Thank you for standing by, and welcome to the SKF Interim Report, January to September 2013 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today on Tuesday, the 15th of October, 2013. I would now like to hand the conference over to your first speaker today, Marita Björk. Please go ahead.
Thank you. Good afternoon, everybody, and welcome to this conference call for the presentation of SKF's nine months results, 2013. This teleconference will take 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, ladies and gentlemen. Today, we released our report for the third quarter of 2013, and I think that overall, we delivered a good report with a good cash flow in the quarter. We continued our journey to improve our operating margin, being up some 0.5 sequentially, if we exclude one-offs, the third consecutive quarter of improvement. This was despite a stronger than expected currency headwind and a negative mix in our sales again this quarter, with automotive performing much better than our industrial businesses. We took a number of new businesses in the quarter, and we announced the acquisition of Kaydon Corporation.
In fact, the tender offer for Kaydon is, in fact, closing today, and if we get the necessary majority of of the shares, then since we now have all the regulatory approvals, we expect to be able to close very quickly. So overall, I think it was a good quarter for SKF, but let me go through in a little bit more detail some of the highlights, and let me start with some new business. Within our automotive business, we continued to gain new businesses. We can only talk about some of them, and the two we highlight in this report are important. Partly . One is a large order for the Fiat Group for supply of hub bearing units to the new SUVs, and the other is additional orders from Great Wall, the largest local car manufacturer in China.
This builds on previous orders that we've taken from Great Wall. We also gained a number of new orders in the industrial business, and we highlight some examples from China, such as the renewable energy order from Goldwind, where we are the main supplier for their 2.5-megawatt turbine. We also gained some important business for wheel bearing units, for high-speed trains, and for bearings for coal power plants. In our service business, we continue to gain orders in Latin America, which helps drive our business in this region. We're also stepping up our activities to strengthen our service business in China, with both the establishment of the gearbox remanufacturing center and the joint venture with WISCO Heavy, for remanufacturing.
Our work in sustainability continues, and I'm delighted that for the 14th year in a row, we're included in the Dow Jones Sustainability Index, and that's a great achievement. Moving on to launching new products. We continue to step up our pace on launching new products, with new sealed bearings being launched, new seals, new lubricants, and lubrication systems. We're also combining two platforms by bringing together our condition monitoring and automatic lubrication expertise into one new condition-based lubrication system, thereby reducing cost and improving performance for the customer. So another strong quarter for new business and new products for the group, which will help support our growth target in the years ahead. 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 just above SEK 15.6 billion Swedish krona were slightly up in Swedish krona and up over 3% in local currencies. A return to growth after a number of quarters of decline, and it feels good to be back in growth. Volume was up 2.2%, but a little lower than we expected at the start of the quarter. This was due to a weak development in our industrial business, while our automotive business had very good growth and was up over 7% in local currencies. It was a very good development from automotive and better than we expected at the start of the quarter. If you remember, I talked a lot during the quarter about September and its importance, both for the third quarter and for the rest of the year.
When I look at our sales in September, they were only slightly up year-on-year on a daily sales basis and no big change sequentially. So let us now look at the sales development around the world, and let us go east to west, so we start in Asia. In Asia, we had a growth of 5% in our sales, which was broadly in line with our expectations. From a country viewpoint, we had good growth in China, driven by strong sales to the car industry, to the vehicle service market, to railway, and to renewable energy, which continues the trend we saw in the last quarter. If I comment on railway, we had good sales to passenger and high-speed rail, and we've now had the new tender for freight cars, where we've been as successful as usual.
And we started some of the shipments in September for the freight cars, but the main shipments will come in the fourth quarter. Elsewhere in Asia, we had good sales in Indonesia, with two-wheelers, of course, being the main driver, and also in South Korea. However, sales in countries like Malaysia and Thailand were weak. Looking at India, the largest, the second largest market in the region for us, we see a slight improvement, but only slight, mainly from automotive, renewable energy, and general industry. Our sales were up slightly. However, it was a very mixed picture across the different business areas. On the positive side, our sales to the automotive business were very good. Trucks developed well, influenced by pre-buy, I'm sure.
Vehicle service market was also very good, both due to a good market demand, but also the actions that I've spoken about that we have taken to grow our business there. We even grew in cars, despite car production being more or less unchanged, and here it's because of us, of mix. It's because of us being on the right vehicles. In the industrial market in Europe, sales to aerospace continued positively, but we did see slight declines in our sales to railway, off highway, and the different process industries. Sales to industrial distributors were relatively unchanged. I would say that there continues to be some cautiousness in the industrial distribution market in many parts of the world. So Europe lacked some traction in the industrial markets.
From a country viewpoint, if I could comment that, we had a positive development in Sweden, relatively stable in Germany, if I look year-on-year, and in Italy, if I look year-on-year, and some improvement in Spain, albeit from a low level. France, however, was weak and weakened for us. Going to Latin America, here we had a mixed picture again. Sales to the car industry, however, have been weak, but our sales to the vehicle service market and to the industrial aftermarket, developing well. As I said last quarter, we benefit from a good development in this region in our service business, and industries such as food and beverage, the different process industries, oil and gas, developed very well. Let's go to North America, and here we did not see the expected development.
I still believe in the medium and long-term development in North America, but just now, with all that's happening politically, it, it's influencing the demand, especially in the industrial arena. Our distributors are very cautious, and they are destocking. Off highway, especially related to mining, was weak also. However, we do see good growth in aerospace and in railway. Our energy business, both traditional and renewable, developed well, but it is relatively small in the big picture. In the automotive business, our sales to the car and light vehicle industry were unchanged, and although this is slightly behind the market, it's more related to the very strong sales we had last year, which gives a tough comparison. We are not losing a share. Our sales to the vehicle service market continued to develop very well in North America also.
So let's all sum that up for the group. Volume was up a little bit more than 2% in the third quarter compared to last year, and relatively unchanged sequentially. If you remember, we raised manufacturing level going through the second quarter, and we've kept it at that level in the third quarter, which means it was slightly higher year-on-year. Inventory reduced to 21.3% of sales, but this is due to currency. In fixed currencies, inventory was up a little bit, some 150 million SEK, mainly due, mainly in raw material and components and not in finished goods, so it did not influence our result at all. We adjusted our manufacturing as we went through the quarter in line with the demand. So let me turn now to our profit development.
Our operating profit was a little bit more than SEK 1.9 billion, giving a margin of 12.3%, or 12.9%, if I exclude the one-offs. I should comment that the one-offs were mainly related to write down an impairment of assets. There was a little restructuring, but it was small. So if you look at that margin, the margin continued to improve sequentially, being up 0.5 point compared to the second quarter. And I must say, I'm very pleased about this, because we must remember, summer is a time when we have, in absolute terms, lower sales and production than in the second quarter, but we still improved our margin sequentially.
If I also compare to the same quarter last year, then I can see that despite the negative price mix caused by a better automotive development than an industrial development, and despite the heavy currency headwind, we improved margin compared to last year, excluding one-offs. As I mentioned, the negative currency impact was more than expected due to the major currency change in the quarter, mainly the weak dollar. We had a negative 190 million krona versus some negative 100 million krona that we forecast, which therefore impacts the margin. Currency, SEK -190 million, impacts the margin by about 1.2%.
The trend which we've seen on currencies also has an impact in the fourth quarter, and we now expect a negative SEK 120 million in the fourth quarter, bringing the full year negative impact to SEK 630 million, instead of the negative impact of SEK 450 million that we thought we would have for the full year, just one quarter ago. Cash flow was good at around a little bit above 1.1 billion SEK, and for the nine months, so at 1.4 billion SEK, or if I exclude acquisitions, divestment, a little bit just under 2 billion SEK.
However, if you look in the quarter, and you look at the cash flow statement, you will see that working capital had a negative impact on cash flow, unlike last year, when it had a positive impact. The increase in that working capital was due to the inventory and the increase in fixed currencies that I mentioned earlier. There were changes in receivables, and there were changes in payables in fixed currency, but they, they washed one another out. They eliminated one another. So remember back to the Capital Market Day last month. We said we were putting an increased focus on net working capital, which is inventories, plus accounts receivables, minus accounts payable, and this we are doing. We, we see a trend of increasing accounts receivables in our business, and this year alone, there's some 3% higher in number of days.
On one side, this increase is due to the mix of business, with more sales in areas with longer credit times, but we also see that customers are delaying payments. The big area in focus for us is Asia, and particularly China, where we see that trend. When it comes to payables, I think we're a little too kind to our suppliers, and this is being addressed in our purchasing project. We should, at a minimum, have the same payment terms from our suppliers in each region as we have with our customers, and this we don't have today. In summary, we've some work to do on working capital, and this, as I said, we already highlighted to you at the Capital Markets Day. Enough about the third quarter. Let me now move on and look to the fourth quarter.
And again, I want to stress, this is the demand for SKF, not an outlook on the market. We expect to see relatively unchanged demand sequentially, but it will mean a slight growth overall for the group year on year. Why? Because please remember, we saw a decrease in our sales sequentially in the fourth quarter last year, really across all businesses and areas. So keeping flat sequentially will mean slight growth for the group, overall. From a regional and a business area viewpoint, we see all of them staying around the same level as they are just now, except for Asia, where we expect a slight sequential improvement. And this is driven by the end markets we serve in Asia. Cars and light vehicles, which we expect to continue well, renewable energy, railway, two wheels.
We expect these ones to continue well and improve sequentially, and that brings Asia up sequentially. From a year-on-year development, then we expect to see growth in all business areas, but a little bit better than automotive than the other two. So again, a somewhat little negative mix for us. From a regional viewpoint, some growth in Europe and Asia in the fourth quarter, but we expect Latin America and North America to be unchanged year-on-year. And here, as I say, we believe the political uncertainty in North America will continue to influence demand in the short term. So outlook is for a relatively unchanged demand sequentially and a slight growth year-on-year. Looking at manufacturing, we will keep the manufacturing level from the third quarter overall, which means it will be slightly.
It will be higher, sorry, year-on-year, and inventories will be slightly lower, but not significantly. Turning now just to comment on raw materials. I would say raw materials at the moment. They are slightly lower, so slightly lower input costs compared to last year, and that is mainly due to the lower surcharges we see. So as usual, let me give you my view on what this all means when looking at the fourth quarter. Volume and sales will be slightly higher than the fourth quarter last year, and manufacturing will be higher. We will have the savings programs, and we will have lower raw material costs. These are all positives. From a headwind viewpoint, we have the currency headwind and slightly higher R&D in our business.
However, if you want to look at the fourth quarter, I think the best comparison is to the third quarter this year, since volumes in both sales and manufacturing are expected to more or less at the same as in the third quarter, as I think will be most of the other factors. In closing, I think we delivered a good quarter. We've returned to growth in our business. We have a good cash flow, and for the third quarter in a row, our margin is improving sequentially when I exclude one-offs. We're taking steps to reduce our costs, and they're working. We continue to invest in our business in many ways, increasing our research and development, launching new products, gaining a number of new businesses, and last but not least, by acquiring quality companies that add value to our offering, to our customers and to our shareholders.
So we have actions on cost and on growth that are moving us in the right direction towards achieving our financial targets, and they're working. Now, back to you, Marita, then over to questions. Thank you.
Thank you, Tom. Now it is time for the Q&A session. Please, start with the first question.
Thank you. If you would like to ask a question, please press star one on your telephone. Your first question comes from Guillermo Peigneux from UBS. Please go ahead.
Hi, good afternoon. It's Guillermo Peigneux from UBS. Can I ask three questions? September flat sequentially, is that versus August, or are we just talking about maybe second quarter kind of run rates? Because August tends to be weaker, so I'm wondering whether September being sort of flat with August actually means demand is deteriorating. And then second, we all look at leading indicators, and it seems like there's a bit of a decoupling in between activity and leading indicators. I'm actually curious about what you think, Tom, on that decoupling occurring versus basically leading indicators pointing to sort of a V-shaped recovery on industrial markets being a little bit more sloppy when it comes to growth.
Then the last question is on Kaydon. When do you expect to incorporate those numbers into the first quarter of 2014? Or how many weeks should we include, actually, or months we include for the fourth quarter?
Okay, so thanks, Guillermo. September was flat sequentially over what we saw through the third quarter, not just against August, because August, as you rightly point out, is a month that you've got to look at differently because of the holidays there. So if I talk it being relatively flat sequentially, it's from what we saw coming out of June through July, August. So if I look at all the points, it's relatively flat across that period in total. So we didn't see the quarter in total kicking off sequentially, so it's relatively flat overall there. So it's not just against August, it's against through the quarter there.
Yeah. Thank you.
In terms of the decoupling, that's a good question you raised there. I mean, I think there is still some, especially in the industrial arena, some cautiousness in the market. Because I know I've used that word a lot, but I think there are people who are looking, and many leading indicators, indicators, if you look at PMI, et cetera, are moving to the more positive thing. And if all that comes through, it should mean some time going forward, we should see a better environment. But at the moment, we're not seeing that. If I see our order intake, which I know is not a huge part of our business, but if I see our order intake, our order intake isn't stronger than our sales.
So that points to me that level of activity is gonna stay fairly much where it is just now. If things, as it seems, that is working, gets sorted out in USA, then I think that will take a little bit of pressure off, and maybe things will move a little bit better going forward. But there is, for me, a little bit lack of traction, and it's mainly in the industrial markets. If I just put a comment, and maybe I should do it right now on trucks. I think trucks, we benefited in Europe, on trucks, due to the pre-buy, as I mentioned there. That pre-buy will be up year-end. So I think into next year, we'll see a somewhat weaker truck business at the start of next year because once the pre-buy is passed there.
Switching on to Kaydon. If we, I mean, the tender offer closes tonight at midnight, U.S. time, so we will not know until officially tomorrow morning how things are. If it comes to, if, if everything goes according to plan, we will be able to move ahead with that very, very quickly. So you'll get a couple of months of it into our figures, I would expect, in the fourth quarter. But what I would prefer to do is, once we know how things are, we will come back and see what we can do. Because we'll close it fairly quickly once, if, if and when we get above 50.1% there with it. And then, of course, you've got to bring it in there. But I would expect we've got a couple of months in.
But let us come back with some more details on Kaydon once we know where things are. Because, remember, at the moment, we are still dealing on an arm's length business because they are a competitor as well, and there's only so much we can do at this point.
Thank you very much. Maybe just a follow-up. Last one, I promise. You mentioned on basically the headwinds and tailwinds into fourth quarter, and you used third quarter as a reference. Am I right in just sort of thinking that what you're seeing in terms of basically EBIT margins is levels that are around the levels that you're seeing now?
No, I think that, as I said, what I'm looking at is when I see the volume and in terms of sales, in terms of manufacturing, I don't see big differences in the fourth quarter versus the third quarter there. So it's a somewhat similar quarter.
Thank you.
Welcome, Guillermo.
Thank you, Guillermo. Next question, please.
Thank you. Your next question comes from Lars Brorson, from DNB. Please go ahead.
Thank you very much. Good morning, Tom. Good day, or rather, good afternoon. Good afternoon, Marita. A couple of questions from my side. First of all, in SI, a little surprised to see underlying margins here down about 100 basis points year-over-year on a flat top line. Can you talk a little bit about what's driving that from a mix, price, or cost perspective? And I'll come back on a couple of follow-up questions.
Yeah. And RSS, you've hit it on the nail. It's a couple of factors that's impacting them. One is a mix of the business there. You'll remember this, I think, from the past, when we've talked about RSS. If you look at where their business and how their business develops, what you see is that regions for them, like North America, are more profitable for them than, say, regions like Asia are for them, and also certain parts of Europe. And why is that? It's because in North America, they're purely an aftermarket business because we have a big OEM business there. Whereas when you go into East Europe, they do both OEM and aftermarket. You go into many markets in Asia, outside of China and India, they do both OEM and aftermarket.
So the mix of the business was not in their favor with the fact that you had North America not as strong for them. That's one point. The other point is they had a little bit of impact, of course, from the currency. When you take that currency of the SEK 190 million, of course, the majority goes to SI, but then RSS takes another bit before automotive get it. So these were the two factors that impacted them.
Just to be clear, Tom, on your industrial aftermarket in North America, are you seeing a re-acceleration here of distributor destocking, and what kind of visibility do you have going into Q4? You talked about a weak, sort of political environment impacting your distributors there.
Yeah, yeah. I think, we don't have a huge amount of visibility because they generally, order on us as they need it. Service level is very important for them, and we have a good service level to them there. I don't see an acceleration in the destocking there. I still see stock coming out from them there, but, I'd also don't see them, being positive, in going forward at the moment. There is a real cautiousness when you talk to them, and I and my team have talked to them quite a bit over the. During the quarter, during the third quarter, there. So I think they, they.
'Cause remember that many of the markets they serve are the small and medium-sized businesses, and if I look at reports from small and medium-sized businesses, the reports say that they are being impacted by what's happening. So there is a lot of cautiousness, and that was expected at the end of the third quarter as well. They were anticipating that. So I wouldn't say it's an acceleration of destocking. It's more a case of them just being, keeping their cards close to their chest at this moment in time. And as things develop and hopefully move positively over there, then it should improve for them.
Useful. Just one final one, if I could. Just on your demand outlook for automotive, you're obviously guiding up in your trucks and two-wheeler segments, which should be about 30% or so of your automotive division. Where, by segment or geography, do you see demand decline sequentially?
Yeah. Decline sequence, if you actually look at that, I think you've got, it's just a balance between the two. As you rightly point out, it's up quite a bit for them in these two areas. But in the other areas, they're important for them in total. I wouldn't say there's anything dramatically declining sequentially for them. It's more just when you add all the figures together, you know, you've got a band when we talk about relatively unchanged there. And if you're a little bit up in two areas and then 70% of the business flat, the little bit up has to be twice as strong as the other areas to influence the total average, and I wouldn't say it's twice as strong.
Thanks.
Thank you, Lars. Next question, please.
Thank you. Your next question comes from Erik Golrang from ABG. Please go ahead.
Thank you. A few questions from me. First one on China. If you could talk a bit more about the trends there outside of wind and rail. Maybe you touched upon it, but it would be great if you could address that again. And then just to get a sense of what you feel here, I mean, in conjunction with the second quarter report, if I remember correctly, you argued that guidance, if anything, might prove a bit too cautious. Is it a similar situation today, looking into Q4, since you have a few of the segments pointing up, but none down? Or are you more. You sound almost more believing in flat now than you did previously.
That's a good, very good comment there, Eric. No, I would say, I am. We try to call it as best as we see it. We were looking at a lot of the statistics and a lot of the trends that were coming through and you know, information that was coming through, and that's why I said I thought the risk going into the third quarter was a little bit more on the upside than downside. To me, at the moment, I would say this is the best call we can do, and I don't see upside or downside specific risk in this there. In terms of China, yeah, as you mentioned, rail, high speed, doing well, freight, doing well, renewable. Remember, though, from a very low base, starting to come back. We must remember that as well.
Cars is good for us. Vehicle service market is good for us in China, and we've also seen a little bit more activity in the Chinese region, in the industries there. Some of the steel industries a little bit better, but again, they dropped off quite a bit. Some of the process industries a little bit better, but again, they dropped off a little bit there for us. So these thirty ones a bit. Off-highway and that, no, not much better. So it's more process industries that are a little bit better for us down there.
Okay, thank you. Then the final question, I think you, you talked about around SEK 75 million in cost savings in both the third and the fourth quarter, year-on-year, I guess. Is there any change in the, in cost reductions if we look sequentially for Q4 relative to the third quarter?
No, not.
When the sort of the next step up comes in terms of cost savings?
It's good. Not dramatically any change there. I would say we've got the 75, plus, remember, we got the 50 that we get in the S&A as well. So don't forget both of them. They are figures that we've got. No big change sequentially.
Thank you.
Welcome.
Thank you, Erik. Next question, please.
Thank you. Your next question comes from Ben Maslen from Bank of America. Please go ahead.
Yeah, thank you. Afternoon, Tom, Henrik, Marita. A couple of questions, please. Firstly, just on the industrial businesses, which you said were weaker than you expected at the start of the quarter. You mentioned that aerospace, wind, and rail are growing pretty nicely. I wonder if you could just give us the markets where you see the weakness that is still coming through to offset that and keep you basically flat. And then secondly, just on. I just wonder if you could just run through other operations and unallocated group activities a little bit, which become a kind of bigger part of your EBIT for this quarter. You know, firstly, just from other operations, it seems to be up nicely on last year, you know, is that underlying performance?
And then on unallocated, just remind us how that arises. I think it's the difference between your management accounts and financials, which is the. I want to refresh, of course, if I can. Thank you.
Okay. Yeah, let me talk maybe on, take the financials first, and then I can click back to the other industries, if I could, just take that. Yeah, you're right. It's a difference between the. It's a timing issue in the other line, that unallocated line. It's a timing issue between the quarters to do, as you say, with internal reporting, external reporting, currency rates used, inventory, as it moves into the through the chain there with us. If you go up to the other operations outside the business areas, yeah, they're developing well. I mean, and that is performance. And that is areas like PEER, GBC, and our logistics are in there. So they are developing well.
Remember, Carol, compared to the first nine months last year, what you've now got in Q4 last year through to Q3 this year is GBC in. You didn't have GBC in the first nine months of last year. So that's one of the reasons for the step up there. But I've got to say, they are performing very, very well there. When I go to the industries there, if you look at it around the world, and maybe we chat a little bit where things are not going, we don't see any real traction in the European market, in general industry, which is areas like electric motors, small gearboxes, pumps, compressors. We don't see that traction at all. In the European market as well, off-highway is not very good for us.
Actually, railway Europe is not very good for us at all. Railway is good in North America, good in Asia, but not very good for us in Europe. In North America, I highlighted what was down a bit there, and particularly off-highway in North America. If I relate it to what goes to construction, mining sector, not very strong for us there. What else can I say in the industrial mix? In Europe and a little bit of traction in North America, in the industrial arena, that wasn't so strong, and it was cautiousness in distribution in these areas.
Got it. Thanks, Tom. A good, a good color. And then just on, maybe just coming back to the, the central line. So Kadant will go into other operations, I think you said, going forward.
Yes.
Okay. And then on the unallocated, which you say is a timing difference, I mean, does that mean that, you know, when these timing differences eliminate themselves, that actually the margins in industrial, automotive, and, you know, sales and service are actually higher when you and the central line would be lower?
Yeah.
I think you almost understate the margins a little bit in the divisions, and it catches up at a group level. Is that how we should look at it?
Yeah, and if you look at it in the first two quarters, remember, we had big, heavy negatives-
Yeah
In that area there. So what you normally find is over four, five quarters, these things even themselves out a little bit, not completely, but even. There will always be unallocated group costs in our business there. But they do balance themselves out a little bit there. So I think, as you rightly point out, at this moment in time, they're probably the margins are obviously a little bit understated, but maybe they were a little bit overstated in the first part of the year.
Got it. Thanks, Tom.
Welcome.
Thank you. Your next question comes from James Moore, from Redburn. Please go ahead.
Yes, good afternoon, everyone. It's James at Redburn. I've a few questions. Just to follow up on Ben's question there. If it's that we should look at the group margin, perhaps more than the divisional margin, given the timing of the unallocated, I'm just trying to think about the fourth quarter, and it feels like you're talking about sequentially unchanged demand and manufacturing, so that feels like a nice, easy comparison. But normally, I think the RSS, the service business, tends to see a margin up, but the auto business tends to see a margin a bit down. Should we think about any divisional issues in the fourth quarter compared to the third? If you could help us a bit with that. And then a couple of other questions I could come back to you.
Okay. On the BA issues there in the fourth quarter, you're 100% right. Normally, what happens with automotive, because vehicle service market is normally a little bit weaker for them in the fourth quarter, and that's just a seasonality issue, then that impacts them a little bit. I think automotive, by the way, and I should have commented that in my speech, I think they've done a very good job, and they held up their margin very, very well indeed. I mean, the clean margin, they're holding what they had in the first part of the year. But they have a little bit negative impact because of their mix of business in the fourth quarter. Absolutely correct. RSS, yes, you're absolutely right again. They normally get better.
However, one of the things that normally drives that is that they have a better aftermarket business in the fourth quarter. If the North American aftermarket business kicks in well for them, and the European business is a little bit better, then they may get something from that. It may not be quite as strong this year as we've seen in other periods at this moment.
Okay. That's very helpful. Thanks. And on Kadant, I'm sorry, I didn't hear the timing. I've got the start of January. Is that right? And my real question-
No, no, no. No, no. No. Let's just say, how we see Kadant going. First of all, we need to get it through today. We need to get the tender offer finalized.
Mm-hmm.
Let's assume the tender offer comes in our favor, then we will then move to close fairly quickly. And that, therefore, will mean that we will be able to get a couple of months of Kadant. Exactly how much it will be depends on, you know, the reporting and how we can do things. And as I said, remember, we've seen certain things that they do, but we couldn't dig into all the details we'd like to do there and because they're competitors. But we should be able to get a couple of months of them in the fourth quarter there. And we'll come back to you on that. And then, of course, another question you'll have is, so what sort of how are you going to allocate all the things in the different lines?
How much PPA you're going to have?
That's my real question, yeah.
Let me . We will come back to that. We need to dig in in detail. We've our views just now, but before we give you figures, I'd like to spend some time to go into that. So give us some time, if and when we are successful in closing it, give us the time to then come back to you with that.
Okay. I mean, I've stuck in 18, and I'm concerned if everyone does that, and it ends up being a mid-single digit for a year because of a year of PPA, then we will have to go up to come down. But if you could come back, that would be great. And,
We'll try to give you some guidance, James, as soon as we can.
Just on the group margin, big picture question, my last one. I think, you know, given the number we've just seen today and where we seem like we're heading for the next quarter, let's say we're somewhere in the order of 12.5% clean margin for the year. And I think, I really just want to ask, are you still feeling confident that it's valid, that we should think about a sort of 15% as we get to 2015, 16% as a genuine viable target, given what you see currently on demand? And should we think about that as a straight line, or is there anything you can help us with on the longer term?
I mean, it's clear that our objective is to operate around the 15% operating margin level. And there's a combination of, we expect to have some growth in our business, at the same time as we need to adjust our costs. And we're working on both these areas to do that. And as we've identified, by the end of 2015, we expect to have taken out a SEK 3 billion cost-saving runway, of which we expect to keep the majority. So if you take that figure, then you look into 2016 and make assumptions of the volume, and then you can do the calculation of margin. The margin absolutely is in focus, as is the growth target for us, absolutely in focus.
Great. Thank you very much.
Welcome, James.
Thank you, James. And next question, please.
Thank you. Your next question comes from Markus Almerud, from Morgan Stanley. Please go ahead.
Hi, Markus Almerud here from Morgan Stanley.
A question, a follow-up question on your demand outlook. So when you stood in September at the Capital Markets Day and also after Q2, and you were talking about an upside risk. Disregarding what you expected for Q3, did you expect Q4 to see an improvement in demand? And if so, what if that was the case, is there any specific areas which did not come in as strong as you expected? Then on FX, is there any specific reason you mentioned the dollar has a big impact, but any one of the emerging market currencies which has impacted that as well? And then I'm just wondering if we should expect any costs for the restructuring in Q4.
Okay.
Thank you.
If I take the outlook, I at the end of the Q2 report, when I did the Q3 outlook, I did say to you that when I looked at this is our best outlook, if anything, I expected an upside risk. At the Capital Market Day, I actually stated that September would be very important to determine where we would go and how the fourth quarter would be. And as I mentioned earlier, September did not improve sequentially there. So from that viewpoint, I think there's no change in what we said and what we expected there with it.
As I highlighted in my opening comments, I think basically, the industrial markets were the ones that didn't come through exactly as we expected it, and especially North America was a little bit more down than we expected. I think they're the two factors that meant that we came with a 2.2 and not something a little bit better than that. In terms of cost, restructuring, currency, I think the US dollar and US dollar-related currencies is the major impact that is affecting us, because there are a number of ones in that area that's impacting us, as I know. In terms of cost, yes, good question for the fourth quarter. We're working on a number of things just now.
At this moment, I don't see anything particular that we will take in the fourth quarter at this moment in time. But if we do, it depends how the programs go, it depends how the discussions go. If we do come through with something, then, we'll let you know.
Thank you very much.
You're welcome, Markus.
Thank you, Markus. The next question, please.
Thank you. Your next question comes from Aaron Ibbotson from Goldman Sachs. Please go ahead.
Yes. Hi there. Good afternoon. I have two questions, if I may. And the first one was just coming back to your net working capital and your inventory. First of all, I was hoping if you could help us a little bit see what the FX impact was in the inventory, 'cause as far as I could tell, the balance sheet impact should have been larger than the PNLs. So I would have expected the inventory to come down a little bit as it's being translated to Swedish krona. And if I look at overall net working capital now, either on the fourth quarter rolling or for this quarter, you're sort of back to the levels where you were at the end of 2011, where you felt the need to sort of break production.
So I'm just wondering if, if you feel that there is a risk that if demand doesn't pick up, as, as we all hope and expect, that we will see a sort of a repeat of that. And my second question was just on, on your view on sort of available cash for acquisition. So obviously, this Kaydon acquisition is quite large. And, and if I look back, sort of how much cash you generate after dividends, it's sort of SEK 1.5 billion or so per year. So you're consuming quite a large chunk of that now, and, and I guess your net debt to EBITDA is, is at least, on my numbers, higher than, than you've had since the, since the 1990s.
I'm just wondering if you feel that you still have room for another large-ish acquisition, or if you feel that for the next few years, you sort of basically only have room for smaller bolt-ons?
I think you summed up well there at the end, Aaron. I think in the next two, let's say, year to two years, we need to work at bringing Kaydon into the group, if we're successful, then working at bringing Kaydon into the group, and getting ourselves in a position where we can make a distinction. So don't expect anything significant in the next one to two years beyond Kaydon. We need little bolt-ons we can click on, but nothing significant. And the reason also is, first of all, to absorb that, but the reason also is actually linked very much to your first question, is to generate cash in our business.
If, as I said, I mean, the inventory's been down about SEK 100 million in the Swedish krona, and as I said earlier, there was about SEK 150 million put in, in six currencies, to the inventory there. And the majority of that, and the majority of the inventory change for the full year, by far the majority is raw material and components, which has no impact on our manufacturing. So in order for us to address things, we need to take, reduce a little bit more of raw material and components in our areas, which will not impact our manufacturing and not mean a break in the manufacturing area. If I look in total at net working capital, I'd say, as you say, inventories are bouncing around. Inventories have not really moved.
We've told you the programs we're working on, and we will work on these programs. But the area I think to me, we need to work more on, and we are working more on, which is why Henrik raised at the Capital Market Day, is actually the other parts, is accounts receivables, where we've seen a steady increase in our accounts receivable in total as a percent of sales. And as I mentioned in my opening comments there, receivable have gone up in terms of number of days, about 3%. And when you calculate that in, that's a lot of money there. And that's due to mix of business on one side, but also customers delaying payments. So that's an area we need to work more on.
Net working capital, going forward, will be a heavier focused area for us, which is the combination of inventories, receivables, and payables. In order to A, get it in a little bit better shape, because it's a flat development over the last 10 years. If I do a net-net figure on that, A, to get in better shape and, B, to generate cash so we can invest in our business.
Okay, that's very helpful. But if I ask a slightly pointed question, sorry, if that's okay. But, you know, my view has always been that there's a slight trade-off between, you know, Net Working Capital and margins. So I'm just wondering if in your payment terms, you know, and maybe the way you run your inventory, are you slightly sort of accepting a little bit more lax payment terms to make sure you see this margin improvement that you're seeing, or what do you think you can work on?
No, it's not that. It's not that. I think the. At all. It's and that you cannot do. No, the issue is that there is an impact, of course, on net working capital, on margin, if you hit the manufacturing line quite heavily there. But as I said, when I look at what's happened in inventories this year, it's primarily raw material and components. So it's so to address that is something we can, we can work on. In terms of payment term, there is two factors. It is the factor that custom. We're growing our business in areas which are slightly longer payment terms than we have as an average for the group.
And secondly, we are seeing, though, that certain customer groups in certain areas are not paying when they should be paying, even with these credit times as well. So that's an area we need to focus on. I don't see that there's a risk in these payments because we're getting banknotes and things like that to guarantee the payment, but it is an area we need to work on. And thirdly, of course, in accounts payable with our suppliers, is something that we need to get a better balance between, region by region in our payables and our receivables there. So, I, we are not actively going out and saying, "If you give us the volume and you give us this price, we will give you longer credit terms." That's not the case, no.
Okay, thank you.
You're welcome, Aaron.
Thank you, Aaron. Next question, please.
Thank you. Your next question comes from Martin Wolski from Deutsche Bank. Please go ahead.
Hi. Thank you. It's Martin from Deutsche Bank. Just a couple of questions. The first one is just a clarification on your restructuring and one-off costs. I think you originally talked about a cost of about SEK 700 million for the year. I just wanted to clarify an earlier comment you made. Is that still what we should be expecting for this year? Or, given your what you charged in the quarter, is the potential that you come in a little bit below that number? And the second question was just on currency. You mentioned that the US dollar and dollar-linked was the largest impact, and I can understand that in absolute terms, but obviously, I'm guessing in Latin America, there were some, you know, quite big changes in the quarter because of the Brazilian real and some others.
I was just wondering, in those markets, I mean, have you had to change pricing or your cost base or anything like that, to reflect some quite substantial depreciation in some of the currencies in Latin America? Thanks.
I can take that last point as well, immediately. When we see big changes in the currencies and when we're in a country like Brazil, when we're doing in Brazilian reais or other areas, yes, we do move prices to reflect that there. So that we do from a currency viewpoint. And that, of course, has some impact to us, but it's not as big as the US dollar and US dollar-related areas there. In terms of, you're right, the SEK 700 for the year is what we expected at the start of the year, or we expected a figure something higher than we are at the moment at the start of the year. There's a couple of the things that we're working on. It's just taking a little bit longer to negotiate, I would say.
So that's why I said, I'm not convinced we can get it in the fourth quarter. They're just taking a little bit longer to negotiate.
Okay. That, that's clear. Thank you very much.
Thanks, Martin.
Thank you, Martin. Next question, please.
Thank you. Your next question comes from Colin Gibson, from HSBC. Please go ahead.
Hi, good afternoon, everyone. It's Colin at HSBC. A couple of questions. Firstly, thinking about the outlook for price mix in Q4, would it be sensible to expect that unless we see a big re-acceleration in industrial demand, which it sounds like you're, you're not expecting to see in Q4, probably price mix, although it's got a little better, sequentially, can't get substantially better until we really do see an improvement in industrial demand? That's, that's, that's my first question. And second question, just thinking about the pace at which you're getting benefits coming through quarter by quarter from cost cutting. In Q3, I think it's fair to say, judging from your comments, probably judging from market expectations as well, that margins were relatively better than, than revenue growth would have, would have suggested.
Should we see that mostly as driven by cost-cutting measures, or is there an element of that little increase in inventories and that little bit of overproduction, which also helped out in September? Thank you.
First of all, there was no overproduction, as I said. The increase was in raw material and components. There was no overproduction from that viewpoint, so that didn't help it. The movement is to do with the savings programs that we've got in place and the other steps that we're taking. So, just on the price mix, if all three business areas had grown roughly the same, our price mix would have been half a point better, roughly. That was the impact of the negative development of the automotive versus industrial. Going forward, I'd say,
That's very helpful. Thanks.
Thanks, Colin.
Thank you, Colin. Next question, please.
Thank you. Your next question comes from Andreas Willi from JP Morgan. Please go ahead.
Yeah, good afternoon, everybody. It's Alex Wyatt at JP Morgan. I've got three quick questions, please. Firstly, we've heard quite a bit around the U.S. distributor business, so thanks very much for that. But can you give us a little bit more color on what you've seen in the EM, the emerging market distribution business, sequentially? Secondly, is the weakness in North American heavy industry limited to mining, or are some of the other areas also developing negatively, sequentially? And lastly, just if you could provide some comment on the pricing environment in the industrial businesses. Thanks.
Yep. If I take the distribution business, we talked North America. I would say Latin America distribution business is developing well for us, and that's also linked to the service business that we've got in Latin America, as we've mentioned, that's developing in a good way for us. And of course, we service that hand in glove with our distributors there, so that's why it's developing positively. Asia, the distribution business is down a little bit. I'd say that there's been a change in pattern over the last two, three, four years compared to maybe the previous five, six, seven years. In the previous years, distributors, they used to sit with fairly big inventories and liked to sit with inventories.
They saw that as investing money, and you know, it was better than putting money in the bank. And nowadays, I think they're just run it a little bit tighter. Some of them have had difficulties, especially in markets like China and India, in getting money to fund their business. So therefore, even if that is a little bit better for them at this moment, I'd say the issue is more a case of they're just running with lower levels and just being a little bit more cautious down there. So going forward, I don't see any change dramatically in that in the fourth quarter. In terms of the industrial markets, it was. Yeah, we saw a weakness in North America in areas like off highway.
We didn't see any big development in the heavier industries like metalworking, paper, et cetera, in North America either, for us. So these markets were relatively unchanged for us, and nothing really positive for us in North America. In the pricing arena, I would say that we've not made any steps to move prices up at this moment in time. That's always something we're going to monitor and look at there. Is it tough out there in our pricing environment? It's always tough in the business, but it's not dramatically different today than it was a quarter ago. I don't know if that answers all your questions.
Yeah, no, that, that's very helpful. Thanks very much.
Welcome.
Thank you, Alex. We have time for a few more questions. Okay?
Thank you. Your next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Hi, good afternoon, and thanks for taking my questions. Firstly, on inventory, and sorry to labor it, but I think you said in Q2 that you increased inventory slightly on underlying basis in terms of finished goods, ready for Q3, and now in Q3, I understand you did not reduce it. It feels like, especially in combination with the ramping up of bought-in materials and raw materials, it feels like you were ready for an uptick in Q4. Would that be a right inference?
Yeah, I think it's right. I mean, we put some increase in Q2. We said it was predominantly raw material components. It was not only there. In this time, it was raw material components that was put in during the third quarter for us there. So of course, that is to prepare and to be ready for the production. We did say, if you remember, after Q2, that we were putting that in to be ready to, if.
Mm-hmm.
demand was better. If the upside risk came through, we'd put it in there, in place. And I would say the raw material components is something we will address during this quarter.
Okay. Then if we cruise into Q1, and there is no uptick, then would you be happy with your current level of finished good inventory, or would you need to reduce it?
The finished goods inventory is not bad overall, but remember, if we're going to be able to hit our 18% target over the next few years, then clearly we can't keep running the total inventories around the 21, 21.3%. Even if we take raw material components out, we still have to address the finished goods inventory over a longer period of time. So, I can't say I'm happy with the absolute level. It's not bad with what we're doing just now, but overall, we need to take inventory down as a total, and some of that will be raw material, and some of that will be finished goods. But it's not something we're gonna slam the brakes on to do. It's something we'll do over a longer period of time.
Got it. And, just on the outlook, say, if you had a government, and the issue was sorted last week, would it be fair to assume that that arrow for U.S. would be pointing up and potentially the whole group pointing slightly up, too?
It's difficult to say that would have happened there. I mean, because this we did, and the others, we were working them all the time through, and I think it's difficult to say that if the U.S. government had reached an agreement last week or it didn't have the debt ceiling discussions that had taken place, it would have been different. Things don't work quite as fast as that. I think it takes a little bit of time for machinations to go, so it's difficult to say, to be honest.
Good. Just a very final question on competitive landscape. Could you just give us an update if you're seeing any kind of changes in behavior from your Japanese competitors or from Chinese competitors locally, maybe?
Competitors locally, no big change. In fact, I would say, SKF has been quite successful in getting business down there. If you look at many of the businesses we've gained in automotive, which are with the local Chinese car manufacturers, we're gaining more business in the renewable energy arena, not just with the big ones, but with other ones, as well. So I would say generally, we are developing, in a positive way in the Chinese market, relative to the local players. In terms of the Japanese, there's always the question vis-à-vis how they would use or how they can use the currency, et cetera. It is tough fighting out there with them, but I cannot say it's currency related. It is tough, particularly in the Asian region. It's a tough competition we're facing.
Thank you very much for your time.
I'm not seeing any dramatic changes, Andre.
Great. Thank you.
You're welcome.
Thank you, Andre. Now we have to take the last question, please. The final question.
Thank you. Your next question comes from Alexander Virgo from Berenberg. Please go ahead.
Hi, thanks for taking the question just at the end. Just a quick one, really, on the BeyondZero portfolio, and I'm wondering, related to the price mix discussion, how that has developed over the last quarter or so, just generally going forward into the next year, and I suppose looking out, how much can that offset the business mix, if you like, in terms of auto versus industrial on the price? Thanks.
Yes. Yeah, it's a good, very good question, yeah. It's developing well, and I'd say a lot, a number of the new businesses, not a lot, a number of the new businesses that automotive are taking are coming in products which have got advantages for the customers. So yes, I think that that portfolio will have a positive influence, but we must realize that relatively speaking, it still is a small part. I think it was SEK 3 billion last year. Relatively speaking, it's still a small part of the overall. So it has a little positive impact. It'll have more of a positive impact 3, 4 years down the road than it has today. But it is an important part of achieving our growth target and an important part of improving our profitability.
But it's not a hugely influential part of the price mix at this moment in time.
Okay, thank you.
You're welcome.
Well, well, I see we still have time, 1 minute left, so we can take the final, final question now. Please.
Thank you. Your next question comes from Peder Frölén from Han. Go ahead.
Hi, can you hear me?
Yes, we can hear you, Peder.
Hey, finally. Thank you. So, a couple of quick ones. I mean, we all know that you have some wiggle room on the profitability, and I really want to grasp here, how much did you have to fight to have this margin with those volumes and this mix? i.e., is this the base, and we should add savings and volume coming from this level? That's my first question. Secondly, the underlying profitability in, in sort of, others, I mean, how strong profitability is actually PEER and GBC sort of showing in the quarter?
Finally, we all talk about it, sort of the daily rates, I guess, in your outlook, but from your ex- sort of history and also looking at current environment, how much is seasonality in the fourth quarter? Should we expect a couple% better and then sort of come to think of the sequential outlook? That's it, as for now.
Okay, we'll take them in reverse order. Seasonality is always difficult in the fourth quarter because of what happens round about Christmas and New Year. So I would say I don't look at a dramatic difference, fourth quarter versus third quarter. As I say, there is issues around Christmas and New Year, and had a bigger impact, negative, on us last year than normally. PEER and GBC are doing very well. I've got to say, both in terms of sales development, in terms of profitability, they are developing in a very good way, and we're very happy, and they definitely support the group margin level as it is. In terms of-
So, so sorry, Tom. Tom, coming back to that, is the savings actually could be sort of directed from these two operations rather than sort of overall cost absorption in the bigger picture, so to speak?
I don't fully understand the question. Sorry, Peder, but I'd say that PEER and GBC, they're much more focused on a growth mode in developing their business and developing their profitability, and their margin is good overall. So they're much more focused on that than on a specific savings program.
Yeah, absolutely.
That's your question there.
Yeah.
If it doesn't, we can take it later, your question on that one.
Yeah.
In terms of a margin, I mean, margin, when you're working to improve your margin, you work on all the levers all the time there. I wouldn't say we work dramatically more in the levers this quarter than we do in the other quarter. We're focusing on all the levers to improve our operating margin. We're hunting costs in all of our businesses, and we're reviewing that all the time. But I think the issue is to get the right mix of our business, the right mix of the products and end market sales, and the profitability from that area, and of course, to grow our business. So there wasn't anything more dramatic this quarter than any other quarter.
Okay, that's very clear. Thank you for that.
No problem, Peder. Thank you so much.
Thank you, Peder. Thank you. And that brings us to the end of this presentation. Thank you for joining us, and if you have more questions, please do not hesitate to contact me. I will be available for questions right after this call.
Thank you so much, everybody. Thank you. Bye-bye.
Thank you.
Thank you.
That does conclude our conference for today. Thank you all for participating. You may disconnect.