Thank you for standing by, and welcome to the SKF Half Year Report 2013. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday, the sixteenth of July, 2013. And I'd like to hand the conference over to your speaker today, Marita Björk. Please go ahead.
Thank you very much, and good morning, everybody, and welcome to this conference call for the presentation of SKF Half Year Results, 2013. This teleconference 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, Group Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by presenting the results, and then after this, there will be a Q&A session. Over to you, Tom, please.
Thank you very much, Marita. Ladies and gentlemen, hello. We released our report for the Q2 earlier this morning. I think the steps that we're taking to address our costs, combined with a slightly better volume development, enable us to deliver a good, solid result despite the currency headwinds. I'm particularly pleased with the strong cash flow. Volume was better than we expected going into the quarter, but that was due mainly to our Automotive business. As a result, we increased our manufacturing in the group to the same level as in the Q2 last year. When you look at the sequential operating margin development in quarter two compared to the Q1 , then we can see that it improved by one percentage point, which is similar to the sequential improvement we made in the Q1 .
So step by step, we're moving in the right direction. When we look specifically at demand for SKF, then, as I mentioned, it was somewhat higher than we expected, both sequentially and year-on-year when we started the quarter, and that was driven by our Automotive business, particularly our Truck business and Vehicle Service Market. But I'd also say that Cars Europe were better than expected. Our industrial business overall, on the other hand, still does not have real traction. Looking forward, I think that the level we are at just now will continue in the Q3 , which will mean we will see slightly higher volume for the group compared to the Q3 last year.
At this point, I would say the Q3 is always quite challenging to read due to the holidays, and I think that September will be a very, very important month, both for the quarter, but also to set the scene for the remainder of the year. During the quarter, we gained a number of new businesses, as you can see in the report. In the Aerospace business, we gained an important long-term order from Turbomeca for the supply of bearings for their helicopter engine. We also gained a number of very good service contracts in Latin America. Our service business in Latin America continues to develop very well indeed, as does Latin America in total for us. We also gained a very important contract with Volvo Cars for wheel bearing supply to the new premium vehicle platform.
I could comment here that the trend we have seen in automotive to gain new business, business continued in the Q2 , and we'll see the benefit of these later in 2014 and in 2015. We continued to build the network of SKF Solution Factories and opened two more in the quarter in Spain and in Poland, bringing the total number to 23 worldwide. We will open more during this year and at the start of next year. The opening of the SKF Solution Factories, combined with the two major industry conferences, which we held during the quarter, fully supports our increased focus on Total Asset Lifecycle Management, which we are driving, especially in the industrial business. From an activity viewpoint, I think we had another successful quarter.
Now, let's get back to the financials, and let me start with the high-level figures before going into detail, specifically in the demand development. Our sales at around SEK 16.4 billion were down 4.6% in the quarter in Swedish krona, but up 0.4% in local currencies. But that increase was due to the positive contribution from structure of 2.6%, which is, as you know, GBC and BVI, where organic sales showed a drop of 2.2%. Let me, at this point, comment on price mix, which was negative in the quarter, but this is due to two factors. Firstly, we have not made any major list price moves in the last 12 months, as you, as you well know.
Secondly, the intra-business area mix was negative for us because automotive grew to nearly 8%, while our Industrial businesses combined declined by around 6%. If we exclude this intra-business area mix, then price mix was slightly positive in the quarter. So let's look a little bit on the sales development. Automotive business up nearly 8% and had growth in all regions of the world. As I mentioned earlier, we saw a good development in the Truck business, with good growth in Europe and in Asia, which for us, as you know, is mainly India. One point, even though we're seeing a good development, one point we must remember for trucks is that although it's developing positively, the absolute level remains below its peak. The Vehicle Service Market business also developed well in Europe, North America, and Latin America, but Asia was a little bit down for us.
As you will remember, we've had a poor development in Vehicle Service Market in the past couple of years, and we've taken specific actions to address this, as I commented before. And I'm very pleased that we're seeing the result of these actions and that growth is now coming back in the business. From the Car business, we saw very good growth globally, and here also, somewhat better than expected, and that was mainly due to Europe. Europe's car production was not down as expected in the quarter, and we performed just a little bit better than the market. North America, production grew, I think, around 5%, and we developed broadly in line with the market. In Asia, we see a strong development of business, and this is driven by China, where we also continue to gain new business.
For two-wheelers, we have a very good development in Indonesia, which is a little ahead of the market, and we see a stable level in India. Let's turn over to the Industrial businesses, and let me comment first of all, about what's happening with RSS, Regional Sales and Service. Regional Sales and Service were down nearly 5%, but with Latin America continuing to develop well, especially Brazil, Argentina, and Peru. But I'd say Chile remains weak for us due to, of course, the mining industry. Europe was significantly down year-over-year, but here we see some signs that the European business has leveled out. North America, our sales are impacted still by some cautiousness in the market, and I think there's still some continued destocking taking place.
In Asia, we see some improvement in China and Korea, in RSS, but still weak in India and in Southeast Asia. Central and Eastern Europe for RSS, well, Hungary, Russia, Ukraine, and Poland go well. The Czech Republic remains weak, and we also see some improving signs in countries such as Turkey. Let's switch over to look at Strategic Industries, where we saw the biggest decline with our sales being down some 8%. The auto business develops well, as does some industries in certain regions. For example, energy in Asia is developing well for us just now, but I've got to say, overall, we don't see the, the, a positive development in this business. Let's look region by region. Asia, our main business for, for SI in Asia is in China and India.
In China, we see a slightly positive sequential development, but driven by Renewable Energy and some positive signs in our General Industry, which is pumps and compressors. However, railway off-highway remain very weak in in China. In railway, the main tender for freight cars has not taken place, and so we don't have much business for the freight cars there. Normally, there are two tenders per year for freight cars, one in the spring and one in the autumn, but the spring tender did not come. We do expect a tender in the H2 of this year, but overall, the overall demand should be at a lower level than last year. That's for freight cars in China. We now turn to Passenger Rail. Passenger Rail is developing quite well for us, though, in China, but overall, railway off-highway in China, not so good.
Turning to India, our business is down a lot here in SI, but we do see signs of stabilization. I've got to say, also in India, we see some improvement in Renewable Energy. Overall for the group, volume was down 1.6% compared to the Q2 last year, but was sequentially a little bit better than in the Q1 , which means the step up that we expected for the H2 of the year came already in the Q2 for us. To meet this, we raised production a bit from the Q1 and also ran it at the same level as the Q2 last year, which was broadly in line with sales. We also ordered more raw material components to enable us to continue to run at this level of manufacturing during the summer.
In the H1 , in total, inventories have increased by some SEK 500 million. A little less than half of that increase is due to currency. The remainder is in fixed currency, so it's a real increase. Of this, some 75% is raw material components. Let me turn now to our profit development. Operating profit was a little bit SEK 1.8 billion, giving a margin of 11.2%. If we exclude the SEK 190 million one-off, then we had an operating profit a bit above SEK 2 billion, giving a 12.4% margin.
If I compare the margin this year with the margin in the Q2 last year, and if I adjust both of them for one-off costs and take the currency impact out, we can see that Q2 this year, at a 12.9% operating margin, on the same currency rate as the, as the Q2 last year, compared to 12.7% the margin last year. So we see a sequential improvement and a year-on-year improvement if we clean out from a currency viewpoint and a one-off viewpoint in both years. And that is even with a slightly lower sales volume and a negative price mix. So, as I said, I think the steps we're taking are bringing results. What about one-off costs? We took an additional one-off cost of SEK 190 million in the Q2 as part of our announced program.
This was a little lower than expected, but this is due to timing issues rather than any changes. The additional cost will come later over the next two to three years. The program in the Q2 impacts approximately 320 people through early retirement programs, voluntary redundancy programs, and that's mainly in Germany and Italy. This is the third step in the restructuring part of the growth cost and efficiency program we announced last year. We put a table in the report to try and help you follow what we're doing in the restructuring part of the program. You can see we've made three announcements so far, totaling a cost of some SEK 640 million, which will give a saving of 330 million Swedish krona.
In the H2 , we expect savings from these announced programs already of some SEK 150 million, which means roughly SEK 75 million per quarter. The full annualized rate of what's been announced so far will be released in the Q1 of next year. However, in addition, we have a saving of some SEK 50 million a quarter, which we put in place in the Q1 related to general cost reductions, and that will continue going forward. Of the program and the cost part of the program is on purchasing, and that's moving in a good way in total, even if we don't see a major impact from the program so far. We have some benefit coming through from lower scrap surcharges at the moment, which is reducing our input cost.
This should continue in the next couple of quarters, when we will see the benefit from the surcharges in the H1 of this year coming through to our income statement. However, I think we should not count on this long-term benefit since scrap prices are volatile, and as you know, very much impacted from the demand in the global economy. But at the moment, though, we are benefiting from scrap surcharges. So in summary, you can expect from Q3 onwards, savings of some SEK 75 million from the restructuring program, SEK 50 million from our other cost reduction activities, and some additional savings from purchasing. So on the right way. The negative currency impact of SEK 200 million was in line with what we expected, even with some major currency changes in the quarter.
This brings a negative impact of currency on the group and our operating profit to SEK 320 million for the H1 . Going forward, as we see it just now, we expect some negative SEK 100 million in the Q3 and an additional negative SEK 30 million in the Q4 . This is better than we expected a few months ago, but it's still a significant headwind. Cash flow was good in the quarter at nearly SEK 1.15 billion. We had the effect of the increase we put into inventory, the negative effect of increase in inventory and, of course, the higher account receivables. And, and then the higher account receivables is due to the end of the quarter being at the weekend, which means customers did not pay until into the start of this quarter.
So let me now move on to the outlook for the Q3 , and I stress again, this is a demand outlook for SKF, not an outlook for the market. Firstly, we saw a better level in the Q2 than we thought at the start of the quarter, so we moved up from the level we were running at in the Q1 . We expect to keep to that level, which means we will see some growth in the quarter compared to the Q3 last year. Manufacturing will remain at the current level also, which means it will be slightly higher year-on-year. Sales and manufacturing relationship will, will be more like a normal Q3 , which will mean we should see a slight reduction in our inventory during the quarter.
However, I think it's important that we watch demand and how it develops during the quarter, and in particular, how it looks in September, to make sure we're operating our manufacturing at the right levels to meet the market demand towards the end of the year. Back to our expectation on demand, then, for the Q3 . Let's have a look at the regions. I think it's a positive picture, since basically we expect growth year-on-year in all regions except Europe, where we expect it to be relatively unchanged. Latin America should continue to deliver good growth for us, both sequentially and year-on-year. We see a return to growth year-on-year in both Asia and North America, even if it's a slight growth, and we stay at the same level sequentially.
From a BA viewpoint, we expect all three to show slight growth year-over-year, which means we shouldn't see any negatives in our divisional mix. From an industry viewpoint, aerospace, energy, and trucks are expected to continue to develop positive from a sequential viewpoint, continuing the trend from the Q2 . All the other industries are expected to stay relatively unchanged sequentially. Maybe let me comment a little bit on Vehicle Service Market and why we've kept the arrow flat in the sequential for Vehicle Service Market, since it did see good growth in the Q2 . Basically, the Vehicle Service Market is a more seasonal business, with normally the H1 being better than the H2 for them.
And this year, we expect, therefore, to keep the demand at the level that we saw in the H1 , which I think is still positive. So outlook is for a relatively unchanged demand situation sequentially, but slight growth year -on -year, which even with the uncertainty out there, supports our view we have, that we have stabilized around this level. Again, for the coming quarter, I'd say the risk is more on the upside than the downside, but I've got to say, it's still a difficult macro environment to judge. So in closing, let me give you my view on what this all means when looking at the Q3 . If you look at the Q3 compared to the Q3 last year, volumes in both sales and manufacturing will be slightly higher, but in a more normal Q3 relation.
We still face a big currency headwind of SEK 100 million, but our cost reduction activities will give us the benefits I mentioned earlier. In closing, I think we had a good Q2 . We've taken some important new orders, launched some new products, and some good products, progress in addressing our cost base. We have, and will continue to drive our four priorities of sustainable, profitable growth, investments in innovation, cost reduction, and capital efficiency. With that, I'll hand back to Marita and then pass over to questions.
Thank you very much, Tom. Now it's time for the Q&A session. Please state your name and company name. Time for the Q&A session now.
Thank you. If you wish to ask a question on the phone lines, please press star one. Your first question comes from Ben Maslen from BofA. Please ask your question.
Yeah, morning, Tom, Henrik, Marita. It's, it's Ben at Merrill's. A few questions, please. Firstly, Tom, just on the inventory build we saw in the quarter, is that a normal seasonal step up as far as you're concerned, or procurement ahead of the summer? Did you overproduce? Maybe a bit more color around that, please. Secondly, as you say, there may be some upside risk to your guidance, but I guess you've guided flat sequentially, and all markets and geographies are kind of flat to up in terms of the arrows. So are there any markets or regions that you think sequentially will still fall or decline in the Q3 ? And then just finally, on your cost savings program, I think I followed your numbers.
Just can you say what savings you had in the Q2 , in terms of the different parts of the savings program? Thank you.
Sure. No problem, Ben. Good morning. So inventory. In the H1 year in total, we put about SEK 500 million in inventory, a little bit less than half of that was currency. The rest was fixed currency. That's real, real increased there. And of that, 75% was raw material components. So we weren't really producing much ahead of demand there. The reason we put the raw material components in was to enable us to run at this production level during the Q3 . So we actually raised our orders during the quarter on our suppliers to bring it in. So that is raw material components in our system to help us produce during the summer at the level we're now running at there.
There's nothing special, and there's no real impact in our results from that.
Okay.
When I switch to the sequential development, now I would say our outlook is as we see it, as you say, we don't see anything going down, and I don't see any specific trend of any industry or parts of our regions of that going down. I suppose different countries have different developments, but generally, we see it sort of stabilizing at the level we're at. But remember, we stepped up a little bit, the level in the Q2 , and we see us still stabilizing at that level going forward. So no, no major changes in that there. In terms of the savings, yeah, so let me maybe put it a little clearer.
In the Q3 , what we will see is the 75 million SEK from the three programs we've already announced, plus the 50 million SEK from the other cost actions we put in place, which wasn't related to restructuring, and that will stay with us. We had that also in the Q1 . And we will see some benefit, as I mentioned earlier, from the scrap surcharges, et cetera. In the Q2 , what did we have? We had a little benefit from input costs, of course, because the scrap was somewhat lower for us. We had the 50 million SEK that we had in the Q1 as well.
In terms of the SEK 75 million, I've not got an exact figure of what that was, but I'd say a little bit less than half of that we already had in the Q2 , something around the 30 figure there. So the Q2 , we had something around that level, plus the 50, plus, of course, some money from the input cost.
Got it. Okay, very clear. Thanks, Tom.
Thanks, Ben.
Thanks, Ben. The next question, please.
Thank you. Our next question comes from James Moore from Redburn. Please ask your question.
Yeah. Hi, Tom. Hi, Henrik. Hi, Marita. Just to follow up on the inventory, if I could. Did you say 75% raw material and components?
Yes.
So we're thinking SEK 500 million, say, is the all-in, SEK 300 million is the clean of currency, and then we get down to something like SEK 80-90 million is the pure, finished goods and the WIP, which presumably has some margin impact. Just trying to get a sense for how that number differed divisionally. That's the first question on inventory. And then the other bit of it is: How does it go up a couple of percent on currency when the top line's gone down 5%? That just seems quite a mismatch. And then on the savings, is the SEK 75 million combination of plan one, plan two, and three of the three last quarters of announcements, which are sort of phasing up?
And then finally, on the auto side of the business, where you've had some pretty impressive upticks in volume rates in the car and light truck piece, could you just give us a bit of color about market share takes by region, by model, by OE? What's really going on there?
In inventory, your calculation is broadly right, James, when you do it there. So as you say, roughly, if you do... I'm not gonna say exactly, 300 of the 500 was that. But you take that figure, and you take 25% of that roughly as being finished goods, I think you've got the right, is in line with that, the figure there. It's equally spread across the business areas, so there's nothing special in one business area or another business area there in total. And the currency impact is the impact that we see, because remember, inventory is set in different places compared to where the sales are, so they have a different factor that we within the mix.
If you look at the balance sheet, in total, you can see that there is inventory, sorry, it's currency impacted as well in total. Maybe Henrik can give a little bit more color on that at the end, there. In terms of the savings program, yes, the SEK 75 million refers to the three programs already announced, and that we will see from the Q3 going forward, and it will step up a little bit more in the Q1 of next year because the program three we just announced has a full impact from the first part of next year. In the automotive side, now I think the volume development we've seen in automotive is a combination of Vehicle Service Market doing very well, and they really have seen a good bounce back in the Q2 .
As you know, we put a lot of actions in there. We've made some management changes. We've made some, changed some activities in the market. We are starting to see the benefit, particularly in Europe and North America. The Truck business was somewhat better for us and the Car business. If you look at it in Europe, I think at the start of the quarter, we expected car production to go down around 4% from my memory, off the top of my head, there. And it looks to have been relatively flat, and then the mix has changed a lot between the different vehicle producers. So I wouldn't say particularly in our figures, we are taking market share. But remember, the mix of the business was a little bit negative to us during last year, so this swings from time to time.
Probably any market share change is more related to the model change, gaining business in the market rather than us specifically gaining at this moment in time. That will change a little bit going forward when we go into the end of 2014, 2015, where the new businesses we've kicked in do improve our, our, our margin. Yeah. Maybe I should expect a consequence. I don't know, Henrik, if you want to say anything on the consequence?
Oh, no, only thing I can add, Tom, is that as you know, James, we are using a different way by translating, and then we are using those things a little bit more for the battery. So there is, there's a difference there as well. That's just my clarification.
Okay. Thank you.
Thank you. Next question, please.
Thank you. Our next question comes from Andreas Willi from J.P. Morgan. Please ask your question.
Yeah, good morning, everybody. My first question is on Latin America, which was very strong for you in the quarter. You continue to see that strong even continue to improve sequentially. That's in a bit of contrast to a lot of the economic data we are currently getting from Latin America, and particularly Brazil. Maybe you could give us some comments around your business, where you see that strength in Latin America. The second question, to clarify on production, you basically said you increased production as the quarter went on, and now you expect it to be flat from here. Is it flat from the average level of Q2, or flat from the run rate at the end of Q2?
The last question on your outlook, where you said you don't really see any major market potentially declining in Q3. If you look at the merchant market, PMIs, they're falling across the board for a few months now. Where do you see the risk there? How comfortable are you that your Industrial businesses in emerging markets will be up rather than down in the H2 of the year? Thank you.
Okay. In Latin America, we do see some negatives in areas, for example, like Chile, related to the mining business. So the mining business is impacted there. But we do see good growth in our service business in Latin America. We mentioned these new contracts we've taken. It continues to grow and develop very, very well. Market like Argentina, even with all the macro data you see there, continues to develop very positively, and I think we are also helped by the fact that we manufacture in the country, which helps us with imports and other things there. Brazil, I say we're seeing it better outside of the Car business there, even though the Car business was good for us down there in Brazil.
But we do see a better development in the other areas down there generally. So, I've seen the data that comes out, the macro data, but our development continues to be pretty positive down there in Latin America, and I think it's due to the end markets, which is much more a service-oriented market than a replacement market than an OEM market for us. In terms of production, it will run at the average of the Q2 in the Q3 . In terms of Industrial Market, yeah, you're absolutely correct. The many PMIs, there's a lot of mixed pictures of PMIs in emerging markets. But also, when the PMIs in emerging markets were pretty positive, we were seeing business dropping quite a bit.
So we dropped much earlier than I would say, some of the PMIs, and that's why I don't see it dropping off significantly more. I think we had it a little bit earlier than what happened in the marketplace. For example, as I say, in certain industries in China, like Renewable Energy, we are seeing a positive development just now. But we must remember, we dropped off dramatically in that business. So we're seeing a positive development from a very low base. If I look at our General Industry business in markets like China, then, then it is developing, okay, it's slightly positive. But again, we saw a bigger drop-off than what you would have seen from the macro data.
So I just, I just think that we were a little bit more disconnected going down, and probably we are a little bit disconnected at the moment from the macro PMI data.
Thank you very much.
Thank you very much, Andreas. Next question, please.
Your next question comes from Lars Brorson from DNB. Please ask your question.
Thank you very much. Good morning, Tom, Henrik, and Marita. Three questions from my side. Firstly, Tom, can you elaborate on what you perceive to be the sustainability of the recovery in your European truck segment? And how do you expect to manage production levels here in light of the Euro 6 pre-buy that perhaps would be pulling demand from 2014 into 2013? The second question is on the development on your industrial distributors. How did the level of destocking in Q2 compare to Q1 and what's your outlook as you move into the H2 ? I'm particularly interested in your U.S. market, as well as some of the OEM segments such as mining, that should see easier comparisons year-over-year.
And then thirdly, if I could, on your manufacturing restructuring, the 320 headcount reduction in Q2, a little lower than the reductions we've seen in Q1 and Q4. Can I just ask you to confirm that the 2,500 reduction that you set out initially is still the target, and perhaps elaborate on when you expect to complete those? Thank you.
Yeah. You're right. What we're seeing just now, if I take the first one on trucks, what we're seeing just now is a positive development in the trucks. How much of that is related to pre-buy before Euro 6, and how much is related just to the mix of the business, I think is a good question there. I get different views from the market related to how much of a pre-buy there is going to be on Euro 6, although I do expect some pre-buy on that there. We are managing it. It's demand has moved up faster, and that's why in our manufacturing operations that supply the truck industry, because it did drop off quite a bit, and we used the flexibility tools to manage that there.
So, we are managing it there, but it has, I've got to say, it's been quite tough putting up and option up as we've been doing it, for the, specifically for the truck side. In terms of destocking, in particular in the North American market there, I'd say we probably have a little bit of destocking still, in the Q2 there. But I've got to feel we're getting towards the end of that destocking. I thought we were getting towards the end of the Q1 . I think we must be getting towards the end of it, which as you rightly therefore point out, should make some easier comparisons going forward, or at least comparisons where you end destocking, so you don't have the negative impact of that there.
I don't think there's a lot more to come. I don't see restocking taking place, but I don't think there's a lot more to come in destocking there. In terms of the manufacturing restructuring, yes, our target is still 2,500 people, and we said that we should complete that by 2015, and that target remains.
Thank you. Very useful.
Thank you. Bye bye.
Thanks, Josh. The next question, please.
Your next question comes from Marcus Almered from Morgan Stanley. Please ask your question.
Hi, Marcus Almered here from Morgan Stanley. Can I start by asking a little bit about the cost savings? So the return on the cost savings so far is quite low, and I know we talked about that last quarter, that they would pick up during next year. Do you still expect that to happen? At the moment, this is just about roughly half of the cost, which just goes into savings. That's my first question. And then maybe you could talk a little bit about, on the industrial side, the industrial demand sequentially, if you could talk a little bit about what you're seeing in Europe and what you're seeing in the US, if you take away the calendar effect, et cetera, on the industrial side in particular. Thank you.
Okay, good, good. On the cost savings, you're absolutely right. The return is somewhat lower at this moment in time relative to the cost, and that's due to where the programs are and the type of programs that we're running at this moment in time. The type of programs we're running at the moment is early retirement schemes and other schemes which are a little bit more expensive there, but still are good steps to be taken to adjust our cost base. So you're right in that, and we still expect in total to manage the program, the SEK 3 billion, with the SEK 1.5 billion going forward. But remember, in the SEK 3 billion saving in the program, there are other elements out there which are not to do with restructuring there.
In terms of industrial development sequentially, I mean, that's a good, good question. I mean, we don't see... If you look at the arrows that we put out from a sequential development overall, I would say that both in Europe and North America, we see signs of some form of what you want to say, stabilization in the Industrial businesses. That is, it's not getting dramatically worse, but it's also not getting dramatically better. Let me give some areas. Have a look at that there. Construction, heavy equipment, et cetera, has been dropped down a lot for us, especially on an OEM side, mining, et cetera, there. But when I then factor back in end users, et cetera, we don't see it dropping dramatically further or changing a lot going forward.
In terms of energy business in North America, we've seen a big drop-off in the Renewable Energy business. So far, it's small in our big picture of energy worldwide. Big drop-off, but it seems to be holding at that level in total. Whereas Renewable Energy in Europe is showing slight signs of improvement for us. Not dramatic, but slight signs of improvement there for us. So I would say the arrows that you see for the group are broadly in line with, for the Industrial Market, broadly in line with the arrows that we see for Europe and North America as well.
Thank you.
Thank you, Marcus. Our next question, please.
Your next question comes from GP from UBS. Please ask your question.
Hi, good morning. It's Guillermo Peigneux from UBS. Three questions actually regarding raw materials and implication for pricing. Can you quantify, to some extent, the benefit during the Q2 from lower raw material costs, especially regarding scrap steel? And given that you are stocking cheaper raw materials as we speak, could you quantify potential benefit in subsequent quarters? And when do you expect those benefits to flow through your P&L? And also then regarding to pricing actions, given demand, given the fact that demand looks a bit better now here, are you intending putting up prices at some point or announcing price increases at some point?
If I take the second one, yes, that we have no activities underway to announce general price increases at this moment. And as and when we do, when we get, if we take steps that way, we would then make a proper announcement, but we have no activities at this stage there with it. In terms of the raw material benefits, I don't want to give the exact quantification of that, but I can say already today, we are seeing that the scrap surcharges are lower, on average, that we've seen as an input already into our P&L than they were during last year.
We will get that benefit also going forward, because we can see that the scrap level, scrap surcharge level at the moment is quite a bit lower than it was in the average of last year. Already, we're seeing some benefit in the Q2 . We'll see that benefit continuing going through the rest of this year.
Yeah, but is that benefit increasing?
It will get a little bit better as we go through the year. Yes.
Thank you.
Thank you very much, Guillermo. The next question, please.
The next question comes from Erik Golrang from ABG. Please ask your question.
Thank you. Three questions from me. Firstly, the Vehicle Service Market in Europe was much better in Q2. What was behind this? Do you think it was mostly end market improvement, or was there an element of restocking in there? Secondly, you said you saw mainly upside risk for the Q3 . Any particular customer segment or region you would be expecting that upside from? And then finally, more of a reflection. automotive was much better in Q2, and if I remember correctly, in Q1, North America was much worse. Do you feel, Tom, that it's become, you know, more difficult to predict demand also for the near term, or do these swings not really stand out relative history? Thanks.
I think I'll take the last one first, Eric. Yeah, it is difficult to work even in a market like the automotive to predict demand. We get external forecasts, we get forecasts from the customers, but especially in the automotive industry, they're very good at doing or they change production fairly quickly within this. So it is more challenging in forecasting that. The automotive team have done a good job in total, and it's a combination of them taking the actions that we put in place there, which is to reduce cost, to improve the non-performance. If you remember, I've talked a few times about Mexico not being where it needs to be.
It's still not where we want it to be, but it's moving in a good better direction there, with it, as well as the better businesses helping them develop. Just on that, if I could just take the opportunity in automotive to say that they've had a good positive development in their margin, as you've seen, and if you take a clean margin without one-offs running around the 5% level just now. But remember, automotive do have a seasonality in the business. It's not as seasonal as it was some years ago, but it used to be something like two-thirds in the H1 , one-third in the H2 . In terms of profitability, it's probably more like, I don't know, 55-60% H1 , 40-45 in the H2 .
They are more like that than the, than the two-thirds, one-third, but they, they have a seasonality in their business. I'm going backwards on your questions. And the upside risk, I think generally what we see is that, it was a little bit more positive in the, the Q2 as we expected, there with it, than we expected there. And we do see... You can't say it's broad-based and upside, because that's not, that's not fair to say. But I do think in areas like, America, for us, maybe in some markets in, in Europe, may be a little bit better, but I think we're, we're trying to call it the best we can just now.
Even with all the mixed data out there, we don't see, as I say, any major downside risk, but we don't, so I would balance it more a little bit on the upside. But I can't comment to say a specific market, just look at that rather level just now. If I take VSM Europe now, end market versus restocking, I don't think there's significant restocking. We've not seen that. What we put in place, if you remember, we were not happy with our Vehicle Service Market activities. We made a number of changes in what we were doing in that operation, and I think we started to see the benefit of that. So I think it's increased activity level in the marketplace for us.
I think there is some end market developments in Europe and North America, especially in North America, for us, but it is due to a lot of activities we've got in the market itself. I don't hear, and I've chatted with my guys on this, I don't hear of a dramatic restocking. They always do something ahead of the summer, so they've got some ability to supply ahead of the summer, but it's not a significant impact, I don't see.
That's great. Thank you.
Thank you very much, Eric. Next question, please.
The next question comes from Arnaud Brossard , from BNP Paribas. Please ask your question.
Hi, everyone. I have a few questions on savings. First, Tom, you gave a few indications. You gave quite a few figures on restructuring and non-restructuring related savings. Did I understand well that overall, we could say that around two-thirds of the total savings plan will be related to purchases? That's the first question. Then, on the inventories, it seems we're getting further again from the inventory to sales target. Over time, could you tell us what supports the long-term inventory to sales target? And finally, the yen has been weakening in recent months. I was wondering whether this has had any effect on the behavior of your Japanese competition. Have you seen them being more aggressive on prices or just being more commercially aggressive internationally?
Okay. Thanks, Arnold. On the SEK 3 billion program that we have in place, no, it's roughly half related to. It's not precise that, but I would say it's more towards the half related to the purchasing efforts and the new purchasing initiatives we've got, rather than two-thirds. On the inventory to sales target, yeah, it is up a bit just now. As we told earlier, I won't impact this currency on our absolute levels on inventory. It's more of an impact than it is on the sales side.
But also, I would comment that the acquisitions that we made of some other companies, if I exclude, that's something like, from my memory, 0.4% impact on inventory due to the fact that we put the inventories in, but we don't have the sales in fully of, for example, BVI, et cetera. But you're right, we're not in the right direction in total. We will take inventories down a little bit in the Q3 , a little bit more in the Q4 . The actions to get towards the target that we've got in place are the actions that we have underway, which is working with our suppliers on one side, working with our customers on the other side, working with flexibility in our operations there.
So there are specific actions underway to address that, but it isn't a short-term fix. It does require some changes in how we do things in an operation. Thirdly, the yen weakness, we don't see any dramatic change due to the yen weakness in the business. Many of our competitors in Japan need this, need the possibility to use the yen to help them and improve the profitability in total. So we don't see any dramatic change in the commercial activities from our Japanese competitors.
I have commented before, however, that we must realize that there could be more indirect impact that we must be aware of, in that as customers who -- or as companies who manufacture in Japan, in total of finished goods, become more competitive, the likelihood of them being supplied by local suppliers in Japan increases. So, like, that could have a likely impact on us there. Remember also our Japanese competitors have a global manufacturing footprint much more today than they had before. So it has been a change.
Okay. Thank you very much.
Thanks, Arnold.
Thank you, Arnold. And the next question, please.
The next question comes from Peder Frölén from Handelsbanken. Please ask your question.
Yes, good morning. My first question relates to the other line in the P&L. And basically, if you could elaborate a bit about the profitability on Peer and on the General. What’s in that number? Have you seen a sort of difference in profitability given the distribution market, maybe in some places? That’s the first question. The second question relates to market shares, and you commented that you don’t have seen any market share gains on the motive. But what about in the industrial field? I sense certain sort of aggressiveness from some players in the bearing field. And do you have some capacity in some segments, some places that you want to sort of take down?
Thirdly, detailed questions to Henrik. Maybe you could help us with the FX split by division, the SEK 200 million on EBIT in the quarter. And finally, on the FX hedge, so I'm a bit puzzled by the negative FX impact on the P&L in the Q4 . So is the outlook given on today's exchange rates or maybe the end date of the quarter, or have you changed the hedges? That's all for me. Thank you.
Okay. Let me take the other line there. I mean, Peer GVC are developing well for us overall. We're very happy with the development and the margins that they've got do support the group margins. No big changes in that at all, I would say, for them. They're not as exposed to distribution. They, they're more exposed to the OEM business there, but they're developing pretty well in total. In terms of market share issues, do we have any capacity we want to take out? Yeah, I mean, we're taking steps to reduce our capacity, but it's more to... Or to change our capacity footprint, but it's more to move capacity down to support our growth, and our localization activities down in Asia, than that. So I don't see any changes.
I don't see any real changes in the market share areas. We've been successful. I mean, it's a tough competition out there. We've been successful in gaining some businesses in some areas, there, and I'm sure there's some other areas where we've maybe not been as successful in keeping the business there. But generally, as a broad base, I don't see any big changes within that. In terms of the currency, I can throw a quick answer back at that now, maybe before I throw over to Henrik. The -200 is split roughly 60% into SI, 30%-35% into automotive, and then the remainder into RSS, from my memory. There, I don't know the exact split, but from my memory, it's in that area, roughly there.
In terms of the hedges going forward, I don't see any major changes there.
There's no major changes. Yeah, there's the same, same philosophy, philosophy that has applied before.
Okay. And the outlook is based on today's exchange rates, or is it the end of the quarter?
End of the quarter.
That's very clear. Thank you all.
Thank you.
Thank you, Peter. The next question, please.
Your next question comes from Colin Gibson from HSBC. Please ask your question.
Hi there. Morning, everybody. Three just detailed follow-ups, really, from me on, from other people's questions. First question, just really on the inventory cycle. So we've seen some fairly small scale restocking then in the H1 of this year. Where do you think that leaves us in terms of your inventory cycle and perhaps more importantly, your customers' inventory cycle? Second question, on the mix, effect that Tom mentioned, the intra-divisional mix effect that Tom mentioned in Q2, does that continue unchanged in the H2 of this year? Does that get better, or does that get worse? And then finally, just following up the Japanese yen question, is yen weakness the reason you haven't been able to raise list prices so far this year? And if it's not yen weakness, then is it, you know, is it just general market weakness?
How come that is affecting your ability to raise pricing more this time, it seems, than it did a few years ago, when volumes were also down year-on-year, but you were able to increase prices year-on-year, nonetheless? Thanks.
Mm-hmm. Inventory cycle, yeah, as you said, we put a little bit into to inventory and finished goods. It's more raw material and components that we put up our inventory there. And I think we're on a more normalized pattern, we expect to get inventory down a little bit going forward in the third and the Q4 . So I don't see any big changes in that area. There's well into a more normalized group, Colin, in doing that. From a customer's viewpoint, as I said earlier, I get the feeling that we're getting sort of towards the end of the destocking. I don't see anything, and that's mainly in America, any big steps further than that going forward. The intra, divisional intra business-...
Forward, at least in the Q3 , I don't see that as being a negative impact to us. I don't see—I mean, there's always there'll be different growth rates of each of the three business areas there, but it's not as significant as we saw there in the Q2 , where we saw +8 for auto, and if I average the Industrial businesses out, -6% in sales development for the industrial business. So it's quite a big, big swing that way. I don't see that back as we see it now for the Q3 there. It's a good question you put on the price. We've judged at the moment on pricing.
It's not to do with the yen, it's to do with the fact that we've judged at the moment with the current business environment in this time that this is not the time to move prices. It's a macro decision that we make. But of course, we are looking at how we see demand developing going forward as to as and when it is an appropriate time for us to look at things, but there's no decision made in that at the moment. So it's not to do with the yen. If I compare to previous times, I mean, we saw big drop-offs in previous time in terms of demand. But at that time, we also felt that the environment was somewhat different, and our ability, or not our ability, our, our...
Yeah, what we wanted to do from a pricing viewpoint. At this moment in time, we've really felt, and we made a judgment call, our executive team, that we don't think this is the right time to be moving prices.
Okay, thank you.
No problem.
Thank you, Colin. And next question, please.
Your next question comes from Aaron Ibbotson, from Goldman Sachs. Please ask your question.
Hi there. Good morning. I have three questions. The first two are related. First, I know you talked a lot about it, but I'm trying to get my head a little bit around your Q3 guidance. You're saying flat demand. To me, that sounds pretty positive if I compare it to sort of previous seasonal effects. I know the seasonal effects have gone down a bit, but your Q3 is still being down sequentially for the last few years, even in the very good years. So should we read this as seasonally adjusted flat demand, or is it, is this actually that you're expecting flat demand?
And related, second question was just, if you could elaborate a little bit on sort of the demand levels you saw going in towards us getting out of the quarter, i.e., it seems to me that June came out quite well. Did I understand that correctly? And then I have a question on inventory, but maybe I start there.
Okay. If I take the three Q3 guidance, we always take account of the seasonality when we're looking at things there, and the seasonality is somewhat less for us in total. So the flat demand there, of course, we have difference in number of days within there. The flat demand relates to a daily rate. That also applies to manufacturing, for example. So if you take manufacturing, although we'll keep it at the same level, it's a daily production level, which means in absolute terms, the manufacturing will be lower. In real actual volume production, the manufacturing will be lower in the Q3 than the Q2 , but on a daily rate, it will be roughly the same there. So it's seasonally adjusted there.
June, no, June was not any particularly better than we saw in the April-May average in total there. So no, that was not the factor of that. So there wasn't a dramatic upturn in demand at the end of the quarter there in total. I mean, there's always differences month-on-month. There isn't any dramatic change at all in that, Aaron. What was your question on inventory?
Okay, thank you very much. So my question on inventory was basically, if I look a little bit big picture of how it's developed over the last year or two years, I can't help a little bit that it feels like we're sort of back where we started after talking about underproduction a lot throughout 2012. And if I look at your Q4 rolling sort of inventory rather than the specific quarter, i.e., inventory to sales, you're ticking up now for the first time in over a year. So should we expect you to try to underproduce if we see a recovery throughout H2 and into next year constantly?
So I know you've semi-answered the question before, but it feels to me that this inventory move, if I put it together over the last few quarters, we really seem to be ticking up on a sort of Q4 rolling basis, which it surprises me, considering how much we talked about underproduction, the commitment last year to getting this level down a little bit. So if you could sort of develop that a little bit.
Yeah. Aaron, if you look at it, the inventory increase, as we've highlighted, was predominantly built on two factors. One was currency, and the second was raw material and components. It wasn't production related. It was raw material and components to let us run the Q3 manufacturing level at the daily production level, which is similar to the Q2 . So it was not an overproduction issue. Yeah, there was 25% of the roughly of the inventory increase in fixed currencies due to normal way, or let's say, production finished goods, but that's nothing dramatic in the total picture that we've got in inventory. So that was more raw material component issues. Then going forward, clearly, in the Q3 , we normally take a little bit out. So we're into a more normalized relationship.
We normally take a little bit out there, so I wouldn't look at that as being, in terms of inventories out, I wouldn't look at that as being specifically an underproduction per se. That's outside of the normal pattern that we would see in a Q3 .
If you go into a decent recovery over the next three, four quarters, you know, are you planning to underproduce a little bit to get sort of your Q4 rolling down at least under 20 again, or?
I mean, our target over time is to over the few years to get down to 18. I think last year we did a major correction, which was necessary because the year before, we did the wrong thing. We overproduced dramatically. So we're now into the more normal pattern that we will do to try and bring the inventories down.
Okay, I'll settle with that. Thank you.
Thank you. The next question, please.
Your next question comes from Martin Wilkie from Deutsche Bank. Please ask your question.
Good morning, it's Martin Wilkie from Deutsche Bank. Just a question on China. We've, we've seen a lot of the macro data, probably on balance, weaker than we'd expected, during the quarter. But I wonder if you could just sort of step through what you'd seen in China during the quarter, thanks.
Sure, sure. And I think that's a good point you raised there as well. That a lot of the data coming out is weaker today, the macro data, than what we've seen before there. For us, it is a mixed picture in China. We get a good Automotive business, like Car business, I would say. Car business is going very well for us, and we continue to grow well in that area. The Truck business is a little bit better, but it's small still for us. Vehicle Service Market was not very good for us in the H1 of the year. So the Vehicle Service Market demand in China, I mean, the Vehicle Service Market was good in other areas of the world.
It wasn't good in China for us, and that may be an indication of the general demand situation that we have within there. As I mentioned earlier, the railway business was not good for us due to the specifically freight car tenders not coming out. There's normally two tenders in the year, one in the H1 , one in the H2 . We didn't get the H1 tender, so maybe that's an indication there's some cautiousness taking place also within the railway area there. Renewable Energy, we see an improving business, but I've got to say, it went down dramatically for us, and we see improvement, but it's still lower than where it was at its peak there. And that probably is impacted also by end of destocking all the way through the pipe as well there.
So in the General Industry, yeah, a little bit better in the General Industry market, but not dramatic. So it is a mixed picture down there in China in total for us. So it's something that we do need to keep monitoring as we go forward. But it's not... I've got to say, it's not weakening for us in total. In fact, the signs are that it's, as an average, as we go through it, may get a little bit better in some of these key industries for us there. But it's not weakening for us in total at this moment in time, but we're still a little bit down year-on-year.
Okay, that's very helpful. Thank you.
Thanks, Martin. The next question, please.
Your next question comes from Sébastien Gruter from Société Générale. Please ask your question.
Hi, good morning. Sebastian from Soc Gen. Just one question about the inventory cycle again, given the increasing Q2 demand versus Q1, I mean, as for your sales. I mean, how confident are you that your customers have not built up inventories as you kept down in the quarter, out of the summer and a potential rebound in the overall industrial production in H2? What gives you that confidence it's not restocking just ahead of what people expect a stronger H2?
That's a good question. I mean, of course, we can never guarantee that that has happened, but we don't see any signs of that from a customer viewpoint. We don't see in the discussions we've had any signs at all that customers have been restocking or stocking up significantly that we can see. So, we don't see signs of that. Of course, I can never guarantee that, but we don't see signs of that from the discussions we've had with customers in our organizations. We don't get any indications that that is the case.
Okay, thank you.
Now we take the last question.
Thank you. Your last question comes from Helena Söderpalm from Reuters. Please ask your question.
Yes, good morning. I was just wondering, I know you've touched upon this a little bit already, but if you could give some more color on automotive and where you see the strongest development, and maybe from which manufacturers and so on?
I don't want to go into specific manufacturers at all, but I would say in our Automotive businesses, you can see our Car business has developed well, basically in all regions of the world. Europe was not down. It was expected at the start of the quarter to be down and wasn't down there, and we did a little bit better than the market, but I think that's due to mix of vehicles much more. North America continued well, but production over there is good, and Asia was particularly good for us, especially in China. In the truck side, yeah, what you see the development for us in trucks is that European truck market was somewhat better for us and a little bit better than we expected going in. India was improving for us also from a truck viewpoint.
It dropped off a lot, though, during the last year or so. So even both Europe and India, in terms of trucks, is at a still lower than the peak levels for us, but they are showing improving trend. And of course, the last area, of course, is the spare parts business, the Vehicle Service Market. But there also, we put a lot of actions in place. I think the end market is okay, but we've got actions in place before that.
Okay, thank you very much for that.
No problem at all.
Thank you, Helena. Thank you, thank you, everybody, for joining this teleconference. If you have further questions, I will be available half after this call.
Thank you very much indeed, everybody. Thank you, and have a nice summer.
Thank you.
Thank you very much.
Bye.
Bye-bye. Bye.
Thank you. That does conclude the conference call today. Thank you for participating. You may now disconnect.