Good morning, everybody, and welcome to this conference call for the presentation of SKF's first quarter results, 2013. This teleconference will take an hour. Here from SKF are our President and CEO, Tom Johnstone, our Executive Vice President and CFO, Tore Bertilsson, Henrik Lange, Executive Vice President and new CFO as of May 1st, Ingalill Östman, Senior Vice President, Group Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by presenting the results, and then there will be a Q&A session. Over to you, Tom, please.
Thank you very much, Marita, and hello, everybody. Earlier this morning, we released our report for the first quarter of 2013, and I think that against the backdrop of a drop in volume of nearly 9%, we delivered a good, solid result. When you look specifically at the sequential operating margin development in the first quarter compared to the fourth quarter last year, and it was improved by over 1 percentage point, you can see that we're going a step in the right direction. Our cost reduction actions are working, and this, combined with a little better volume in our manufacturing, gave good results despite the currency headwinds that we're facing.
From a macro viewpoint, there are still a lot of mixed signals out there, and it's difficult to get a really good reading of where the global economy is heading. When we look specifically at the demand for SKF, we can see that it was a little lower year-over-year than we expected at the start of the quarter, due primarily to weaker business in the Industrial arena, especially in North America. However, I feel that unless there are any other major shocks, we are at a turning point in the global economy, and I expect to see signs of some improvement as we go through the second quarter, which basically means a better second half of the year. I'll come back to that in the demand situation and outlook a little bit later.
During the quarter, and at the start of this quarter, we continued to take steps to ensure we will, over time, reach our organic growth target and our profitability targets . We completed the acquisition of BVI, and I had the chance to visit their main operations and meet their team. I must say, I'm even more convinced today that this will be an excellent addition to SKF. They have some really great technologies, both available now and in their development, and this, combined with our existing technologies, will make us a much better partner for the marine industry.
We gained in the quarter a number of new businesses, as you can see in the report, with companies like Pratt & Whitney for main shaft bearings for aircraft engines, with with Nordex, for both bearings and lubrication systems for wind energy, and for a very big and important steel producer, where unfortunately, I cannot give you their name. I can tell you, though, this is a very important long-term contract covering nearly all our technology platforms and a very good business the team have done. If you remember, at the end of last year, I said that our automotive team had had a very successful year in gaining new businesses. In fact, last year was one of their best on record.
Well, this trend has continued at the start of this year, and they've gained a lot of new orders, especially for hub bearing units and for suspension bearing s. And in the report, we particularly highlight the order we've taken for hub units from Great Wall, and they're a Chinese car producer, and we'll make that product in our Chinese manufacturing operations. So they're just some of the orders we've taken. It's been a good quarter for taking new orders. And although I do not like to talk much about order intake and the order book in total, I can say, though, it has been improving a lot in the quarter, and our order intake in the quarter was ahead of our sales.
Other activities we took to strengthen SKF. We opened two new operations in India, one which will manufacture bearing housings in our existing factory, and that will help us better support our customers with these housings from local suppliers. We also opened a new laboratory for lubrication systems, and we put that in our global technical center in Bengaluru, in India. At the start of this quarter, we attended the Hannover Messe, one of the largest Industrial fairs in the world. At that Messe, we launched a number of new products, some of which joined the Beyond Zero portfolio, such as the Extended Life spherical plain bearings , which are used in industries such as construction, farm, and forestry. We launched a new permanent magnet motor and active magnetic bearing package for aeration blowers and wastewater plants.
Both of these, the Extended Life spherical plain bearings and the permanent magnetic motor, will give our customer really, really great energy savings. In addition, we launched SKF Insight at Hannover Messe, which is a real breakthrough in improving machine performance and reducing unplanned downtime. We've been able to develop a wireless sensor, which is also self-powered. This means it does not need any cables or any batteries to work, and it will enable the sensor to be installed in much more difficult locations than we could previously install. When we combine this new sensor with the software that we have, we will be able to monitor performance and we'll be able to detect any stresses in the bearing and the surrounding machinery, thereby enabling us to help the customer adjust the operating window before damage has developed in the unit.
We're working with pilot customers in wind energy, railway, and the steel industry just now and now, and then we will roll it out to other industries. As I said, this is a real breakthrough, and we've now made our bearing, not only the heart of the machine, but also the brains. So from an activity viewpoint, in the first quarter, on orders, on new investment, and in new-launching new process solutions, we had a very successful quarter. Now let's go back to the financials, and let me first start with some of the high-level figures before we go into some detail in the demand development. Our sales were a little above SEK 15.1 billion, which was down 10.5% in the quarter in Swedish krona and some 6.5% in local currencies.
We must remember, when we look at these percentages, though, that we had a record for first quarter sales last year, so the comparison is quite a tough comparison. Our automotive business, it was down some 4%, mainly due to Europe. Our RSS, Regional Sales and Service , was down nearly 8%, with a weak development in many regions, except Latin America. But the biggest decline was in Strategic Industries , which was down over 12% and basically down everywhere globally, geographically. The only real global business in Strategic Industries , which developed well, was Aerospace. All the others showed drops. I'll come back to that in more detail a little bit later. From a geographical viewpoint, Latin America continued to show growth and was up 8% and a little bit better than we expected, but we declined in all other regions.
Europe, North America, down 10%, Asia, down 7%. So if you look at the total year-on-year development from a regional viewpoint, overall, I'd say Latin America was a little better than we expected at the start of the quarter. Europe dropped actually a little bit less than we expected, Asia, a little bit down, but the main deviation was North America. So let's have a look at the regions there. In North America, our automotive business was in line with our expectations. Light vehicle production was relatively unchanged in the first quarter this year. Our sales were slightly down, but that was due to mix, so it was relatively in line. Heavy truck business is down a lot in North America, but as you know, this is not a big business for us.
Our Vehicle Service Market in North America was down a little bit, but I see some positive signs there, and I do know they had some impacts from the, from the early Easter in their business. If I switch to the Industrial arena, that's where we saw lower sales to nearly all industries. Off-highway was down. Energy was down a huge amount. Industrial division, distribution, sorry, was very weak for us. And we also saw some slightly lower sales to general industries such as pumps, motors, compressors, etc . In North America, I believe we saw also some impact from more destocking, especially from our distributors and in industries such as off-highway. But I also think there was a lot of cautiousness at the start of this year.
Going forward, I don't see a recovery in the second quarter, but I do see a relatively stable development, both sequentially and year-on-year. In Latin America, we saw continued very positive developments, and a number of markets showed good growth for us. Peru, Colombia, and the big markets of Argentina and Brazil all developed well. Let's switch over to Asia. Asia, we're down about 7%, but I can say we've seen an improving trend in China, but India remains weak. Let's look at China first. Our sales to the car industry in China developed very well in the quarter. Sales to the Vehicle Service Market were also pretty good and pretty stable. We see an improving demand picture in China when I talk about renewable energy customers, which, as you know, has been weak for us since mid-2011.
Our railway business was down in the first quarter in China, but that was basically due to no major contracts coming through on freight cars . This should improve in the coming quarters as new tenders come out. Sales to Industrial Distribution also, which as you know has been weak for some time, has stabilized there. So overall, for China, when you look across, I would say we see a more stable business and some positive signs that that will develop positively better as we go through the year. In India, however, we still have some concerns. Basically, all major industries in India showed declines, with the biggest drop being in renewable energy, but also industries off-highway and the general industry were weak in India.
Sales to truck industry and cars were down in India, but the sales to the Vehicle Service Market and to our two-wheeler business were developed positively. Time to recovery, it's not showing the same recovery as we've seen in or signs as we've seen in China. If I switch to some other markets in Asia, I can say Indonesia, good positive trend in our two-wheeler business in Indonesia and a good development in our sales in Korea. However, Southeast Asia and Australia has overall been pretty sluggish at the start of this year. Let me turn to Europe, where the development, as I say, was not as bad as we expected, yeah. In Northern Europe, our business was weak in Germany and, of course, the Nordic countries.
Southern Europe remains weak, I've got to say, although France has shown signs over the last couple of quarters of staying at that low level, not, not weakening further. East Europe developed well overall, but markets like Russia and CIS were doing well for us, with other markets like Poland, Czech Republic, and Turkey, actually, did not develop so well. From an industry viewpoint, if we exclude Aerospace, I would say, which, which grew, then all other major industries declined year-on-year and sequentially. This means we saw declines in general industry, pumps, compressors, etc. , in heavy industry, metal, cement, paper, off-highway, but also saw declines in the Industrial Distribution . Saw a big decline in sales to the car industry, car production was down some 12%-13%, and we were broadly in line with that. Our sales to the truck industry was down, and the.
Our Vehicle Service Market , we saw a slight decline there, but again, we see some impact of Easter there. So let's have a look what we're in the regions. I'd say overall, for the group, volume was down 8%-9% in the first quarter, compared to last year. Our production was lower compared to the same quarter last year, but slightly higher than the fourth quarter, as we told you we would do. Inventory finished at 20.3% of sales, which is up from just below 20% at the end of last year. But this was primarily due to the inclusion of BVI and Blohm + Voss Industries in our inventories. We had a little more raw material in the inventories, but mainly it was the BVI change.
With no change in finished goods, so no, we didn't produce ahead of sales. We produced broadly in line with sales. Let me turn to our profit development. Our operating profit was SEK 1.48 billion, giving a margin of 9.8%. If we exclude, if I put the other SEK 250 million one-offs back in, then the profit was SEK 1.73 billion, which is 11.4% margin. Now, when we compare that to the first quarter last year, we can see that the margin dropped a little more than the one percentage point if I exclude the one-offs. And then, what did that?
Well, we nearly, as you saw, 9% lower sales volume with lower manufacturing volume, and of course, we had the currency, and I'll come back to currency a little bit later. If I look sequentially, though, what you can also see, though, is that we had some improvement, some 1.2 percentage points. Again, if I clean them both from one-offs. And this was influenced as a result of, of course, slightly higher manufacturing volume, but also the cost reduction activities, which we have. Cost reduction activities are starting to give us some benefits, and my estimate is in the first quarter this year, we had around SEK 100 million of benefit from our cost reduction activities that we've already taken, and that if you compare it to last year.
A little bit less if you compare it to the fourth quarter, but 100 if you compare it to, to last year. As we advised, or just a few weeks ago, we took an additional cost of SEK 250 million in the fourth quarter as part of our announced program. This impacts approximately 400 people through early retirement programs, voluntary redundancy programs, and that's mainly in Germany and India. So the 400 people, roughly half is in Germany, a little bit less than half is in India, and then some in other places. The benefit from this will be around SEK 100 million when fully implemented. We'll have it fully implemented actually from the third quarter this year, so we'll start to get that benefit from there.
Going forward, we expect to take additional charges for the program during this year. Now, we expect in the second quarter, we will take something similar to what we took in the first quarter. So something around SEK 250 million in the second quarter. We're still working on programs, but I would expect it to be that. We will give you more information once we know exactly. Price mix was positive in the quarter. Of course, it's a little lower than normal, but it's in line with what we indicated. All three business areas had positive price mix, but the interdivisional mix was a little negative for us, as you can see, with the automotive dropping less than the two Industrial areas. Turning to currency.
Of course, when you look at the figures, the negative currency impact was more than we expected at the start of the quarter. We had an impact of around SEK - 120 million, versus SEK 50 million, which we'd forecast. So that was a heavier headwind than we expected going into the quarter. And it was also a little negative, I can tell you, in this first quarter this year compared to the fourth quarter last year. Why? I think you've all seen the trend in currencies, which is related to the strong SEK that we've seen, there has impacted our currency, or has impacted the currency.
We expect now the currency for the full year to be some SEK -550 million for us, and that's compared to something like SEK -250 million that we thought a quarter ago. We also, as you've seen, expect some headwind of about SEK 200 million in the second quarter. Turning to cash flow. Cash flow was slightly negative if we exclude the acquisition of BVI, and that was a little low. But the reason for that is mainly due to an increase in accounts receivable, and that you can see in the balance sheet there. Due to the end of the quarter being at the Easter break, we saw an increase in the number of customers who didn't pay just before the Easter break and actually paid after the Easter break there. So it's not bad there.
It was a move of the payments from what we should have got end of March into getting it in April there. And that's what impacted primarily the cash flow, excluding the BVI acquisition. So let me move on now to the outlook for the first quarter, and I stress this is the demand for SKF, not an outlook in the market. We expect to see relatively unchanged demand sequentially, which still means lower year-on-year. Basically, the only region where we expect to see a positive development sequentially and year-on-year is in Latin America. In all others, we expect a flat sequential development, with Europe also being lower year-on-year, while Asia and North America should be relatively unchanged.
When it comes to the business areas, we also expect a flat sequential development, but the Industrial businesses, both SI and RSS, will be lower year-over-year, while automotive will only be slightly down year-over-year. From an industry viewpoint, basically, Aerospace is expected to continue to develop positively, as will two-wheeler and electro. And you can see that energy, which is renewable energy, we expect a positive sequential development, and that is driven by China, where, as I said earlier, we have received additional orders, and we can see an improving activity in renewable energy in China. All other industries are expected to stay relatively unchanged sequentially.
So the outlook is for a relatively unchanged demand situation sequentially, which supports our view that barring any other major economic shocks, I think we've stabilized at this level. For the coming quarter, though, I would say the risk, I think, is more on the upside than on the downside. And I think as we go through the quarter, we need to monitor that, I think, into the second half of the year as well. For manufacturing, we will keep the manufacturing level broadly at the same level as the first quarter, which means it will still be lower year on year. Inventories, no big change. It may be slightly up, but not dramatically up at all. Before I close, I'll turn to raw materials. Raw materials actually are slightly lower at the moment, the cost for raw materials, compared to last year.
I think that will remain the same in the second quarter. This is generally due to lower surcharges that we're seeing in our business. We'll get a little bit benefit from raw materials. As usual, let me give you my view. What does it mean when looking at the second quarter? Well, it's another tough comparison because actually, the second quarter last year was all-time record sales for the group, in total. Volumes in both sales and manufacturing will be lower in the second quarter compared to the second quarter last year, but they'll be relatively in balance, so there will be no over absorption or under absorption. We face a big currency headwind of SEK 200 million , but we have some, we'll have some positives from our cost reduction program and a little bit in raw material.
Cost reduction program has become very important for us, and we expect it to contribute more in the second quarter than it did contribute in the first quarter. I think, in closing, I think that when you look at the uncertain business environment, we had a good first quarter. We've taken some important new orders, continued to invest in our business, and made an important acquisition. Now, before I hand back to Marita, I'd just like to make another comment, if I could. Today is the 72nd quarterly report of a gentleman called Tore Bertilsson, and who this is his last quarterly report as CFO of the SKF Group. He'll stay on as Executive Vice President, and then from first of May onwards, Henrik will do it.
I just want to take the opportunity when all of you are on the line as well, to sincerely thank Tore for an outstanding job in surviving 72 quarters and 40 of them with me. So, he's been a great contributor to the development of SKF, and we'll have a chance to say goodbye to him properly as a management. But I wanted to take the opportunity in this call just to register my sincere thanks to him for all he's done and for the contribution, and I'm sure you echo that. Thank you, Tore, and look forward to working with Henrik, who most of you know, and who will—i t's great to have him there because he comes in with both the finance background and the business background.
So going forward, you'll need to listen to both Henrik and myself. So you, and we miss Tore in that. With that, back to you, Marita, and over to questions.
Thank you, Tom. Now we forward to the Q&A session. Please go ahead with the questions.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from the line of Andreas Willi from JP Morgan. Please go ahead.
Good morning, everybody. Couple of questions from me, please. The first one, you generally sound more optimistic, talking about more upside than downside to the business from now on. Other than maybe the little bit better orders in Q1, what do you really see to give you that increased confidence? If you look at maybe outside just the specifics like wind, what are you looking at in terms of macro indicators, and so to give you that improvement in confidence? The second question is on the cost savings, in general, how do you expect the SEK 100 million from Q1 to ramp for the rest of the year?
If you look at the kind of payback on the announced charges, if you take SEK 250 million savings to get a SEK 100 million, SEK 250 million charges for a SEK 100 million savings, seems quite a poor return on investment in terms of restructuring. Is this specifically something for this program, or should we expect that kind of payback, and also that means a level of charges going forward? Yeah, that's it. Thank you.
Thank you, Andreas. Thank you. Yeah, let me take the second one first. I think you're right. I think the payback in this one is not so, so, so good at all, really. And that is actually because of where the mix is with the—i t is an early retirement and the voluntary program, and since half of the people are in Germany, that's a little bit heavier cost for us compared to the total program. So this is a tougher payback than we'd expect going forward. If I then look at how do you expect it to come in? You will get the full benefit of that SEK 100 million on an annualized basis kicking in from the third quarter.
We'll see some of it in the second quarter, but you'll get the full benefit from the third quarter. From the third quarter forward, you will have the full benefit from that program, and you will get the full benefit also from the 150 program that we launched in the fourth quarter there. These two programs will, from the start of the third quarter, be doing an annualized benefit of 250, the two programs we've done so far. If I switch to the why a little bit more optimistic, I think it's interesting. We have seen the activity level coming up a little bit more. We've seen orders coming in, which will give us benefit in the second half of this year in a number of our industries, there.
And I think it's also, though, due to the fact that we have been impacted, I think, somewhat more vis-a-vis destocking and other activities over the last 2-3 quarters, and we do see our activity coming up. And if you actually look at macro figures, with the exception of Europe, you do see a little bit more optimism coming with GDP development, Industrial production development, PMIs, etc . But it's, we're not out of the woods. I just want to stress, that's why we don't see it in the second quarter, but we do see signs in what we're doing with our customers. We're much more active in the market with our customers.
Visits have gone up, so we're seeing more signs of orders and activity from our customers, which will not have a big impact in the second quarter, but as we go through, it really, if these carry through, we expect it to impact the second half of the year. And we see some macro signs that support that as well.
Because a lot of the PMIs are now lower than they were three months ago.
Yeah.
That's why I'm asking.
For sure. But I think also with issues like destocking and other things, that had an impact on us, and I think we were heavier hit. If you actually look at our volume development and compare it to Industrial production, I think we're now in the fifth quarter, where we've underperformed Industrial production as well.
Thank you very much.
Thank you, Andreas.
Thank you, Andreas. The next question, please.
Thank you. The next question comes from Ben Maslen from Bank of America. Please go ahead.
Yeah, morning, everyone. Morning, Tom, Marita. Congratulations to Tore. Three questions, please. Firstly, Tom, maybe just following on from that last one. I mean, you have been underproducing and under delivering against Industrial production. As you say, many of your customers have been destocking. What, what visibility do you have on how far through that process they are? You know, I guess, where are their inventories for your larger, your larger customers relative to, you know, what is a normal level? That's the first question. And then secondly, just on working days, does that have any impact on your first quarter sales and production? And how does that reverse into the second quarter? Does your guidance take that into account?
And then finally, on the yen, which is very weak, there's been obviously speculation in the market that that will be a disadvantage for you competitively. Just what's your view on that? Thank you.
Good. Yeah, destocking is a really good question, Ben. It's hard to see how it can continue, to be quite honest, because in the discussions we've had with our big distributors, etc. , we think now they're towards the end. But I've got to say, a quarter or so ago, I felt that we didn't be a lot more, and we did have some impact over there. But when you look through, I think we are pretty much towards the end of the destocking. I think the impact is going to be minimal going forward there with it. So I think we're more in balance, and as you like to say, we're more in balance ourselves as SKF as well.
In the working days, one and a half days different, roughly in the first quarter of this year versus the first quarter last year. So of course, it had a little bit impact on our volume, as well. I think the Easter bit is difficult to judge as an impact, but we knew that was happening anyway, so it's not a surprise to us. Going to the second quarter, yeah, I mean, we take account of that. I think the guidance is more like a volume outlook. So if there's one or two days more in the second quarter, the volume will be a little bit better, second quarter versus first quarter, but that is due to the days there. It's relatively unchanged from a daily volume rate.
Yen, by the way. Yen, yeah. I mean, I think there's a lot of speculation on the yen. We must remember two things. I think firstly, our competitors in Japan, they have changed their footprint in manufacturing over a number of years. So compared to 10 or 15 or 20 years ago, they have a different manufacturing footprint. They have a lot of manufacturing in other areas as well, for example, in China, but also in other parts, which means also when they import products from China into Japan, they have a headwind now. So I think that's one important point. Secondly, I think when you look at the result development, then, they need the extra currency to help the development of the results.
So we don't see that having a big impact on the competitiveness in the market, whatsoever. We must remember, if I look at, and I'm right in the figures, I think the Japanese yen to these quarters back to where it was about four or five years ago, roughly, from my memory. It isn't dramatically different. We've been through this before, only just a few years ago, and we didn't see that impact.
Got it. Thanks, Tom.
Thanks, Ben.
Thank you, Ben. Next question, please.
The next question comes from Erik Golrang from ABG. Please go ahead.
Thank you. Good morning. Two questions. The first one on, on, on guidance and the development in North America. You have now three end segments pointing higher going into Q2, the rest flat. Was it a close call to say slightly up for the, for, for the quarter? And if so, does that relate to some sort of fear that North America, which deviated quite a bit from your expectations, would be weaker again into, into the second quarter? And then the second question here on automotive, quite a sequential improvement here compared to the fourth quarter, and the level already above what I think you talked about as a target for the full year. Could you give some more details on the improvement there compared to the fourth quarter? Thank you.
Let me take automotive first. I mean, clearly. If you look at it, the fourth quarter was a low quarter. We said it was a low quarter. There were a lot of things that hit brakes there as well, and there was a lot of action underway to do it. They're still a little bit behind where they were a year ago, but they're better at the 4.1 if you take the one-offs away. What's that coming from? It's a lot of it is. Well, first of all, they've got a little bit better volume than the fourth quarter because we're not destocking anymore, and they're not impacted with that, so better volume absorption in their manufacturing.
Secondly, they had some operational issues during last year, which we'll get their arms round about. And I said that during this year, as we went through this year, we would see, for example, Mexico getting better, and it is getting better, for them. There's still a bit to go on that. Asia, there's still some ramping up issues that will take a little bit longer to come. So a number of operational things or steps have been put in place in the middle of last year is starting to come through in automotive, but they did have a little bit of volume, as I say, in their manufacturing compared to the fourth quarter because they're not, not destocking.
Yeah.
When I switched to the arrows, it's a good question. Was it a close call? You know, arrows are something that's not very scientific. You've got to look at the trend development, look at the macro, look at the orders we see, look at the bottom up from our team, etc . So we felt at this point that to put the arrows up, we don't see enough evidence that that was going to come through to us at this moment in time. However, we do see evidence that the activity level is improving with our customers that we see some more orders are coming in.
So I wouldn't say it was a really close call, but it's, but that's why I say the arrows are flat, and the risk is probably a little bit more on the upside than on the downside. But it wasn't one that said, should we have it up or not? It was more, it's going to be flat, but there's a risk. I see the opportunity is more on the upside.
Thank you.
Thanks, Erik.
Thank you, Erik. Next question, please.
Thank you. The next question comes from the line of Guillermo Peigneux from UBS. Please go ahead.
Oh, almost. It's Guillermo Peigneux from UBS. Congratulations, Tore. Good morning, everyone. I just want to ask three questions. First, on regional sales and service margins, a bit weaker than last year. Is this just related to what you just commented on distributors destocking? And should we see those distributors just stopping the destocking, those margins will improve from here? And then second, question, Vehicle Service Market . Can you guide us as to how this division has evolved through the quarter compared to last quarter, which you mentioned was, going through some problems? And then last question regarding trucks, obviously, from slightly negative to flat, could you comment on the, whether basically truck bearings are actually higher margin for you on the automotive segment?
Whether that actually would mean that your mix in automotive is also getting better through Q2 or Q3? Thank you.
Thanks. Thanks, Guillermo. I don't know why Tore gets all these congratulations. Is that because you look at the quarter report or you're getting away from me? Anyway, sorry, Guillermo. The questions. Yeah, trucks, yeah, there's a change trucks to your question. I think actually, trucks for us in the quarter was not as bad as we thought it would be, going to the start of the quarter there. So that's why we've changed this to quite well. And that will, combined with a slightly better VSM, be slightly positive for the automotive business, in, in total. From a Vehicle Service Market business, yeah, it developed relatively, okay. That said, we saw some—i t's quite good VSM in Latin America, Vehicle Service Market, Latin America, and Asia was okay.
Europe wasn't brilliant yet, but there's good activities underway with the launching new products, with the working with distributors, with more sales activities in the marketplace. That says to me that it's going to move in a positive trend, both in Europe and in North America. I think there was some impact, a little bit, just before Easter on them. They're the only bit I think had a big impact on the plan due to Easter, so it wasn't important for the group that way. It dramatically changed from what we expected, but they had something there. So I think VSM is on the right track, to be clear. RSS, yeah. I mean, RSS, the volume, our sales are down about 8%, so their margin came down a little bit.
They don't have the swings in margin that the other two business areas have because they don't have the manufacturing, but they are impacted by mix of business there. For example, if Industrial distributors are not good, and especially if their sales are not so good in, for example, North America, Europe, then that impacts them a little bit more, but that was what impacted them.
Do you expect, like, given the current indicators you're looking at, that can sort of improve a little bit from here?
Yeah, I think RSS will improve. If we look at it going forward, we're not seeing a dramatic change in the second quarter, but as we go into the second half, yeah, RSS will improve a little bit.
Thank you.
Thanks, Guillermo.
Thank you, Guillermo. And the next question, please.
Thank you. The next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Good morning. Thank you for taking my questions. Just two quick one. Firstly, on cash, does the early Easter effect and receivables effect explain the whole of SEK 800 million working capital ramp up in the quarter? And I guess the obvious follow, follow-up on that is whether it's all flowing back in April already.
Yeah, yeah. I mean, it was— I mean, we saw actually, I think the total accounts receivable is up with something like SEK 1.2 billion, etc. , in the quarter, from my memory. But some of that, of course, related to currency and other things. But yes, that, that's what impacted it. Yeah, absolutely. Is it all in- I mean, we don't have an increase in bad debt or anything like that. What I could say is an important point on accounts receivables, is we do see a trend that our number of days in accounts receivables has gone up over a number of years from 59- 60- 61. And that's not due to the fact that we have bad debt to that, because that's not changed. We've got a lot of focus on that.
It's due also to the fact of the change in the mix of our business, means that we're growing more in markets where there is more credit days there, and that has an impact on us as well. But specifically, back to the first quarter issue, yes, the majority of that comes in April. The only thing I would guide a little, and I don't know if this will happen, is it could well be that the same trick applies by customers at the end of the second quarter. We'll be watching that very closely, because the end of the quarter is over a weekend this year. So I need to watch that very closely. But you should note that if it doesn't happen, we'll have a benefit from that.
If it does happen, we will not have a negative of it because we've already seen the negative already there. So I don't expect it, and we'll be very vigilant for it there, but it's something we'll keep a close eye on.
Got it. Thank you. And the second question on restructuring. That sort of SEK 250 million annual savings that you're achieving now, I mean, if you take a normal restructuring year or a normal year, sorry, for SKF, what would be the kind of the run rate of savings you were generating, say, in the previous upcycle or coming out of the 2009 downturn? Just trying to gauge what was kind of whether this is a gross number or this is incremental to your previous activity. And then the second, sort of, follow-up on that is: How do you expect that to ramp up in 2014 and 2015 to hit the SEK 3 billion target?
Sure, sure. First of all, the SEK 250 million run rate from the two announced restructurings, we will hit from the second quarter, from the third quarter, sorry, from the third quarter, not from the second quarter, there. We'll have some of it more in the second quarter, but we'll hit that run rate from the third quarter there. Yeah, normally in a year, we would have savings and other things from other things that we do, where it's much less than this. It's probably, yeah, SEK 100 million or so, that we would have. So this is, this is better, than this, unless you have specifically announced programs there. Regarding how the total will ramp up to the SEK 3 billion. Remember, the SEK 3 billion savings comprises three blocks.
It has got one block, which is restructuring, which is what we're talking about just now. It's got one block, which is the change of how we run the group from a support function viewpoint, optimization, etc. , how we manage the asset and can utilize the asset, and the third block is purchasing there. So it is back-end loading. The other two points will take some time. I don't have a plan to give you, or I don't want to share a plan to with you just now as to how I see that coming, because we do need to finalize the discussions, especially on the restructuring, and we do need to get all the other elements in place from our purchasing in other areas there.
But it will ramp up bit by bit as we go through, and we'll tell you as we get each program, what it means and when you'll get it.
Very helpful. Thank you.
Thanks, Andre.
Thank you, Andre. Next question, please.
Thank you. The next question comes from Lars Brorson from DNB. Please go ahead.
Thank you very much. Good morning, Tom. Just for clarification on your demand outlook for North America, I can appreciate you are in Q1, obviously up against a relatively challenging year-over-year comparison. But as you move into Q2, the comparisons get a little easier. You were very cautious in your commentary around the destocking from distributors in Q2. Can you give a little more granularity of how you see that pan out as you move into the second half? And really, why sort of greater optimism around particularly the U.S. market doesn't translate into perhaps more stable channel inventory levels and perhaps a restocking tailwind as you move into the second half. Thanks.
Yeah, that's a good question. Now, I think the destocking, as I say, is mainly through— I can't rule out there'll be a little bit in the second quarter, but it's mainly through. So we will get some benefit of that and correction of that in our business as we go forward. To go to a restocking, I don't think you will see. I do not think you will see a restock, but what I think you will do is see an end of destocking, because we can see that distributors are becoming more efficient and effective in how they're doing the business. So I don't think they will put the stocks back in, that they've taken out, assuming market demand is equal, so that ratio, there will stay.
So from that viewpoint, I don't think you'll see a restocking, but you'll see an end to destocking as you go into the second half of the year. Absolutely.
And that goes for both Automotive and Industrial divisions ?
Yeah, I would say in automotive, there isn't a big issue on destocking for them, to be clear. The Vehicle Service Market distributors have always been, especially in North America, pretty lean in how they manage their inventory. So they have it there. It's more in the Industrial side, in North America.
That's clear. Thanks.
Thank you very much, Lars.
Thank you, Lars. The next question, please.
Your next question comes from Arnaud Brossard from BNP Paribas. Please go ahead.
Hello, everyone. Hi, Tom. First, on the automotive division. Some months ago, you told us that you expected at least 3% margin in 2013. Now, with Q1 and the likely improvement in demand sequentially, if I understood correctly, plus the savings, would it be fair to assume something, in fact, well above 3%? That would be the first question. The second one is on your manufacturing guidance for Q2. You expect it to be somewhat flat, sequentially, given the fact that you expect slightly improving demand throughout the quarter and the effect of summer shutdowns, I'm surprised you're not raising manufacturing a bit. So if you could help me understand that, that would be good. Finally, your outlook statement.
Usually, it's just based on data rather than your impressions, so I wanted to know what led you to make an exception this time?
Yeah, good point. Let me take the last one first. Firstly, the outlook statement is the outlook statement, which is for relatively unchanged demand sequentially and lower demand year on year. What I am indicating is activity in my statement is that I expect to see an improving situation go through the quarter, which will give us benefit in the second half of this year, based on what we're seeing in activity level from our businesses there. But it's not enough for us to change our outlook at this point in time. It's just my judgment call, giving you some indications of how I see things there. And that is also the reason why we're keeping manufacturing roughly at the same level, daily production level in the second quarter versus the first quarter.
Broadly in bearings, we say we'll put a little bit of inventory, but very, very little inventory in the second quarter. And you say, how will we then manage the summer shutdown? What we see is that our plants, a lot of them have been running fairly low for some time. And if we need to, if, for example, the demand, what I feel it comes through the demand situation, improves in the second half, and we need to run manufacturing better than the third quarter, we will run manufacturing more in the third quarter than we would normally do in a normal year, there, because we've been running it low for some time. So I think we can. We've got room to do that there.
So I'm not so concerned, and I would rather not put inventory in the second quarter. So ramp my stocks up in the second quarter than hit the brakes in the third quarter. I think it's not the best optimum for us at this moment, since we're running at a lower level. It's different when you're running at the higher level in the first quarter and second quarter, then you've got the machine running.
To pull the machine up and then hit it three months later down is not the smartest thing to do. So that's why we felt it's better to keep it at that broad level there. And if we need more in the third quarter, then we'll run the manufacturing more in the third quarter than we would normally do there. If I go to automotive, I think it's a good question. I mean, I want automotive to work their way up. Actually, my internal plan has been, remember, as I spoke to you, to try and get up to something like 8% margin as a target for them, and my internal view was also to try and get to 4, 6, 8 over the next three years there.
Just because they've got 4.1 in one quarter clean, let's not get too carried away. They still, they still have to manage customer summer shutdowns and other things, etc. , there. So, I think, yeah, maybe a little bit, a little bit better look just now than they were a quarter ago, but, but we're not out of the woods yet. We're moving in the right direction, though, and I think that's positive.
Okay, thank you.
Thanks very much, Arnaud.
Thank you, Arnaud. The next question, please.
The next question comes from the line of Klas Bergelind from Nomura. Please go ahead.
Yes, good morning, Tom. Good morning, Marita. My first question is on your wind business. You're obviously guiding higher on energy.
Yes.
We've seen some positive news flow recently, both in the U.S. and in China, on extensions of tax credits, new approvals, and so forth. How do you think this will impact margins? I assume your capacity utilization here must be pretty low, so positive for margins. And how quickly could you ramp up here in terms of capacity? The second question is on automotive. Looking at sort of, you know, big picture macro, it seems like the incremental weakness currently is in Germany, with the premium manufacturers starting the cut production. Your volumes obviously weakened much earlier, suggesting that you are more exposed to the volume end. I'm trying to understand the mix here.
Should we assume that we have passed the trough from the volume side, and with less exposure to the premium side, we shouldn't get worried for going into the second quarter?
Hmm, good, good. Very good question, both of them. Let me take the renewable energy. First of all, you rightly point out in North America, the PTC has been extended. It was late in doing that, which means that the renewable energy business was very weak at the start of the year. But to be quite honest, the absolute level in 2013 will still be very, very low compared to what it was in 2012, because there was a lot of activity level on the way in 2012, ahead of the ending of the PTC. So you're still going to see a big drop off, absolute volumes, 2013 versus 2012, in North America. And I've got to say, renewable energy, North America, is not a huge business for us.
It's more for our lubrication business, a little bit more than it is for our bearing business. When you go to China, yeah, we're seeing positive signs in China. And that is good. We're starting to increase the shipments into our renewable energy customers in China. Will it have benefit? Yes, because through the year, it will have benefits in manufacturing. Not so much in the second quarter, and the reason being is that we've been sitting on some inventory for some time, in renewable energy, because of the fact that it actually hit the wall in 2011, mid-2011. So the first thing we'll do is to run the inventory that we've got, but manufacturing will start to move in that during the second quarter.
So as you went to the second half of the year, you will see some benefit from that in terms of manufacturing. And of course, that is a better business for us. If I turn to automotive, yes, good question. Also, on the European mix. The European mix has changed a little bit there, and that's why if you look up until now, we have had a bigger decline in our automotive business in Europe, car business in Europe, than the production decline, but now we're more in balance with that there. So will it get any better for us? I still have real concerns with the automotive outlook in Europe for some time, not only this year, but into next year, in terms of production.
I can't see a lot of positive in that at the moment. The only thing from a demand viewpoint, what is good for us is we have been very successful in getting businesses, which won't help us this year, but will help us, start to help us second half 2014, and definitely help, help us in 2015. But from a demand viewpoint, I'm pretty, still pretty pessimistic for the outlook in European production this year.
Thank you.
You're welcome very much.
Thank you, Klas. The next question, please.
The next question comes from Peder Frölén from Handelsbanken. Please go ahead.
Hi there, Marita, Tom and Tore, and congratulations again, then, Tore, for leaving Tom. No, but coming back to the price issue, and maybe you could help to understand, help me to understand if we see distribution prices, list price to distribution still being positive in the first quarter, I guess, in the global arena. And if they would turn negative, if you in the second half of this year, if you don't come with a new price increase, and the thinking behind and eventually a higher price list prices for the second half. On that also, is it fair to assume that you see higher price component in the OE business than distribution business?
And the third element of the price question is really, if you have some capacity somewhere in the European system, that you feel that you need to defend during the quarter, and by being more active on the price side, and if that would change going forward. That's the first question related to prices. Thank you.
There's a lot of parts in there.
Yeah.
Maybe let Tore answer that one, since he's—n o, I'll take that. Price mix, yeah, I think if you look at our price mix across the three business areas, we had good positive price mix across the three business areas in the quarter. That will continue as we go forward. But, I think the price mix will be good in the business areas there, but of course, it was slightly negative from an intra-divisional viewpoint for us there. Will it change as we go into the second half, if we don't move list prices? Let's see, because there's, I think there won't be a price component, but there will be the mix component in the business, and it will depend on where the end markets are and which products are there.
I still believe in a positive price mix for the group for this year, even without any list price changes. And I can say in our bearing business, we've not announced any list price changes. There's some things we do in some areas from a currency viewpoint, where there's maybe high inflation in that, but these are very small, very pockets that we do. So we, at this point in time, we have not announced any list price changes, and I cannot say what we will do going forward there. Within the —of course, if OEM gets much better than distribution, then, of course, that is somewhat negative for us from a mix viewpoint. But I don't think you will see that scenario.
I think you will see if, if the economy improves somewhat, the distribution to the end of the destocking will be beneficial, for us in total. Are we working to defend capacity, load capacity, using prices as a weapon ? I don't know about doing that, and that's not our intention to do that, and that's not our plan to do that, at all. I hope our guys are equally aggressive, whether I've got load capacity or not load capacity, in making sure SKF gets the best business with the best profitability in the market. But, I don't see any actions that way, to be quite honest, Peter.
Okay, that's very clear. Yeah, two, two quick ones, Tore. Any PPA effects from BVI, Q2, Q1? And also, given the hedges, what would we see the effects be for next year, given what we know today?
The effects from BVI is very limited in the first quarter. There is a acquisition cost and, you know, also the amortization of the PPAs, etc . So basically, you will see some results that are coming in from the second quarter, or the normal results will come in after PPA. On the hedges, we run fairly short hedges, a few months only, so basically, you should calculate on us having and using the rates being out there in the current environments. There's nothing special there.
Thank you. Thank you so much.
Welcome.
Thank you, Peder. Our next question, please.
Thank you. Our next question comes from James Moore from Redburn. Please go ahead.
Hi, Tom. And thanks for all your help over the years, Tore. Have fun, I suppose. Three questions from me, please. Looking into the second half, should we expect some further destocking, and how should we think of the inventory to sales at the year end, between the current 20.3 and the 18 target? The savings, I'm just trying to understand the SEK 100 million comment, Tom and more in the second quarter. If the SEK 250 million by the third quarter is there, divided by four, that's 62.5, what's the rest? And what's the degree to which it should ramp up next quarter? And auto production in Europe versus the 12%, what are you assuming in your outlook for the second quarter there, and how do you think the second half moves? Because I've seen a range of numbers out there.
Well, yeah, inventory second half, we will take out a few hundred million SEK second, the second half of inventory. But, but don't look at that as being dramatic in terms of absorption, etc . We will use balances to get it right to the net sales over a number of years. So but we'll take a few hundred million SEK out in the second half of the year in inventory. On the savings, SEK 100 million saved so far, but that is not really linked in to the programs. There's a little bit from the programs that we've got. We have a lot of other cost actions, which are not restructuring programs and cutbacks.
And we e xcuse me, that we've been making in terms of recruitment, in terms of spending in other areas, and that's what's getting us the benefits just now. So, I would say more than half of that 100 is not to do with the programs that we've launched. So that, a nd that will continue going forward. And in addition, you will add in, as you rightly point out, from the third quarter, 60 or so per quarter. In the second quarter, that 100 will go up a bit now, because we'll keep what we've already got, and it'll go up p roduction in Europe, what I see for the second quarter is auto production.
The latest forecast I've seen is to be down 4%-5% for light vehicle production in Europe, and to be down another 5-6% in the third quarter. I think it may even be down a little bit more than that. I see a slight positive from the latest forecast I've seen in the fourth quarter, but still, light auto production could be down 5-6% year-on-year in Europe, is the figure we've seen. Whether that's a little bullish or not, I think there's more risk on the downside.
Thanks a lot. Sorry, can I just come back? On the IT build , is it on track? How does the SEK 200, SEK 500 P&L cash cost look in 2014 and 2015?
That's a good question there as well. I think it's on track, absolutely. We do have 50 per quarter hitting the P&L, and the full 125 per quarter will hit the cash flow. 'Cause the differences in the balance sheet, as you know, we're capitalizing. Into next year, it'll be more than the 500, but how that will be split between P&L and capitalization, I don't know yet. We're still working that one out there. But the cash flow effect will be more than SEK 500.
Okay, great. Thanks.
Thank you, James. Well, we have time for one more question.
Thank you, and the next question comes from Colin Gibson from HSBC. Please go ahead.
Thanks very much indeed, everybody. Lots of questions so far and lots of very good answers. So I'll just ask one longer-term question, if I can. I thought the Insight product announcement was really interesting, and I just had a query on that, which was the data these bearings produce, is that your intellectual property? And will you therefore be able to use it not only to drive aftermarket revenues, but also as a feedback loop into the R&D process? That was the question. And before you answer the question, I'll just join the queue of everybody else wishing Tore all the best for the future. And Tore, I do keep a small bottle of whiskey in the boathouse, so if you come past sometime, I look forward to sharing that with you.
Thank you very much. And I'll come with you for a whiskey. Yeah, me. Yeah, the data is, which, of course, is the customer's, but is our data as well. Will help us drive our R&D development, of course. So it's good data to get. And remember, the data will not only be on the bearing, the data will be on all the machinery. So we'll be able to pick up, for example, in a big gearbox, that it's certain different stresses on the gears and shafts and other things there, which is outside of the bearing, there. So it will help us also in our modeling of different things we can do for application areas as well.
So yes, the data that comes to us, we can use that data in developing our products. Excuse me.
That's great. Thanks a lot.
Thank you very much, Colin. Thanks.
Thank you very much, Colin. Well, we can take one more question because we have a little bit of more time. So if there's a final question, please.
Okay, and your final question comes from the line of Sebastien Gruter from SocGen . Please go ahead.
Hi, good morning to everyone. Just one question and an update on the investigation. We have seen some of the Japanese peers taking provisions due to the antitrust investigation in Japan, and I would just like to know if you have any update on the investigation in Europe, U.S., and South Korea on your side.
Sure. I've seen the same for Japan. As you rightly point out, the judgments have been made in Japan. In the other jurisdictions, there is no information at this stage to us that I can give you. They're ongoing. We're just waiting to see what happens in that. There is nothing I can give you on that just now.
Okay.
Okay? With that, before we close this, I want to pass over to Tore, who wants to say a few words.
Yeah, thanks a lot for all night's work, and also thanks for very good cooperation over the years. And I must enjoy a lot working with all of you. Thanks a lot.
Yep. Thank you, Victor.
Thank you. That brings us to the end of this teleconference, and I will be available for calls and also for emails if you have further questions or if you didn't conclude with your question. Please just call me or send me an email. Thank you very much.
Thank you.
Bye.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.