Ladies and gentlemen, welcome to the SKF nine-month report for 2014. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. At this point, I would like to turn the call over to Marita Björk. Please go ahead.
Good afternoon, everybody, and welcome to this conference call for the presentation of SKF's 9 months results, 2014. This teleconference will take 1 hour. Here from SKF are our President and CEO, Tom Johnstone, our Executive Vice President and CFO, Henrik Lange, Ingalill Östman, Senior Vice President, Group Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by presenting the results, and then after this, there will be a Q&A session. Over to you, Tom, please.
Thank you, very much, Marita. Ladies and gentlemen, hello. Today, we released our third quarter report for 2014. I think if I look over the quarter, I could say it's a challenging quarter with a lot happening, especially from a micro viewpoint. I think that the geopolitical development, particularly in Europe, has increased uncertainty. Growth for us during the quarter in volume terms was just under 2% and slightly below the expectations which we had entering the quarter. As a result of this, we acted quickly to adjust our manufacturing during the quarter to a lower level, and therefore, the manufacturing was relatively unchanged year-on-year, and of course, that had some impact on our results.
But I strongly believe it was the right thing to do since it meant we were able to reduce inventory in fixed- currency, which, of course, helped our cash flow, which was very good in the quarter at over SEK 1.4 billion. As always, we were busy in the quarter. We took a lot of new and important orders, as you can see in the report, across many industries: automotive, rail, renewable, machine tools, to name a few. We also continued to receive customer awards, which we see as a clear recognition of how we are supporting our customers, and interestingly, awards are normally linked to us gaining business. We continued to launch new products, showing the steps we have taken to increase our investment in research and development is giving results.
Particularly pleasing was the large number of new solutions we launched at InnoTrans, the large railway show, with new hub bearings for both freight cars and for passenger rail, and also new and improved condition monitoring solutions. All of these bring together technology from a number of our platforms and really set new standards in the business. We also announced during the quarter, we would further strengthen our R&D activities in the very important North- American market by opening a new global technical center near Chicago. This is the final piece in our global network of technical centers, which we started to build a few years ago. When completed end of next year, it means we will have two global technical centers in each of the main regions of the world, bringing technology development closer to our customers.
Now, tomorrow is the first anniversary of the acquisition of Kaydon, and so it's an important day for us and, of course, for the Kaydon team. As I mentioned at the Capital Markets Day, Kaydon is developing very well, and the integration is well on plan. They're growing, and they're growing well, and now have a high- teens operating margin, excluding PPA, which is a good step up in where they operated before. If you remember, we mentioned last quarter that we were very successful in gaining a new order, new business of SEK 1.2 billion with a North American wind energy manufacturer for deliveries in both the USA and in Brazil.
As a result, we announced this week, we will now build a new factory in Brazil on the same campus as our existing operating unit, outside the operations outside of São Paulo, to manufacture these bearings locally. The total investment for Brazil is some SEK 220 million, of which roughly SEK 60 million is transferred equipment. Finally, I'm delighted that once again, we've been recognized as a member of both Dow Jones Sustainability Index for the 15th consecutive year and the FTSE4Good Index for the 14th consecutive year. So as always, a busy and successful quarter from an activity viewpoint. Now, back to the financials, and let me first start with the high-level figures before going into more detail on the demand development.
Our sales at almost SEK 17.8 billion Swedish kronas were up almost 14% in the quarter in Swedish krona, and some 8.6% in local currencies. Volume was up 1.9% year-on-year, and then we have the positive addition of structure, which is Kaydon. We also had a positive price mix in the quarter, being up 1.3%, the best quarter for price mix for two years. From an organic sales development viewpoint, strategic industries developed the strongest, being up around 9%, with Asia continuing to drive that development. But we also saw a good development for strategic industries in North America. The automotive and RSS businesses did not see a similar development, with RSS up less than 1% and automotive down 0.5% .
In the Specialty business area, bearing in the general bearings also saw good growth in the quarter, being up some 6%. Let me upfront comment on what we saw in September. I said at this Capital Markets Day that September would be an important month, and it has proved to be so. If I look at our sales on a daily basis, then September was relatively unchanged year-on-year for the group in total and just slightly down in Europe. This is very important when we go into our outlook, which I will comment on a little later. So let's walk around the world and look at what happened to demand development region by region... Start in Asia, which once again had a strong growth.
We saw the best development in the quarter in China and Korea, and we also saw some growth in India. If I look at the Southeast Asian countries, countries like Malaysia and Thailand were relatively unchanged. Let me comment specifically on China. We continued to see a positive development in our sales to industries such as renewable energy, railway, and the car business. Our sales within industrial drives, which is pumps, compressors, gearboxes, developed slightly positively, whereas we still see some weakness in heavy industries in China, such as metals and mining, and I've got to say, a lack of traction in industrial distribution in China. In North America, our industrial business developed well overall, with industrial drives, aerospace, and energy developing positively.
We didn't see any real change in demand in areas like mining, but we did see weakness in other areas like farm and forestry in North America. Our automotive business was relatively unchanged in the quarter in total, as the sales to our car and light truck business was impacted by some model changeovers, and that will continue in the fourth quarter for us. In Latin America, we have weak car business, which is mainly Brazil. The vehicle service market was relatively unchanged, while industrial distributor business and service business developed positively. From a country viewpoint, Brazil was impacted by automotive, Argentina was weak, but I've got to say, with some positive signs, and Chile and Peru developed positively. Turning to Europe, where sales were relatively unchanged for the quarter as a whole.
In West Europe, we did not see a positive development in the main markets, such as Germany and U.K. Italy and France were relatively unchanged. Spain has a slightly positive development, slight improvement we can see in our Spanish business. Central East Europe, we've seen signs of weakening in a number of markets in the quarter, particularly Czech Republic, Poland, and Hungary, whereas Russia develops well. From an industry viewpoint, our car and light vehicles was relatively unchanged, but heavy trucks were down. Vehicle service market was down in the quarter, and here we see some signs of lack of confidence in the market. From an industrial viewpoint, good growth in renewable energy, railway, and aerospace, but general industry in Europe remains pretty lackluster.
So overall, Europe was flat in sales, but of course, with the price mix, and that means it was a little bit down in volume. This is not surprising at all when you look at the signals in Europe just now in the geopolitical situation. In summary, for the group, then, volume was a little weak, weaker than we expected going into the quarter with the growth that, that we did have of 1.9%. This, in addition to some signs of lower demand, mainly within automotive in the fourth quarter, meant the production in the quarter was lower than we planned at the start of the quarter, so it was unchanged compared to last year in the third quarter. This we did to ensure we did not build inventory. In fact, we took some inventory out in the quarter if you exclude the currency effect.
So let me now turn to our profit development. Operating profit was slightly below SEK 2.1 billion , and was impacted, of course, by the lower production. Maybe I can use the bridge here to walk you through the profit development compared to the third quarter last year. So if I start with the operating profit last year of around 1.9 billion, around that, you can see we had a number of positives compared to Q3 last year. Firstly, volume gave us a positive SEK 30 million. Price mix gave us a positive SEK 165 million. We have the positive development of SEK 112 million from the specialty business, which, as you know, we look at separately because of the Kaydon impact in it.
We have savings of some SEK 110 million from our restructuring program, and that's mainly purchasing. We have a positive SEK 65 million this year compared to the third quarter last year in one-offs, since last year, you remember, we took about SEK 85 million last year, and we had a small SEK 20 million this year. And then currencies and translation and transaction were positive by some SEK 100 million, which was better than we forecasted at the start of the quarter due to the stronger dollar. So these are the positives, taking us from the 1.9 up. Then, of course, you see the negative of some SEK 450 million, and let me try and shed some light on what this contains.
A little bit less than half of that is our investment in higher R&D, is our Unite program, and some higher sales activities, as we're increasing our sales actions in, in the marketplace. The other half is due to inflation, including some negative impact, currency impact on purchased raw materials and components into certain countries like Argentina, Ukraine, et cetera. Within the 450, it also includes some impact on profit and, and manufacturing. As we adjusted the manufacturing during the quarter, of course, that had a little bit of impact as well, and that we take in this figure of 450. The 450, little bit less than half was R&D, Unite, and higher sales activity.
The rest was higher cost in inflation and some impact of the negative currency and components, and a little bit with the manufacturing change we made. Cash flow was very good in the quarter, over SEK 1.4 billion, which... And also, you saw a slight improvement in our net working- capital index, and an even better improvement in our net debt equity ratio. As we mentioned at the Capital Markets Day, we started a number of actions addressing the three areas of inventory, accounts receivables, and accounts payable within the net working- capital. Well, I think the real benefit of these actions will not come until next year. These are very important, and I've got to say, all these actions are already started in the group.
So let me now move on to the outlook for the fourth quarter, and as always, I stress, this is a demand outlook for SKF, not a demand outlook for the market... I feel sometimes I must say a little bit like a parrot each quarter, saying the same things about uncertainty in the marketplace. But I've got to say, it is increasingly difficult to give an outlook with such a macro environment which we operate in just now, and particularly as we go through this summer with all the changes we've seen. But anyway, we'll give you our best judgment as we always try to do. We expect demand to stay in the same level sequentially and year-on-year for the group in total. In Asian and North America, we expect a positive development, and sales to be slightly higher sequentially and year-on-year.
For Latin America, we remain concerned overall with the development down there, especially for our automotive business, which will impact it. And in Europe, we expect it to remain relatively unchanged. Because even if we expect a slightly weaker automotive business, we think energy and general industry will remain roughly the same level. But aerospace, and for us, industrial distribution in Europe will be a little bit better after a number of weak quarters. From a manufacturing viewpoint, we will run the manufacturing level slightly lower than the third quarter year-on-year there. To reduce inventory, but also to reflect our cautiousness due to the uncertainty we see in the marketplace. Turning now to look at raw materials and excluding our purchasing program, where we expect a similar saving as in the third quarter.
Scrap surcharges just now are a little bit lower, just to mention that, than their average of last year. In closing, I think we reacted quickly in this changing market to adjust manufacturing, and despite its impact on profit, we delivered a strong cash flow. We continued to take some important new steps to strengthen SKF, launching a number of new products, gaining important new orders, and investing in our technology, which will pay dividends long term. With that, Marita, I'll close off now and pass back to you, and then over to questions. Thanks very much.
Thank you very much, Tom. Let's go over to the Q&A session, please.
If you wish to ask a question at this time, please press star one on your telephone keypad. Again, please press star one to ask a question. We will pause for a moment to allow everyone to signal. We will now take our first question from Martin Wilkie of Deutsche Bank. Please go ahead. Your line is open.
Hi, it's Martin at Deutsche Bank. Just a couple of questions. Firstly, on your demand outlook, you kindly talked about September. Any indications already on October as to whether that sequential trend has sort of broadly remained flat over September, or is it sort of simply too early to comment on that? And the second question was more on your earnings bridge. Obviously, you've highlighted the SEK -430 or so in the EBIT bridge of other. But obviously, that's been quite a volatile number over the past few quarters. And when we think about some of these headwinds in terms of inflationary pressures and so forth, just some commentary as to how we should think about that number progressing over the coming quarters, would be very helpful. Thank you.
On the demand outlook, Martin, it's too early to tell. We're just a little bit into October there, and the demand outlook we've given for the group is, of course, reflects what we've seen in September, what we expect in this quarter. And it's really too early, just a week or so into October to comment how that's going. In terms of the [audio distortion] , yeah, you're absolutely correct. This negative figure is absolutely correct. There it has been quite significant. I think it was actually 300, close to that, last quarter, as well.
It does reflect, as I say, a combination of the investments, but we have increased our activity in the marketplace, which is important to be more active out there in the market, there as well. For me, I don't expect it to get much different to that as we go forward at this stage there. And of course, one things we need to look at longer term, is how we can do other things to offset that inflation. But I don't expect it, that to be much different going forward.
So when you say much different, you mean the rates we had in Q3 or the nine-month rate so far this year? Just to give a sort of trend of how-
Yeah, yeah. Martin, we were very low in the first quarter in that area, element there, so we've stepped up. So if I take it, the key elements within it. R&D, I don't see any major change from this level as we look at it in the fourth quarter, so you'll still have that headwind there. You'll still have the headwind with the sales activity, which I think are important things. They're investments in our business. They're investments in more activities out there in the market. Unite, I don't see a dramatic change in the fourth quarter either. If I then look in inflation, do I think inflation will decrease? No, I don't think so. If I then look at the small impact of currency into it there, that won't be much change. So I would say...
I can't say it's going to be exactly SEK 400 million next quarter, but I think if you look at the Q3, Q4, sorry, Q2, Q3 type levels, to me, my best judgment would say, I don't see a dramatic change between that into the fourth quarter.
Okay. Thank you. That's very helpful.
Thanks, Martin.
Thank you, Martin. Our next question, please.
We will now take our next question from Peder Frölén of Handelsbanken. Please go ahead. Your line is open.
Thank you. Hi, everybody. Thanks for taking my questions. On the profitability, Tom, you mentioned that you take down the inventory sequentially with, I guess, SEK 100 million-SEK 200 million or so in fixed- currency. Given what you see today, in demand, and could you try to help us to see how much you would plan for taking down the inventory Q- in- Q in the fourth quarter? And also to get a feel for that year-on-year, to have a better feeling for that specific component in the negatives here in the EBIT bridge. I know this is a detailed question, but I think it is quite important to try to understand the underlying run rate, at this demand level.
Sure, sure. No problem, Peder, with that. We need to run the inventory down a little bit more in the fourth quarter. So I would expect something similar. I mean, that all assumes that the demand outlook we give doesn't change during the quarter. But based on how we see it just now, with the outlook that we've put in place of demand and manufacturing, SEK 200 million is the sort of thing of inventory we expect in the fourth quarter.
Yeah, that's clear. I mean, if we try to calculate backwards here in the 432 and the absolute numbers on inventory, so forth, is it fair to assume that this particular effect has been around SEK 50 million-SEK 75 million year-over-year, or is that too much?
I wouldn't say it's too much because also the... I'm not going to give an exact figure, but I wouldn't say it's too much, and I'll tell you why. Because there's a combination of us taking the inventory, but also the fact that as you need to adjust manufacturing fairly quickly. We went in, as you remember, to the quarter, expecting inventory to be slightly higher. Sorry, inventory. Manufacturing to be slightly higher in the-
Mm.
-quarter, so we had to adjust during the quarter for two factors. One, our volume, sales volume, was a little bit lower than we expected going into the quarter. And secondly, what we should see as an output. So we did a couple of changes there, which impacted it. So, and in order to get that inventory reduction, we had to do a little bit more impact on the manufacturing than we did on seeing the sales side there. So it's probably somewhat a little bit more than that because we did it short- term, and we did it fairly quickly to adjust, taking-
At a higher incremental margin, I mean, yeah.
Yeah, exactly. Exactly, Peder.
Makes sense. Sorry, another follow-up, but maybe to Henrik as well. On the pension debt, lower interest rate affect your debt here by SEK 2.4 billion or so, on a quite short period of time. How should we think of this ahead? Have you now looked at all the debt for current interest rates, or is this a gradual move? How is your accounting working here?
Also, we do actuarial checks on the outstanding liability we have on the pensions, and it's predominantly Germany and U.S., which are the big contributors. So there's been then rate changes. That was roughly SEK 1 billion in the quarter. So I think that based on the current situation and interest rates, they are now adjusted, and then it's subject to what will happen going forward, that we will have to take as it comes.
Yeah, that's very clear. Thank you. I'll get back in line. Thanks.
Thanks, Peder.
Thank you, Peder. The next question, please.
We will now take our next question from Ben Maslen of Bank of America. Please go ahead. Your line is open.
Yeah, thank you very much. Hi, Tom. Hi, Marita. Just a couple of questions. Firstly, just conceptually on the cost savings, which I guess is related to the inflation question. You know, we're almost halfway through the program. If we stay at these kind of very low growth rates, you know, positive, then negative, how much of the savings do you think you'll actually keep? Because we obviously model them prospectively in our forecast. Or do you think more realistically, you know, they just get eaten up and lost on the inflation that is just naturally running in your business? That's the first question.
And then just secondly, on your arrows, Tom, you've taken up industrial distribution going forward, which seems maybe slightly at odds with just the kind of weakening momentum we see industrially in the PMIs. Anything specific going on there in your business? Thanks.
Yeah, good. Let me take the last one first, if I could, Ben. In industrial distribution, first of all, our areas have been running pretty low for some time within industrial distribution. And we do see in areas like, for example, North America, some slight improvement in our industrial distribution business, and we expect that to continue into the fourth quarter. We have had a good development in industrial distribution in Latin America for some time.
And from what we can see just now in the Asian region, we expect a little bit better there as well. And then I come to Europe. In Europe, as I said, our business has been running pretty weak for some time. And if I look actually at the last couple of months, then I think the industrial sphere in Europe may be just a slightly better for us in total. So when I add all that together, round about it, that's what brings the arrow up there. So it's mainly driven by North America, something we expect a little bit better in the Asian region as well, the continued development in Latin America, and a little bit of a, let's say, positive feel that we might get a little bit better in Europe.
Sorry, you want to come back?
No, that's great. Thanks. Thanks, Tom.
Then on inflation. On inflation, first of all, we must remember in that total figure in there, there is certain bit that's inflation related, and there's certain bits that's investment related, that we don't see as picking up going forward. For example, if you look at the investments we've put in R&D and into Unite during this year, we've already indicated we do not expect that to run at a higher level during next year at all. No real change there as well. So that component of the red should disappear within that as well. Also, when you compare year-on-year, that component, vis-à-vis of increased sales activity, we don't expect to change as well. So roughly half of what you see within there should disappear away.
And then, of course, we've got it in there, as I said, there were some other factors that impacted not just inflation, to do with the little bit changes we made in manufacturing, which you would normally see over in volume and to do with the, the currency impact into, in, in some raw materials there. So if I equate that out, I think the inflation element of that is lower than it looks just now because of these other factors. Which are what that means in the big picture is, as we go forward, we still expect as a total program for SEK 3 billion that we still expect to save somewhat more than half of that.
Got it. And then, just to follow up, just in terms of the big picture program, the SEK 3 billion, has there been any change in the kind of pace you're doing the restructuring, given that, you know, you're departing and Alrik is coming in? Any measures just delayed until the handover?
No, actually, nothing is delayed at all. I think, first of all, I can say that the cooperation, discussions, alignment with Alrik is very good. So things are working exceptionally well on that side there. And then I can tell you, he's as equally pushing the programs we've got in place for us to push and get it, especially when it relates to cost saving, cost reduction, and what is the right structure there. So I can say, we're not holding back in making decisions as this change at all. We keep pushing things. However, as I mentioned at the Capital Markets Day, we can see, especially within the SI operation, that some of the steps of movement has taken us a bit longer than we expected in total there.
That's something that we need to work on, readdress, and push it. That means that part of the program, it looks likely to run out a little bit longer, which we don't like, of course, and which we need to work to try and correct.
Great. Thanks for all your answers over the years, Tom. Thank you. Good luck.
No problem. No problem, mate. Thanks so much, Ben.
Thank you, Ben. Next question, please.
We'll take our next question from Daniela Costa of Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning. I have a question regarding so the comment about manufacturing expected to be slightly lower year-on-year. I guess, given your net working- capital sales targets of 27, this would be something that we should actually see as more structural rather than just related to the demand environment. Can you talk a little bit about how much of this is structural versus how much was just that cautiousness in demand? And whether you think that the growth level, which you have in your mind, has, if we don't reach that type of growth level, we will keep reducing it. Some comments would be great. Thank you so much.
I think in the short term, the issue regarding what we're doing in manufacturing has a much stronger focus towards the demand situation and our view, and as I said, the cautiousness that we have there. We have, as we've discussed at the Capital Markets Day, and that material is on our website, we have a program specifically focused on inventory management, but we're at the pilot rollout of that. So as a short term for the next quarter, I would say no, that is not really an influence of that program. It's an influence of us just trying to manage our inventory, doing our normal activities, but also how we see the demand situation.
Going forward, the program will have more of an impact as we go through 2015, but much more into 2016 and 2017 there. Whereas the other programs I could just mention for accounts payable and accounts receivables will have more of an impact in excess, particularly in the 2015 and 2016 area, whereas the inventory will more 2016, 2017 area in doing that. The other programs are up and running just now.
Thank you.
The pilots are up and running just now, as you say. Pilots are. Okay? Thanks, Daniela.
Thank you, Daniela. Next question, please.
We will take our next question from Peter Testa of One Investments. Your line is open.
Hi, thank you very much. I just had a couple of questions, please, on the auto outlook, where it's become somewhat softer. Is that reflecting views on what you're likely to see at the year-end on the December period, or is that more reflecting the schedules as you're getting into October, November? And then within that, you also see the vehicle services part, particularly weakening. And I was just wondering if you could offer some more comments as to what you're seeing there, and if you can give any geographic color on both those answers, that'd be great, please.
Sure. If I take the automotive side just now, I mean, clearly things can change as we go through the quarter, especially around the Christmas break, and it's difficult for us to judge at this early stage how that may be. So what you're seeing in our auto outlook, cars and trucks, is what we know just now, what is public information and what we know from the order books that we're seeing at this moment, which of course, is much more relevant to the next month or two, couple of months there. They're always likely to change, as we go towards the year-end. So it's much more what we see just now.
If I give you a color on that, around the world, in total, I'd say in Europe, we expect, in the fourth quarter, in total Europe, West Europe and East Europe combined, vehicle car production to be down, a little bit, or light vehicle production to be down a little bit. So that's reflected in year-on-year. So that's reflected in our figures. We also are impacted in North America with the, with a changeover that's taking place just now with one of our big customers and one of our main businesses. So that means even if the North American business is developing, reasonably well, and production is developing reasonably well there, we are impacted because of that changeover that's taking place.
Asia, we expect to continue to develop very well, and Latin America and Brazil, we see a big drop-off, and we expect that to. We don't expect any recovery in that. So that's a little bit about the automotive, but especially car and light vehicle. Heavy truck side, we have some concerns, as we even mentioned earlier, going into the fourth quarter. We do see some reduced production from certain of our customers into the fourth quarter. So that's reflected in our truck area there. Remember, our truck business is predominantly a European business and an Indian business. It's not strong yet in China. It's growing in China, but the market is not, or the business, our business is not strong in that market.
Latin America, yes, we have some in Brazil, but a lot more of it comes from a European input into Brazil. So it's much more a European view and an Indian view that we see. When I switch to vehicle service market, I think if you look at the vehicle service market in total, I think you see a different picture around the world. You see Latin America holding up, even in a tough environment, pretty well, as is Asia, but we have a little bit weaker business in North America. To me, that is not dramatic there. We just see a little bit softer for VSM in North America at the moment, yeah, which is contrary to what we see in other parts of our North American business.
In Europe, though, we see a combination of, I think, lack of confidence in the market, but maybe there is something else. And we're currently studying the vehicle service market to really understand a little bit more what's happening. Actually, I cannot say that our development in Europe is only confidence in market related at this stage. We're still trying to dig a little bit more into to see what's really happening in that, from a demand pattern viewpoint, et cetera, there. But we're a little bit... We're not happy with what I see in the vehicle service market business at the moment.
Okay. Thank you very much for the answers.
You're welcome, Peter.
Thank you, Peter. The next question, please.
We will take our next question from James Moore of Redburn. Your line is open.
Yeah, good afternoon, everyone. Tom, just on the 432 other line, I've got three quick ones and one on price. I guess sales and R&D is partly headcount. And when I look at your headcount progression, I saw you run at 46,000-47,000 for four quarters, from 4Q12 to 3Q13. Then it jumped up to nearly 49,000 in the fourth quarter last year, and it's run there since. So I see that this 5% employee growth in the third quarter is probably gonna fade now. So when it comes back to thinking of the 295, 432, shouldn't we be at the lower end with employee growth coming down?
Another piece of that on the absorption, to Pader's question earlier, should I take it that the absorption impact was more than or around SEK 100 million in the third quarter? And your decision to pull production down slightly in the fourth quarter, is that going to give a bigger impact than that, or similar, or lower? And then, what I see divisionally is that the weakness on the margin came in the automotive business, and it wasn't clear whether that's tied into this 432 line. And is it something that's specifically auto-related? And if not, why is auto the more troubled piece divisionally? And then, sorry for all of these, on price, the 1.3% number, a very good number.
Could you help us think a little bit about pure price and whether you're getting price to stick a bit more after the list price rises, or is it all mix?
Wow! I'm gonna take the rest of the time up, James. Thank you for all these questions. I hope I got them all for you. First of all, if you take the headcount, remember last year, though, that we moved in my headcount viewpoint last year. Remember, we took on board Kaydon when we went into the fourth quarter-
Okay
... last year. So that had an impact from the fourth quarter onwards, remember. So that, that is the step up that you saw there in terms of people. In terms of R&D investment, yeah, that's one element of it, is people. But it's also investing more into our R&D, into research, working with universities, working with other areas there. So it's not just people related within that, in terms of R&D, there. So from that viewpoint, remember the step change with Kaydon. That's one thing.
Okay.
Absorption. Back to your question on absorption there, as well. Yeah, I mean, the absorption was reasonably important because of the speed that we took the decision into adjust production during the course. So I wouldn't take, I wouldn't give you an exact figure, I don't want to go into that figure, but it was, it wasn't insignificant within it there. In terms of the fourth quarter, we're planning for that, so therefore, it will be a more normalized absorption in the fourth quarter. The fact that we're gonna run a little bit and take a little bit of inventory down, 200, as we mentioned, within there.
In terms of automotive, yeah, you're right. I mean, automotive is the one, if you look at the, which is the drop in, in, in margin for us, there. I think compared to last year, roughly SEK 100 million different compared to last year in the quarter. That's a combination of them braking manufacturing, but also the mix, with the vehicle service market being the one that was tougher for them in the third quarter. That mix impact then was very important. So it was a combination of manufacturing change and mix that impacted them. Clearly, the automotive level isn't where we need it to be, and we said that at the capital market, and I don't want to go further on what we said there. It is not where it needs to be.
For us, going forward to hit our margin target, that has to be addressed, and that will be addressed there. In terms of the price mix of 1.3, it was a good level in total for us, 1.3. How much—If I take intra-business area mix, there was very little impact. I did that calculation a number of ways. There was very little impact from an intra-business area mix, so it wasn't that element that was in there. Of course, there is some elements to do with the mix of the different elements, but pieces of the business there for us. So, but, can I say much as pure pricing pure mix? That's difficult for me to, me to judge.
It is a tougher pricing environment out there, but our guys are working hard to try and make the pricing, but it is a tough business environment. But I can't split how much it's pricing makes, James.
Just a quick comeback on the labor headcount. Thank you, Kaydon, I missed that. But if we adjust for Kaydon, it doesn't look like the number of people is going up a lot. Is it that you're going from blue collar to white collar, or is it really just wage inflation? Because we've got more emerging market headcount with 7%-8% wage inflation.
Let Henrik come in and give you some figures on employees.
If I look at it, where we are then, as reported, the jobs change is 3,000 people up, if you look at the September numbers compared to the start of 2012, for instance. But if you then look what have been structurally changed, with the acquisition of GBC, Blohm + Voss and Kaydon, we have acquired some 4,000 people, and we have disposed of some 800-900 people through raw-
...business in Australia, New Zealand, et cetera. So the net is actually a reduction of 40 ± 0, basically. The structure changes that drives it.
Okay, thank you very much.
Thank you. Welcome.
Thank you very much, James. Next question, please.
We will take our next question from Andre Kukhnin of Credit Suisse. Your line is open.
Good afternoon. Yes, it's Andre from Credit Suisse. Just a couple of follow-ups left. Firstly, on manufacturing, for fourth quarter, does your guidance imply that it will be flat or higher year-on-year? Because you're ramping down already in Q4 last year as well.
It's gonna be slightly lower year-over-year, and slightly lower compared to the third quarter, so it's both.
Right. So manufacturing will be slightly lower year-on-year as well. Okay. And then, just a sort of a broader follow-up. In your comments on Asia, before you made it very explicit, you were gaining share. Now, you haven't done. Could you just give us a bit more color on this? Because noticing the growth has slowed to 8%, sort of 11% year-to-date. Is there anything changing in market landscape there or in competitive landscape?
No, no, no. I think it's one of the things as well, is the comps become tougher. And if I look at areas like, for example, renewable energy, we've seen a fantastic growth over a longer period of time. And I think to keep that trajectory, a trajectory going on, it is not realistic that it'll keep going up. So that means the comps will become tougher as we go forward, and that is similar in railway and especially in high-speed rail. Are we gaining market share? I think we're growing somewhat better than the market there, especially in a number of areas like car. We've definitely done it in the railway side and renewable side.
So I, I wouldn't say that, we, I kind of see it as a dramatic market share difference. As, as a total picture, we're growing faster than the market in a market like China at the moment. That I can say.
Got it. Thank you very much, Tom. Appreciate it.
Welcome, Andre.
Thank you, Andre. The next question, please.
We will now take our next question from Alex White of JP Morgan. Please go ahead. Your line is open.
Yeah, good afternoon, everybody. Just a couple of follow-ups, please. Just following up from James' question on the inventory drawdown in Q4. That, that couple of hundred million number you talked about, is that a finished goods number that you're referring to?
Yes.
or a drag on EBIT?
No, no, it predominantly finished goods.
Finished goods. And then, the second part of that question would be, how we should think about that divisionally? Is it more within auto, or how would that be split?
It goes across both the divisions, in total. Actually, it was a little bit more in the industrial arena than it was in automotive.
So, in Q3, you mean, or
In Q3. In Q3.
In Q4, should we be expecting a similar type of split, where it's a bit more in industrial than in auto?
Yeah, I would think a little bit more in industrial than automotive, but I must say, not dramatically different, but a little bit more in industrial than automotive, as I look at it just now.
Okay. And then, the second question was, gross margins are holding up relatively well. I think in Q2, you indicated that your margins, on the OE side of the business were improving across all regions. Just wondering if you can provide a little bit of a comment on pricing trends by region.
I mean, the pricing environment is still tough out there as well, and especially when you're in a market environment that's not dramatically growing, Alex. So it is a tough business environment there, and you've got to fight for every order. You've got to fight to justify the value you deliver to your customers. So the pricing dynamics haven't changed.
Okay. And then you mentioned that industrial distribution in China wasn't really gaining traction in Q3. Is that in line with your perception of the underlying market?
Yeah. Yes, because if you look a lot of their end markets are into areas like, mining, metalworking, et cetera, they are. So because of that, that's their basic end markets. I don't think that they are losing market share. I think it's just their basic end markets are not going so well. And one of the things we must remember, which is still a challenge in a market like China, is access to liquidity, access to cash, and that impacts their customers and impacts them.
Okay, thanks very much for your answers, Tom, and all the best with the last few months at SKF.
Thanks so much, Alex. Thank you.
Thank you, Alex. Our next question, please.
We will now take our next question from Daniel Schmidt of SEB. Your line is open.
Yes, hello. Hello, Tom. I was just wondering, again, on pricing. If you look at, further, what should we expect in terms of further price realization from the hikes that you did during the spring? And then secondly, back to automotive, how should we sort of model the fairly large orders that you actually took in automotive a year ago, that I think you said will start to be delivered by towards the end of this year, going into next year? And could that in any way, sort of neutralize your negative view on automotive short term?
I would say, first of all, I think the automotive side, I think Tryggve also mentioned the capital market, roughly 50% of his business in the OEM side today is coming from business that was launched since 2010. I think there is a new businesses coming in that will help us as we go out this year, next year, but not the ones we took in the last year. The ones we took a couple of years ago will start to come in, definitely into 2015. And one of the things I mentioned earlier, that's impacting us in North America. There is a changeover taking place of one vehicle over to a new vehicle, which we have the business on as well. And will it help them grow?
It should help them grow a little bit better in the market as we go through 2015 into 2016. It should help them grow a little bit better there, but and that is in all regions, major regions, China, Europe, and North America. When I go back to price realization, I think the efforts that's been put in place, we've now seen that come into our business. I don't expect any dramatic improvements from that as we go through the end of this year and into next year. And we have no plans at this moment for other steps.
Thank you so much.
You're welcome, Daniel.
Thank you, Daniel. The next question, please.
We will now take our next question from Lars Brorson of Barclays. Please go ahead. Your line is open.
Thanks very much. Hi, Tom. Hi, Marita. Just returning to ISS and understanding the growth and margins there. So another quarter of quite little growth coming through in ISS. This follows obviously six quarters of underperformance in growth here relative to the group. I'm trying to reconcile that with your comments on trading and indeed, the outlook for your industrial distribution segment. Can you give us a sense for how much your focused industries, the quarter of RSS that's focused industries, is dragging growth within that division? And on industrial distribution, can you give us a sense here? I know we've talked about it before, but whether we're moving into a more prolonged period of sustained recovery here in ISS, or rather on your industrial distribution segment, given where we're coming from on inventory levels among your industrial distributors? Thanks.
It's a good question, that. If I take industrial distribution, there has been a lot of steps taken over time to address inventory. And I think that what we're seeing as we go through the year, as I say, is a little bit better development in North America, that we expect to continue development in Latin America. Asia a little bit better we can see, and hopefully, as we expect, and hopefully get it indication of Europe just a little bit better for us in total for industrial distribution. Is it the end of a longer period? I think that I don't want to go a longer time of projection. I think it...
With what's happening to our macro viewpoint and all the uncertainty there, I think it's too early to start to talk what we think 2015 or 2016 is going to be there. So I think that's a little bit too early to look at that. There is a lot of noise out there, if one looks at it, in terms of the macro development there. So let's go a little bit further before we can give you outlooks going forward within that. Within the area of focused industries, it depends. I mean, if you take, for example, Latin America, even though they have got some good business, even if they work in a tough environment, they've done some good business in terms of service business.
In Latin America, they've developed pretty well in that area. But of course, in somewhere like the European market environment, then the RSS is impacted a little bit with things like metalworking being down, paper being down, et cetera, there. So I can't say. I've got to say, I don't have it off the top of my head, how much of a drag the Strategic Industries business is exactly on RSS. I wouldn't think if I look at the arrows, et cetera, they would be dramatically... Or sorry, the pluses in that, they would be dramatically different without the Strategic Industries. I don't think so.
I'm just struggling, Tom, with the 70 basis points year-over-year decline in ISS margins, in spite of an industrial distribution segment, which is improving, it sounds like. So, again, from my-
Sorry, sorry, sorry. I didn't say industrial distribution was improving. Our outlook is that it will get a little bit better as we go forward. First of all, you must also remember the total. It depends on the mix within that. It depends how the development is within the different regions, et cetera.
Okay, understood. Just finally from me, if I can just ask to the organic growth in Kaydon. Obviously, the structure impact in specialty was, was quite significantly higher than at least I'd expected. What was, what was the organic growth in, in Kaydon? And is there greater seasonality in that business than there is in the group business?
I think the growth that Kaydon has been having so far, roughly around the 7% for Kaydon itself, roughly in that area, year-on-year.
Thanks.
That's the organic growth. And of course, you don't see that in organic within, within specialty. All of that's within the structure at this moment in time. As you go forward, after this quarter, I think, if I remember correctly, we had 10 weeks of Kaydon in the fourth quarter last year. So you'll get a little bit of structure still from Kaydon in the fourth quarter, but the rest of it will be organic development.
Sure. That's clear. Thanks.
Okay. Thank you.
Thank you, Lars. Next question, please.
We will now take our next question from Guillermo Peigneux of UBS. Please go ahead. Your line is open.
Hi, it's Guillermo Peigneux from UBS. Good afternoon, everyone. Just a question on price mix and your inflation comments. Tom, I think if I did my numbers right, your net price is negative here, and I just wonder whether you were expecting this, or is something that is related to limited ability to transfer prices to your customer base as we speak? And then I have a follow-up, but I will ask it afterwards.
Well, I think it's clear that the inflation element relative to the price mix, because if you take that SEK 430 or so in total, as I said, less than half of that is R&D, Unite investment in people. There is some currency impact, I mentioned that, and some production impact in that remainder. So with that, I wouldn't say it's dramatically priced negative, but I would also not say it's dramatically priced positive there. With it, in terms of we look at inflation, just pure inflation, versus what we're seeing on price mix. I don't think there's a huge difference between the two.
... Thank you. And is that inflation coming from emerging markets, countries with what devaluation problems, in a way?
Some comes from that there, but some also comes, of course, from the normal wage development you get in other areas there. And if you've got normal wage development, and you don't have the level of growth that you need to have, then you have to try and to offset some of that through productivity. And if you don't. And some of that productivity you get into the savings, and some of it you get in, you know, you don't get, it's not so visible. So that is, it is related not only to low inflation currency-related countries or to Asia with higher inflation levels, that it is related to also a West European area as well.
Last question. I was a bit surprised to see your comments on truck production, slightly negative, when we're seeing very strong data and probably in the U.S. And strong data out of the U.S. and in terms of sales development. So I was wondering whether your customers have taken a different view as regarding the sustainability of that growth.
Of trucks North America, I'd say trucks North America, for us, is a relatively small business. So from my viewpoint, don't look at our truck North American business as an indication of the market. It's a relatively small business for us in total. So please don't look at it that way, at all there. My comments on trucks are much more related to what we see in West Europe, what we see in India, et cetera.
Thank you very much. Best of luck.
Thanks so much, Guillermo. Thanks all. Thank you, all the best.
Thank you, Guillermo. Next question, please.
We will take our next question... Sorry. We'll take our next question from Andreas Koski of Deutsche Bank. Please go ahead. Your line is open.
Yes, good afternoon. Can you hear me?
Yes, I can hear you, Andreas.
Perfect. On the cost savings program, you're running at the same savings rate now as at the end of Q2.
Yeah.
But do you plan any actions in the fourth quarter that will change the savings rate?
Good, good question. I mean, of course, we're always looking at different things just now. I cannot say that we see anything specific that will come through to in the fourth quarter. As I mentioned a little bit earlier, we see the areas like, for example, our industrial business, SI, is not to the level we'd like to see from a restructuring viewpoint, but I don't think we'll be able to finalize all the details of that for the fourth quarter. I think it'll take a little bit longer.
Okay. Then Henrik mentioned on the Capital Markets Day that you are running behind schedule in some parts of the cost savings program. Can you please give us a feeling of what kind of savings that is planned for 2015, and how much of it that will be delayed into 2016?
No, I don't want to give an outlook on that just now. As we revisit the programs to look into it and see what other elements we need to do. I don't want to give an outlook at this stage until we've done that.
Okay. Then lastly, on organic growth for the different business areas. You and me, we have spoken a lot about industrial business areas tend to lag automotive. Automotive fell organically by 0.5 percentage points as a quarter, and you're guiding for slightly lower demand in Q4. Do you think historical patterns are still valid, and are you taking any measures to be prepared for a downturn in your industrial businesses?
Firstly, it's an extremely good question. I think that also depends on your end market exposure. But as you rightly point out, that's the sort of pattern we've seen before. And be sure that we are aware of that pattern, and we will take the necessary steps to address that. That's already well aware and well being covered.
Okay. Thank you. Thank you, Tom, very much.
Thank you, Andreas. Thank you so much.
Thank you, Andreas. Next question, please.
We will take our next question from Peder Frölén of Handelsbanken. Please go ahead. Your line is open.
Come on, Peder. Peder, can we hear you? No? Don't hear. Maybe next question then.
Oh.
We've lost Peder.
Peder? No.
Can you hear me?
Yeah, we can hear you now, sir. Hear you now.
Oh, sorry, sorry. Okay, maybe on FX next year on EBIT, Henrik, what's your best guess, given what you see today?
My best guess is what we gave, and that is for the next quarter.
Oh, okay. Okay, and, and, and then on the year-on-year profit bridge in Q3, if we just... You started to elaborate a bit on Q4, Tom. If you have the slide in front of us, let me think Q4 instead. I mean, you will have, hopefully, a price mix that is strong, volumes, basically none you guide for. Specialty business, Kaydon will not contribute more than maybe two weeks. We have savings the same, one-time items, I guess we get back to that, and then we have currency in 230, and then about the same on others. Is that what you're seeing?
Yeah, yeah. As I say, when I looked at the bridge, if I take away the one-offs from last year, the 1,800 roughly-
Yeah
Then I look at it and say, volume will not give us anything from a sales viewpoint. We'll have a negative, a little bit from a production volume viewpoint.
Yeah.
Positive price, positive cost reduction, a positive in currency that's been highlighted there-
Yeah
and then some negative on the side of inflation, et cetera.
Yeah. So you're probably... I mean, it's pretty straightforward, given that. So it's all about the volumes, right? And on that note, I would just say, savings, you mentioned about the same before. Did I hear you correct? So we expect the year-on-year about SEK 110, or is this same in absolute levels as in Q3? What's the year impact in Q4?
Yeah. My best judgment just now is something similar to the Q3 110.
... Great. And just to clarify on the specialty on the Kaydon contribution, the SEK 112, I mean, it's basically what the EBIT was, I guess, or is the PPA effect here came in later, so you will have a sort of a negative effect in the fourth quarter on specialty business, or it's basically flat due to the consolidation period?
The 112. What we do with that 112 is we take the total specialty business, difference profit this year versus profit last year. It's not just the Kaydon figure. In there, you've got the profit improvement of the GBC , PEERs plus the Kaydon profitability is in the 112. So it's a total specialty business profit improvement. Some of it, as I say, comes from PEER, GBC, but the majority, by far the majority, comes from the Kaydon figure there. Now, of course, as you go into the fourth quarter, we've got to take out the figures. Remember, we wrote down the, took the full cost for the inventory, et cetera, et cetera, within Kaydon.
So that you have to take out on one side and then look at the profit on the other side. So it won't be that sort of increase in the fourth quarter clean versus the fourth quarter last year, as it was in the third quarter versus the third quarter last year.
That's very clear. Yeah, on FX June the quarter, Q3, we usually have sort of rule of thumb here, a sort of split of the SEK 110 million by percent in different divisions. Is that the same 40/40/20, or how should we look at it in terms of percent? Any big difference versus historical pattern?
No difference in historical pattern.
No.
But a little bit more in ISS than in the others. Yeah.
Okay, that's very clear. Thank you so much for these years. And, well, we'll see each other later. But thanks so far, and thanks for the call.
Thanks so much, Peder. Thank you very much indeed.
Thank you, Peder. We still have time for one or two questions.
We will now take our next question from Colin Gibson of HSBC. Your line is open.
Hi, good afternoon, everybody. Lots of good questions so far, so just a quick broad brush question from me, please. One of the questions analysts get asked the most is when they look at... When investors look at the increase in profitability that most European engineering companies have seen over the last decade or so, people say, "Yeah, but was that just all the super cycle, really? Was it just Chinese industrialization? And if you take all that away, will they be back to the sort of levels of profitability that we saw in the 1990s?" Well, if we look at SKF, you're into your third year of much tougher trading conditions, and you're still comfortably in double digit EBIT margin. Whereas, I guess, if these trading conditions had hit you in the 1990s, you'd have been down into mid-single digits and falling, probably.
Tom-
Right.
When you look ahead, do you think there is a significant risk for a company like SKF, that the profitability falls from here? Or are you confident with everything you can see, that you can at least keep profitability at these levels, if not improve it?
I think. Your assessment is absolutely correct. That we've made a step change in our profitability to move up from where we were in the nineties, around the 8%-12%. We set a target of 15% going forward, and I think what Henrik covered very clearly at the Capital Markets Day was the steps that we need to take to get up to that. Which includes three important steps to move up to offset inflation. One is, we get the benefits from the restructuring program. Second is, we get some growth, not huge growth, but some growth in our business there. And thirdly, we get productivity, and we do portfolio management. We really manage our portfolio in a good way.
These were the three steps he put in, put in place, and I believe strongly that these are the right three steps for SKF. We need to take the cost. We need to get a little bit more efficient in our operations there. We need some growth, but it doesn't need to be spectacular growth that we had in the nine- the last decade there as well. But portfolio management and managing that, along with productivity, are very important step. So I'm confident we won't step back.
That's great, Tom. Thanks very much. And from all the team at HSBC, all the best. Thanks a lot.
Thank you so much, Colin, to you and all the team. Thank you.
Thank you very much, Colin. That brings us to the end of this teleconference. I thank you very much for joining us.
Yeah, thank you very much, everybody. Just for me, this is my last quarterly report. For those still on the line, thank you very much for all these years, the 46 reports. Thank you so much. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.