Good day, and welcome to the First Quarter Report 2016 Conference Call. Today's conference is being recorded, and at this time, I would like to turn the conference over to Mr. Patrik Stenberg. Please go ahead, sir.
Good morning, and welcome to this Conference Call on The First Quarter Results. This conference call will take about an hour. Present today are our President and CEO, Mr. Alrik Danielson, our Senior Vice President and CFO, Christian Johansson, Kristina Franzén, Director of Group Central Finance, Theo Kjellberg, Press and Media Director, and myself, Patrik Stenberg, Head of Investor Relations. We will start as usual by presenting the results, and after that, we'll continue with the Q&A session. With that, I leave the word to Alrik. Go ahead, please.
Thank you very much, Patrik. Ladies and gentlemen, good morning, and thank you for listening in today. With this said, I will move to slide number 3, to start to comment on the slides as usual. As you know, today, we released our report for the first quarter, 2016. Demand from the industrial customers in China and North America continued to be challenging during the first quarter, while demand for customers in the automotive industry was stronger. In total, sales in local currency declined by 6%. I'll talk a little bit more about regional performance when we get to slide number two. Despite lower than expected organic sales development, our operating margin was 11.1%, and the benefits from the cost reduction initiatives implemented during 2015 are now materializing.
The automotive market profit improvement program, launched during the fourth quarter of 2015, is also progressing well, contributing to an operating margin of over 7%. All in all, we generated an operating profit for the group of SEK 2 billion in the first quarter. Our leaner cost base position used to better take advantage of the upswing in the market. But with that said, it's not something we are content with. Our efforts to cut, cut costs and improve efficiency will continue. Turning to the next slide, in our sales development by region compared to last year, organic sales were down by 6% year-on-year, as I said, driven mainly by North America and Asia, where we saw declines of 11% and 9%, respectively.
Continued low levels of industrial investments are impacting our business, as is distributor destocking, especially in China and North America. However, it is worth noting that we are comparing with an unseasonable high sales performance in Q1 of last year. In Europe, demand was more stable, with a moderate decline of 1.9%. Sales in Middle East and Africa grew by 1% in the quarter. If we turn to the next slide and look at the segment level, renewable energy in Europe struggled, whilst cars, light trucks, trucks, vehicles, service market, all performed well, but not enough to compensate for the decline within the industrial market. In North America, we saw generally weak markets across the board, with the exception of aerospace. In Asia and China, in particular, general industry activity levels continued to be low, while the truck market was strong.
Turning to the next slide and some operational highlights. We opened a new factory for seals production in Zapopan, in Mexico. It is located near the group's existing sealing solutions factory in Guadalajara, allowing for continued expansion of production, predominantly for automotive original equipment manufacturers in North America. Together with Ericsson and Chalmers University here in Gothenburg, we announced the launch of a 5G, fifth-generation enabled manufacturing, fifth, fifth-generation mobile, communication technology. It is a two-year project aimed at combining the next-generation mobile technology with manufacturing technologies. We continue to focus our business around the rotating shaft. As a result, we have recently agreed to divest part of our business. In March, we signed an agreement to divest the Fly-By-Wire business to LORD Corporation, and earlier this week, we announced the divestment of Kaydon Velocity Control, making industrial shock absorbers.
The total consideration for these two divestment is about SEK 3 billion. In order to further simplify and further drive organic sales growth and improve profitability, we have adjusted our structure to four areas: Industrial Sales Americas, Industrial Sales Europe, and Middle East and Africa, Industrial Sales Asia, and Automotive and Aerospace. In addition, we have combined the responsibility for our end-to-end procurement, manufacturing, and logistics operations in the newly formed Bearing Operations, and formed a new structure for product and business development. We turn to the next slide. I want to highlight some examples of recently awarded business from our operations. We secured lubrication management system and bearing contracts with Las Bambas Mine in Peru. Las Bambas will be the third largest copper mine in the world when fully operational in 2017.
SKF signed a five-year contract with Gamesa do Brasil for the supply of sealing bearings for their wind turbine generator business. SKF will have a majority share of the business supplied from our new facility in Cajamar, outside São Paulo. We also supply the FCA Group with solutions for their compact SUV model, the Jeep Renegade. The products supplied are wheel hub bearing units for front-wheel and rear wheels, shock absorber seals, transmission seals, and engine seals. SKF signed an agreement that extends its long-term collaboration with Valmet. SKF will supply bearing units, lubrication systems to Valmet for the pulp and paper and energy industries. SKF won additional business with the world's largest port crane manufacturers, the Chinese Shanghai Zhenhua Heavy Industries, ZPMC.
SKF will deliver bearings, condition monitoring, and service solution to ZPMC Zhenjiang and its customer, PSA, a worldwide terminal operator with a main port in Singapore. Some new products. SKF developed a mobile and cloud-based data collection, analysis, and support system to suit the needs of the global wind energy industry. SKF Enlight is designed to improve inspection efficiency, and reduce costs for frontline maintenance teams, and to provide operators with rich, real-time data on turbine performance and reliability. SKF launched a new device, the SKF Turbo Sludge Buoy, for fast and easy separation of oil and water in tanks in marine and offshore applications. SKF introduced a new app for its proven SKF Drive-u p method for mounting bearings. It enables the user to achieve accurate adjustments of spherical roller and CARB toroidal roller bearings mounted on tapered seatings.
In addition to what is shown on this slide, we also awarded interesting new business across different customers and industries, such as SKF supplied wheel hub bearing units for pickup trucks as part of a six-year agreement worth SEK 170 million annually to one of the world's largest global car manufacturers. SKF received a four-year contract worth SEK 70 million for a big player in the pulp and paper segment in Brazil. The contract includes supply of integrated solutions to achieve the best rotating equipment performance. SKF signed a supply agreement with a global supplier of wind turbines, making gearboxes based in Europe for a new application worth SEK 90 million. SKF received a one-year contract regarding supply of axle boxes and journal bearings for one of Central Europe's largest railway wheel sets manufacturers.
SKF supplied equipment for vibration measurements online at Iggesund Mill, which is part of the Holmen Group. The new investment in IMx, condition monitoring, which is SKF's standard system for online vibration measurement, monitors critical process equipment on the pulp line at Iggesund Mill. With this, I want to sort of give example of even though we, the market is not as strong as we would like it to be, there are still plenty of opportunities. If you turn to the last slide, and as I said before, we have, you know, during the last 12 months, increased our efforts to focus on our core business around rotating equipment. As a result, we have made several divestments. Last year, we completed the divestment of Erin Engineering, Purafil, and Kaydon Filtration, as well as Canfield Technologies.
With the recent agreements to divest Fly-by-Wire and Kaydon Velocity Control business, we've taken significant steps forward. In total, these divestments will raise a total consideration of more than SEK 4 billion when completed. Following the three divestments, the Kaydon Bearing business will now be fully integrated into SKF operational structure, strengthening our value propositions in key industrial segments. The Kaydon Bearing business is one that complements our own from a manufacturing footprint, customer segment, and technology perspective. With those words, I conclude my introduction and hand over to you, Christian. Please run through the financial in more detail.
Thank you, Alrik, and good morning to all of you. Turning to the next page, total net sales decreased with 8.9% in the quarter. The structure component in the first quarter was -0.8, and relate to the what you've observed, the three divestment transactions that were completed last year. Currency effect year-over-year turned to a -2% in the quarter compared to the tailwind that we experienced throughout last year. In quarter one, the effect is primarily related to Asian and Latin American currencies. We turn to next slide, the quarterly development of organic sales. We see the decline that we have reported on in the last quarter continue, and that follows a typical cyclical pattern also in this quarter, with a decline of 6.1% versus last year.
Turn to next page. Operating profit, excluding one-time items in the quarter was SEK 1.972 billion, down from SEK 2.376 billion last year. We see that this year we are also somewhat better off than the first quarter of 2014. Rolling 12 months after first quarter was SEK 8.3 billion. We go to the next slide. The operating profit bridge. One-time items year-on-year was SEK 559 million positive when we calculated in last year's exchange rate. Main items, and this relates to that we had a substantial part of our cost reduction charges in the first quarter last year. Organic sales development impacted negatively by around SEK 400 million in the quarter, and this includes volume and mix.
Currency impact, compared to last year, currency exchange rates was slightly negative by SEK 30 million in the quarter, and savings from the ongoing cost reduction program were SEK 250 million in the quarter. Other impacts was to SEK -208 million, including general inflation and the negative impact of lower manufacturing volumes compared to last year's first quarter. Divestment, divested companies correspond to a SEK -17 million. If we turn to the next slide, operating performance per business area, starting off with industrial market, net sales declined with 9.3% in local currencies versus last year. European sales declined, and especially energy, both renewable and oil and gas, and industrial general had a weak quarter.
In North America, sales to the railway industry was slightly lower, and sales to the heavy and special industry were lower, while sales to all other industries, including industrial distributions, were significantly lower compared to first quarter last year. In Asia, sales to energy industry were lower, while sales to all other industries were significantly lower compared to first quarter last year. Industrial Market operating margin, excluding one-time items, was 12.7%, compared to 15.5% last year. Margin decreased primarily due to the lower organic sales, together with negative mix with the lower distribution share. Also, lower manufacturing volumes were not fully compensated by cost reductions, and obviously, as you see on the sales decline, industrial market was more severely impacted among the business areas. Also, currency development contributed negatively in industrial markets.
Specialty business, net sales declined by 3.3% in local currencies. Aero sales improved somewhat, while sales elsewhere were lower due to headwinds in industrial segments. Specialty business operating margin, excluding one-time items, was 12.1 in the first quarter, an increase compared to 11.7 the year before. Aero had a stronger quarter than last year, and especially in total, had good execution in cost reductions, as well as positive currency development, different to industrial market. Automotive market, net sales in local currency were almost flat in the quarter. Sales in Europe were significantly higher compared to last year, while with significantly higher sales to the car and light trucks industry, and higher sales to the vehicle service market and customers in the heavy truck industry.
North American sales in the quarter were significantly lower, including significantly lower sales to both the truck industry and the cars and light trucks industry, and lower sales to the vehicle service market. In Asia, sales were slightly higher, compared to quarter one, 2015, and significantly higher to truck industries, relatively unchanged to cars and light trucks, and lower in the vehicle service market. Automotive market operating margin, excluding one-time items, came out at 7.4% in the quarter compared to 5.2%, last year. Positive effects from our profit improvement program, launched last year, and we can see that that's materializing. Also, costs are reduced, including material costs. We turn to the next page. Income statement, just a few additional comments.
Gross profit, adjusted for one-time items, we were down 0.9 year-over-year, caused by the lower volumes, some extent to mix, but also that we haven't been able to fully compensate the volume decline in manufacturing, although we have a positive effect from the cost reduction programs. Selling and admin expenses, adjusted for one-timers, acquired and sold companies, and currency, was about 7% down versus last year. Financial net in the first quarter was -SEK 270 million. Quarter one last year, we had a gain of SEK 80 million related to that we sold equity securities. Taxes, negative SEK 514 million, giving an effective tax rate of 31%.
Tax rate was negatively impacted by tax losses carried forward created in the quarter that we don't recognize as tax assets. If I go to the next slide, cost management, just want to emphasize that cost reduction remain a high priority for us, also in 2016. We see a positive development on our fixed costs, and in this slide, show the development since end of 2014, excluding one-time effects and in fixed currency, expressed as an index. You see that we are now at 94 after first quarter this year. We should also note that the IT program, the Unite spending, have increased during last year, and I would say on average, represent a 2 percentage point increase of our fixed cost.
Second graph shows a number of employees, including agency workers and temps over the same time period. The reduction in quarter one was more than 600 employees, bringing the total since end of 2014 to some 2,900. As we said then in earlier conferences, we are not content with this. Our high focus on cost reductions continue, and when we have specific activities implemented, we will inform you, and in addition, we will continue with this slide, and of course, give your comments when we walk through the EBIT page. On next slide, we have the cash flow. We achieve the cash flow after investment before financing, adjusting also for acquisitions and divestments of SEK 510 million in the quarter, compared to just above SEK 1 billion in the first quarter last year.
And if you look at the last 12 months cash flow, it amounts to the rolling SEK 5.1 billion. And if we take seasonality into account, where we see from the past, that quarter one usually is weaker, I'm pleased with this quarter. Net working capital was 28.2% of sales in the end of the first quarter, and as you know, we have increased our ambition on working capital reduction, and the new target is to achieve a level of 25% of annual sales over a business cycle. And in the first quarter, working capital ratio improved than compared to last year, where it was 32.1. We have a slight increase compared to Q4 due to seasonality, and we should also note that it's positively impacted by exchange rate changes.
On the next slide, some comments to, on the financial effects of, of our divestments, and as you've heard, we have announced two divestments during the quarter. We are very pleased with the outcome of these two agreements, and if you look at the financial effects of the transactions combined, we expect a cash flow, net of taxes, of SEK 2.8 billion, and a negative effect on, on net income of around SEK 350 million, primarily referring to tax costs. And these, as you know, these amounts are based on current exchange rates and may still change. And we expect to reflect, the effects on net income in the second quarter.
On the next slide, some comments to our financial position. Net debt equity was 106% end of the quarter, which is slightly up compared to the year end, due to increased pension liabilities. Where we between quarter four and quarter one had an increase of SEK 1.2 billion, of which 1.4 relates to lower discount rates, primarily in Germany, but also in U.S. and U.K. If we adjust for the change in pension liabilities, we reduce our net debt by about SEK 200 million in the quarter. On the next slide, we have our guidance for 2016. We have for the next quarter, we expect a financial net of about negative SEK 250 million.
We have a currency impact that gradually, during, I would say, in the last quarters, have turned to the negative. We expect that on, with the exchange rate we have around on March to be around -SEK 300 million in the second quarter compared to 2015. For a full year, tax level below 30%, and as, no change either to additions to property, plant, and equipment, around SEK 2 billion on a full year basis. So next slide, SF, SKF demand outlook. Just very short definition to repeat. I think we, we've said it a few times now, but in short, the outlook represent the expected volume development in the coming quarter. It's based on raw data, and the sequential outlook is not seasonalized, so no seasonalization of our numbers. With that, I leave the word back to you, Alrik.
Thank you very much, Christian. Well done. Well, let's look at the SKF demand outlook for Q2 then. And as we see it, demand compared to the second quarter 2015, the demand for SKF products and services is expected to be slightly lower for the group. Demand for the automotive market is expected to be slightly higher. Demand for Specialty business is expected to be relatively unchanged, and demand from the industrial market is expected to be lower. Demand is expected to be relatively unchanged in Europe, lower in Asia and Latin America, and significantly lower in North America. Demand compared to the first quarter 2006, however, is as follows: the demand for SKF's products and services is expected to be slightly higher for the group.
Demand for the industrial market and automotive market is expected to be higher, and demand for S pecialty business is expected to be relatively unchanged. Demand is expected to be relatively unchanged in Rest of Europe and in Latin America, higher in North America, and significantly higher in Asia. If you look at the last slide before we conclude, you look at the financial calendar, and maybe it's worth just noting, Patrik, that the report on second quarter 2016 is July 21st, and report on the third quarter 2016 is going to be on October 26th. Patrik, I hand over to you.
Thank you, for the presentation, and operator, now we are ready to start our Q&A session. Please go ahead.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal for questions. We take our first question from Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Alrik. Hi, Christian. It's Klas from Citi. A couple of questions, please. Firstly, on the guidance, you said that you expect demand in industrial and autos to be higher quarter on quarter. I guess, higher industrial in North America and Asia, and higher in autos in Asia, just to clarify that. And then, how much of the industrial guidance is underlying end of destocking in the channel, maybe restocking versus just seasonality quarter on quarter?
Yeah, you're right, of course. As you have a seasonal pattern Q1, Q2, both in Americas and in Asia- Pacific, I mean, with the Chinese New Year, for example, huh? So seasonality is an important part of that. I mean, if you start with Asia- Pacific, we see, as part of our guidance, we see India sequentially improving. If you take China economy overall, I would say that we don't see a turning point in China yet. It's heavy industry, for example, is. We have overcapacities and low investment levels. We have railway. We see some changes there, where we have much less freight market, which is a mixed change. We have good markets on high- speed and on metro.
Wind installations, quite high volumes this year, although slightly lower than last year. And the underlying, we have had destocking in our distributor channels, as you know, in previous quarters in the past. So, I mean, overall, I mean, on the overall economy, we don't see, you know, some big changes in China. For us, though, in addition to the seasonality, we might see that we have bottomed. If you go to Americas, we have on the vehicle service market seasonality device. It is second quarter, we have an effect. We have also our Aero business doing well. We have also, as you can read in the report also, where we've got a new contract, we are ramping up also our Brazilian facility on wind. So, yeah, that's what I can add to your.
Okay.
Request.
And then, the paper.
In the U.S., just let me jump in here. I think if you recall, it was clear I had even been myself visiting our American distributors in the end of last year, and for them, business was really weak in the end of 2014. It has come back, so the business for our distributors is back. So the additional inventory that they purchased, because, of course, you know, the purchasing pattern, when you get a weak end of a year, they still continue to buy. They've been burning that inventory. Maybe there's a little bit more burn going on even in this month, but then it's over. But the business is back. But that doesn't mean that we really see sort of a turnaround in the U.S. It's t he business is back on the similar kind of level it was during the 2015 normal.
So to speak.
Okay. Then, I guess, the famous question about how the quarter trended throughout when you look at March, and if you could comment a little bit on what you see in April versus March currently.
Well, the biggest difference I would argue is that in the end of last first quarter, it was still strong. We had, you know, very abnormally high sales in Asia, for instance, to distribution. We had still at the end of 2014, was very strong, so people were still sort of replenishing in the first quarter of last year. So the comparison set figures are exceptionally different, so to speak, in the first quarter. So this has been this quarter—this year has been more normal, so to speak, in the in the.
And then on production levels, you did a lot of destocking in the fourth quarter, and I guess we are increasing here a bit quarter-on-quarter on seasonality in the first quarter. Could you say by how much? So inventory move, ex-currency, and then for the second quarter, this is the biggest quarter for production, normally. Could you tell us how much you intend to increase from current levels?
I mean, on the Q1 versus Q4, I can comment that. I mean, as you correctly comment, we have a seasonality. I mean, we have built some inventory, but we have built less than we did last year.
How much?
Year-over-year, we are down some SEK 150 million, in that range. Going forward, I cannot comment on what to do with production there, but I mean.
But as you can see, if you look at it, we are with this new simplified structure in SKF, we are much closer to the markets. We have. We are working with being tight on the demand and quick to react. You know, we have sharpened our targets on capital employed, and that is due to the fact that one of the things we can control is, of course, how we plan our inventories going forward. So it. We tend to be very tight on the market and not and try to avoid the swings. But you understand, it will all depend on the demand. We cannot allow the market not to be served, and this is sort of what will give the short-term swings. The long-term decline will come from a better end-to-end planning in our logistics, which we are working hard on, and higher flexibility in the manufacturing.
Okay. My absolute final question is on automotive. Total volumes, flattish, but now margin here is almost at your target. How much did the sort of higher production utilization versus cost savings and mix drive this? Trying to understand how sustainable the margin is going into the second half.
Yeah, I mean, a very relevant question. I mean, you have, of course, a seasonality. I mean, you have a very clear Christmas shutdown in automotive customers' plans so that you get an effect of moving into Q1, so that you have. But, I mean, we have good effects on our cost reduction activities. We have also quite good effects now on what we do on the purchasing and re-specification side, there, I would say. On the mix, I would assume that of the three is the least, the one contributing least.
The key question going forward, long term, I would argue, is when we win new business, how is the dynamics of the marketplace as far as competitiveness in the mid-term, long term? That's going to more be relevant to the sustainability of this target than actually the short term. I think this is a real figure as we stand today.
Thank you.
We take our next question from Beth Maslen, from Morgan Stanley. Please go ahead. Your line is open.
Firstly, just, if you could comment around, you know, working days for the quarter and whether that had any negative impact on Q1, as some companies have said, and would you expect to get any benefit from that as that reverses in the second quarter? Thank you.
Let me come back to that. I have to look in the big, big book. Take another question first, and I will.
Okay, fine. Maybe one on pricing. There's been lots of concern around, you know, the pricing development during the first quarter. Maybe a comment on just how you see pricing developing in your different geographies. Because my calculations suggest price mix was actually a bit better in the first quarter than it was in Q4. Just a comment on pricing, please.
Well, absolute pricing is. You can understand when markets are weak, pricing becomes-- There are two things that happens: the pricing focus from the customer increases, and when there is ready availability of the product, also the readiness from the different competitors to actually use the price tool as gaining volume increases. So there is an increased price pressure in the market. As I have said already last quarter and the quarter before that, that's no change. What we see, however, is that, If you really look at it from a more macro standpoint, the market has actually been served since the Lehman crisis. Meaning, there's been excess capacity in the marketplace since the Lehman crisis.
Yes, there's price pressure, yes, there's an increased focus by end users, especially the ones who are in heavy industry or are having tough times. You know, they really need to focus on this, and they are. There are very tough discussions, but it's normal. It's what happens, and there is a deflationary momentum in business also on input costs. And this is the big struggle, you know, to try to prevent price erosion as much as you can, still keep the business and then drive the cost. But this is sort of, I see the situation more as a textbook kind of reality, and this is normal reality.
Thank you. And then a final one, if I can. I mean, you introduced a margin target of 12%, last quarter, and maybe there wasn't so much discussion around it then, but you've just done 11.1% on a 6% organic decline. What kind of volume growth would you need to get to 12%? Is it the 5% growth that you've targeted, so the two targets are linked, or do you think you can get to 12% on lower growth than that? Thank you.
Well, you know, this is a very, very interesting question in the sense that it's, it's all about what kind of—If you wanna grow, and, in the end, this is what, what needs to happen, we need to start growing, there will be different kinds of opportunities available to you. And, depending on, which part of the market is growing the fastest, that will influence our ability to reach the target. What do I mean? Let's say that we get a new super cycle on commodities again, and mining starts roaring, well, you know, that's where we have our best position, and of course, that would help us tremendously. While if it's other more price disputed segments that are growing, well, it will be more difficult.
So it's a very, very difficult question you're asking me, because it depends on what part of the global market that will actually start growing and how fast. So it's just not a figure. I would love to tell you, it would be the easiest thing for me just to give you a figure, but it would not be truthful. So I answer in this way, if that's okay.
Thank you.
If I come back to your working day question, and eventually you are referring to more European company. In Europe, we had, on average, half a working day less. But I mean, as a global company, and we weigh this together with a different region, we are more or less exactly on the same number of working days between 2016 and 2015, if you take the months of March? So, I wouldn't say we don't have a working day effect in the quarter.
Got it. Thank you.
We take the next question from Erik Golrang from Nordea. Please go ahead, your line is open.
Thank you. First one, question is on the new structure, four area structure and the other changes to the organization there, Alrik, if you could say anything about the whole benefits you expect to get from that, a bit more color on the thinking here.
Yeah. Well, you know, what we've done, basically, if you take from the start, we started by taking seven staff functions and put, reduced them to four. We took the two industrial divisions and we put them into one, and in the specialty, we sort of took out the businesses that were not absolutely clearly part of, integrated, sort of, in the mainstream business, either automotive or industrial. Now, we've taken the last step, and we've actually sort of taken. You can say we've sort of collapsed the cons, the complete management level. We have now three sales areas directly in the group management.
We have one manufacturing organization, where we have very close to the operations, the global purchasing and the supply chain, the logistics, and so forth, very close to the operations. We have a segment and application development function directly in group management. And we have then sort of taken the businesses that are clearly either in fixed mode or as you have seen now, we have sort of started to divest and make it ready so that Kaydon can actually be integrated in the normal business. We put that with Christian, and by that, we have absolutely made SKF so much smaller. You know, I.
It's so interesting, I saw a journalist writing, saying, "Oh, SKF has now increased group management." But what they forgot to, to sort of recognize is that actually we have eliminated a complete level of management. SKF has been, is, has become so much smaller from an, from and much less complex. And what we hope to get from that is, of course, the ability to drive costs, the ability to be close to the market, and the ability to take quick decisions, this, in this increasingly changing world, we need to be faster than we've ever been before. And we believe now that this is the structure. We have discussed this at length in group management, and we think now that this is the way we wanna work forward, in order to achieve these things that I've mentioned.
But maybe we should also add, if it's behind your question, it will not be, you know, some kind of program like last year to capture some short-term effects of the reorganization. They will come gradually as the management team start to find the shortcuts in how we can work in a more efficient way.
Okay, thank you. And then two more questions coming back to guidance. Realized all the comments you gave earlier, but, but could you say if there's any improvement in terms of quarter-on-quarter demand expected into Q2, if you would adjust for the, the typical, normally higher sales in the second quarter? And then within that, if you look at the vehicle service market, specifically, given the importance it looks as it has on margins or automotive, where do you see that going into Q2? Thank you.
I mean, overall, we don't see big improvements. I think we said that. Europe has been wobbling on quite stable during the last quarters here. We see similar development going forward as we have guided. Asia- Pacific, I think we commented, we don't see an underlying strengthening of the Chinese economy in the segments we are operating, rather a stabilization. And I mean, eventually the destocking in general, the worst part of it is over, and we might feel the bottom. I mean, Americas, we commented also, I think, on the VSM side, which is important for us, particularly in Americas, we have a seasonal effect of that. But I wouldn't say that. I mean, your question, if it's generally a big impact, I would say no, no. I would say no on that. It's not a big driver in the overall picture on the VSM, seasonality, yeah.
Thank you.
We take next question from Marcus Almerud from Kepler Cheuvreux. Please go ahead, your line is open.
Hi, Marcus Almerud from Kepler Cheuvreux here. I'd like to first come back to Beth's questions about pricing, and if you could just maybe talk a little bit about the acceleration, deceleration of pricing. We understand there is pricing pressure, but how has it developed in the past year? Is it worse or is it just the same? I know that one of your competitors is talking about stabilization in Europe, et cetera. Are you seeing the same thing? That's my first question, please.
Yeah, well, when you talk, when we talk about stabilization of prices?
Yeah.
Yeah, yes.
The pricing pressure.
What I'm trying to tell, what I'm trying to say is, you know, this is customer by customer, and of course, when raw material prices go down and when the slowdown starts, the higher pressure is at that point. You know, when people start realizing, now I have an argument with my customer to say that the steel price used to be at 100, now it's down. I have an argument with you, let's negotiate. And of course, that period is over. That we have already gone through. So from that point of view, I would agree to it, that the dynamics is different.
But there's always a fight for the customer, you know, this is something that's always happening, and the only time when there's not a fight for the customer is when there's a very strong upturn, and it becomes the seller's market, as opposed to the buyer's market, and that's my argument. So, as I would agree with them and say, the big, the tough discussions were, of course, during the periods where it was obvious that the same argument used when you increase the price, that the raw materials are up, and the same arguments are, of course, used on the other way around, when raw materials are going down, for instance, that period is over. Because that has now happened, those negotiations are happening. But I've what I'm arguing is that in a relatively weaker market, pricing opportunities are lower, and it's a tougher, tougher environment.
Okay. Then maybe to move on to a similar area, but market shares. Could you talk a little bit about market shares trends, both in the previous quarter but also maybe in the last year, to see what you have seen in different markets would be helpful, both in industrial and automotive.
You know, from a quarter to quarter, there's very little that happens. What I think, and I think we've said that consistently, in North America, we're trading below market. I think that's absolutely obvious that in automotive, in the US, we're trading below market. Due to the fact that we are, let's say, a larger bearing company, and our stronghold is with larger equipment. When you have a customer like Caterpillar and others geared towards the mining industry, that affects SKF especially hard. So if you look at it, I wouldn't argue that we have lost market share in those segments.
It's more like those segments are, have reduced in importance in the total market, and in the segments where we are less present are more the ones that are winning. It's the same in China. If you look at China from a consumer market point of view, things are not that bad, you think about hair dryers and smaller consumer appliances, there the market is not that bad. We have a lower presence there than we have in heavy industry that's suffering. Then there are swings, of course, there. You lose a business, and then, for a while, you maybe have lost a little bit, and then you work hard to take it back, and that dynamic is there all the time. And I don't see any large differences in this sense at this point.
Okay, thank you.
We take our next question from Andreas Koski from Deutsche Bank. Please go ahead. Your line is open.
Thank you. Good morning, Alrik. Good morning, Christian. Yeah, I would also like to ask about pricing, and especially regarding European distribution, industrial distribution.
Yeah.
The reason is that you have lowered your list prices quite significantly, and we were used to price hikes of around 3%-5% when, when Tom was in the chair. So I just want you to explain why you are doing this and what your customers' and competitors' response have been to it. And lastly, how confident are you that net pricing will not also be down in industrial distribution?
Yeah. The situation is the net prices, this is a change that it was very much needed. When you look at, you know, price lists, maybe over a period of 20 years, increasing significantly every year, and real prices not following the same development, after a while, prices become a very numb sort of tool, if you understand, where the major part of the business is actually special business. So what we have done is we have updated the structure and the discount levels, and some. I know there's been discussions, there was a comment from Deutsche Bank saying that, you know, SKF has that we have done a complete lowering the price, and this is, of course, not true. What we hope now.
It was actually me writing that piece, and.
Oh, that was you?
Yeah. And what I was saying was that it was gross pricing, not net pricing.
Yeah, exactly.
I looked at list prices.
You're right.
That's right, yeah.
Yeah, that's absolutely right. The gross prices are completely different. So what will happen is that the discount levels will be different and the amount of business being on normal, sort of normal, discount without special business will be considerably increased. So this we have done as a way of curing a tendency that has been going on for decades. And our hope is that everybody in the marketplace see the benefit of this and will do the same thing. If prices, true prices, real prices, erode or not, that's gonna be a consequence of behavior from the different market players. That is not directly derived from a list change, you know?
I really hope that everybody understands that we are not reducing prices in the sense that we will only do that in absolute necessity, if there's a reactive, if we have to defend some position. Otherwise, our goal is the same as always, to try to defend the market prices as much as we can.
May I ask, what is the customer's response to this? Because if I were the customer, and I saw that you lowered your list price by, yeah, let's say 20%, then I would expect an impact also on my purchasing prices.
Yeah, but you can understand, this is, this has been a debate in the marketplace for years.
Yeah.
This is not something that we have just done because we think it's fun. We have done it because.
Of course not.
We have discussed with the distributors and customers, and we have realized that the tool is irrelevant, and there was a need for reform, and we thought that we bite the bullet, and we do it.
Yeah. Okay, thanks. Then secondly, on raw material costs. So we are now seeing scrap prices, iron ore prices, and other raw material prices increasing again. So can you just update us on how your structure looks like? Are you buying on agreement, and how long-term agreement are they? So the question is, basically, will we see further tailwind in coming quarters from lower raw material prices during last year, or will it start to become a headwind for you again?
I mean, you're right, of course, in your assessment. We've had over quite a period now, declining scrap prices. I mean, and they might have bottomed out now, and we see that we are turning upwards again. I mean, it's very difficult question you say. I mean, obviously, we've been this has been a support for a period, and you know, you have a mix of contracts, whether it comes in on the spot level, let's say, or if you have somewhat a delay in it. But I mean, so I cannot say, I mean, in the short quarter of the quarter, but I mean, and we are not hedging and so on, as you know, so the development will be reflected in the numbers as they come. And I mean, if the net effect where it goes in Q2, I cannot tell you.
I can just see that the overall, I mean, this is one part of the material cost, of course, and we are doing a lot of other things also, and we have a positive trend in material cost reduction, and I expect that to continue also in the second quarter as a net effect. Many activities ?
Can you, can you quantify what kind of impact it had on you in the quarter?
The year-over-year, you mean?
Yeah, lower raw material costs year- over- year.
Oh, I cannot. Raw material cost, I cannot isolate. I, I only see a total material cost, and that's.
Oh, yeah, that's fine, that's fine. If you go with total material costs.
I mean, I cannot give you a number, exact number on that, but it's a positive year-over-year development on that. You have also currency in that, which is difficult to separate since you, you know, if some plants are buying in foreign currency, and.
Anyway, we are not disclosing this.
Yeah, okay.
It would be absolutely absurd to disclose the figure. You can imagine I would get a call from.
Yeah, yeah, I just wanted to know ballpark figure, what the tailwind was in the quarter. May I lastly, on cost savings, so SEK 250 million in the quarter, what is the split between industrial market and automotive market?
I don't have that for you.
Okay. Thank you very much.
We take next question from Daniel Schmidt from SEB. Please go ahead. Your line is open.
Yes, hello, good morning, Alrik and Christian. Can I just ask you on the Unite program? Could you say how much you expensed in the first quarter, and what we should model in the coming quarters, to start with?
Oh, I mean, you have all the guidance on Unite for the full year, and that's still valid, huh? I mean, we are executing this program as we have set out. We don't have a change in the way we have ramped it up or in the first quarter compared to our plans. So, that's still valid.
Okay.
The guidance is also on plus plus 250, I think we said.
I think it's 200-300, right?
Yes.
So, midpoint SEK 250 then.
Correct.
Okay. So no sort of comment on what you've done so far?
No.
Okay. Can I just ask you, you've also refrained from giving any comments in terms of the production rate going into Q2, but is there any reason to believe that production would not be higher in the coming quarter, given the guidance, given the seasonality, even though, of course, you have this long-term ambition to be very tight with the market?
No, you're right. I mean, as demand increases sequentially, of course, we will produce accordingly.
All right. Okay. And then, thirdly, you've done five divestments, the last one was fairly big. What do you see ahead of you in terms of sort of further pruning of the portfolio and the focus on the rotating shaft? What should we expect?
Well, you know, I think the direction is clear, but there are two things. One is, of course, there are businesses that, if we see that we have an ability within SKF to have good profitability and keep our technological leadership, there's no reason why we shouldn't keep them. That's one reason. The other thing is, even if one day I would be looking at divesting something, I would never say that because automatically the price would go down, because, of course, that would give a clear signal to whatever buyer that I am eager. So, we would never disclose that anyway. But the reason, for instance, for Velocity, the clear reason was we had an interesting offer.
It is not related to our core business, and our belief is that we, as a host to industrial shock absorbers, we are not as good a host as the buyer, Stabilus, who comes from the similar kind of automotive side, and are now coming into the industrial side. They are a better host for the company to develop that technology than we are, since it is a completely different technology than what we have been dealing with previously. And that was the essence of the rationale for divesting Kaydon and Velocity, for instance. So, but there are no dogmas. We will work according to our ability to create good, strong cash flows.
All right. Okay, thank you.
Thank you very much for listening in to this Conference Call on The First Quarter Results. We have to stop here. If you have any additional questions, please give us a call or contact us by email. On that, thank you for today.