Please go ahead.
Good morning, everybody and welcome to this conference call for the presentation of SKF's First Quarter Results 2015. This teleconference will take one hour. Here from SKF are our President and CEO, Alrik Danielson, our Executive Vice President and CFO, Henrik Lange, Carina Fransson, Director of Accounting, Theo Kjellberg, Press and Media Director, and myself, Marita Björk, Head of Investor Relations. We will start by presenting the results, and then after this, there will be a Q&A session. Over to you, Alrik, please.
Thank you very much. Welcome, ladies and gentlemen. Here we are in Sweden, a wonderful spring day, sunny and warm, and a lot of pollen in the air. So, if I'm a little bit if I sound a little bit different today, it's because I have starting to feel it myself. Well, today, we released our report for the first quarter of 2015. As always, we were very busy in the quarter.
We took a lot of new businesses across many industries, as you can see in the report, in rail, renewable, and automotive, to name a few. We've also launched several new interesting innovations, some of which we have included in the presentation material. On top of this, we have advanced well in implementing the restructuring program.
As you all remember from our last quarter report, the program is aimed at improving white-collar productivity with an estimated total reduction of 1,500 employees, and with an estimated cost of approximately SEK 1.4 billion, and a full year saving of SEK 1.2 billion.
Our aim is to have this implemented fully during 2016. In one-time items in the first quarter report, we have SEK 540 million related to the restructuring program, covering 576 employees and generating a full year saving of SEK 460 million, as from 2016, mainly. As we said last quarter, we estimate the major part of this program should be finalized by the year end.
As you may already have seen, we have, from this quarter, introduced a slightly modified, and as we see it, improved format of our quarter report. We hope you like it. Now to our results. Our organic sales growth in local currency was up 1.4%, and basically in line in total and per region, with what we thought entering the quarter, with one exception. This is the development in North America.
What we forecasted to be up, has instead turned out to be a slight decline in organic sales in the region of 2.3%. We will come back to this, the reasons for this, further on. Our profitability, excluded one-offs, has also come in according to expectations. Henrik, we'll come back to this. During the quarter, we also became one of the first organizations to achieve the energy management ISO 50001 certification.
Please go ahead.
Good morning, everybody and welcome to this conference call for the presentation of SKF's First Quarter results, 2015. This teleconference will take one hour. Here from SKF are our President and CEO, Alrik Danielson, our Executive Vice President and CFO, Henrik Lange, Carina Fransson, Director of Accounting, Theo Kjellberg, Press and Media Director, and myself, Marita Björk, Head of Investor Relations. We will start by presenting the results, and then after this, there will be a Q&A session. Over to you, Alrik, please.
Thank you very much. Welcome, ladies and gentlemen. Here we are in Sweden, a wonderful spring day, sunny and warm, and a lot of pollen in the air. So, if I sound a little bit different today, it's because I have starting to feel it myself. Well, today, we released our report for the first quarter of 2015. As always, we were very busy in the quarter.
We took a lot of new businesses across many industries, as you can see in the report, in rail, renewable, and automotive, to name a few. We've also launched several new interesting innovations, some of which we have included in the presentation material. On top of this, we have advanced well in implementing the restructuring program.
As you all remember from our last quarter report, the program is aimed at improving white-collar productivity with an estimated total reduction of 1,500 employees, and with an estimated cost of approximately SEK 1.4 billion, and a full year saving of SEK 1.2 billion.
Our aim is to have this implemented fully during 2016. In one-time items in the first quarter report, we have SEK 540 million related to the restructuring program, covering 576 employees and generating a full year saving of SEK 460 million, as from 2016, mainly. As we said last quarter, we estimate the major part of this program should be finalized by the year end.
As you may already have seen, we have, from this quarter, introduced a slightly modified, and as we see it, improved format of our quarter report. We hope you like it... now to our results. Our organic sales growth in local currency was up 1.4%, and basically in line in total and per region with what we thought entering the quarter, with one exception. This is the development in North America.
What we forecasted to be up, has instead turned out to be a slight decline in organic sales in the region of 2.3%. We will come back to this, the reasons for this, further on. Our profitability, excluded one-offs, has also come in according to expectations. Henrik will come back to this.
During the quarter, we also became one of the first organizations to achieve the Energy Management ISO 50001 certification on a global scale. The group's energy management system is deployed across 38 manufacturing facilities around the world, covering more than 90% of the group's total direct energy use. We're having a very good week at Hanover Fair at the moment, that is running now. Where we have there, we have announced many new innovations.
One example is the new generalized bearing life concept, enabling customers to much better account for real-life conditions when calculating SKF bearing life in their machines. As mentioned many times, one of the key activities going forward is the continued step-up of relevant technical development, to be able to differentiate, create value to our customers, and to be cost competitive.
One such initiative, just announced, is the investment of SEK 300 million in two large size bearing test rigs in Schweinfurt, Germany. One is to be dedicated to bearings for wind turbines, and the other for a wide range of application segments, such as marine, mining, construction, and steel. In these rigs, real-life running conditions can be replicated. Another important investment is the building of a new flexible manufacturing line in Gothenburg, here in Sweden, for spherical roller bearings.
Right now in Europe, and I think everywhere, there's a lot of talk about the concept of Industry 4.0 or smart manufacturing. This is where integrated IT systems are combined with flexible automation technology for increased productivity, efficiency, speed, and quality. This new flexible manufacturing line is one more step forward for SKF in this direction. The investment amounts to SEK 190 million.
The review of the automotive business area is progressing as planned, and we will give you more detailed information about this in our next quarter report in July. Before I hand over to Henrik, I would like to highlight to you that we have earlier this week announced the new CFO of SKF. His name is Christian Johansson. He is 51 years old, Swedish, married, and has two children.
He has done an extensive international career as CFO and controller, as well as in general management in Gunnebo, Volvo, ABB, and Alfa Laval. As much as I hate to see Henrik leave, I now know we have found a worthy successor in Christian. Now, Henrik. Henrik, we'll go through the financials. Please take over, Henrik.
Okay, thank you, Alrik. Then, let me first start with the high-level figures before going into some detail and demand development. Our sales in the quarter at some 19.4 billion SEK, were up 16.3% in the quarter in SEK, and some 1% in local currencies. So, main part is currency. From an organic sales development in local currency, industrial market developed the strongest, being at 1.8%, with Asia continuing to drive that development, but we also had a good development for industrial market in Latin America, but we saw a decline in North America as well on a global scale.
The group's energy management system is deployed across 38 manufacturing facilities around the world, covering more than 90% of the group's total direct energy use. We're having a very good week at Hanover Fair at the moment, that is running now. There, we have announced many new innovations. One example is the new generalized bearing life concept, enabling customers to much better account for real-life conditions when calculating SKF bearing life in their machines.
As mentioned, many times, one of the key activities going forward is the continued step-up of relevant technical development, to be able to differentiate, create value to our customers, and to be cost competitive. One such initiative, just announced, is the investment of SEK 300 million in two large-size bearing test rigs in Schweinfurt, Germany.
One is to be dedicated to bearings for wind turbines, and the other for a wide range of application segments, such as marine, mining, construction, and steel. In these rigs, real-life running conditions can be replicated. Another important investment is the building of a new flexible manufacturing line in Gothenburg, here in Sweden, for spherical roller bearings. Right now in Europe, and I think everywhere, there's a lot of talk about the concept of Industry 4.0 or smart manufacturing.
This is where integrated IT systems are combined with flexible automation technology for increased productivity, efficiency, speed, and quality... this new flexible manufacturing line is one more step forward for SKF in this direction. The investment amounts to SEK 190 million.
The review of the automotive business area is progressing as planned, and we will give you more detailed information about this in our next quarter report in July. Before I head over to Henrik, I would like to highlight to you that we have earlier this week announced the new CFO of SKF. His name is Christian Johansson. He, Christian Johansson. He is 51 years old, Swedish, married, and has two children.
He has done an extensive international career as CFO and controller, as well as in general management in Gunnebo, Volvo, ABB, and Alfa Laval. As much as I hate to see Henrik leave, I now know we have found a worthy successor in Christian. Now, Henrik. Henrik, we'll go through the financials. Please take over, Henrik.
Okay, thank you, Alrik. Then, let me first start with the high-level figures before going into some detail and demand development. Our sales in the quarter at some SEK 19.4 billion were up 16.3% in the quarter in SEK, and some 1% in local currencies. So, main part is currency.
From an organic sales development in local currency, industrial market developed the strongest, being up 1.8%, with Asia continuing to drive that development, but we also had a good development for industrial market in Latin America, but we saw a decline in North America, as Alrik alluded to earlier. Organic sales in automotive was likely up by 0.6%, and the positive development in Asia continued for automotive.
Europe improved and is now growing slightly, but sales were down in both North America and Latin America. Our specialty business was up 0.7% in the quarter in local currency. So, first, let us look a little more detail at what happened to demand development region by region. We start in Asia, which once again had the strongest growth driven by good development in cars and trucks, renewable and industrial distribution. Geographically, we saw the best development in the quarter in China and Korea, and while India was basically flat.
For the Southeast Asian countries, we saw a mixed picture with growth in some countries such as Thailand, while Malaysia, Australia, and Indonesia showed the sales decline. Let me comment specifically on China. We continue to see a very positive development in our sales to industries such as renewable, cars, and aerospace.
Our sales in industrial distribution and railways developed positively, whereas we still saw some weakness in the general heavy segments such as metals and mining, and also lack of traction now in industrial drives, which is pumps, compressors, and gearboxes. There is a lack of liquidity in the market, which is dampening the demand. In North America, our sales were lower than we thought going into the quarter, and this is due to three main reasons .
First and foremost, on the industrial side, the direct and indirect effect of the low activity in mining, pharma, forest, and oil and gas had a negative effect on our sales to customers serving those industries. The parts of the industrial business which developed well in North America were energy and industries outside of mining, pharma, forest, and oil and gas.
Secondly, also on the industrial side, as we indicated in last quarter, there was a pre-buy effect from industrial distribution, which had a negative impact on the aftermarket sales in this quarter. Thirdly, sales to automotive customers were also down in the quarter, with cars and light trucks being down due to the mix of customers we serve, and heavy trucks and VSM being relatively unchanged. Going to Latin America, sales were basically flat overall, and we continue to see a very weak automotive OEM business in total, whereas our VSM business developed well in the quarter.
Our industrial distributor business, which has developed well despite the macro problems in the region, was relatively unchanged in the quarter. From a country viewpoint in Latin America, Brazil was impacted by a weak automotive OEM.
Argentina showed good growth, albeit from a low level, and Chile was relatively unchanged, and Peru showed a decline. Then turning into Europe, where sales were relatively unchanged for the quarter as a whole. In West Europe, sales were lower in Germany, France, and UK, whereas Italy and Spain had a positive development. Central and East Europe, we have continued to see signs of a weak demand in a number of markets in the quarter, particularly Czech Republic, Poland, and Ukraine, whereas Russia and Turkey continued to develop well.
And from an industry viewpoint, we saw very good growth in railways, while sales to renewable and aerospace were relatively unchanged. Both sales to industrial distribution and to general industries were slightly down in the quarter, and in automotive, all our main businesses, such as cars, trucks, and vehicle service market, were relatively earlier.
Organic sales in automotive was likely up by 0.6%, and the positive development in Asia continued for automotive. Europe improved and is now growing slightly, but sales were down in both North America and Latin America. Our specialty business was up 0.7% in the quarter in local currency. So, first, let us look a little more detail at what happened to demand development region by region. We start in Asia, which once again had the strongest growth driven by good development in cars and trucks, renewable and industrial distribution.
Geographically, we saw the best development in the quarter in China and Korea, and while India was basically flat. For the Southeast Asian countries, we saw a mixed picture with growth in some countries such as Thailand, while Malaysia, Australia, and Indonesia showed the sales decline. Let me comment specifically on China.
We continue to see a very positive development in our sales to industries such as renewable, cars, and aerospace. Our sales in industrial distribution and railways developed positively, whereas we still saw some weakness in the general heavy segments such as metals and mining, and also lack of traction now in industrial drives, which is pumps, compressors, and gearboxes. And there is a lack of liquidity in the market, which is dampening the demand.
In North America, our sales were lower than we thought going into the quarter, and this is due to three main reasons. First and foremost, on the industrial side, the direct and indirect effect of the low activity in mining, pharma, forest, and oil and gas, had a negative effect on our sales to customers serving those industries.
The parts of the industrial business, which developed well in North America, were energy and industries outside of mining, pharma, forest, and oil and gas. Secondly, also on the industrial side, as we indicated in last quarter, there was a pre-buy effect from industrial distribution, which had negatively impact in the aftermarket sales in this quarter. And thirdly, sales to automotive customers were also down in the quarter, with cars and light trucks being down due to mix of customers we serve, and heavy trucks and VSM being relatively unchanged.
Going to Latin America, our sales were basically flat overall, and we continued to see a very weak automotive OEM business in total, whereas our VSM business developed well in the quarter. Our industrial distributor business, which has developed well despite the macro problems in the region, was relatively unchanged in the quarter.
And from a country viewpoint in Latin America, then Brazil was impacted by a weak automotive OEM. Argentina showed good growth, albeit from a low level, and Chile was relatively unchanged, and Peru showed a decline. Then turning into Europe, where sales were relatively unchanged for the quarter as a whole. In West Europe, sales were lower in Germany, France, and UK, whereas Italy and Spain had a positive development.
Central and East Europe, we have continued to see signs of a weak demand in a number of markets in the quarter, particularly Czech Republic, Poland, and Ukraine, whereas Russia and Turkey continued to develop well. And from an industry viewpoint, we saw very good growth in railways, while sales to renewable and aerospace were relatively unchanged.
Both sales in industrial distribution and to general industries were slightly down in the quarter, and in automotive, all our main businesses, such as cars, trucks, and vehicle service market, were relatively unchanged. So, overall, Europe was up by 1% in sales in local currencies. In summary for the group, volume was broadly in line with expectations going into the quarter.
This, in addition to some seasonality, meant we ran production in the quarter at a level slightly higher than demand, which has meant that we built some stock in the quarter. So, let me turn now to our profit development, and our operating profit, excluding one-offs, was slightly below 2.4 billion SEK, and in line with expectations, I would say.
Let me use the operating profit bridge here to walk you through the profit development compared to the first quarter last year. You'll find the bridge in our quarter report from this quarter, and also in the release presentation material as from before. If I now start with the reported operating profit of SEK 2,024 million from first quarter last year.
One-time item is a negative of some SEK 770 million, being the sum of this quarter's SEK 655 million and last year's first quarter of SEK 117 million. But then recalculated to the 2014 exchange rates, the one-time items amounts to SEK 700 million year on year, year over year, and the difference mainly then refers to the US dollar exchange rate change year over year. We have an organic sales growth of 1.4%, gave us SEK 120 million.
No material impact from our acquisitions or divestments, and currency in translation and transaction were positive by SEK 450 million, better than we forecasted, and mainly due then to the stronger dollar. We have no savings yet from our current restructuring program. However, we are progressing according to plan, which I already told you. Then you see the other being negative of SEK 170 million, and let me try to shed some light on what this contains.
This line then contain general inflation, manufacturing and purchasing impact, IT projects and running costs, and R&D. Then that gets to our reported operating profit of SEK 1,721 million for quarter one this year. Looking at the reported operating profit, it includes the SEK 655 million restructuring costs, of which 380 is in S&A and 275 is in COGS.
Split per business area, it is 458 in industrial, 156 in automotive, and 41 in specialty. Specifically then for the SMA, since a large part is, of the restructuring is coming in SMA, if I take away the one-off effects, currency effects, and also the fact that more of the UNITE costs over the P&L is running over the P&L this year, i.e., we capitalize less of the UNITE cost. The underlying S&A is flat in quarter one compared to last year in absolute terms, as well as in percentage of sales. As to the UNITE cost in total, they're running on a slightly lower level this year for the first quarter than last year. If I then turn to our cash flow.
Our cash flow from operation was good at SEK 1.4 billion, and much stronger than last year, mainly due to improved profits. As to the working capital, we saw increases in the AR in the quarter based on a strong sales, and then we built some SEK 400 million inventory in the quarter due to seasonality.
Cash flow from investing activities was SEK 460 million, with investments running slightly lower than depreciations, and cash flow from similar change... so, overall, Europe was up by 1% in sales in all the currencies. In summary for the group, volume was broadly in line with expectations going into the quarter.
This, in addition to some seasonality, meant we ran production in the quarter at a level slightly higher than demand, which has meant that we built some stock in the quarter. Let me turn now to our profit development.
Our operating profit, excluding one-offs, was slightly below SEK 2.4 billion, and in line with expectations, I would say. Let me use the operating profit bridge here to walk you through the profit development compared to the first quarter last year. You'll find the bridge in our quarter report from this quarter, and also in the release presentation material as from before. If I then start with the reported operating profit of SEK 2.024 billion from first quarter last year.
One item is a negative of some SEK 770 million, being the sum of this quarter's SEK 655 million and last year's first quarter of SEK 170 million. But then recalculated to the 2014 exchange rates, the one-time items amount to SEK 700 million year-over-year, and the difference mainly then refers to the US dollar exchange rate change year-over-year. We have an organic sales growth of 1.4%, gave us SEK 120 million.
No material impact from our acquisitions or divestments, and currency translation transactions were positive by some SEK 450 million, better than we forecasted, and mainly due then to the stronger dollar. We have no savings yet from our current restructuring program. However, we are progressing according to plan, which Alrik told you.
Then you see the other being negative SEK 170 million and let me try to shed some light on what this contains. This line then contains general inflation, manufacturing and purchasing impact, IT projects and running costs, and R&D. And then that gets to our reported operating profit of SEK 1,721 million for quarter one this year. Looking at the reported operating profit, it includes the SEK 655 million restructuring costs, of which 380 is in S&A and 275 is in COGS. And split per business area, it is 458 in industrial, 156 in automotive, and 41 in specialty.
Specifically then for the SMA, since a large part is of the restructuring is coming in SMA, if I take away the one-off effects, currency effects, and also the fact that more of the UNITE costs over the P&L is running over the P&L this year, i.e., we capitalize less of the UNITE costs. The underlying S&A is flat in quarter one compared to last year in absolute terms, as well as in percentage of sales.
As to the UNITE costs in total, they're running on a slightly lower level this year for the first quarter than last year. If I then turn to our cash flow. Our cash flow from operation was good at SEK 1.4 billion, much stronger than last year, mainly due to improved profits.
As to the working capital, we saw increases in the AR in the quarter based on the strong sales, and then we built some SEK 400 m illion inventory in the quarter due to seasonality. Cash flow from investing activities was SEK 460 million, with investments running slightly lower than depreciation, and cash flow from financing activities being a negative SEK 873 million, mainly related to the rates on external financing related to acquisition financing.
Of course, we, we have had a currency advantage in the SEK value of the related US dollar profits for the acquisitions. All in all, our net working capital to sales ended up at 32.1%, and our net debt to equity ratio improved by a further 4% to 122.2.
I think it's worth mentioning here that actuarial losses in our pension obligations were a further SEK 1.4 billion in quarter one due to lower discount rates. Excluding this effect only, our net debt to equity would have been around SEK 111 million. Also, just to remind you that in 2014, our actuarial losses were a further SEK 3.4 billion due to the discount rates. So, all in all, the movement in our pension obligations have been material over the last year and a half, and had a negative effect on our net debt to equity. Now, back to Alrik for the outlook and conclusion.
Thank you, Henrik. Let me move on to the outlook for the first quarter. I said, this is the demand for SKF, not an outlook on the market. As I have said before, it's still difficult to give an accurate outlook with such a macro environment, which we operate in just now. Anyway, I will give you my best judgment at present.
We expect demand to be relatively unchanged, both sequentially, year-over-year, for both the group and in total, and for Europe. There are, however, some positive signs in Europe, but not yet robust enough to merit a more positive outlook in my mind. In Asia, we expect demand to be higher, both sequentially and year-over-year.
In North America, we expect demand to be relatively unchanged sequentially, but down year-over-year, whereas in Latin America, we expect the demand to be down both sequentially and year-over-year. Per business area, we expect demand in both automotive and industrial to be relatively unchanged, both sequentially and year-over-year. In specialty, we expect demand to be slightly higher, both sequentially and year-over-year. From a manufacturing viewpoint, we will run the manufacturing relatively unchanged, both sequentially and year-over-year.
Turning now to look on raw materials. The scrap surcharge just now remain a little lower than the average last year, and they are at a similar level as the first quarter. In closing, I think we produced a result in line with our expectations.
We launched new innovations, we took good orders, and we took the first steps in implementing our restructuring program. All in all, a busy first quarter for me and my team. Now back to Marita, and then over to questions. Thank you.
Thank you very much, Arlik. Let's go on to the Q&A session. Let's go on to the Q&A session.
Certainly, yes. Ladies and gentlemen, if you have a question for the speaker, please press star one on your telephone, and you'll enter a queue. Please ensure the mute function on your telephone is switched off to allow your signal to reach your-
Financing activities, being a negative 8.73%, mainly related to drawdowns on external financing related to acquisition financing. Of course, we have had a currency advantage in the effective value of the related US dollar proceeds for the acquisitions. All in all, our net working capital to sales ended up at 32.1%, and our net debt equity ratio improved by a further 4% to SEK 122.2 million.
I think it's worth mentioning here that actuarial losses in our pension obligations were a further SEK 1.4 billion in quarter one due to lower discount rates. Excluding this effect only, our net debt equity would have been around SEK 111 million. Also, just to remind you that in 2014, our actuarial losses were a further SEK 3.4 billion due to the discount rates. All in all, the movement in our pension obligations have been material over the last year and a half and had a negative effect on our net debt equity. Now back to Henrik for the outlook and conclusion.
Thank you, Henrik. Let me move on to the outlook for the first quarter. I stress, this is the demand for SKF, not an outlook on the market. As I have said before, it's still difficult to give an accurate outlook with such a macro environment, which we operate in just now. Anyway, I will give you my best judgment at present.
We expect demand to be relatively unchanged, both sequentially, year-on-year, for both the group and in total and for Europe. There are, however, some positive signs in Europe, but not yet robust enough to merit a more positive outlook in my mind. In Asia, we expect demand to be higher, both sequentially and year-on-year.
In North America, we expect demand to be relatively unchanged sequentially, but down year-on-year, whereas in Latin America, we expect the demand to be down both sequentially and year-on-year. Per business area, we expect demand in both automotive and industrial to be relatively unchanged, both sequentially and year-on-year. In specialty, we expect demand to be slightly higher, both sequentially and year-on-year. From a manufacturing viewpoint, we will run the manufacturing relatively unchanged, both sequentially and year-on-year.
Turning now to look on raw materials. The scrap surcharge just now remain a little lower than the average last year, and they are at a similar level as the first quarter. In closing, I think we produced a result in line with our expectations.
We launched new innovations, we took good orders, and we took the first steps in implementing our restructuring program. All in all, a busy first quarter for me and my team. Now back to Marita, and then over to questions. Thank you.
Thank you very much, Arlik. Let's go on to the Q&A session. Let's go on to the Q&A session.
Certainly, yes. Ladies and gentlemen, if you have a question for the speaker, please press star one on your telephone, and you'll enter a queue. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll pause for a moment to allow everyone the opportunity to signal. We'll now take our first question from Andre Kukhnin of Credit Suisse.
Good morning. Yes, it's Andre from Credit Suisse. A few questions for me, please. Firstly, just to understand the bridge better, could you help us with splitting out how much the contribution was from price mix within the organic growth? And secondly, the inventory build that you mentioned, was there any underlying inventory build, and did it affect operating profit at all?
And then just the last one on this area is, you said no savings during the quarter, but obviously there was a previous program running there throughout last year. So, annualizing that, or having sort of the follow-through impact of that this year, should still be there and should still be benefiting first quarter? Or could you comment on that? I have just a general question on the FX, please.
Okay, so, I'll take that. On the bridge, what we do from this quarter is combining the volume and price mix into organic sales. We have not split that out, and the attempt was not to do that because I think there's been an overfocus on the price mix, where I alluded to last quarter when I talked to some of you guys, that we should probably have called it mixed price.
So we are baking together into organic sales. As to the inventory build, in the other part of the bridge, as I said, that is the sum of whatever we did, plus or minus from the previous program, in predominantly, that was the... what was remaining to be done there is the continued work that we do on purchasing and the effect of that, the effect of our manufacturing level, including plus the inflation, R&D, and IT costs, are lumped into the other physical part of other.
Okay, got it. Am I right to read that the inventory build did not have a meaningful impact on operating profit in first quarter year-over-year?
Whatever effect there would have been from running the manufacturing slightly higher would be part of one of the effects in the other bar. And you calculate it the best yourself, how you see that part.
Okay, and so how much was the increase in inventory on underlying basis, XFX?
On the underlying basis, it's a SEK 400 million build in the quarter.
Got it. Thank you. If I may, just a broad question on FX benefits. Obviously, these are running at substantially higher levels, substantially higher levels. How should we think about them more broadly for the year and going to 2016, in terms of the ability to internalize all of that? Do you expect to do that, or is there a scope for reinvestment, and do you think the competitive landscape would allow to keep all those currency benefits in entirety through this year and beyond?
I can just start by saying that we don't know what the currency will do in the longer perspective. That is, who knows what where it's gonna be? Right now, we sit in a sweet spot from that effect, that we had SEK 450 million.
Again, that's star one to ask a question. We'll pause for a moment to allow everyone the opportunity to signal. We'll now take our first question from Andre Kukhnin of Credit Suisse.
Good morning. Yes, it's Andre from Credit Suisse. A few questions for me, please. Firstly, just to understand the bridge better, could you help us with splitting out how much the contribution was from price mix within the organic growth? And secondly, the inventory build that you mentioned, was there any underlying inventory build, and did it affect operating profit at all?
And then just the last one on this area is, you said no savings during the quarter, but obviously there was a previous program running there throughout last year. So, annualizing that, or having sort of the follow-through impact of that, this year should still be there and should still be benefiting first quarter. Or could you comment on that?
I have just a general question on the effects, please.
Okay. So, I'll take that. On the bridge, what we do from this quarter, is combining the, the volume and price mix into organic sales. We have not split that out and the attempt was not to do that, because I think there's been an over, over focus on the, on the price mix, where I alluded to last quarter when I talked to some of you guys, that we should probably have called it mixed price. So, we are back together into organic sales.
As to the inventory build, in the other part of the bridge, as I said, that is the sum of whatever we did, plus or minus from the previous program. In predominantly that was the what was remaining to be done there, is the continued work that we do on purchasing. The effect of that, the effect of our manufacturing level, including plus the inflation, R&D, and IT costs, are lumped into the other physical part of other.
Okay, got it. So, am I right to read that the inventory build did not have a meaningful impact on operating profit in first quarter year-over-year?
Whatever effect there would have been from running the manufacturing slightly higher would be part of one of the effects in the other bar. And you calculate it the best yourself, how you see that part.
Okay, and so how much was the increase in inventory on underlying basis, XFX?
On the underlying basis, it's a SEK 400 million build in the quarter.
Got it. Thank you. And if I may, just a broad question on FX benefits. Obviously, these are running at substantially higher levels, substantially higher levels. How should we think about them, more broadly for the year and going to 2016, in terms of the ability to internalize all of that? Do you expect to do that, or is there a scope for reinvestment, and do you think the competitive landscape would allow to keep all those currency benefits in entirety through this year and beyond?
I can just start by saying that, we don't know what the currency will do in the longer perspective. That is, who knows what... where it's gonna be? Right now, we sit in a sweet spot from that effect, that we had SEK 450 million positive in this quarter, and we forecast in the next quarter it to be SEK 800 million. But then on the longer term, maybe you want to say something, Andre?
No, I think that the... it's I understand your question, but it's also, you can imagine that it is, of course, affecting in the end, if these situations where, where do you have your factories? What are you producing where? How, what are the competitors producing where? Et cetera.
There is part of the market, of course, that will be pressures in some markets. If in that market you happen to have a competitor that is in a low currency, sort of, if you understand what I'm trying to say. There was a lot of questions last quarter about, are the Japanese now more aggressive when they have the low yen? And the answer is, well, some of it, they are obviously using to increase their profit. But of course, in some areas, it's clear that they are now capable of being more aggressive, in taking some business. The same is the other way around.
There was a lot of questions about will there, the American competitors have, a less, advantage now in Europe? And the truth is, of course, as long as they don't have their manufacturing in other regions, that is, of course, so at this moment. But then you have to start looking at in where are they sourcing their products and where are they truly having their manufacturing footprint.
I would say, in general, it's a very slow-moving material because we all have our footprint fairly global.
Yes. But the question, I understood the question as a long-term kind of question.
Yeah.
We're working hard to differentiate our offerings and ourselves, naturally. Also, we have a globalized footprint.
Got it. Thank you very much for extensive, extensive, answers. I appreciate your time.
Thank you, Andre. Next question, please.
Thank you. We'll now take our next question from Daniel Schmidt of SEB.
Yes, a couple of questions. Good morning, by the way. Could you say anything about the pace of the new cost-cutting program, i.e., the white collar program? There's no savings, of course, in first quarter, and you're saying full effect, 460 are the ones that you've done so far by the start of next year. But what should we expect gradually throughout this year in terms of savings coming through?
Okay. As I said, I think that we've been progressing according to plan, where we said that the majority of this should be done by this year, and we have roughly 40% of the people taken in the first quarter. So, I think we're really active with speed, and this is a high-focus program. There are no real savings yet, and as this is now announced, and then the people are, some few have left, and some will start to leave. You will see some effect in the latter part of this year, but the bigger effect will actually come next year, the way that the program runs right now. But that does not mean that we are late in any way, shape, or form.
So on the contrary, I would say, it's extremely important to a program like this, when you're just talking about many time managerial positions, that you diligently, quickly-
Positive in this quarter, and we forecast in the next quarter it to be SEK 800 million. But then on the longer term, maybe you want to say something about it.
So I think that it's... I understand your question, but it's also, you can imagine that it is, of course, affecting in the end, if these situations where, where do you have your factories? What are you producing where? How, what are the competitors producing where, et cetera. And there is part of the market, of course, that will be, there will be pressures in some markets.
If in that market you happen to have a competitor that is in a low currency, sort of, if you understand what I'm trying to say. There was a lot of questions last quarter about, are the Japanese now more aggressive when they have the low yen? And the answer is, well, some of it, they are obviously using to increase their profit.
But of course, in some areas, it's clear that they are now capable of being more aggressive in taking some business. The same is the other way around. There was a lot of questions about will there, the American competitors have a less advantage now in Europe? And the truth is, of course, as long as they don't have their manufacturing in other regions, that is, of course, so at this moment. But then you have to start looking at in where are they sourcing their products and where are they truly having their manufacturing footprint.
I would say, in general, it's a very slow-moving material because we all have our footprint fairly global.
Yes. But the question, I understood the question as a long-term-
Yeah
kind of question. And, we're working hard to differentiate our offerings and ourselves, naturally. Also, we have a globalized footprint.
Got it. Thank you very much for extensive, extensive, answers. I appreciate your time.
Thank you, Andre. Next question, please.
Thank you. We'll now take our next question from Daniel Schmidt of SEB.
Yes, a couple of questions. Good morning, by the way. Could you say anything about the pace of the new cost-cutting program, i.e., the white collar program? There's no savings, of course, in first quarter, and you're saying full effect, 460 are the ones that you've done so far by the start of next year. But what should we expect gradually throughout this year, in terms of savings coming through?
Okay. As I said, I think that we've been progressing according to plan, where we said that the majority of this should be done by this year, and we have roughly 40% of the people taken in the first quarter. So, I think we're really active with speed, and this is a high-focus program. There are no real savings yet, and as this is now announced, and then the people are some few have left, and some will start to leave. You will see some effect in the latter part of this year, but the bigger effect will actually come next year, the way that the program runs right now. But that does not mean that we are late in any way, shape, or form.
So on the contrary, I would say, it's extremely important to a program, program like this, when you're just talking about white collar and many time managerial positions, that you diligently, quickly get the reorganization in place so people can start working. And, I really feel, that, we have succeeded with that in a good way. I think we've been fast.
People know their new jobs, and it's running according to plan. And I think we, we're quite satisfied so far. Then, as people really physically leave, that is what takes a little bit more time, but the actual structure is more or less on a broad base now in place. So, if your question was, should you calculate that the SEK 150 million, i.e., quarter of the SEK 460 million, should come next quarter? The answer is no.
Could you give us some sort of indication for the second half then? Is it reasonable to believe that out of these, slightly more than 500 people, would they have left by H2? Half of them left?
No, but I would say that a fair part of it, but not all. So, as I said, you will see the effects predominantly in 2016.
Okay. I'm just sort of a bit puzzled, given the quite aggressive start, that you should have at least some decent effect in H2, but most of it in 2016.
Yeah.
Okay.
There will be some effect in second half, but the most effect will be in 2016. That's right.
Okay. Just one question on what you said in terms of the UNITE program. You said there would be less capitalization this year, or at least maybe in first quarter. Could you just give us the numbers that you've said there before, and what you expect in terms of capitalized and so on?
We have not been extremely specific on this subject, but we have had a bigger part that has been capitalized prior years, and this year it's a fairly small part which has been capitalized and more being run over the PNL.
Okay.
But all in all, the quarter one cost for UNITE is slightly lower, this quarter than the same last year.
I think you've had a guidance of SEK 900 million, previously, at least.
Yeah, for the total, it has been SEK 900 million, and that has been very fair, that we've been running on the similar type of level this year. We are right now into some design work, so there will be some more activity in this in the latter part of this year, in the project. Sorry.
Could you say something finally about the trend in Europe? I think there's been a lot of anecdotal evidence, and also leading indicators, of course, pointing to a gradual improvement in Europe during first quarter. Would you agree with the fact that March was a fairly good month, compared to the other two months, or could you shed some light on that?
I think that the beginning of the quarter, excuse me, the beginning of the quarter was quite like it usually is, you know, you add to Christmas, you have a relatively slower start, and then as the quarter comes up, evolves, you see an improvement in the business. That is usually what... get the reorganization in place so people can start working. I really feel that we have succeeded with that in a good way. I think we've been fast, people know their new jobs, and it's running according to plan, and I think we're quite satisfied so far.
Then, as people really physically leave, that is what takes a little bit more time, but the actual structure is more or less on a broad base now in place. So, if your question was, should you calculate that the SEK 150 million, i.e., quarter of the SEK 460 million, should come next quarter? The answer is no.
What would you... could you give us some sort of indication for the second half then? Is it reasonable to believe that out of these, slightly more than 500 people, would they have left by H2? Half of them left?
No, but I would say that a fair part of it, but not all. So, as I said, you will see the effects predominantly in 2016.
Okay. I'm just sort of a bit puzzled, given the quite aggressive start, that you should have at least some decent effect in H2, but most of it in 2016.
Yeah.
Okay.
There will be some effect in second half, but the most effect will be in 2016. That's right.
Okay. And just one question on what you said in terms of the UNITE program. You said there would be less capitalization this year, or at least maybe in first quarter. Could you just give us the numbers that you've said there before, and what you expect in terms of capitalized and so on?
We have not been extremely specific on this subject, but we have had a bigger part that has been capitalized prior years, and this year it's a fairly small part which has been capitalized and more being run over the P&L.
Okay.
But all in all, the quarter one cost for UNITE is slightly lower, this quarter than the same last year.
I think you've had a guidance of SEK 900 million, previously, at least.
Yeah, for the total, it has been SEK 900 million, and that has been very fair, that we've been running on the similar type of level this year. We are right now into some design work, so there will be some more activity in this, in the latter part of this year, in the project. Sorry.
Could you say something finally about the trend in Europe? I think there's been a lot of anecdotal evidence, and also leading indicators, of course, pointing to a gradual improvement in Europe during first quarter. Would you agree with the fact that March was a fairly good month, compared to the other two months? Or could you give us some shed some light on that?
I think that the beginning of the quarter, excuse me. The beginning of the quarter was quite like it usually is. You know, you add to Christmas, you have a relatively slower start, and then as the quarter comes up, evolves, you see an improvement in the business. That is usually what happens. And as I think I said in the beginning here, of course, we also see some positive signs, but there's so much uncertainty still in what's gonna happen in the next quarter, that it's... I think it's within these boundaries of saying, well, you know, it's on the margin error. But yes, we see some positive signs as well.
Would it be fair to say that the trend that you saw in first quarter has continued into second quarter then, if you sort of relate that to what you're saying?
Well, no, I'm... I think I say what I'm trying to say. I'm saying that you could argue that we are then on the upper quartile of sequentially flat in the way we look at this. You know, there are no absolute binary on and off here. And we are... there is... we see some positive signs, and that's clear, but we also see some uncertainty.
Okay, thank you.
Thank you, Daniel. Next question, please.
Thank you. Our next question comes from James Moore of Redburn.
Yes, good morning, everyone. I've got three questions, if I may. Just on your decision to drop the price mix disclosure, I'm sure you thought long and hard about it, but it has a consequence. I wonder if you could help us on how we should read the outlook. Previously, the outlook related to volumes. Does the outlook and the arrow now relate to organic sales growth, with the same numerical pattern behind it? That's my first question. Maybe we could touch on that first.
Yeah, yes, I would say yes, James. It's Henrik here.
Okay.
So the outlook is looking to the organic sales pattern now.
Thanks. And on the EBIT bridge, I'm not sure I fully understood the answer earlier. I just want to be clear. Are you saying that in the other line, the old savings plan is in there with the inventory effect and with inflation, and is there anything else in there that I missed?
Yeah, the answer is yes to that, and the other that you missed is any move up or down on R&D spend and IT spending as well.
Okay, very clear. Thanks. And finally, just on the US and the demand there. One of the debates running at the moment is how much the weakness is due to the more temporary factors like weather, and how much is due to the indirect effects of oil, and also the impact on US exports from the stronger US dollar, which is something you didn't mention. I know you mentioned auto-
Yeah
T he pre-buy and the oil, but I just wondered, do you have a sense as to whether your slowdown in the USA is impacted by customers?
Yeah
S uffering export weakness?
Yeah. You know, there was a strike on the coast. There was bad weather, but I can't really say that that's something that I can measure, how if there was any real effect. I don't think so. What we see clearly is, of course, that when we look... what, one of the misperceptions from when I looked into when we looked into the first quarter, a quarter ago, was we underestimated happens.
As I think I said in the beginning here, of course, we also see some positive signs, but there's so much uncertainty still in what's gonna happen in the next quarter, that I think it's within these boundaries of saying, well, you know, it's on the margin error. But yes, we see some positive signs as well.
Would it be fair to say that the trend that you saw in first quarter has continued into second quarter then, if you sort of relate that to what you're saying?
Well, no, I think I say what I'm trying to say. I'm saying that you could argue that we are then on the upper quartile of sequentially flat in our... in the way we look at this. You know, there are no absolute binary on and off here. And we are. There is. We see some positive signs, and that's clear, but we also see some uncertainty.
Okay, thank you.
Thank you, Daniel. Next question, please.
Thank you. Our next question comes from James Moore of Redburn.
Yes, good morning, everyone. I've got three questions, if I may. Just on your decision to drop the price mix disclosure, I'm sure you thought long and hard about it, but it has a consequence. I wonder if you could help us on how we should read the outlook. Previously, the outlook related to volumes. Does the outlook and the arrow now relate to organic sales growth, with the same numerical pattern behind it? That's my first question. Maybe we could touch on that first.
Yeah, yes, I would say yes, James. It's Henrik here. The outlook is looking to the organic sales pattern now.
Thanks. And, on the EBIT bridge, I'm not sure I fully understood the answer earlier. I just want to be clear. Are you saying that in the other line, the old savings plan is in there with the inventory effect and with inflation? And, is there anything else in there that I missed?
Yeah, the answer is yes to that, and the other that you missed is any move up or down on R&D spend and IT spending as well.
Okay, very clear. Thanks. And finally, just on the US and the demand there. One of the debates running at the moment is how much the weakness is due to the more temporary factors like weather, and how much is due to the indirect effects of oil, and also the impact on US exports from the stronger US dollar, which is something you didn't mention. I know you mentioned auto-
Yeah
The pre-buy and the oil, but I just wondered, do you have a sense as to whether your slowdown in the USA is impacted by customers?
Yeah
S uffering export weakness?
Yeah. You know, there was a strike on the coast. There was bad weather, but I can't really say that that's something that I can measure, how if there was any real effect. I don't think so. What we see clearly is, of course, that when we look, what one of the misperceptions from when I looked into when we looked into the first quarter a quarter ago was we underestimated how much our customers are affected by agricultural slowdown.
And mining slowdown, and also the oil and gas slowdown in the US, in the sense that when we look at the customers that are down, they can be clearly identified to actually being delivering to these segments.
And that was, for me, a learning, of course, in how I should judge this. And if you take away those and the pre-buy that we knew was going well, then, you know, business isn't that bad. Of course, indirectly in these segments, I'm sure that we're also suffering from export problems. Many of these big, heavy industry and general industry customers are, of course, exporting also mining equipment to other regions, and they may be suffering. So, that could be also a collateral effect. But we see it like this, and it's quite obvious that this is the main impact.
Just to follow up briefly on that, how would you size your direct or indirect exposure to oil and mining in the US?
Well, I mean, I just told you that I missed a little bit on this when I looked forward into the... but I think that it's basically, I don't know, Henrik, what you would say. I mean, I'd, I wouldn't want to give you the wrong. No, and I think that the sort of direct effect into the oil is not extremely big, but there are indirect effects of some customers who make equipment selling into that industry and to other industries-
Yeah
W hich are then down, as Alec alluded to. So, the effect here has been seen on the oil and gas and also on the agriculture side, both on the SKF brand and under the PEER brand, which, as I've showed you before, is a primary segment for the second brand. So, to clarify, what I say is that I underestimated or we underestimated the exposure of some of our customers to these segments, and that's the difference.
Okay. Thanks, guys.
Thanks.
Thank you, yeah. The next question, please.
Thank you. Our next question comes from Lars Brorson of Barclays.
Hello, Lars?
Let's just step away. We'll now take our next question from Alexander Sherrat of JP Morgan.
Yeah. Good morning, everybody. It's Alex at JP Morgan. Just a follow-up question on Europe. It looks like the development there are a bit softer, particularly in auto and trucks. I'm just wondering, is that a reflection of the end market trends, or are there any sort of SKF specific factors or customer-specific model changeovers, et cetera, at play here? Just a bit more color on what's happening in both auto and trucks, if you could.
So I think that you know, it's always, of course, true that for some car makers, SKF has, and also truck makers, we are more into them, and for some other brands, we have a lower market share. Like, for instance, if you understand with a brand like Toyota, for instance, our market share is considerably different than it is for Fiat, if you understand what I mean. So, of course, those kind of swings do impact on this.
But otherwise, I would say I think that it's basically in line with the development. During a quarter like this, there's no swings when it comes to the market shares within any particular customer as such, if you understand what I'm trying to say.
I also think that, I mean, of course, our light vehicle business was slightly up in Europe, and VSM and trucks was basically flat. I think that that is giving a fair picture of where Europe is heading and also where the auto production is right now. I don't think that it sticks out as something odd.
Okay, and then just, just following up on Europe, you said that it was improving as it moved through the quarter, and sort of business levels pick up after the Christmas period, et cetera. But were the, were the year-on-year growth numbers improving sort of week by week, month by month, as you went through the quarter? Or are the positive signs that you see sort of more forward-looking expectations rather than what you already see in business levels?
No, I think what Henrik alluded to that after Christmas, there's always a seasonality in the first quarter, and it's pretty hard to predict early on what exactly where the quarter is heading. And you see, you gain momentum through the quarter, and that's nothing that has been particularly different this year from last year. But what Henrik said was that, in our judgment of keeping it flat, it was in the upper end of that judgment.
Yeah, no, and I appreciate that, but were the year-on-year growth numbers, like, given that seasonality, were the year-on-year growth numbers improving as you went through the quarter?
That's nothing that we go into the details of the month. I think there are... what we said, it remains as our view, so to say, and there are no specific patterns that I would judge dramatically different from the first quarter last year.
Okay, and then, on the, UNITE program, can you just remind us of when the key sort of milestones or event risks are as we progress there?
As you know, we have implemented one pilot in Finland. We are doing now, and that was the first sort of test installation. Based on the experience that we have gained, we are now doing the global design template to be able to program a global setup and solution during the latter part of this year, and then move into a global rollout during next year, and that's where we are.
Okay, that's helpful. And the third, the third and sort of final question I had was just, on the SEK 400 million inventory build, would a sort of two-thirds finished goods, one-thirds components split be, be appropriate or is it materially different to that?
No, that's approximately right.
Okay, thanks.
How much our customers are affected by agricultural slowdown and mining slowdown, and also the oil and gas slowdown in the US, in the sense that when we look at the customers that are down, they can be clearly identified to actually being delivering to these segments. And that was for me, a learning, of course, in how I should judge this.
And if you take away those and the pre-buy that we knew was going, well, then, you know, business isn't that bad. Of course, indirectly in these segments, I'm sure that we're also suffering from export problems. Many of these heavy industry and general industry customers are, of course, exporting also mining equipment to other regions, and they may be suffering.
So that could be also a collateral effect. But we see it like this, and it's quite obvious that this is this is the main impact.
Just to follow up briefly on that, how would you size your direct or indirect exposure to oil and mining in the US?
Well, I mean, I just told you that I missed a little bit on this when I looked forward into the... but I think that it's basically, I don't know, Henrik, what you would say. I mean, I wouldn't want to give you the wrong-
No, I think that the sort of direct effect into the oil is not extremely big, but there are indirect effects on some customers who make equipment selling into that industry and to other industries.
Yeah
W hich are then down, as Alec alluded to. So, the effect here has been seen on oil and gas and also on the agriculture side, both on the SKF brand and under the PEER brand, which, as I've showed you before, is a primary segment for the second brand.
To clarify, what I say is that I underestimated or we underestimated the exposure of some of our customers to these segments, and that's the difference.
Okay. Thanks, guys.
Thanks.
Thank you, yeah. The next question, please.
Thank you. Our next question comes from Lars Brorson of Barclays.
Hello, Lars?
Lars just stepped away. We'll now take our next question from Alexander Sherrat of JP Morgan.
Yeah. Good morning, everybody. It's Alex at JP Morgan. Just a follow-up question on Europe. It looks like the development there are a bit softer, particularly in auto and trucks. I'm just wondering, is that a reflection of the end market trends, or are there any sort of SKF specific factors or customer-specific model changeovers, et cetera, at play here? Just a bit more color on what's happening in both auto and trucks, if you could.
So I think that you know, it's always, of course, true that for some car makers, SKF has a... or, and also truck makers, we are more into them, and for some other brands, we have a lower market share, like-
Thanks.
Thank you, Alexander. Next question, please.
Next question comes from Peder Frölén of Handelsbanken.
Mm-hmm.
Yes, good morning, to all of you. Can you hear me?
Yes, we can hear you, Peder, loud and clear.
Thank you. A couple of questions, if I may. Sorry about this, but if I start with the inventory build, you mentioned SEK 400 million quarter-on-quarter in volume. And if I remember correctly, Henrik, it was an increase around SEK 100 million first quarter last year, which on a year-on-year basis gives a bridge of SEK 300 million with a certain leverage on that. So, could you please try to indicate, is it true to assume that somewhere between SEK 1,500 million and positive effect on the yearly bridge, or is am I totally out of reach here?
The effect of the inventory, of course, has an effect, and that lies in the other line in the bridge, and there is a certain absorption on. Then it's also assuming that all the inventory is the finished goods inventory. Yes, that there is an effect, and you can do your calculation-
Okay.
As anybody can on what that part is.
Okay, that's fair. Coming back to the outlook, just a bit curious if you're talking about underlying organic growth, or if you incorporate certain day effects in particular in Europe?
So sorry, I don't. If underlying growth or certain?
If you incorporate certain day effect, working day effect, predominantly in Europe, or this is sort of on a day-to-day basis.
Yeah, there's no. We're not. When we're looking forward, we're not sitting, calculating if there's one more day in the quarter or something like that, compared to last year.
No, that's very clear.
We're looking at daily rate.
Yep, very clear. And coming back to another nitty-gritty short question on FX, what were the SEK 800 million, at what date do you base those calculations on?
At last quarter, my dear friend, the end of the quarter. That's what is that.
Okay. Then into some more intelligent questions, perhaps. On the pre-buy, it usually maybe takes slightly longer than a couple of months to sort of get through the pre-buy. Is that the case? So do you expect this to be go away and already in the second quarter, sort of the lack of pre-buy? Is it even possible to have a reversed situation?
Well, you know, what happens is, distributors, and this is something, of course, that we try to get away from, and we're working diligently. And if you look at the pre-buy today, compared to when I was working in SKF ten years ago, they've actually gone down. But there's still some distributors that have this, you know, year-end kind of push to get my rebates and so forth. And that means that they fill up their stock, and then, as the year evolves, these stocks are sold.
And of course, it all depends on, how much of the stock, for instance, if you understand, with a brand like Toyota, for instance, our market share is considerably different than it is for Fiat, if you understand what I mean.
So of course, those kind of swings do impact on this. But otherwise, I would say, I think that it's basically in line with the development. During a quarter like this, there's no swings when it comes to the market shares within any particular customer as such, if you understand what I'm trying to say. And I also think that, I mean, our core light vehicles business was slightly up in Europe, and VSM and trucks was basically flat. And I think that is giving a fair picture of where Europe is heading and also where the auto production is right now. So, I don't think that it sticks out as something odd.
Okay, just, just following up on Europe, you said that it was improving as it moved through the quarter, and sort of business levels pick up after the Christmas period, et cetera. But were the, were the year-on-year growth numbers improving sort of week by week, month by month, as you went through the quarter? Or are the positive signs that you see sort of more forward-looking expectations rather than what you already see in business levels?
No, I think what Henrik alluded to that after Christmas, there's always a seasonality in the first quarter, and it's pretty hard to predict early on what exactly where the quarter is heading. And you see, you gain momentum through the quarter, and that's nothing that has been particularly different this year from last year. But what Henrik said was that in our judgment of keeping it flat, it was in the upper end of that judgment.
Yeah, no, and I appreciate that. But were the, the year-on-year growth numbers, like, given that seasonality, were the year-on-year growth numbers improving as you went through the quarter?
That's nothing that we go into the details of the months. I think there are what we said remains as our view, so to say, and there were no specific patterns that I would judge dramatically different from the first quarter last year.
Okay, and then, on the UNITE program, can you just remind us of when the key sort of milestones or event risks are as we progress there?
As you know, we have implemented one pilot in Finland. We are doing now and that was the first sort of test installation based on experience that we have gained. We are now doing the global design template to be able to program a global setup and solution during the latter part of this year, and then move into a global rollout during next year, and that's where we are.
Okay, that's helpful. The third and sort of final question I had was just on the SEK 400 million inventory build. Would a sort of two-thirds finished goods, one-third component split be appropriate, or is it materially different to that?
No, that, that's approximately right.
Okay, thanks.
They have sold in the first quarter to Sweden. That will determine how quickly we start to refurbish.
Yeah.
But it's clear that we see that as the quarter evolves, we see that they... in some items, we can see that, oh, now they're starting to buy this again, et cetera. So, of course, this is a clear dynamic that works like that.
Let's try, just try.
For me, at this point, giving you exact figures of this, but this is the way. So, as the year progresses, this effect is disappearing. Sometimes there is even a competitor who comes in and suddenly tries to make a deal with one distributor and somebody else. This is a dynamic kind of thing, and that's normal business. But this pre-buy in the end of the year is quite normal every year, and this year is no different.
That's clear. Tied to that, have you increased the list prices to the distribution channel in Europe and North America in the early part of this year?
No, this year is one of those years where there's more of a more difficult for generalized price increases. I think we said that already last quarter, that we are always working, of course, with pricing and looking for pricing opportunity. But this year is one of those years where the underlying growth is such that just a mere market dynamic , the market is supplied, and there's not any major general price increase opportunities.
Okay, that's fair. Final one. Sorry about this. Hedges, could you please, where are you now, Henrik? Between the one and four months on the 75% of the dollar flow. Just helping us to calculate.
We are on the shorter side, Peter.
Okay, that's great. Thank you, I get back in line.
Thanks.
Thank you, Peter. The next question, please.
Next question comes from Colin Gibson of HSBC.
Hi, morning, everybody. Two questions from my side, please, and both relate to concerns the market's had on a couple of specific issues. First of all, you obviously recorded quite good growth in Middle East and Africa, and that seems contrary to worries that people have had about what would happen to demand in oil-exporting countries. So, if you could give us some sort of color on demand in oil-exporting countries, that would be really helpful. And my second question relates to pricing, but I'll try and ask it in a way that hopefully you can answer.
One of the market's concerns, given the number of antitrust actions in the automotive industry over the past couple of years, one of the market's concerns has been that we would be entering a period of generally tighter pricing, not only for automotive OEMs, but obviously therefore for automotive suppliers as well. So, any general comments, qualitative comments, if you like, that you can give on the pricing environment in OEM, automotive, and also in the vehicle service market? Thank you.
Okay. Yeah, but on the Middle East and Africa side, we show the good growth, but you have to also realize this is a small, relatively small business for us, so it's more product related and some nice orders coming or not coming. The base is fairly small, so I have not so much more to comment on that.
Very much appreciate this.
Thanks.
Thank you, Alexander. Next question, please.
Next question comes from Peter Frölén of Handelsbanken.
Yes, good morning, to all of you. Can you hear me?
Yes, we can hear you, Peter. Loud and clear.
Perfect. Thank you. A couple of questions, if I may. Sorry about this, but if I start with the, the inventory build, you mentioned SEK 400 million quarter-on-quarter in volume. And if I remember correctly, Henrik, it was an increase around SEK 100 million, first quarter last year, which on a year-on-year basis gives a bridge of SEK 300 million, with a certain leverage on that. So, could you please try to indicate, is it true to assume that somewhere between SEK 1,500 million and positive effect on the yearly bridge, or is, am I totally out of reach here?
But the effect of the inventory, of course, it has an effect, and that lies in the other line in the bridge, and there is a certain absorption on... then it's also assuming that all the inventory is the finished goods inventory. Yes, that there is an effect, and you can do your calculation.
Okay.
As anybody can on what that part is.
Okay, that's fair. Coming back to the outlook, just a bit curious if you're talking about underlying organic growth, or if you incorporate certain day effects, particularly in Europe?
So sorry, I don't... if underlying growth or certain?
If you incorporate certain day effect, working day effect, predominantly in Europe, or this is sort of on a day-to-day basis?
Yeah, there's no... we're not, when we're looking forward, we're not sitting, calculating if there's one more day in the, in the quarter or something like that, compared to last year.
No, that's very clear.
Looking at daily rate.
Yeah, very clear. And coming back to another nitty-gritty short question on FX, what were the 800 at what date you based those calculations on?
At last quarter, my dear friend, the end of the quarter. That's what I said.
Okay. And then into some more intelligent questions, perhaps. On the pre-buy, it usually maybe takes slightly longer than a couple of months to sort of get through the pre-buy. Is that the case? So do you expect this to go away and already in the second quarter, sort of the lack of pre-buy? Is it even possible to have a reverse situation?
Well, you know, what happens is, distributors, and this is something, of course, that we try to get away from, and we're working diligently, and if you look at the pre-buy today, compared to when I was working in SKF 10 years ago, they've actually gone down. But there's still some distributors that have this, you know, year-end kind of push to get my rebates and so forth. And that means that they fill up their stock, and then as the year evolves, these stocks are sold.
Of course, it all depends on how much of the stock, on the pricing side in general, is what Alrik said, that in today's environment, which is a low interest environment, it is of course harder to get the pricing leverage coming out of the antitrust actions per se. I don't see that that has had any general effect on pricing for any of our businesses, really. I don't know if you want to say a few words, Alrik?
No, it's true, it's true. And you still have to understand, I think that generally in oil-exporting countries, and this is a general comment, there's a drive to try to have alternative business models or economic models, sorry, for the countries not to be so dependent on oil, so, and gas. And I think that going forward, despite the fact that they are actually earning less, you will see an increased wish for many of these countries to try to industrialize and build alternative infrastructure going forward.
That's very helpful. Thanks.
Okay. Thank you, Colin. And next question, please.
Next question comes from Sebastian Growe of Exane.
Hi, good morning to all. Three questions, if I may. The first one will be quite simple on FX. Could you help us to understand the sequential development of FX impact in second quarter versus first quarter? You guide it for year-on-year impact, but could you help us with the quarter-on-quarter impact? If my calculation is correct, you should be, it could be about SEK 350 million impact, quarter-on-quarter. Maybe you can start with this one.
Yeah, we display this in what it is on a year-on-year effect. Then we have the SEK 450 million on quarter one and SEK 842 million, but sequentially, you are in the right neighborhood of what the effect would be.
Okay, thank you. Second question, coming back to your comments on Europe, Alrik, you mentioned there are positive signs, but also some uncertainty. Could you help us understand what are these uncertainties? Is it macro-related, or is it related to your own business?
No, as I've said, tried to explain many times and, you know, there in one quarter, actually, there's seldom very big movements. It's the movements as far as market share and things like that, are often of a longer term. So, when we are looking into the business, of course, even though we are only forecasting our own situation, it's related to the way we are in the market and how we see this market develop. The longer trends, of course, then you can talk about, are we losing, are we gaining, et cetera. But in the quarter, short term, it's more about where we are, how we see the development going forward.
But of course, if you look into Europe and where Europe is, we see some positive signs, and then you can read there are some positive signs in Europe, but if Greece would leave the euro, if something happens in Russia and East Europe, the picture could quickly change.
Yeah. And as we said, the signals are there. They have sold in the first quarter, which that will determine how quickly we start to refurbish.
Yeah.
But it's clear that we see that as, as the quarter evolves, we see that they, in some items, we can see that, oh, now they're starting to buy this again, et cetera. So, of course, this is a clear dynamic that works like that.
Let's try to-
For me, at this point, giving you exact figures of this, but this is the way. So, as the year progresses, this effect is disappearing. Sometimes there is even a competitor who comes in and suddenly tries to make a deal with one distributor and somebody else. This is a dynamic kind of thing, and that's normal business. But this pre-buy in the end of the year is quite normal every year, and this year is... that's clear. Tied to that, have you increased the list prices to the distribution channel in Europe and North America in the early part of this year?
No, this year is one of those years where there's more difficult for generalized price increases. I think we said that already last quarter, that we are always working, of course, with pricing and looking for pricing opportunity. But this year is one of those years where the underlying growth is such that just a mere market dynamic , the market is supplied, and there's not any major general price increase opportunities.
Okay, that's fair. Final one. Sorry about this. Hedges, could you please, where are you now, Henrik? Between the one to four months on the 75% of the dollar flow. Just helping us to calculate.
We are on the shorter side, Peter.
Okay, that's great. Thank you, I get back in line.
Thanks.
Thank you, Peter. The next question, please.
Next question comes from Colin Gibson of HSBC.
Hi, morning, everybody. Two questions from my side, please, and both relate to concerns the market's had on a couple of specific issues. First of all, you obviously recorded quite good growth in Middle East and Africa, and that seems contrary to worries that people have had about what would happen to demand in oil-exporting countries. So, if you could give us some sort of color on demand in oil-exporting countries, that would be really helpful. And my second question relates to pricing, but I'll try and ask it in a way that hopefully you can answer.
One of the market's concerns, given the number of antitrust actions in the automotive industry over the past couple of years, one of the market's concerns has been that we would be entering a period of generally tighter pricing, not only for automotive OEMs, but obviously therefore for automotive suppliers as well. So, any general comments, qualitative comments, if you like, that you can give on the pricing environment in OEM, automotive, and also in the vehicle service market? Thank you.
Okay. Yeah, but on the Middle East and Africa side, we show good growth, but you have to also realize this is a small, relatively small business for us, so it's more product related and some nice orders coming or not coming. The base is fairly small, so I have not so much more to comment on that.
Positive, but it's not like you're saying that we're, there's a completely new level. It's too early to say.
Okay, thank you. And the last question, I understand that you will give only the outcome of the review on automotive in at the end of second quarter, but can you share with us, at least over the last two months, the work you've done regarding this review? How do you see the automotive business performance over the last five, ten years? What are the issues? Maybe can you help us with that?
Well, you know, I think that I would like to tell you, that's why I said this. I would like to pass on that one, if you allow me, and let me come back to you next quarter. We are, this is my first quarter now. We are working on this diligently to see how we want to drive this business forward. It's a business that is close to our heart. The assessment that we are doing today is, of course, that we are looking at it inside SKF going forward, and I will be more explicit in our next quarter conference. I promise you.
Okay. Thank you.
Thank you, Sebastian. Next question, please.
Next question comes from Alistair Leslie of Société Générale.
Yeah. Hi, good morning. A few questions on, on Asia. Just a clarification, firstly, on, on rail in Asia. Seems like you've, you've got three negatives there for the quarterly development in the table in the release, but the text talks about positive development, at least in China. I just wonder whether you can clarify what you're seeing there, any change? Because obviously, being a very good market for you.
And then just on India, how you expect your business there to develop maybe in the next couple of years, particularly your position in wind, and whether you feel you can replicate the, the success you've had in China, given the difference in, in customer mix? Obviously, less local players there, more Western OEMs. Thanks.
So in Asia, the development that we have seen has been good. India more flat, and I think that there is a lot of hope and expectations with the new government that should be more pro-business, and that we should be able to leverage more in India. We are serving partly the renewable market in India, but it's much smaller than in China. And of course, with innovation and then trying to spread the good work that we do in other markets, we're also trying to address that. But from a macro point of view, India has not been doing so well.
In China, the railway business was relatively unchanged, but we have been gaining a lot of new orders, which on a very, very high level, you have to bear that in mind. I don't know if you want to say something about it?
Yeah, I think, you know, railways, definitely as you, as you have seen, one of our strong segments, and we're investing in new innovations around railways. And railways is not only freight and passenger, but it's also a lot of mining companies, you know, they have railways, and we are working hard to keep our leading position in this segment. So, I'm bullish about that long term. And also on renewable in India, you know, we actually have a factory ready which is not at all fully utilized in India, to be able to produce main shaft bearings for the Indian green sort of energy drive. I was listening to Modi.
You know, the Hanover Fair here in Europe is running this week, as I said, and I was there and listening to Modi and the Indian president. He especially alluded to this as one of his main themes going forward, to have a conversion to green energy in India as well. So, we're looking forward to him doing what he said.
Great, thanks. If I could just have a quick follow-up on autos. It looks like you continue to underperform global automotive production. You've talked previously about the potential for new program wins to kind of boost the top line. I just wonder whether you've had any impact yet, and whether you and how you expect that to phase in, in 2015 and 2016, and just whether you think you can outgrow your end markets this year in autos. Thanks.
Well, I would again say, I think there's no major thing to discuss at this point. If you bear with me, when we've done the analysis, it would be a little bit preemptive of me if I try to give you an answer on that before I've actually concluded this process I'm in. And when we look at our strategy for automotive going forward next quarter, I hope to be more explicit on that one, if you allow me.
So, just to confirm, we'll get the conclusions at the second quarter stage? Sorry.
I mean, what I'm saying is that we're right now, as I said last quarter, not looking at the automotive. We understand that the automotive business in SKF has not been performing according to expectations. We think there are things that can be done. We would like to try to look at it within SKF as opposed to a different path at this moment. And this is the approach we've taken, where we're starting to say, "Okay, what business are we gonna be in? What are we gonna drive? How are we gonna do this?" Et cetera. And this is the kind of information I hope to be able to be more explicit around in the next quarter.
Great, thanks.
Thank you very much.. . [inaudible] And next question, please.
Next question comes from Ben Sherrat of Merrill Lynch.
Yeah, thank you. Morning, everybody. Firstly, just Your commentary on the US, about the weakness you see with your customers selling into mining, agriculture, and oil and gas. Can you give us any sense of how much demand fell year-on-year during the quarter, the magnitude? And oil obviously has weakened more recently, but for agriculture and mining, those markets have been weak for some time now. Did you see another, kind of a sequential step down in demand from those customers? That's the first question. Thank you.
Well, you know, if you just say... take what I said, we were looking into the quarter and seeing, thinking that it was going to be a relatively flat quarter in the US going forward, the first quarter. And then in the end, we had a slight decrease. And there are basically two factors that have contributed.
On the pricing side, in general, is what Alrik said, that in today's environment, which is a low interest environment, it is of course harder to get the pricing leverage coming out of the antitrust actions per se. I don't see that that has had any general effect on pricing for any of our businesses, really. I don't know if you want to say a few words about it?
No, it's true. It's true. And you still have to understand, I think that generally in oil-exporting countries, and this is a general comment, there's a drive to try to have alternative business models or economic models, sorry, for the countries not to be so dependent on oil, so, and gas. And I think that going forward, despite the fact that they are actually earning less, you will see an increased wish for many of these countries to try to industrialize and build alternative infrastructure going forward.
That's very helpful. Thanks.
Okay. Thank you, Colin. Next question, please.
Next question comes from Sebastian Growe of Exane.
Hi, good morning to all. Three questions, if I may. The first one would be quite simple on FX. Could you help us to understand the sequential development of FX impact in second quarter versus first quarter? You guided for year-on-year impact, but could you help us with the quarter-on-quarter impact? And if my calculation is correct, you should be, it could be about SEK 300 to 350 million impact, quarter on quarter. Maybe you can start with this one.
Yeah, we display this in what it is on a year-over-year effect. Then we have the SEK 450 million on the quarter one and SEK 842 million, but sequentially, you are in the right neighborhood of what the effect would be.
Okay, thank you. Second question, coming back to your comments on Europe, Alrik. You mentioned there are positive signs, but also some uncertainty. Could you help us understand what are these uncertainties? Is it macro-related, or is it related to your own business?
No, as I've said, tried to explain many times, and you know, in one quarter, actually, there's seldom very big movements. It's the movements as far as market share and things like that that are often of a longer term. So, when we are looking into the business, of course, even though we are only forecasting our own situation, it's related to the way we are in the market and how we see this market develop, the longer trends, of course, then you can talk about are we losing, are we gaining, et cetera? But in the quarter, short term, it's more about where we are, how we see the development going forward.
But of course, if you look into Europe, and I'm a Europist, we see some positive signs, and then you can read there are some positive signs in Europe, but if Greece would leave the Euro, if something happens in Russia and East Europe, the picture could quickly change.
Yeah. And as we said, the signals are there. One is then a pre-buy from the industrial distributor. And the other thing we see is this effect that we see some of the these kind of customers actually selling less than we thought. And that's the kind of magnitudes that we see at this point. So, you already have it, let's say, in what we are trying to show you. And more explicit than that is difficult for me to be at this point.
Okay, but it's more, it's a more general weakness rather than a dramatic drop-off in those markets, even though they're small for you?
Yes, exactly. Exactly.
And then on Europe.
If you go... if you yourself look at the... you know, SKF is a broad base supplier in the US, and I think if you go in and you will yourself be able to identify. I would presume a similar kind of pattern when you look into our customers, so to speak.
Got it. Thank you. And then on Europe, you know, I get that visibility is low, but specifically on automotive and truck markets, where, you know, you get production schedules, and you maybe have more visibility. You know, when you get the production forecast in Europe for the second quarter from the OEMs, are you seeing any uplift in their demand for product there?
I would say that it followed the patterns that we've said in general, that it is on the upper side of relative launch change, but some positive sign.
Okay. Thank you. Thanks, Henrik. Thanks, Alrik.
Thank you very much, Ben. And now I think we just have time for one more question. Please.
Thank you. Our final question comes from Gunther Deutschmann of Goldman Sachs.
Hi, good morning. I'll keep it short. Just a few questions left from my side. Just on the cost savings program, less on the savings, but more on the cost. You've guided to SEK 1.4 billion overall. Now, the run rate, if I just look at the FTEs affected and the charges you've booked so far, is actually below what you're guiding overall.
Is that because the low-hanging fruits, I mean, it consumed early on? Or how do you think about the full scale of the program over the two years? And, secondly, on CapEx, you've had two announcements, this week, one on Wednesday about the testing center in Germany, and then today in Gothenburg on the production side.
So if I add those two up, that's just over SEK 500 million in CapEx, and I think you guided to a SEK 1.7 billion budget for this year. Is that spread out over several years, those projects? Is that part of the existing CapEx program, or would that come on top? And then I've got a short FX question to follow up on as well.
Okay.
Okay, on the cost savings program, if you look at the ratios that of what we have done compared to what we estimated total program to be, we are in that neighborhood, and we see that we are roughly in that neighborhood for the total program still, so that is no change. On the CapEx side, yes, we have announced these investments, and they will then be addition to plant and property over this, some this year and then next year.
Positive, but it's not like you're saying that we're, there's a, a completely new level. It's too early to say.
Okay, thank you. The last question, I understand that you will give on the outcome of the review on automotive in at the end of second quarter, but can you share with us, at least over the last two months, the work you've done, regarding this review? How do you see the automotive business performance over the last five to 10 years? What are the issues? Maybe can you help us with that?
Well, you know, I think that I would like to tell you, that's why I said this. I would like to pass on that one, if you allow me, and let me come back to you next quarter. We are... this is my first quarter now. We are working on this diligently to see how we want to drive this business forward. It's a business that is close to our heart. We are... the assessment that we are doing today is, of course, that we are looking at it inside SKF going forward, and I will be more explicit in our next quarter conference, I promise you.
Okay, thank you.
Thank you, Sebastian. Next question, please.
Next question comes from Alistair Leslie of Société Générale.
Yeah. Hi, good morning. A few questions on Asia. Just a clarification, firstly, on rail in Asia. Seems like you've got three negatives there for the quarterly development in the table in the release, but the text talks about positive development, at least in China. I just wonder whether you can clarify what you're seeing there, any change?
Because obviously, being a very good market for you. And then just on India, how you expect your business there to develop maybe in the next couple of years? Particularly your position in wind, and whether you feel you can replicate the success you've had in China, given the difference in customer mix? Obviously, less local players there, more Western OEMs. Thanks.
So in Asia, to say, the development that we have seen has been good. India more flat, and I think that there is a lot of hope and expectations with the new government that should be more pro-business, and that we should be able to leverage more in India. We are serving partly the renewable market in India, but it's much smaller than in China. And of course, with innovation and then trying to spread the good work that we do in other markets, we're also trying to address that. But from a macro point of view, India has not been doing so well.
In China, the railway business was relatively unchanged, but we have been gaining a lot of new orders, so it's on a very, very high level. You have to bear that in mind. I don't know if you want to say something about it.
Yeah, I think, you know, railways, definitely as you, as you have seen, one of our strong segments, and we're investing in new innovations around railways. And railways is not only freight and passenger, but it's also a lot of mining companies, you know, they have railways, and we are working hard to keep our leading position in this segment. So, I'm bullish about that long term. And also, I think we in the announcement that we, I think we even said the Gothenburg production will be finished by next year, and the Schweinfurt test rig is finished by 2017.
So is that CapEx then evenly spread over the two years, or how should we think about the phasing of the expenditures? Okay. Thanks. And then lastly, on FX, it's... well, you had a very strong transactional impact, positively, of course, in the first and even more in the second quarter, but very little or underwhelming organic sales growth. So, how do you think about the trade-off between competing on FX to boost organic sales and taking the boost on the margin side, longer term as well?
Yeah. It's an interesting one, and of course, it's not that easy either, is it? You know, in the relationship with the customer, as I said before, when we're looking... last quarter, there was a lot of discussion about the Japanese, and you can say with the lower yen, the Japanese, the competitors producing in Japan, they have a possibility, of course, to be a little bit more aggressive on some businesses. But it doesn't work out that they just suddenly, you know, take over everything. This is a slow-moving matter.
We tend to look at it, of course, in the fact that there are realities that we have to live within, and our ambition, if you take real long term, is, of course, to maximize the cash flow over time, huh? For our shareholders. So, there must be a cash flow, sort of, equation that we look at when we decide what businesses to go for and not. And that, of course, takes into account this dynamic that you're actually talking about.
Okay, that's very helpful. Thank you very much.
Thank you very much, and that brings us to the end of this presentation. Thank you very much for joining us, and goodbye.
Thank you. Hope to see you all next quarter again, and thank you very much for listening in and giving us your time. Thank you very much, and enjoy the spring. On renewable in India, you know, we actually have a factory ready, which is not at all fully utilized in India, to be able to produce main shaft bearings for the Indian green sort of energy drive. I was listening to Modi.
You know, the Hanover Fair here in Europe is running this week, as I said, and I was there listening to Modi and the Indian president. He specially alluded to this as one of his main themes going forward to have a conversion to green energy in India as well.
We're looking forward to him doing what he said.
Great, thanks. If I could just have a quick follow-up on autos. It looks like you continue to underperform global automotive production. You've talked previously about the potential for new program wins to kind of boost the top line. I just wonder whether you've had any impact yet, and whether you and how you expect that to phase in, in 2015 and 2016, and just whether you think you can outgrow your end markets this year in autos. Thanks.
Well, I would again say, I think there's no major thing to discuss at this point. If you bear with me, when we've done the analysis, it would be a little bit preemptive of me if I try to give you an answer on that before I've actually concluded this process I'm in. And when we look at our strategy for automotive going forward next quarter, I hope to be more explicit on that one, if you allow me.
So just to confirm, we'll get the conclusions at the second quarter stage. Sorry.
I mean, what I'm saying is that we're right now, as I said last quarter, we're not looking at the automotive. We understand that the automotive business in SKF has not been performing according to expectations. We think there are things that can be done. We would like to try to look at it within SKF, as opposed to a different path at this moment. And this is the approach we've taken, where we're starting to say, "Okay, what business are we gonna be in? What are we gonna drive? How are we gonna do this?" Et cetera. And this is the kind of information I hope to be able to be more explicit around in the next quarter.
Great. Thanks. Thank you very much, Matthew. Next question, please.
Next question comes from Ben Sherrat of Merrill Lynch.
Yeah, thank you. Morning, everybody. Firstly, just your commentary on the US, about the weakness you see with your customers selling into mining, agriculture, and oil and gas. Can you give us any sense of how much demand fell year-on-year during the quarter, the magnitude? And oil obviously has weakened more recently, but for agriculture and mining, those markets have been weak for some time now. Did you see another, kind of a sequential step down in demand from those customers? That's the first question. Thank you.
Well, you know, if you just say, take what I said, we were looking into the quarter and seeing, thinking that it was going to be a relatively flat quarter in the US going forward, the first quarter. And then, in the end, we had a slight decrease, and there are basically two factors that have contributed to that. One is then a pre-buy from the industrial distributor. And the other thing we see is this effect that we see some of these kind of customers actually selling less than we thought. And that's the kind of magnitudes that we see at this point. So, you already have it, let's say, in what we are trying to show you.
More explicit than that is difficult for me to be at this point.
Okay. But... but it's more... it's a more general weakness rather than a dramatic drop-off in those markets, even though they're small for you?
Yes, exactly. Exactly.
And then on Europe-
If you go... if you yourself look at the... you know, SKF is a broad-based supplier in the US And I think if you go in and you will yourself be able to identify. I would presume a similar kind of pattern when you look into our customers, so to speak.
Got it. Thank you. And then on Europe, you know, I get that visibility is low, but specifically on automotive and truck markets, where, you know, you get production schedules, and you maybe have more visibility. You know, when you get the production forecast in Europe for the second quarter from the OEMs, are you seeing any uplift in their, in their demand for product there?
I would say that it follow the patterns that we've said in general, that it's on the upper side of relative unchanged, but some positive sign.
Okay. Thank you. Thanks very much, Alrik.
Thank you very much, Ben. Now I think we just have time for one more question. Please.
Thank you. Our final question comes from Gunther Deutschmann, of Goldman Sachs.
Hi, good morning. I'll keep it short. Just a few questions left from my side. Just on the cost savings program, less on the savings, but more on the cost. You've guided to SEK 1.4 billion overall. Now, the run rate, if I just look at the FTEs affected and the charges you've booked so far, is actually below what you're guiding overall.
Is that because the low-hanging fruits, I mean, they consumed early on? Or how do you think about the, the full scale of the program over the two years? And, secondly, on CapEx, you've had two announcements, this week, one on Wednesday about the testing center in Germany, and then today in Gothenburg on the production side.
So if I add those two up, that's just over half a billion SEK in CapEx, and I think you guided to SEK 1.7 billion budget for this year. Is that spread out over several years, those projects? Is that part of the existing CapEx program, or would that come on top? And then I've got a short FX question to follow up on as well.
Yeah. Okay.
Okay. On the cost savings program, if you look at the ratios that of what we have done, compared to what we estimated total program to be, we are in that neighborhood. And we see that we are roughly in that neighborhood for the total program still, so that is no change. On the CapEx side, yes, we have announced these investments, and they will then be addition to plant and property over this, for some this year and then next year. I think we in the announcement, it we I think we even said the Gothenburg production will be finished by next year. And the Schweinfurt test rig is finished by 2017.
So, is that CapEx then evenly spread over the two years, or how should we think about the phasing of the expenditures? Okay. Thanks. And then lastly on FX, it... well, you had a very strong transactional impact, positively, of course, in the first and even more in the second quarter, but very little or underwhelming organic sales growth. So, how do you think about the trade-off between competing on effects to boost organic sales and taking the boost on the margin side, longer term as well?
Yeah. It's an interesting one, and of course, it's not that easy either, is it? You know, in the relationship with the customer, as I said before, when we're looking... last quarter, there was a lot of discussion about the Japanese, and you can say, with the lower yen, the Japanese, the competitors producing in Japan, they have a possibility, of course, to be a little bit more aggressive on some businesses, but it doesn't work out that they just suddenly, you know, take over everything.
This is a slow-moving matter. We tend to look at it, of course, in the fact that there are realities that we have to live within, and our ambition, if you take real long-term, is, of course, to maximize the cash flow over time, huh?
For our shareholders. So, there must be a cash flow, sort of, equation that we look at when we decide what businesses to go for or not. And that, of course, takes into account this dynamic that you're actually talking about.
Okay. That's very helpful. Thank you very much.
Thank you very much. That brings us to the end of this presentation. Thank you very much for joining us, and goodbye.
Thank you. Hope to see you all next quarter again, and thank you very much for listening in and giving us your time. Thank you very much, and enjoy the spring!