today's conference call. Thank you all for your participation. You may now disconnect.