Ladies and gentlemen, welcome to the SKF first quarter report 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. I will now give the word to Marita Björk. You can now begin.
Good morning, everybody, and welcome to this conference call for the presentation of SKF's first quarter results 2014. This conference call will take an 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 of Group Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by presenting the results, and then after, there will be a Q&A session. Over to you, Tom, please.
Thank you very much, Marita. Ladies and gentlemen, hello, in what is a beautiful, sunny morning here in Gothenburg, and I hope it is where you are as well. Early this morning, we released our report for the first quarter of 2014, and as you can see, demand developed well compared to the first quarter last year. But the mix was somewhat negative for us, too much OEM and not enough aftermarket. We did not see the level of price increase pre-buy in Europe and North America that we would normally see. Overall, though, I think it was a solid quarter again from SKF, even with the negative price mix and the currency headwind. A lot happened in the quarter which impacted the demand development and was difficult to predict at the start of the quarter.
The activities in Eastern Europe, the weather in USA, the major currency swings in, especially in Latin America, to name just a few. How much the impact to demand is very difficult to judge at all, but I feel it did have some impact. However, I feel that unless there are any other major shocks, we should see some improvement as we go through the second quarter. I'll come back to the demand situation in the second quarter in a little later. During the first quarter, we continued to take steps to strengthen SKF and ensure we can deliver on our organic growth and profitability targets. We gained a number of new businesses, as you can see in the report, with companies like Volkswagen, Geely, Bell Helicopter, and Hindustan Aeronautics. In addition, we continued to gain new service business in Latin America.
One example is the contract with the major cement producer, which covers nearly all of our platforms. Unfortunately, I cannot give you the name of the customer. What was also good to see is that we're gaining more and more service business also in other areas, such as the Nordic region, with SCA, Bakker Bardahl, and PostNord, to name a few. These are just a few of the orders that we took in the quarter. It's been another successful quarter for orders, which will help support our sales going forward. We also continued to step up our spending in research and development, which is now some 3% of sales, up roughly 0.2% from the same quarter last year, and we launched a number of new products. So from an activity viewpoint, I think we had a successful quarter.
Now, back to the financials, and let me first start with the high-level figures before we get into the detail and the demand development. Our sales are above SEK 16.7 billion. We're up some 10.4% in the quarter in SEK, and more or less the same increase in local currencies. Volume was up over 6% year-on-year, and then we have the positive addition, of course, of the structure, which is virtually all Kaydon. Maybe let me make some comments on Kaydon right now. It started the year very well, indeed, with very good growth, and they also gained some important new businesses. Operating margin also improved year-on-year. Of course, we are impacted by PPA and the fact that the full savings expected this year have not kicked in yet, but excluding this, it's still improved margin.
You can also see in the specialty business area that even PA and GVC saw strong growth in the quarter. Back to the other business areas and their demand development. Our automotive business was up almost 8%, with a strong development in Europe and Asia. SI was up, with Asia seeing a very strong development, and RSS was a little over 3% due to the strong growth in Eastern Europe, despite what is happening there. Let us look what happened to demand development, region by region. In North America, our automotive business was in line with our expectations. Light vehicle production was up, as were our sales. Trucks developed well, very well, indeed, and our sales to the vehicle service market. In the industrial arena, we saw very strong sales growth to railway and energy.
Aerospace stayed at a good level, but we still see weaknesses in general industries such as pumps, compressors, motors, and of course, in mining and off-highway. Industrial distribution was relatively unchanged in the quarter. The cautiousness continued, and maybe we saw some additional destocking. Going forward, we expect to see a continued good development in the areas which were good in the first quarter, but we also expect a slightly more positive development in the industrial arena. No real change, though, in areas like heavy industry and mining. In Latin America, we saw a weak development, as you would expect with the currency development. Argentina was the weakest and down for us. Chile weakened slightly due to the demand situation in the mining area. Brazil was relatively unchanged, though, despite a weak car business.
We benefited from our service business in Brazil and in the area in general. If we look at Asia, we had a very strong development, and we're up over 10%. From a country viewpoint, very good growth in China, driven by cars, sales to passenger rail, renewable energy. But also in China, general industry developed okay for us. India also showed some slight growth in the quarter. However, we still see weakness in Southeast Asia and Australia. But in industrial distributors, development was also slow in the quarter in Asia overall, although somewhat better in China. Turning to Europe, where the development was a little bit better than our expectations. Germany and U.K. developed well. Spain and Italy showed some improvement, but France continues to be weak.
From an industry viewpoint, we saw growth basically in all areas if we compare it to last year. Very good growth in cars and light vehicles, and here we grew ahead of the industry growth. Trucks developed much better than expected and had a strong growth compared to the first quarter last year, and only slightly down compared to the fourth quarter. Here, we benefited from some restocking and also good growth from the trailer industry. In the industrial environment, energy was strong, as was aerospace and railway in the quarter. However, general industry, which pumps, compressors, et cetera, and heavy industry was weak. While we saw some growth year-on-year in industrial distribution, we must remember, though, that's compared to a weak first quarter last year.
In Central East Europe, there was strong development in Poland, Turkey, Hungary, Czech Republic, and that's where we see the main sales coming in the RSS business. So overall for the group, volume was up some 6% in the first quarter compared to last year, but relatively unchanged sequentially. Our production was higher compared to the same quarter last year. Finished goods inventory increased a little in the quarter, and we also brought in some raw material for the second quarter production, which will be slightly higher than the first quarter. So let me now turn to our profit development. Operating profit was just above SEK 2 billion, but this included some positive SEK 120 million one-offs.
This was due to the release of SEK 150 million from the reserve taken in the fourth quarter for the expected EU fine. We really did not know if we could release this, but having gone through expenses in addition to the fine and after discussions with our auditors, we thought it was right to make this release. Sorry for not advising you of this before today, but it was a late decision. If we exclude this and also the one-offs from last year, then even though profit was up, the operating margin was unchanged in this quarter compared to the first quarter last year. You may ask, why this, when the volume was up some 6%? But please remember, the currency impacted the margin by over half a point, price mix by nearly half a point, with higher R&D spending.
So all in all, we had much more than one percentage point hit on the margin, which was offset with the higher demand and of course, our cost reduction program. If I talk about our cost reduction program, I can tell you it continues to develop well, and in the first quarter, we are running at roughly an annualized run-rate of some SEK 1 billion. Negative currency impact was just a little bit more than expected due to the major currency changes in the quarter. Why was it not more? Why it was not more than, than that was due to the fact that the euro developed somewhat positively for us, which helped in translation back to Swedish krona. We also took a SEK 20 million currency hit in profit before taxes, due to the Argentinian peso devaluation.
Without this, the financial net would have been around SEK 210-SEK 220. Cash flow from operations was okay, but hit from higher accounts receivables due to the strong sales in March and of course, the earlier mentioned higher inventory. So let me now move on to the outlook for the second quarter, and I stress, this is a demand for SKF, not an outlook on the market. It continues to be quite difficult to forecast just now with all the major uncertainties around. And also it's quite challenging to say everything on the business in a lot of detail, since we do know that this will change during the quarter. It always does. But now we have to be even more cautious in saying anything at all about the development during the quarter.
Anyway, I will give you my best judgment at present, as I always try and do. We expect to see slightly higher demand, both sequentially and year-on-year for the group in total and for our business in Asia and North America. In Asia, we see the same industries continuing to develop well: cars, energy, passenger rail, and general industry. In North America, a similar development compared to the first quarter, but there are signs that the industrial arena may be a little bit better, especially in distribution as restocking ends. In Europe, we expect it to remain relatively unchanged, because we expect both cars and trucks to stay around the same level, maybe cars down a little bit. Energy to improve, but still some cautiousness in the industrial arena. In Latin America, we don't expect it to get worse sequentially, but it will be down a little year-on-year.
So the outlook, slightly better development in the second quarter for the group, both sequentially and year-over-year. From a manufacturing viewpoint, we will slightly increase the manufacturing level from the first quarter overall, which means it will be higher year-over-year. Inventories may be up slightly in the quarter, but not significant, and that's due to us preparing for the summer shutdown. Turning now to look at raw materials, they're slightly lower compared to last year at the start of this year, and will remain so in the second quarter. We're facing some pressure from our suppliers for higher prices, but our purchasing cost reduction program is working, and we expect a similar development this year as we had last year from our purchasing. So as usual, let me try to give you what all this means to when you put it together for the second quarter.
I think we will still have a slightly negative mix in our business due to automotive and SI developing better than RSS. Volumes will be slightly higher in sales and higher in manufacturing.... to last year, we will face a big currency headwind of SEK 125 million. So in closing, I think we had a solid first quarter. We've taken some important new orders. Our cost reduction program continues to deliver results, results, even if we have some negatives offsetting this. With that, I think I close now, Marita, and hand back to you and over to questions. Thank you very much, everybody.
Thank you very much, Tom, and now it is time for the Q&A session. Please start with the first question.
Yes, ladies and gentlemen, thank you. If you have a question for the speakers, please press star one on your telephone keypad. We have a question from Mr. Andre Kukhnin from Credit Suisse, London. You can now begin, sir.
Morning, it's Andre from Credit Suisse. Thanks for taking my questions. Just three, please. Firstly, Tom, as you said, it is interesting for us to find out the reasons why the margins have stayed flat, despite very good organic growth. Appreciate the 100 basis points comment, but that explains SEK 150 million from what you said about your cost savings program. We should be getting SEK 500 million year-on-year benefit from that, plus SEK 300 million, I think, operational gearing on the 6% growth. Kind of where is that delta? If you could help us with that. And I've got two other quick questions afterwards.
No, the cost reduction is not SEK 500 million year-on-year. We had cost reduction during last year. I think the full cost reduction from our cost reduction program last year, I think the gross savings was around SEK 800 million for the full year. We had in the first quarter a certain amount. It was a lower amount. As you remember, restructuring ramped up as we went through the year in total. So I estimate that if I adjust out at the moment with the purchasing situation, with the cost reduction, et cetera, we probably had something like SEK 140 million or so in benefit first quarter this year versus first quarter last year. Secondly, remember, the mix was somewhat negative.
That impacted it, primarily, the group, but also the automotive, business, particularly with trucks doing much, much better, for them there. So when you click it all the way through, and you look at the other inflation and other, issues there of currency, negative mix, then offset that with the cost reduction program, sorry, higher R&D of 0.3, 0.2, sorry, there. And offset that with the cost reduction programs and the volume development, there that comes into that. We've done an EBIT bridge, and it stacks up, roughly. And the issue is, I think, we didn't get as good an absorption, probably in our operations, as we should have got in the first quarter.
It was lagging a little bit, so there's a little bit lag there, which we'll correct as we go through the year.
Right, but generally, you would say there's nothing sort of abnormal impacting the Q1, like extra high ERP cost or something like that?
No, no, that's a good point. There's nothing, nothing, nothing dramatically higher in there. There is the normal inflation that you get a little bit earlier before you get the benefit of it, but there's nothing dramatic, one-off that big impacts. No, not at all, Andre.
Great, thank you. Just very quickly, firstly, on Wafangdian joint venture in China that you had, our recent trip suggests that that has kind of fallen apart. You had an investment there. Could you just tell us the reason why? And then, lastly, the kind of reaction to pre-buy that you mentioned right at the start, that there wasn't actually pre-buy ahead of price increases. Kind of why is that? Is that sort of people taking a view on pricing not sticking, or, or, or how do you explain that?
Yeah, I think, let me get the second one first. I think it's a combination of maybe two factors within there. One is, if you take the main markets, we moved the prices in Europe and North America, and you look at the general industrial arena, outside of the areas I've mentioned that were going well, the energy, the railway, the aerospace, cars, trucks, et cetera, the general industrial arena hasn't been overly strong at the start. So I think on one side, there's a degree of caution there. Secondly, I do think there is a question that it's not easy to make the price increase stick this time, so we're working hard to make that stick. So that's a challenge for us.
When people look at that and compare that to the fact of do they really want to borrow the money, or take a board deck to put extra inventory in, when they... Because of caution that's in the market. So I think it's just a combination of a number of factors. We're still actively working, and we will push through that price increase as we go through this quarter. But it is a challenge to do, but we'll push it through. If I go back to the other one, of Wafangdian, I would not say it's fallen apart.
First of all, we still have the investment in the group that we have, and we've made a conscious decision, as we mentioned before, that the fact that we will step back from that joint venture because we did not see that developing the business in the way we wanted it to develop there. It was not possible with the rule changes there are in China, vis-à-vis ownerships, et cetera, for us to develop that the way we wanted to develop it there. We've tried a number of ways over a number of years to try and do that, but of course, that didn't come through. So therefore, we've made the other decision to part company from the joint venture, but not from the group. We still have the shareholding in the group.
Got it. Thanks very much for your time. Thank you.
You're welcome.
Thank you, Andre. Our next question, please.
Our next question is from Ben Maslen from Bank of America. You can now start, sir.
Yeah, thank you. Morning, morning, Tom. Morning, Marita. Two questions, please. Firstly, on working capital, quite a large outflow for the quarter despite better production, and I think one of your slides shows it hits the highest level as a percentage of sales it's done for a while. Just maybe, what's driving that, Tom, and how fast do you think you can get that down as we go, you know, go through, through this year? That's the first one. Thanks.
Yeah, I think that's a good, good, good observation and good, good point... a very strong increase. I mean, sales in March were very good for us, a very, very good March sales. So therefore, we then replaced in our accounts receivable, a part of December and January, early in January with the account receivable, mainly the January figure with the accounts receivable. So therefore, it's a strong sales or so accounts receivable are up quite a, quite a bit. In addition, as I mentioned, we put a little bit extra raw material components in for the second quarter. So we put about SEK 100 million or so in finished goods, so it's nothing in the quarter there. The rest was raw material components. So it was these two factors that primarily kept up the working capital.
I've got to say accounts payable developed as positively as it should have done. What are we working on? We're working on three big activities. One on inventory, on localizing or regionalizing supply chains to reduce our lead times. We have around 85% of our suppliers to our operations localized at the moment per region, and we will move that up to 90% this year. So that will reduce the lead times a lot, which means we tie up less capital in the business. We are also working on programs for both accounts receivables and accounts payables quite aggressively at the moment, to do the normal work. But in addition, we have new programs we're working on, and we will come back with some more details on these new programs later this year.
I think, we will struggle a little bit still with the net working capital through the second quarter. But as we go through the third and fourth quarter and into the first part of next year, you will see movements in the working capital.
Thanks, Tom. And then the second one is just on price mix, which was slightly negative in the quarter. Whether you could break that down into price and mix and just say whether I think you raised prices during the quarter, whether you've had any benefit from that yet, or whether that would all... Well, A, how well those price increases went, and B, would you expect to see a better price mix in Q2? Thanks.
I would say that if you look at it, we had a negative price mix, primarily mix within there, I've got to say. But we also had a negative price mix in both Automotive and SI, and a positive price mix in RSS. Why was that? Automotive was due to the fact that they did much better than the OEM, especially the truck business was much stronger, car business was stronger than the VSM, even though the VSM developed in the right direction, relatively speaking, the mix was there. Also they did a much better Automotive in Asia than they, they did elsewhere. And of course, that had a little impact because still we're ramping up the production down there in Asia for Automotive. Similar with SI.
SI's strongest growth, if you look at their figures, I mean, the organic is up 6%, but if you look at their figures, the big, big growth was in Asia. And that area at the moment still has, as we mentioned last quarter, also somewhat negative level for them in total. Going forward in this quarter, as I mentioned in my opening remarks, I think we still face a little bit of a headwind on mix between the different business areas in the second quarter. If I switch to the price increases, how they're sticking, as I mentioned earlier, it really is, we're pushing harder on the pricing.
They will stick, and we do expect to get a normal one, but it's, there's a lot of work out there to make them stick, yeah, but they will stick, but it will take us during the second quarter to start to get them. There was no benefit on that in the first quarter at all.
Thanks, Tom.
Thank you so much, Ben.
Thank you, Ben. Next question, please.
Yes, and our next question is from Mr. Erik Golrang from ABG Sundal Collier. You can now start, please.
Thank you. A follow-up on the mix there. I mean, we know pretty well what are the good and bad mix in the auto division, but could you remind us now, what are the good and bad divisions when, or sort of in the industrial divisions? What are the major margin differences there? It used to be rail and wind that was good, but has that changed now?
Yeah, rail and wind overall from a group viewpoint are good, good margins. But at the moment, with the situation still, I mean, the low Asia is ramping up and renewable. If you look at in total, the mix between the regions is much more an issue for them than the mix between the businesses. And of course, we'll see a much stronger ramp up in Asia in both, renewable and rail. We still have a little bit higher cost in that area because the operations down there are not fully utilized yet. So as we go through that, we'll get back to better margins, but it's a regional mix and an industry mix that's impacting them on.
Okay, thank you. Then on the working capital, did I catch you correctly? You said that finished goods was up around SEK 100 million quarter on quarter-
Correct.
in the inventories.
Correct.
Okay.
Yeah.
And then final question on, on Europe, your guidance there for unchanged demand sequentially in Q2. Maybe you said it, but I didn't catch it. What's the reason for that? What, what parts of, is holding back the demand development in Europe quarter on quarter?
Yeah, I think first of all, the car business, I think if you look at car, as I said, flat or slightly down, we expect sequentially. Why is that? Because if you actually look at the production, what we can see from production plans at the moment, the absolute production level in the second quarter will be a little bit lower than the first quarter. Secondly, trucks will develop, even though the production will be up a little bit quarter on quarter, both year on year and second versus first. We had a very strong first quarter in the truck segment. Part of that was, and I mentioned in my opening remarks, part of that was due to some, we believe, some restocking in the pipe.
That is, at the end of last year, the truck producers worked very, very hard to produce vehicles pre- Euro 6, and really cleaned out their supply chain. And we saw a boost of that at the start of this year. Of course, it's a one-off boost there. So we think that overall, even with the production, the trucks will remain relatively... market, the general industrial market to be a little bit cautious at the moment going forward. And, on contrary, on other sides, we expect areas like energy to be strong in its development going forward quarter and quarter. So it's a combination of all these pieces together gives a rather different factor.
Thank you.
Welcome.
Thank you, Erik. And next question, please.
Yes, our next question is from Mr. James Moore from—no, sorry, it's from Mr. Nick Wilson, Espírito Santo.
Yes, good morning. I've got one specific and one slightly general question. The specific one is it looks like in terms of investing activities, so go against CapEx and purchasing has more than halved year-on-year. So maybe you can just give us a bit more color between PPE, business acquisitions, and CapEx to try and give us a feel actually what's happening largely on the CapEx line and whether your guidance for CapEx changes at all for the year on the back of that lower Q1 number. Then a more general question, if I may, Tom. Why does general industrial continue to be so weak and lagging all the PMI activity? I mean, what's your take on this?
I mean, we've been through now probably 12-18 months of general industrial, not showing signs of picking up relative to PMI. So just be interested in your view on that. Thanks.
I'll take the second one first. It's a really, really good question. I mean, if I look at it, and you split out certain specific industries, we just see that general industry being slow. I think it's just people are still pretty cautious. If you look at many companies, they're sitting with fairly good balance sheets. They're sitting... But there is lots of uncertainty in Europe at the moment. We've got all the issues in Eastern Europe and North America. There has been lots of issues going forward, and I don't think you can just blame the weather. I think lots of other issues around investment in the general industry arena. Energy, strip out energy over there, both traditional and wind. If you strip out aerospace, if you strip out railway, then you see the big, heavier industry just not coming through.
I think it's just a cautiousness from the people. It has gone on. It's a good point you raise. It has gone on longer than one would expect, but it is a cautiousness that is out there in total. So from that viewpoint, I don't have any better answer than you've got on that one at all. In terms of CapEx, no, I mean, we are running CapEx broadly in line with depreciation at the moment there. Some big differences you may have seen may be related to the acquisition that we made last year in the first quarter. But to be honest, it's beyond that. No, there's no big change there.
Remember, if you look at the cash flow statement, that's where you've taken it from. Remember, the cash flow statement, we did buy BVI in the first quarter last year, so that you get in the figure there. Beyond that, we're running it broadly in line with depreciation, and we expect to continue with that for the rest of the year.
Okay, that's great. Thank you.
Thank you, Nick. The next question, please.
Yes, and now the question is from Mr. James Moore from Redburn.
Yeah. Good morning, everybody. Good morning, Tom. I've got three, if I could. On the auto division, the margin looks perhaps a little lower than people thought, and you've explained the mix. But just on the pure price side of the auto business, have you seen any slippage there post the EU issues? Secondly, you talked about hopefully seeing some better U.S. general industrial in the second quarter. What's behind your hope for that actually picking up in the light of the comment we've just had on the indicators? Is it the weather dropping out, or do you see something there? And then thirdly, R&D, can I take it that you were 3.0 in the quarter versus 2.8? And we're up from two towards three.
Is three really the sort of level you want to run at going forward, or is there more increase to come?
Yeah, let me take that one first. 3.1, in that sort of area, is roughly the sort of level we look to run it, not any more than that. The average last year was 2.9 for the full year. We were a little, just a little bit lower at the start of the year, 2.8, so we're at three at the moment, there. But remember, just to put that together, that's three and a much higher sales figure as well. So it means from a money viewpoint, it's a bigger impact on the bottom line than just the 0.2, in total. In terms of, I'll do it backwards if I could. In terms of general industry, we...
In general, in areas like mining, construction, et cetera, we don't expect any development, so somewhat better. We do expect, though, from the discussions we've had in North America, a little bit better sales development. We saw some destocking in our distribution in the first quarter of this year, and we expect that to come out a little, as we go through the second quarter, not to have the same impact there. And just a general feeling is that with weather dropping out, with other factors, that they cannot continue to lag PMI. So from the indications we've got from our organization and from the discussions I've had, I'm going to USA next week as well. It looks a little bit better into the second quarter, but not a dramatic change there in total.
In automotive, no, nothing on pure price slippage following the EU investigation at all.
Brilliant. Thanks, Tom.
Welcome.
Thank you, James. Next question, please.
Yes, our next question is from Sebastien Ubert from Société Générale. You can now begin, sir.
Hi. Good morning. My first question is, I'd just like to understand a bit more the issue on regional mix and in Asia, more specifically. And just if you compare with Q1 2013, how has developed your margins in Asia compared to Q1 2014? Do you see a stable margin in Asia, and it's just an issue of mix, or do you see some pressure in Asia from margin? And I have a follow-up questions.
... Asia in total, the margin has improved a little bit in the first quarter this year versus the first quarter last year. Do we see pressure? As I mentioned before, there is, it is an area of where we've seen tougher price pressure over the second half of last year, and that's continued into the start of this year. So, and I expect that to continue at this moment. And I think it's due to the fact that the overall demand development has been lower there for some time. So it is a tougher price environment down there, yes.
I mean, how does that compare with the group average now, Asia versus the group? Are we, like, talking about mid-single-digit type of margin? Is there a material difference between Asia and the group?
Yeah, it's a little bit behind the group at the moment.
Yeah. And that's for the last two quarters. I mean, the margins are clearly not going into the right direction compared to your midterm target of 15%. And we still don't see any step up in your restructuring plan, any restructuring charges. Should we see that coming in Q2?
Yeah, we expect to see something in Q2. We have a major activity underway right at the moment. Hopefully, we can announce it during the Q2. I'm pretty confident we can announce it during Q2, but we need to finalize the negotiations. That's the first step, and I think you'll see more as we go out this year.
I think compared to the 2,500 people that should leave the company, how many have already left to date?
I think we're 1,000 and a few hundred, from my memory. 300, 400, 500, in that area. I don't have the figures, but something in that area, or at least the programs have been announced for something like 1,400, or something like that, there from my memory. But, not all of them have left because some of them are in longer-term programs in places like Italy, et cetera.
Okay, and, just a final quick question. You mentioned that March was good. Could you tell us what the volume growth year-on-year was in March compared to, the Q1, 6%?
In a specific day in March or the whole month in total?
The whole, the whole month.
Sorry, we're not going to get into the specific months.
The daily sales rate in March.
Oh, it was okay. It was, it was good.
More than 6%?
It was good.
Okay. Thank you.
Thank you, Sebastien. Next question, please.
Yes, our next question is from Martin Wilkie from Deutsche Bank. You can now start, sir.
Hey, good morning. It's Martin Wilkie at Deutsche Bank. There's a couple of questions. First, on your cost savings, you've given the number for the quarter. Just could you give some indication as to what you expect for the full year? I'm assuming it's not going to be up at SEK 800 million you saw last year, but just sort of some indication of as to whether we should expect SEK 500 million, SEK 650 million, just to give us some sort of sense of how to that progresses towards the second half. And then secondly, you're obviously undergoing the UNITE program as well.
Yes.
Was that a meaningful drag in the quarter in terms of the net investment you made? And if you could just comment as to how that progresses through the year as well. Thanks.
If I take the UNITE first, the UNITE program was, of course, more expensive for us in the first quarter than the first quarter last year. But in terms of bottom line impact, SEK 10 million-SEK 20 million, something like that, more than the rational. But there was something from my memory, like SEK 180 million -SEK 190 million put into capital in the quarter, and we will capitalize it there. So the impact from a cash flow viewpoint was greater than the impact of the bottom line there. Going forward for the year, I don't think this year we should be, as a total amount of savings, dramatically different from what we achieved last year on the SEK 800. Yeah, maybe SEK 104 less, but it's not going to be a dramatic difference.
It's not going to be more, but it's not going to be a dramatic difference. Exactly whether it will be SEK 600-SEK 800, it'll be, it'll be in that ballpark, but I don't want to, I can't be more precise than that at this stage, but it depends when we can announce certain things.
But we should expect the quarterly run-rate of savings to accelerate as the year progresses. That's still a reasonable-
But not dramatically, but it will accelerate, but not a huge amount, there.
Thank you. And if I can just come back to-
Remember, if we're going to hit... We did about SEK 140, as I mentioned, in the first quarter. If we're going to hit SEK 600, we need to do SEK 150 per quarter. If we're going to hit SEK 800, we need SEK 200. So we'll go up a little bit, but not dramatically.
Okay, that's clear. If I could just come back on UNITE. When we have to start amortizing those capitalized costs, I mean, is that something that we need to worry about later this year, or is that something that doesn't really happen until full implementation, and therefore, not necessarily a drag on EBIT until 2015 or 2016?
We capitalize already once we put them in. But of course, the big impact will come later because if I remember, can you remember, Henry, last year we put in something like, was it 4, 400 or 4 into capital? Can you remember? I can't remember last year.
When we talked about...
Yeah.
400 .
We're roughly in total with a two, up to now, something like SEK 700 million in capital in for UNITE in total. So we're already starting to amortize that, but it will go up over the next couple of years as we capitalize the... Because the peak development will be the next two, possibly three years. So that amount will go up.
Okay, clear.
We capitalize over 15 years from my memory.
Depreciation.
Depreciation, sorry, over 15 years, there, with it. So it's that amount over 15 years.
Okay, that's clear. But thank you very much.
Thank you.
Thank you, Martin. Next question, please.
Our next question is from Mr. Alex White from JP Morgan. You can now begin, sir.
... Yeah. Hi, Tom. Hi, Marita. Just, just a couple of questions left, please. You mentioned some weak demand in compressors and pumps in North America and Europe. Just wondering how that sort of looked as we went through the quarter, if it was stabilizing, accelerating, decelerating? Then my second question is around the finished goods inventory growth, which I think you mentioned was around SEK 100 million. Just wondering, did that fall in a particular division, or was it fairly well spread? Thanks.
It was so the SEK 100 million was split between automotive and SI. Not a dramatic difference between the two of them in total. In terms of the drive, just the way I could say, drive, sorry, drives, the pumps, compressors, electric motors, gearboxes, business. That business actually did well in Asia, did okay in Asia. It was Europe and North America didn't do so well. It was relatively flat during the quarter. If I take away the days, look at it, it was relatively flat during the quarter.
That's helpful. Thanks, Tom.
You're welcome.
Thank you, Alex. Next question, please.
Our next question is from Mr. Alexander Virgo from Berenberg. You can now begin, sir.
Yeah. Morning, Tom. Morning, Marita. Thanks for taking the question. Just a quick one on the energy comments, actually. Wondering what's if you can give us a little bit of color around what's driving the sequential strength in both Europe and North America.
Yeah, for energy in total, I mean, energy, we've had a very good development at the end of last year than in the first quarter. I mean, we must remember, first of all, we take North America. North America went down dramatically during last year. And with the program in place, that is improving in North America. So I think it's just a normal development that you would see as a result of the fact that it was a huge drop-off last year. Similarly, in Europe, we had a weak earlier part of last year. And what we've seen is also we've gained some new business. We've been commenting over the last year or 18 months about new businesses we've gained in that area there, and that is now kicking in for us there.
So that's what's driving our development. It's so clear to me that we're performing better than the market in all three regions.
Right. But, sorry, so the European development was just you rather than the market, or was there underlying demand improvement as well?
I think there was underlying demand improvement in the market as well, as I listened to some of the comments coming out from some of the wind turbine producers, but I think we performed better than the market.
Okay, cool. Thank you.
You're welcome.
Thank you. Thank you, Alexander. Next question, please.
Next question is from Mr. Peder Frölén from Handelsbanken Capital Markets. You can now begin, sir.
Thank you. Good morning, Tom, Marita, and Henrik, and Ingalill. Could I please start with digging between the inventory situation? You mentioned the finished goods build up. Is it fair to assume a certain leverage on that, helping the EBIT quarter on quarter by SEK 50 million or so? That's my first question. Secondly, how will that impact the production? Had you mentioned on a previous question here that you will sort of gradually taking down inventory, but we should expect a normal buildup of production in Q2. I don't really understand that since we are running so much higher than the inventory target. So will you produce less than normally in Q2, is my sort of concrete question.
I think that's a good, good one. Yeah, we will have a little bit in inventory up in the second quarter, but not dramatically. And nothing like we would normally do. If you go back 2, 3 years ago, we'd normally have a big increase in inventory during the second quarter. That we will not have. So as I said, it may be slightly up, but not dramatically, because then we be down in the second half of the year. On the roughly SEK 100 million inventory, it's hard to give any specific impact. I don't think the impact on the bottom line was much at all, because SEK 100 million inventory and the level of inventory we carry is not a significant change at all.
Okay, that's fair. And Tom, if I also may, when we talk about mix and price, we have, we start with mix. We have interdivisional mix, and we have mix between the divisions. And from the arrows, I totally appreciate the mix between the divisions also in the second quarter, but also looking at the interdivisional mix, I mean, it seems a bit tough for the second quarter. So do you think that the mix element, all else equals, will be equally negative in Q2 or slightly less so? That's my sort of question.
I think the mix will be, a little bit negative in, in the second quarter. Will it be dramatically different from, from the, the first quarter? I can't say, but it, but it will be... I mean, if you look at the last couple of quarters, we've seen figures of around that level, in negative price mix. I don't think we'll see a dramatic change in the, in the second quarter for that, that level of 0.4, 0.5%. Will it be exactly that? I don't know. But it, but a little bit negative it will be.
Okay. Final price, sorry about this, but could you just remember on the history here, when you, when you raised prices the last time, when was it? If it was last year or prior to that, so we can get the base correct.
It was mid, if I remember, it was mid-2012-
Yeah.
-was the previous time that we moved prices. So this movement in, March this year, or in the market in April this year, is the first move that we've made for 21 months in the European and North American markets.
Yeah, that's very clear. Thank you so much for that. I get back in line.
Thank you, Peder. Thanks.
Thank you, Peder. Next question, please.
Our next question is again from Mr. Erik Golrang from ABG Sundal Collier. You can now begin, sir.
Thank you. I just had a follow-up on the mix there regionally. In Asia, when do you think these utilization issues will be sorted? How much volume, assuming the current mix, would be needed for you to stop, for Asia to stop being more dilutive on the industrial side?
I think it's not just to do with the—it's all to do with the mix of the business of the end markets that they're serving down there. I don't want to give a figure, but I think we're on the right track in Asian development. As I said, the start of this year was better than the start of last year. We're on the right track, but I don't want to give a volume figure. It is, but it's important that is achieved or that continues to develop if we're to achieve our 50% operating margin. But I don't want to give you a volume or a timeline on that.
Thank you. Thank you, Erik. Next question, please.
Yes, and I remind you, if you want to ask a question, you have to press zero one on your telephone keypad. And right now, our last question will go from Mr. Andre Kukhnin from Credit Suisse, London. You can now begin, sir.
Oh, hi, it's Andre from Credit Suisse again. Thanks for taking the follow-ups. Just in terms of the cost savings run-rates, Tom, could you just run through us kind of the plan, how we're going to get to the SEK 3 billion? Is that still on the cards? Because I think you said we got to run-rate of a SEK 1 billion by now, which was SEK 800 in 2013. We're adding another SEK 600- SEK 800 to that, which still leaves kind of a SEK 1.5 billion gap to get to the SEK 3 billion run-rate. Are you still planning to get there next year?
No, we never, we never said next year. We said at the end of 2015, we should be at a SEK 3 billion run-rate, which would mean that we see the benefit of that in 2016, and that is a gross figure. Roughly half of that will come from purchasing. The majority of the rest comes from the restructuring program, although there is some of the savings on, on the, the back office, that which has already been done, is there. So, to me, we're pretty much on, on track. So we should be in a position to be able to do that kick in to 2016, but we should be at that run-rate end of 2015.
Okay, great. So in terms of actually year-on-year benefits kind of modeling, that sort of SEK 600-SEK 800 is what we should put in per annum over sort of 2013, 2014, 2015, 2016.
Yeah, I think it will vary, and I don't want to go further than that. It will vary than that, yeah.
Okay, got it. And a very final one. On Kaydon PPA, could you just run us through what the levels are of PPA in Q1, and what do you expect for the year?
Yeah, I think the exact figure I don't have on the top of my head, but I think it hit their margin from my memory, just over 5 percentage points, 5.2 or 5 point... Just over 5 percentage points, it was hit the margin by.
In Q1?
In Q1.
You expect that sort of impact for full year as well?
Yeah, roughly, it'll have roughly a 5, but I think it's around the 5 percentage points impact it will have on PP, on their margin. But remember, we intend to improve their margin as we go through the year. They had a better margin at the start of this year than they had at the start of last year, and we intend to improve that as we go through the year, as the other cost reduction and sales strategies start to kick in.
Okay.
They're running exactly in line with the plan that we put in place, for them.
Sure. Sure. And I actually think PPA should be taken out of underlying profits. So that's, that's why I'm asking. And you don't expect it to repeat fully in 2015 at that level? I mean, how quickly does it run off?
It will run for some time. It will run for some time. Actually, you raise a good point, Andre. One of the things that we're actually looking at, but we've not decided, is to actually maybe give you a underlying profitability rate, excluding amortization in total. So like an EBITA.
Yeah.
That we're discussing at the moment, because before it wasn't that relevant for us, it wasn't that big. But now with the acquisition of Lincoln, with the acquisition of Kaydon, with what we're doing in UNITE, there's a lot of things coming in that it could impact. So that's something we're looking at, but we've not decided to do that yet.
I think that would be great because we've got a couple of companies in the sector already doing that, and
Yeah
... we will look at those numbers, so it'd be good to have that, like for like.
Yes, good, good point. So, so that's something we'll come back to you on.
Great. Thank you very much.
You're welcome. Thanks, Andre.
Our next question is from Mr. Peder Frölén from Handelsbanken Capital Markets. You can now begin, sir.
Yes, thank you for taking my follow-up. Tom, could you just repeat the ERP answer? How much does that hit the P&L in the first quarter and expectation for this year? Secondly, you also mentioned something about raw material headwind, I mean, helping us out there with the bridge. And finally, just a simple one, but I can't get the math together. What's the volume component quarter-on-quarter? You wrote, unchanged, but I mean, what was it? Maybe, Henrik, you have the figure on top of your head. I can't get the math together here.
The volume in the first quarter versus the fourth quarter?
Yeah.
Sorry?
Yes.
Okay. It was relatively unchanged, the volume there for us in total. It was, it wasn't much difference there in total for us. If I back out the other questions on ERP, the SEK 10-SEK 20 was an additional hit of the UNITE program for this year versus last year. The exact total amount that we have in the right, I can't remember off the top of my head, to be quite honest, the exact total amount it was in the first quarter, the bottom line there. I need to check that and get back to you, Peder.
Yeah, no problem. But the full year expectations here on the year-on-year bridge, I guess they might step up a bit, during the coming quarters?
Yeah, I think on the P&L, from my memory, it is something like close to SEK 100 million exactly, hit on the P&L this year versus last year, because we're now going to the first rollout, and then we've got the second big rollout in the summer. So I think it's roughly that. The total cost is about SEK 900 million for the year, but I think the actual P&L hit is close to SEK 100 million compared to last year.
Yeah, that's fair. And finally, on the raw material, you mentioned you had a headwind in the first quarter. Is it possible to just walk me through your thinking ahead?
No, no, no. In raw material, I didn't. Did I mention a headwind? I shouldn't have mentioned a headwind. Raw material was a little bit better for us in the first quarter, but we're facing a lot of price increase pressure on us from our suppliers. So the raw material in the first quarter was slightly lower for us compared to the first quarter last year.
Yeah, that makes more sense. Okay, and you expect that to continue, I guess?
Yeah, yeah, yeah, absolutely, absolutely. And we expecting a similar saving from our purchasing this year as we got last year.
Yeah, that's very fair. Thank you so much. Thank you.
Thank you, Peder. Our next question, please.
Yes, our next question is from Mr. James Moore from Redburn. You can now begin, sir.
Yeah, just some follow-ups. Tom, on the Asian margin, I think there was a time when it was in line with the group or even a touch above, and it obviously came down some way. Was that all due to wind and rail, large-sized bearings, or the growing mix of car and light truck, or both or something else? And what I'm really trying to get my head around is what is it you need to do to get Asian margins back to where they need to be for the 15%? And two others, one, is the Kaydon margin about 14% after PPA in the P&L at the moment in the quarter?
It's a little bit less than that after PPA in the quarter at the moment, and it will ramp up. It will improve as you go through the year, the Kaydon one, but it's a little bit behind. And that's because of the fact that in order to get that type of level of figure, we need to get the full cost-saving program in place. And if I remember, I told you that roughly this year, we should have 40% of our targeted cost saving in the bottom line this year. But that ramps up as we go through the year. So it's a little bit lower than that. In terms of Asia, if I go to that, it is a combination of the fact that we've got a much, much stronger growth in our automotive business in Asia.
That's point one. Point two is the fact that we've also invested in some operations which are still in ramp-up mode down there. You have the new automotive factory that will open later this year. We opened an automotive factory just 18 months ago for the truck industry, which is still in ramp-up mode, and also the transfer down of some products from Europe is still underway to take place there into the industrial arena. So it's going to take us a little bit of time to get that kind of a little bit more operational code at the moment. But it was necessary for us to do that. It's important because if we didn't put the production down there, we wouldn't get the business. The production had to be local.
So we're in that phase of investing in our production base down there, of transferring down production and ramping up the production in order for us to keep the business and develop the business. Once that's done, we will be back to margins in line with the group, but we need to go through that investment phase to get there.
That's very helpful. Thanks. Just finally, on general inflation and wage inflation, which we all never talk about that much, have you noticed any particular changes?
Yeah, there is a general inflation, not so change, not many changes, but in terms of wage inflation, yeah, there are some more challenges in that area. There is a lot of pressure on, especially in the European environment, to drive wages up at this moment in time, for example, in countries like Germany, countries like Italy, there is a lot more pressure in that area. In addition, remember, we still have the tough pressure in markets like China, India, where the wage inflation is much higher than that. So, I'd say the wage inflation is the one that's a little bit more pressure-
Mm.
Relative to general inflation. If you take general inflation, that's not so strong, but wage inflation is a little bit higher relative to that. So yes, there's a bit of a headwind from that.
All right. Thanks.
Welcome, James.
There's time for one more question.
Yes, our last question is from Mr. Ben Maslen from Bank of America. You can now begin, sir.
Yeah, thank you. Just a couple of follow-ups if I can. Firstly, on, on Latin America, you sounded a lot more cautious on the outlook there at the Q4 results. I just wonder whether the development was better than you expected, and, you know, what, what's changed in Latin to put that arrow flat this time relative to last time? And then on your, just your comments on March, you said that growth was very good. Do you think that reflects an acceleration in the markets, or is that, you know, Easter timing, more working days, U.S. weather stabilizing, you know, kind of short-term factors that may be then reversed in the second quarter? Thank you.
Yeah, I think I would take the second one first. I think there was a number of short-term factors that did influence the March figures that we should be aware of there. So it's too early to say that that little flower that we saw in the month of March just means spring is here. So I think we should wait to go through a couple more months there. But there were some positive signs, I've got to say there. But let's wait. We have to wait there with that. In terms of Latin America, now, why I think...
I think we've seen a big change in the Argentine environment, and we've seen a big change also in the automotive situation, OEM in Brazil, although they have got to say the service business and the vehicle aftermarket in Brazil did well, even if the vehicle aftermarket in Argentina and the other markets was not good for us, which brought the vehicle service market down in total there. We feel that that change has taken place. We got, we did get impacted a little bit at the, in the January-February period, when we had to, for example, in the market of Argentina, we had to do things on our sales activities there because of the big currency swings that we've all seen as switch pricing to dollars, et cetera, there to protect ourselves going forward. So, but those changes have taken place.
That's why we think it will run relatively level now, but still be down year on year.
Got it. Thanks, Tom.
Welcome.
Thank you, Ben. I see there is a couple of minutes left, so we could take another question or even two.
Yes, thank you. We have no further question at this time, but I remind you, if you want to ask a question, you have to press zero one on your telephone keypad. And now we have a question again from Mr. Sebastien Ubert from Société Générale. You can now begin, sir.
Yeah, thank you. Just one question. I mean, just to know if your competitors have followed you on the price increase in North America and Europe?
Yeah, I can say, Sebastien, in North America, I've not heard of anything. In Europe, I've heard of a two increases, that is, it should take place in the summer. I've heard of that, but I've not seen the evidence of that. But in North America, I've not heard anything at all.
Okay, thank you.
Okay, thank you, Sebastien. And I believe that, that takes us to the end of the telephone conference. And if you have more questions, you're welcome to call me or email me or if you are. So thank you very much for joining this telephone conference.
Yeah, thank you, everybody, and wish everybody a Happy Easter.