Good evening, everybody, and welcome to this conference call for the presentation of SKF's half-year results, 2014. This teleconference will take around one hour, and 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, and hello, everybody. A short time ago, we released a report for the second quarter of 2014. We saw good growth in the quarter and a good sequential profit and margin improvement. Price mix was positive in the quarter and shows the steps that we're taking to improve price quality and get a better mix in our business are working. Cash flow was also very good in the quarter at over SEK 1.4 billion, if I exclude the EU payment. So I think it was a good solid quarter from SKF and a definite step in the right direction. As always, we were very busy in the quarter. We took a lot of new orders, as you can see in the report, across many businesses: renewable energy, service, automotive, railway, to name a few.
There are many more, which we cannot mention yet, but it was a very successful quarter for new business for the group. What's particularly pleasing is how we continue to strengthen our position in China, taking more and more business from local Chinese customers who see the value of our technology and how we can help them develop their products. There's no doubt that the investments we have made in recent years in China for technology, manufacturing, and distribution are giving benefits and that we are growing faster than the market. In the quarter, we also took two additional steps through the opening of our campus at our Northeast Asia Distribution Center, one of the most advanced of its kind in China.
We hold a number of very important customer events in Europe and Latin America, bringing together customers across a number of industries to share knowledge and experience at how they can improve the efficiency of their assets, and of course, use SKF technology to do so. We also increased our investment in R&D as planned and launched many new products, as you can see, both in the report and in the presentation. Again, a main focus of these new, new solutions is energy and fuel efficiency, helping our customers reduce their energy costs and give benefits to their customers. Kaydon continued to develop well, and the integration is well on plan. They have a better operating margin this year, excluding PPA. A number of new businesses are coming as a result of the combination of Kaydon expertise, SKF expertise. But as you know, we're taking this step by step.
One highlight, though, was the order for over SEK 1.2 billion from the North American renewable energy customer for business in both North America and Brazil. I know personally that one major factor in that decision was the combined strength of SKF and Kaydon with our existing SKF presence in Brazil. So sales synergies are more, more than on track, as are cost synergies, which we can see in their margin improvement. So from an activity viewpoint, I think we had a very good quarter. Now, back to the financials, and let me first start with the high-level figures before going into the details and the demand development. Our sales at almost SEK 18 billion Swedish krona were up some 9.5% in the quarter in SEK and 8.4% in local currencies.
Volume is up 3.6% year-on-year, and then, of course, with the positive addition of the acquisition, which is Kaydon. From an organic development, the Strategic Industries developed the strongest, being up over 11%, with Asia driving that development, and I'll come back to that later. RSS and Automotive grew slightly and were up 2% and a little more than 1%, respectively. What I could comment at this point for both RSS and Automotive is that we saw a slow end to the quarter, mainly in Europe. You can also see in the Specialty Business area in total that in addition to Kaydon, PEER and GBC saw good growth in the quarter. So let's look a little bit more detail what happened to organic demand development, region by region. Let me start with Asia.
We had a very strong growth in the quarter with China, Korea, and Indonesia, particularly developing well. In India, our sales were slightly up, whereas we saw continued weakness in many Southeast Asian countries, such as Malaysia and Thailand, and then, of course, a weak Australia. This weakness we're seeing in Southeast Asia was a major factor in why RSS did not see a strong growth in the quarter or growth in the quarter in Asia, but we saw a very good development in Asia by both SI and Automotive. Taking China, our sales continued to develop very positively for renewable energy, for railway, and of course, in particular, high-speed rail, where we gain market share. We also saw a positive development in Industrial Drives, which is pumps, compressors, and gearboxes. Our car business in China and in Asia in total, I'd say, developed very well.
Trucks were good in China, but weak in India. Two-wheeler business in Indonesia develops very well, but is relatively unchanged in India. If I look at the industrial distribution arena, I'd say in all of Asia, it still lacks a little bit of traction. In North America, switching there to there, our industrial business developed well as we felt it would when we presented last quarter with renewable energy, railway, and the drives business, which is always pumps, compressor, gearboxes, developing positively. Our aerospace business was down year-on-year, but this was due to a tough comparison since we had a very strong quarter last year. Sequentially, it was as expected. Industrial distribution was a little bit more positive in the quarter, and this trend should continue in the third quarter.
Our automotive business was relatively unchanged in the quarter in total, even if trucks, which is small for us, as you know, and Vehicle Service Market developed well. This was due to a mix in the car business, due to model changeovers, but also where our sales growth year-on-year was affected by the comparison to a strong quarter last year. In Latin America, we saw a very weak car and truck business, which, of course, is mainly Brazil. Vehicle Service Market was slightly up in our Industrial distributor business, and our service business continued to develop positively. We see a very good development in our service business in the region, which also helps support our sales through distributors. From a country viewpoint, Brazil was, of course, impacted by Automotive, but the Industrial business was okay there. Argentina was weak, but Chile and Peru developed positively.
Let me take the Venezuela impact a little bit later, if I could. Turning to Europe, where the development was in line with our expectations for the quarter as a whole. In West Europe, we did not see any real positive development in the main markets, such as Germany, U.K., Italy, and Sweden. While France, well, it's continued to be weak for us for some time. Spain, however, seems to have stabilized. In Central East Europe, despite all that's happening there, we saw good sales development in Czech Republic, Poland, and Russia, whereas Turkey and Hungary were a little weak in the quarter. From an industry viewpoint, our car and light vehicles and truck business were relatively unchanged, but as I mentioned earlier, we saw weak sales in the second half of June.
Maybe it was some correction before the summer break, but this we must watch as we go through the third quarter. Vehicle Service Market was also down a bit in the quarter. From an industrial viewpoint, we saw good growth in renewable energy, railway, and aerospace, but general and heavy industry were impacted. Sales to industrial distribution was relatively unchanged over the quarter, with a little slow at the end of the quarter. All this meant that Europe was slightly up, but this was mainly Central East Europe, which gave that picture. West Europe really lacked some traction overall for us. At the moment, I think there's some mixed signals in Europe when you look at what's happening with industrial production figures, Germany, Italy, and of course, the bank situation in Portugal. So I think we must watch these developments closely.
Let's sum that up then overall for the group. So volume was up 3.6% in the second quarter compared to last year, which was in line with our guidance. Our production was slightly higher compared to the same quarter last year, and we did adjust it a little at the end of the quarter to manage the inventory, which increased some SEK 250 million to 300 million in the quarter in fixed currency, which is quite normal before the summer holidays. Let me turn now to our profit development. Our operating profit was just around SEK 2.1 billion , including some SEK 120 million negative one-offs.
Without that, it was a little over 2.2 billion, with a 12.3% margin, which is almost 100 basis points better than in the first quarter of excluding group one-offs from both. So definitely moving in the right direction. Our cost reduction program continues to develop well, and with a gross savings of SEK 335 million in the quarter compared to 2012, on an annualized rate now in the program of something like SEK 1.34 billion. You can see the breakdown in the presentation of where we are in this program. Overall, I would say that purchasing is working according to plan, as is the central cost savings, which is shown as S&A. But I do think we're just a little bit behind in the, in the restructuring program.
It takes a bit more time to negotiate the changes and make the movement than we expected. An example is the French program, which we just announced, which took over one year of planning and negotiation to reach an agreement. So overall, this restructuring may be just a little bit delayed, especially in the industrial business. How much? We're reviewing just now, and we'll have a better picture as we go through the third quarter. Negative currency impact of -SEK 120 million was as expected, but this will now turn positive with the major changes we've seen in the currency market. We have, though, taken a one-time cost due to the change in currency regulations and levels in Venezuela of SEK 20 million in operating profit and SEK 100 million in the financial net.
Basically, we had to revalue our balance sheet, primarily cash and receivables, to the new rate of something like 50 bolívares to the US dollar, compared to an old official rate of just over 6.6 bolívares to the dollar. You'll also see in the package, I hope, that we've added an operating profit bridge for the first time to try and see how the operating profit developed compared to last year. So let me, let me walk through that, please, if I could. The starting point for the second quarter was almost SEK 1.84 billion operating profit. You have a normal drop through based on our sales development of around SEK 165 million. But please note, this is the organic sales development, excluding Speciality Business , which is heavily influenced by the Kaydon acquisition.
We have a positive price mix of some SEK 160 million. The profit from Specialty Business , which we've identified there, is SEK 134 million, which is mainly Kaydon, but also a good development from PEER and GBC. The gross savings is from our SEK 3 billion program, is SEK 150 million more than the second quarter last year. One-time items are SEK 70 million lower this year than last year. Remember, last year, we took SEK 190 million, this year, SEK 120 million. Currencies are the negative SEK 120 million. And then you have the minus 295, which is the higher R&D spend, Unite, S&A, inflation, etc.
SKF, if you look, compare the Q2 one to the half year one for the SKF, you're already seeing that that other line of R&D, inflation, et cetera, is, is higher in Q2 than in Q1. That's mainly due to the higher cost in Q2 related to timing for salary and wage increases in the, in the group. That normally hits us in the second quarter, so there's nothing strange in, in that. So now you've got there an operating profit bridge for Q2 and the half year, and we'll continue with that, going forward for you. Cash flow from operations and excluding the EU payment was, was very good, at over SEK 1.4 billion Swedish krona.
In fact, if you actually look at it, cash flow from operations was the best in seven quarters, so I think we're moving there in a good way as well. However, there was no real improvement yet on net working capital index. We have a number of actions underway, as we've talked about before, and we'll give you more details on that at the capital market date. Addressing the three areas of inventory, accounts receivable, accounts payable. So I think the real benefit of these actions will not start to come until next year. Let me move on to the outlook for the third quarter, and I stress this is the demand for SKF, not an outlook for the market.
I've got to say, it still is quite difficult to forecast just now with the major uncertainties around, as you've all seen, and particularly what's happened in the last week, so that which can impact confidence. But anyway, I'll give you my best judgment at present. We expect to see demand to stay at the same level sequentially, which would mean it would be slightly up year-over-year for the group in total. In Asia, we expect the good development to continue and the sales to be slightly sequentially and year on, higher year-over-year. The main industries and countries that developed well in the second quarter will continue in the third quarter, in our opinion. For North America, we also expect to see a positive trend and to be slightly higher, both sequentially and year-over-year, a similar pattern to the second quarter.
For Latin America, we remain concerned, especially for our automotive business in Latin America. We think that will impact the total business for us. In Europe, we expect it to remain. Spain remains relatively unchanged sequentially, because we expect cars and trucks to stay at a similar level, energy and aerospace to improve, but still there's a lot of cautiousness in the industrial arena, there. So the outlook in total is for a similar demand sequentially in the third quarter, the second quarter. As you know, though, it will be somewhat lower sequentially due to holidays, and that's normal. That's a normal thing. There's nothing special, there. From a manufacturing viewpoint, we'll keep the manufacturing level from the second quarter overall, which means it will be slightly higher year-on-year, but of course, again, lower in absolute terms in the second quarter.
Inventories should be slightly down. Turning now to look at raw materials and excluding the purchasing program, where we expect a similar saving, year-on-year, as in the third quarter. Scrap surcharges just now remain a little lower than the average last year, but they are at a similar level as at the start of this year. So as usual, let me give you, in closing, my view on what this all means when looking at the third quarter. I think we'll have a similar development in the third quarter as in the second quarter. Sales, manufacturing, and sales volumes in manufacturing in daily terms will be similar to the second quarter, but of course, slightly down in absolute terms due to the seasonality. If I look at other factors, there's really no big change between the quarters as well.
So that means I think third quarter is going to be pretty similar to the, the, the second quarter. So in closing, I think we had a pretty good second quarter with good sales growth, improving margins sequentially, and a very good cash flow. We've taken some important new steps to strengthen SKF, launching a number of new products, gaining new business, and investing in China to ensure we continue to, are trying to grow ahead of the market. With that, I think I can pass back to you, Marita, and then over to questions.
Thank you very much, Tom. Now it's time for the Q&A session. Can you please give your name and company name?
Ladies and gentlemen... Yes, ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, and you'll enter a queue. After you are announced, please ask your question. That is zero one. Thank you. And we have a first question coming in from Mr. Marcus Almerud from Morgan Stanley. Your question, please.
Hi, this is Marcus Almerud from Morgan Stanley here. Starting off with the savings, can I just ask if we should expect further costs to be taken in the second half? That is, will you expand the cost savings program? Secondly, on the price mix improvement, is it mainly price or is it mix, and that is, is the internal mix here, which is improving, or that is also growing slower than before, or is there other improvements in price we see here as well? And thirdly, on the industrial demand, you say there's a general cautiousness, but strategic is same up. Could you elaborate a little bit on in which areas you are seeing improvements going forward? Thanks. Yeah. First of all, let me take the savings program, Marcus. Yeah, I...
We still have steps to take in the savings program as well, yes. So we still have some more steps regarding restructuring. I do not expect anything at this moment in time in the third quarter, but as I mentioned earlier, it does take time to negotiate these agreements. It's taking a little bit longer, so we can negotiate them properly there. So I don't expect in the third quarter, but in the second half of the year, there should be something, but I'll give you more guidance for the fourth quarter when we get there. Regarding price mix, the price mix actually was positive in all three business areas, which I think is good there. So even within the business area, the price mix is positive.
But as you rightly point out, if you look at the mix development there, then automotive grew, what? Organically, just a little bit more than 1% in the quarter, whereas SI was up 11%, and RSS was a little bit better. So there was some intra business area mix there that was positive. However, we are taking steps addressing pricing in the market. As you know, we've moved the list prices in RSS, in the aftermarket. We've also taken steps to apply that where we can within the OEM business. So there is some price within there, but it is helped by the mix between the different areas. Regarding the outlook in total, I'd say yes.
I mean, if you actually look at it for, for us, we are saying SI will be up, which is our industrial businesses there. And, and that will continue to develop well. But I've got to say, Asia is one of the bigger drivers for that. We still expect good development in, in the industries such as aerospace, renewable energy, developing positive, positively for us, and, and railways. So these big industrial areas doing well. If I look at Industrial Drives, which is the pumps, compressors, et cetera, we see a little bit better development in Asia and in North America, but we don't really see that moving in the, the European market, at this stage, just now. Hope that helps, Marcus.
Okay, thank you.
Thank you, Marcus. Next question, please.
The next question comes from Mr. Guillermo Peigneux from UBS. Your question, please.
Hi, Guillermo Peigneux from UBS. Thanks for the profit bridge. It's very useful. A question on that precisely, and a follow-up on Marcus' question. Do you think you're gonna be able to offset with the current kind of price attrition you're getting in the market to offset the kind of SG&A, R&D, and inflation increases you're facing on your cost structure? Or is it difficult for now just to get it on the price?
Yeah, I... It's a good point. I mean, if you look in there, there are a number of factors that's in there. If you look at the R&D, we've said we would invest in R&D. We know that will have a little bit of impact short term on our business. So if you look at that, that's not something we looked short term to offset with price. We have the higher inflation, we have the higher spend in Unite as well, which is impacting us in total in there. And of course, some of that we need to bring back on productivity. Some of that we need to bring back on price mix. I think going forward, we should be able to manage the package in total.
With a big impact in this quarter, as I said, due to the higher R&D and due to the higher Unite costs in the quarter. But we need to keep working on the price mix, so there's still some steps to take in that. But of course, linked to that also is our cost savings program as well. So if you actually look at that in total, the cost savings and the price mix together, I think worked in a very, very good way for us and offset the total cost increase in R&D and inflation increase.
Yeah, yeah. Thank you. Can I ask a follow-up on R&D, inflation, and so on? What is the main aim? I know it may sound like a silly question, but the main aim of your R&D increase budget at the moment is you're facing increased competition, or you need to sort of leap your product portfolio from current stage levels to a new innovation level?
Yeah, I think it's more the second, Guillermo. I mean, if you look at it, there are two elements in that. One is we are stepping up our R&D closer to the customers in markets like India and China, so we can penetrate more different markets down there. That is developing specific products for that marketplace there. So that is a step up that we're making to help us get into that marketplace. Secondly, as we combine together a lot more of the new the technology platforms and bring a lot more new solutions, which are more energy efficient, then we've got to sow the seeds today to harvest that tomorrow. And that is something that is meeting a demand in the market. It's not something that is defensive in any way.
It's something where we've got an advantage with our technology to be able to meet a demand in the market. And that's why we feel by investing in that area, it will give us, the ability to meet the customer's requirement and a stronger differentiation.
Those that aim to penetrate more, I guess, is the mid-market in Asia, particularly in China. Would you need to follow up with SG&A increases as well? So you would need to migrate your sales force capabilities into those markets as well?
Firstly, it's not just the mid-market in China. It is the development in a market like China, India, for, of course, mid-market specific products, but also to develop high-end products and to do more R&D development for the group in total in that area. I think from an SG&A viewpoint, I don't see the need for us to increase that further. We've put a lot more feet on the ground over the last year, so I don't see a need for us to increase that further. And our steps going forward will be to work to get productivity in that.
Last question. Can you give some guidance on railway and wind energy margins in China, roughly as we speak?
Yeah. They're improving the margin as we're utilizing the operations down there in a better way. And I think also Asia is a total for us, and especially in China, is improving its margins again. Because what impacted it a little bit, and I mentioned this before, was the fact that we had invested heavily with new facilities down there over the last two to three years. With things that we just opened, like our campus in Northeast Asia Distribution Center. And that therefore gives us a little bit of cost that impacts the margins, but it's part of the investment for the future. So the margins in total for our business in Asia are improving in a good way as well. So they're absolutely moving in the right direction.
They far from peak? Just... Yeah, I just wanted to get a-
The group's a little bit from its peak margin as well, so, we're all a little bit from our peak margin at the moment, so a little bit more to do.
Okay, thank you.
Thank you, Guillermo. Next question, please.
Okay, the next question comes from Mr. Martin Wilkie from Deutsche Bank. Your question please.
Good morning, it's Martin at Deutsche Bank. Just coming back to the, the cost program, you mentioned a little bit about the timing there. I just wonder if you could let us know, is that just a sort of a quarter-to-quarter change, or, or should we think of a, a longer-term change in the phasing of when you get those savings? Thanks.
No. Yeah, what I was saying is, it's taking us a little bit longer in some of the programs, Martin, to be able to negotiate through all the steps we need to do to make the moves. Within there, as I said, as I mentioned, specifically, the case in France took us over a year to negotiate there. And that's nothing that you can plan for when you start the activities. You have to go through the process, and it does take time to do it in the right way. And we believe it's important to take the steps that we need to take to make sure we reach the right agreements at the end of the day, which is in line with both parties.
So it's more, a little bit delayed in being able to do things. Will that impact the full end program? That's something we're reviewing at the moment there. I don't see a dramatic impact, but it will have some, and we need to look at it during the third quarter. But I've got to say, if I look at the other areas, purchasing is fully on track. And remember, it's roughly half the total savings or S&A is already in line with what we expected there. It's just that restructuring part that we're still seeing when we can get that through.
If I think about, I think last year you had total cost savings of about SEK 800 million, and obviously you've got the SEK 3 billion total. So, should we just think of 2014 as being sort of a, yeah, a little bit lower than that run rate and then accelerating back up in 2015? Or is that something you, you'll come back to it later in the year as to-
Yeah.
when we should expect that?
I mean, if you look in the first half year, we've had SEK 280 million additional in the first half year. There, where we were SEK 800 million last year, we've had SEK 280 million additional there. We still expect purchasing to continue at a good rate as we go through this year. I don't think purchasing will be dramatically different for its full year savings as last year. But we may be just a touch slower on the restructuring side than the run rate of last year.
Okay. Thank you very much.
Thank you, Martin. Next question, please.
There is a very last question coming in from Mr. Peder Frölén from Handelsbanken. Your question, please.
If I may, my first question on inventory. The inventory bill of SEK 700 million Q and Q, I guess, most of that is due to FX. So my question is really, how much did that affect the EBIT? My guess is, around SEK 80 million to 100 million, if you can confirm that. Can you hear me, by the way?
Yeah, I can hear you clear.
Yeah. Secondly, on the price mix, just to get around this. I mean, mix between divisions, of course, it was positive, quite a lot, I guess. But from reading your comments on the different segments, also within the divisions, it should be at least slightly positive. Then you have the list prices, I guess, the drop-through 1% or so, which if to get the equation to 1% on the total price mix, the OE needs to be down. Could you please help me to understand those different components? And then I get back in line, I guess.
Okay. If I take on the inventory in volume terms, Peter, the inventory increase was somewhere between SEK 250 million and SEK 300 million.
Yeah
In total there. A little bit more than half of that was finished goods inventory. And then, of course, then you look at that, and that takes the, what happened in the, in the bottom line, there. So it's not as high as the figure you highlighted.
Mm.
If you go in the price mix, first of all, we don't have the full impact in the RSS yet of the price move that we made yet. As we said, we would start to see that through the second quarter. We'll see more of that in the second half of the year. And we do see that in some of the OEM business we have improvement. But you're right, each of the three business areas had a positive price mix, which means that the... When you look at automotive, when you look at SI, they had positive price mixes, but also RSS had a positive price mix. And then when you look at the average altogether, the intradivisional one made it positive for us, as well.
So you can't say that the OEMs went down, because I know in OEMs, we did see movement up in the right way. But you cannot see the full impact of the price increases that we made yet in our bottom line for RSS. So we don't have that, 1% drop-through that you mentioned.
Okay, less. Okay, that's very fair. Coming back to the seasonality, a couple of % lower sales, I guess, all else equals. Is that still valid, or do you expect anything special in 2014? And on the inventory question, then, would you basically try to... Will the situation in Q2 be reversed in Q3, in EBIT effect, or should we expect more or less?
Yeah, I'd say the inventory. I'm going to take that one first. The inventory, we expect to take a few hundred million SEK out in the third quarter, as well, which is normal. But that, Peter, that's a normal seasonality-
Yeah
Between the quarters. So that will come down a little bit. And yeah, you'll be down a few percent in absolute terms, third quarter versus second quarter in absolute terms. Once the delivery continues, that's just the seasonality of the holidays.
… Mm-hmm. Okay, I get back in line. Thank you so much.
No problem, Peter. No problem.
Thank you very much, Peter. Our next question, please. Okay, there is the next question. Please introduce yourself before asking a question. Thank you. Okay, your line is open now. Hello?
We don't hear any questions here this side. I don't know if we're missing something.
Okay, so I think if it's okay for you, we will take the next question.
Yes, please. Yes.
Okay. So please introduce yourself before asking your question. Thank you. Okay, the line is open now. Is something wrong with the line? There is no sound coming from the line. So in case you are on mute, please unmute your line. You can't hear us at all?
She can hear us.
Okay. Yeah, I can hear you, but there's no sound coming from the line. There's no other question in the queue. Would you like me to give a reminder or?
Yes, please.
Yes, please.
Okay, perfect. So ladies and gentlemen, just as a reminder, if you have any question for the speaker, please press zero-one on your telephone keypad. There is a follow-up question from Mr. Peder Frölén , from Handelsbanken. Your question, please.
Okay. Hi again. Can you hear me?
Yes, Peter, we can hear you.
Yeah. Okay, we were into the sort of the cost inflation and R&D, and so forth. Could you just remind me how it works on the Specialty Regional Sales and Service division? How do you spread the R&D into that? Because if I look at the margin from the different divisions, I could sense maybe less leverage than I hope for in the production division of the industrial side. So could you just please explain to me how that work, if that could be an explanation?
Yeah, yeah, that's a good point, Peter. The R&D, the major part of the R&D is carried by the manufacturing operations. That therefore means the major part of the R&D is carried by automotive and SI in their product costs. RSS has... The only R&D they have is where they're doing specific R&D for the products they're responsible for, such as service products, et cetera. So that therefore means that the R&D cost is mainly carried within the automotive and the SI businesses.
Implying with a better organic growth in Regional Sales and Service , the leverage, of course, should be much, much better.
Absolutely. Absolutely, and I've seen that as well. Also, the opposite there. If you actually look over a longer period of time, you see the swings in their business is much less. The swings in their margin when the volume changes, is much less than the other areas because they don't carry that cost, they don't carry the fixed costs.
So in your initial comment, Tom, you mentioned on the industrial distribution in the U.S. in particular, we've seen Fastenal and other companies commenting on sort of the broad industrial distribution-driven demand is improving. How would you consider that spread across the globe? I mean, we talk about the OE side being more maybe questioned in Europe, but the industrial distribution still lagging in Asia. So if you combine the entire picture here,
Sure.
flat, is it or a bit better on industrial distribution?
I mean, we see sequentially, industrial distribution, going to be flat for us, sequentially as we go into the next quarter. But look, what we're in the regions, I can just talk a little bit about that. In the Asian area, if you actually look at Asia, there's specific end markets that are doing particularly well. They are from a geography viewpoint, it's markets like China, Korea, Indonesia, India is relatively flat, a little bit better area, but there's still weakness in Southeast Asia. These are the areas where there is, a lot more sales through industrial distribution for replacement usage.
So, and if you even look in the China or that, what you're seeing in China is that it's the big markets like renewable, railway, cars that are doing particularly well, drives getting a little bit better, but the distribution has not really got the traction in the Asian region. So we don't see any big change in that as we go through the third quarter.
Mm.
If I look at the European market, again, there, the industrial distribution was relatively flat, year on year, and we expect that to continue. It was a little bit weaker, I've got to say, the industrial distribution in Europe at the end of the quarter, but that, let's see how that develops through the third quarter, but we expect it to be relatively flat.
Mm.
Industrial distribution for us in Latin America is doing a little bit better, but that's driven by the fact that we are driving hard in the service business and gaining a lot there. So the combination, when we gain service business, it also helps us gain business for spare parts, et cetera. And then in North America, yeah, we're seeing a slight improvement in industrial distribution in North America. But when I put all these pictures together and take the total business together, there, we think industrial distribution in the third quarter will still be sequentially
... Taking that very sort of clear answer into broader perspective. If you look at your outlook by division, where do you feel the largest potential upside versus downside when you look at it right now? I mean, this is your best guess as of now, I understand that, but it's a downside on industrial Europe and the upside on China in distribution, or?
I'm not looking at any upsides or downsides at this point. Just say we try to give the best call we can right, right at the moment, Peter. So I don't want to... Don't, I don't want to cover that with an upside or a downside.
Okay, we get back to that. Okay, thanks.
Thank you.
Thank you, Peter. Are there any more questions, please?
Yes, we have three more questions in the queue.
Good. Please go ahead.
Okay. So the next question comes from Mr. Andre Kukhnin from Credit Suisse. Your question, please.
Hi, can you hear me?
Yes, Andre, we can hear you.
Ah, excellent. I thought it was me struggling last time.
There was something with the line, I think, last time. I don't know what happened, Andre, so apologies for that.
No, no, sir, it's probably our side. So lots of questions asked already. Just a couple, please. One specific, one more general. On China, could you just repeat what you said in terms of taking share in high-speed rail and then somewhere else? And then just on high-speed rail, we thought that market is already kind of pretty much in the hands of internationals, with you being the key player in there. So could you just elaborate how you're taking share within that?
Sure, no problem. You know, in the high-speed rail area, we are growing very well. I've got to say, in China, in total, if you go back, I think in the 2011/12 timeframe, in the industrial arena, we were impacted because the end markets we were stronger in were doing somewhat worse than the general marketplace. Whereas in the last two years, the end markets we're in have recovered a little bit better than the general market, and we're doing even better than their recovery. So that's why I say clearly that we are, and we can see clearly, that we are gaining market share in the last year and a half, two years in China. But it was impacted by the end market development, not by specific actions there.
If I look specifically in high-speed rail, you, you're right, there is a, it is an area which has been primarily handled by the more international players, could one say, there. But there are -- there's work underway. There's developments underway in that area. There's new businesses, there's other businesses that have to work on replacement and maintenance, and we are gaining market share in that area. There is no doubt that we've gained significant business in that arena.
Right. Got it. And was there another end market that you mentioned that you taking share in?
No, I said the high-speed rail was the one that we're taking share, but I did say in total, if you look at our development, and I talk industrial, I'll come to automotive in a second. In industrial arena, of course, because of their position and the new businesses we're taking with the renewable energy, I think we're probably strengthening a little bit, but it's too early to say in total how that is from a market share. But my judgment at the moment, we're growing faster than the market per se, but it's difficult to say if that is additional market share overall, or just a mix of our customers doing better than other customers.
If I look at automotive, then it's clear in the automotive side, if I look at the new businesses we've been taking from local Chinese players over the last, I'd say three years, two, three years, we've taken considerable business with the, with the local Chinese players. Because not just the, as we had in the past, with the big international manufacturers who are down there. Now, more and more with the local Chinese players as well. And we've talked about them before. You've seen them in issues like, for example, Great Wall, we've talked about Geely, we've talked about... et cetera, to give a couple of examples where we're gaining business there, in that market, which and definitely gaining market share.
Got it. Thank you. Just, more generally, with price increases sticking and sounds like more to come through, in Q3, would you say that, generally the competitive situation has become a little easier compared to the start of the year?
I wouldn't say it's any easier than the start of the year. I think the competitive environment is still the normal tough competitive environment out there in general, in total. I would say that, as I mentioned to Peter earlier, Andre, we don't see the full impact yet of the steps that we've taken on the list price increases, but we are pushing in a number of areas to improve the price mix. So within that price mix, you're seeing a 1%. There is the intra-business area mix. There is mix within the businesses, but there is a degree of price as well. But I wouldn't say the market development has changed dramatically. There's still a competitive environment out there.
Got it. Thank you very much.
Welcome, Andre. Thanks.
Thank you, Andre. Next question, please.
The next question comes from Mr. Guillermo Peigneux from UBS. Your question, please.
Hi, it's Guillermo again. Just a follow-up actually on price mix. In the past, you expressed how much of the price increase was driven by price and how much was driven by mix. Can you make the same kind of calculation here?
I've never done that. I don't remember having done that, Guillermo. I, I said, I've always said it's very difficult to split out price and mix. What I have talked about is the, the intra-business,
Mm-hmm.
-area mix, but I've not done the split out of how much is price and how much is mix in total.
I know-
And I can't, and I can't do it now either, to be honest.
Okay. Okay, thank you. It's okay.
Thank you.
Thank you, Guillermo. And next question, please... And the last question comes from Mr. Björn Enarson from Danske Bank. Your question, please.
Yes, oh, it's actually colleague, Björn Enarson, asking a question about your automotive comments there, where you forecast some flattish development quarter-on-quarter. Have you seen something new during the quarter, or if, if I just look at the IHS's data, it looks pretty flattish quarter-on-quarter for quite some time. So, are there anything new during the quarter that you have seen? Thank you.
No, no, okay, Björn. If I look at it in total for automotive, I would say that we've seen a good development. If I just take the car business, we've seen a very good development in the Asian region. Latin America has weakened and weakened a lot during the quarter in the car business, and that, as you know, is primarily Brazil. Brazil, Argentina, but primarily Brazil. But what we did see in Europe is, it is, I've got to say, a weak end to the quarter for our sales to the car light vehicle industry, to the heavy truck industry, right at the end of the quarter.
Again, whether that was due to the changes in the you know preparing for the summer holidays or that. Let's see as we go through the summer holidays, but it was a little bit weak at the end of the quarter. In North America, North America is okay. I mean, if you look at our business, we were slightly or North America was slightly unchanged or relatively unchanged in North America. But that was due to the fact that, A, we had a tough comparison year-over-year because we had a good second quarter last year. And as I mentioned earlier, there are some model changeovers, so it's a mixed issue there, but it's not anything dramatic.
I still expect the North American automotive business to be pretty good in the car business, pretty good from an absolute viewpoint in the third quarter. We still have to ramp up the new business.
Okay, thank you. The comments on Europe weakening during towards the end of the quarter goes for both cars and trucks?
Yes, it goes for both car and light trucks and for heavy trucks. Yes.
Perfect. Thank you.
Thank you, Björn. Are there any more questions?
Yes, there are two more questions. The next one comes from Mr. Austin Earl from Marshall Wace. Your question, please.
Hi, good morning, everyone. I have to add two questions. The first is more of a housekeeping, just so if I can understand the EU fine. Was that SEK 2.8 billion, and that came through at the working capital line within the cash flow in the second quarter?
Yes. Yes, yes. The 2.8, 2.5, it gives you that 1. Absolutely correct.
Perfect. And the second question was just going back to, as you mentioned several times, the issue of the implemented price increase. Could you just remind us how much was implemented, how much you think will stick, and then how much of that you think was in Q2, and then how much remains in Q3?
Yeah, I think it's difficult to judge exactly how much will stick. Normally, we get roughly around one third of the price increase sticking. And we've always said that in the quarter after, it takes time. And we also said for this time, we saw, if you remember at the end of the first quarter, we saw that we weren't getting the traction we should have got at the end of the first quarter, because we normally get some pre-buy. We didn't see that. And we said that, therefore, mean probably it'll take longer to go through the quarter. So we still have some ways to go going forward, Austin, to get that to the stick. We don't have it yet.
I can't say how much of it was in, and you can't say how much of it more it's going to be. I think as we go through to the end of the year, yes, it will stick, but it'll come in bit by bit as we go through.
Okay, great. Thank you very much.
Welcome, Austin.
Thank you, Austin. And the next question, please.
Okay, the second question was canceled, so there is no further questions.
Okay, then, that takes us to the end of the conference.
Okay. Okay.
Thank you all very much.
Yeah. Thank you. Thank you, everybody, for the conference, and I wish you all a, all a nice summer. Thank you so much.
Thank you.
Thank you. Bye-bye.
Bye.