Ladies and gentlemen, good morning to you all, and very welcome to this conference call for the presentation of SKF's half year results, 2012. This will take an hour. Here from SKF are our President and CEO, Tom Johnstone, our Executive Vice President and CFO, Tore Bertilsson, Ingalill Östman, Senior Vice President, Group Communication, 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. Please go ahead, Tom.
Yeah, thank you very much, Marita, and hello, ladies and gentlemen. We have just released a report for the second quarter of 2012, and I would say against the background of the uncertain market, I think it was a good report. During the quarter, demand did not develop as we expected at the start of the quarter, which prompted us to come out with a revised demand outlook around a month ago. As a result of that revised demand outlook, we had to adjust our manufacturing in the quarter. I'm particularly pleased with how we were able to adapt to this new demand level, which was lower compared to what we thought three months ago, and our manufacture was significantly lower than in the same quarter last year.
I think this showed a very quick response from the team and enabled us to deliver, you could say, a little bit better result, excluding one-offs in the second quarter than in the first quarter, even if we had a similar volume in both sales and manufacturing. I'll come back a little bit more to volumes and demand later. But the quarter was not just about managing the macro environment. We continued to take important new orders and take some important steps to strengthen SKF. I'd like to start by looking at them. There were many new orders in the quarter, but I'd like to highlight the three specific ones. Firstly, in our Latin American business, we received an important new order from Fibria, the Brazilian pulp and paper company.
We've had a close partnership with them for many, many years, and we have now signed a new agreement which widens the number of their operations that we work with and also covers not only the supplier products, but also many other services to them. By using SKF knowledge, Fibria is able to improve the efficiency of their operations and reduce their costs. Second order to highlight is the one actually, where we started deliveries already, which is to Volvo Cars to supply wheel bearings and suspension bearings for their new important V40 vehicle, and that's a good long-term contract for our automotive business. The third order is the one we announced last week, and that's the for the wind industry. The Nautilus bearing is a special main shaft bearing we developed a few years ago, and recently we launched the next generation of Nautilus.
And I'm delighted we've now received the first major order for this. It's a multi-year order with one of the major wind turbine manufacturers. Wind market is an important one for SKF, and this order reinforces our commitment to support our current market. That's important. Some important orders. Some important activities, we opened two new operations in the quarter. Our eighteenth Solution Factory was opened in Perth, Australia, and that factory will focus primarily on the mining industry, which is an important industry in that part of Australia and is actually developing very well. And then we also opened a new railway testing center in Tver, in Russia, at our factory. Both of these operations will bring our technology and our technical support much closer to our customers, which is important. We also launched a number of new products and solutions.
Let me just comment on three that you can see in our report and you can see in our presentation. First of all, there's a new automated lubricating system that we call System 24, which is much easier to use, much easier to maintain. Secondly, a new family of seals that we've developed, which are very important for aggressive applications, such as in gearboxes, automotive gearboxes. And thirdly, not a product, but a service to our customers, a new app to help our customers select the right seal. We are increasing the number of apps that we have in the group, not just to provide information of how the group is and facts in the group, but also to help our customers find and select the right product.
Take a look at the App Store and you'll see a number of these, apps that's there. In the quarter, we also stepped up our activities in the environmental arena with the launch of a new BeyondZero portfolio of solutions and by SKF joining the WWF Climate Savers program. We covered these in detail at the Capital Market Day, so I'm not going to this in, anymore here. But just remind you, that from the BeyondZero solutions, we plan to quadruple our sales over the next five years, which basically means that with that quadrupling, the BeyondZero portfolio would account for more than 10% of the growth of the group over that period, which is an important part of our growth. Now, back to the financials, and let me first start with demand development.
For the group, overall, our volume was somewhat similar to the first quarter and down nearly percent year-on-year. But again, we had a different picture around the world, with our sales developing positively in the Americas, both North America and Latin America, showing very good growth, up over 8% and 16%, respectively. In Europe, we saw a decline of over 3%, and in Asia, business is down some 8%, which actually is a similar decline in Asia as we saw in the first quarter. So let's now go into more detail, region by region. North America, we'll start there. We saw a good growth in our business, which was led by the increase we saw in sales to the automotive industry.
The big increase of light vehicle production in the U.S., which was up year-on-year by some 25%, combined with the new business which we gained, resulted in a very strong volume growth for us. Our industrial business developed positively as well. In a few, we saw a positive development in our sales to energy, both renewable and traditional, off-highway, aerospace, and our lube business, lubrication business in total. We also saw a good growth in our sales to our industrial distributors. I had a couple of areas that weren't so strong in North America, though. That was our sales to the vehicle service market, which overall was quite weak and to the railway business. But I've got to tell you, railway, for us, is relatively small in U.S..
So North America, in total, has been very positive for SKF during last year, and this has continued in the first half of this year. But it's clear when you look at that, you can see the rate of growth is easing, and we saw that also as we went through the second quarter. We believe, going forward, we will stay at this level of demand in the third quarter, which still means a growth year on year. But of course, the rate of growth will be lower than earlier in the year. In Latin America, same with Latin America, we also saw a very positive development. A number of markets showed good growth for us, Peru, Chile, Colombia, and not forgetting the largest market, Brazil. But here, I say, also, auto and automotive in Brazil remained rather sluggish for us.
It was the industrial and service business that was better for us in Brazil. Let me turn over now to Europe, where the development weakened for us during the quarter to what we expected going into the quarter. In Southern Europe, I've got to say, we did not see a big change compared to what we'd seen in the first quarter. The business is down a lot in these markets, but seems to be staying around that level. Eastern Europe developed well overall, with especially markets like Hungary and Russia developing positively. While other markets, like Poland, Czech Republic, didn't develop so well. The main change during the quarter was in Northern Europe, where we saw some softening as we went through the quarter in the major countries such as Germany and Sweden.
Let us look maybe a little bit more detail of the industries in total in Europe. Industrial business still saw growth overall, but I've got to say this was driven by the sales to renewable energy and our sales to aerospace, where we saw a strong development. In renewable energy, it is due to the new business we've gained, not the market as such. When I look at the other industries, such as off-highway, metals, paper, and railway, then we saw some weakening of our growth in the quarter. We saw some weakening in the business in the quarter. Our sales to our industrial distributors, I've got to say, held up very well despite the uncertain market development.
Turning to automotive, we saw a major decline in our sales to the car industry, to the truck industry, and to the vehicle service market. So all three major areas of our automotive business saw declines. For the car industry, our sales were down, actually this quarter, more or less in line with the market, where vehicle options seemed to be down close to 12%. Our sales to the heavy truck industry weakened a little bit more in the quarter, and we expect that to continue also in the third quarter. Let me move over to Asia, if I could. Here, as in the first quarter, we saw the biggest decline in our business, for the group in total was Asia, and it did not develop sequentially as we expected.
The pattern was similar to the first quarter, with the main impact coming from our sales in China and India. Let me talk at China, about China first, if I could. Here, our decline in sales was mainly in the industrial businesses. Renewable energy continued to be weak. Railway business improved for us for freight cars, but not for passenger rail, and we still have weak sales to our distributors due to the continued money supply issues, which is also affecting their ability to, to pay us. Going into the quarter, I thought that the signs that we'd seen at the end of the first quarter, we would saw a steady improvement, and the steps that had been taken to improve money supply would drive a much better development in our business in China.
It was a little bit better sequentially, but only slightly better sequentially, so that development we expected did not come. It's interesting, it's not all dark in China. One bright light in China for us is our sales to general industry, small gearboxes, pumps, compressors, et cetera, which showed some growth in the quarter. Let me close looking at China by looking at automotive in China. Our sales to the car industry were impacted due to model mixing, which means we are on medium and larger vehicles, which didn't develop so well as the smaller vehicles. In India, let's turn over there. Our sales overall weakened a little bit in the quarter, reflecting, to be honest, what's going on in the economy. While our sales to car and two-wheelers grew in India, our sales to the truck industry really dropped a lot.
Our industrial business also was a mixed picture, with renewable energy down a lot, but some general segments doing okay. Another country in Asia that was down for us was Indonesia, and that was due to weaker sales in the two-wheeler market in Indonesia. However, I've got to say it's not all down in Asia, even though China, India, Indonesia is weak. We see a very positive development in our sales in a number of other countries, countries in Asia Pacific, such as Australia, such as Malaysia and Thailand. So that wraps up the group a little bit, which means volume was down in the second quarter compared to last year, close to 3%.
Because of that and because of the change that we saw in the quarter, we had to be very quick and flexible in adjusting our manufacturing, and this we did by breaking it as we went through the quarter. This was both to meet lower demand levels and make sure we didn't build inventory that we didn't want. The result was that manufacturing was similar to the first quarter in absolute terms, but significantly down compared to the same quarter last year. As I said earlier, I think the team did a great job in managing that, even if it impacted our result. Let me turn now to profit development. Here, I was trying to look at a comparison for you, and here I think a good comparison is between the second quarter of this year and the first quarter this year.
Since volumes and sales and manufacturing were quite similar in both quarters. If you exclude the one-offs in the second quarter, then our operating profit was nearly SEK 2.2 billion, which, as you can see, means we improved the margin a little bit, 20 basis points to 12.8%. Of course, that's still lower than we would want, but due to the fact we were continuously adjusting our manufacturing, I think this was a good performance. In terms of cost, we faced higher raw material costs in the quarter, but due to our actions that you know well about, and a positive price mix, we could offset this. Maybe I should talk about the one-offs. You'll see that at SEK 140 million, this was lower than we guided.
We said, remember, when we came out earlier that it'd be 170. So why was it lower? Quite simple reason, actually. We're running... The program we're running in, in Germany is a voluntary program. So there's two voluntary schemes running. The first, a voluntary retirement program, and the second, a voluntary redundancy program. And we had hoped to get some 400 people or so, takers of this voluntary program. But in fact, we've so far got 340 takers. So that means that impacts the cost that we have in the program because there's fewer people, but it also impacts the savings, and especially the savings, next year in, in the report. But we're not there, and we're, we're continuing to look at other possibilities to hire additions to plant, particularly in Europe, after cost facilities we have going forward.
So that surprise for them. But one which was a bigger figure, and that's, importantly, is we had a big, big impact, some SEK 400 million or so on our financial items in the quarter. And that you can see in the cash flow statement. This is due to how we manage our internal cross-currency funding and deposits between our companies in different countries, which we do actually to use our capital as efficiently as we can. In order to avoid speculation losses, we hedge all these transactions. In this quarter, we had major settlements of contracts, which led to cash outflows since the euro weakened significantly against both the U.S. dollar and SEK.
It's quite technical, what happened there, but it did have an impact for us in our cash flow statement due to the big currency changes that we saw in the euro in the quarter hitting these contracts. Currency, if I turn to currency, look at that from an operating profit viewpoint. At the start of the quarter, we thought we'd be around SEK 125 million, but with the currency changes during the quarter, we had a slightly better impact there. So here it was about SEK 160 million for the group. For the third quarter, we see a positive SEK 125 million, and we've upped the forecast for the full year to some SEK 300 million. So let me move on now to the outlook for the third quarter.
I stress, this is the demand outlook for SKF, not our view and an outlook on the marketplace. We expect to see a relatively unchanged business overall for the group, and to stay at the actually quite a good level we're at. We're not quite at the peak that we had in 2008, but we're at a very good level there. We expect that the decline that we've seen in Europe to continue sequentially a little bit, and it'll be down a bit year on year, driven a lot more by our automotive there. In North America, we expect the business to stay at the level, so sequentially not to grow any more there, but it will still mean that it will be higher year on year. In Latin America, we still think will develop very positively for us.
Turning to Asia, I've got to say this is, it and Europe are the most difficult to judge, but we expect to stay now in Asia at a similar level sequentially. However, since the fact that we started to see a downturn in Asia, in our business in the third quarter last year, if you remember, that's when renewable energy really went down a lot. We will probably also see a relatively unchanged business year on year. Don't see any big changes, just a little improvement. By business area, we expect automotive to be down sequentially, driven by lower sales to cars and trucks, and as I said, Europe will be the driver here.
Both the industrial businesses should stay at the same level sequentially, but SI should be a little bit better year on year, driven by a little bit better energy and aerospace business, and also a better comparison in their Asian business because of the drop they saw last year. From an end market viewpoint, we expect that on a sequential basis, aerospace and energy will be up, cars and trucks will be down, and all other industries will be unchanged, similar to the group. From a manufacturing viewpoint, what do we do in manufacturing? Well, we'll slightly lower the manufacturing level from the second quarter, which means it'll be lower year on year, and that will mean we'll take a little bit out of inventories in the third quarter. Turning to raw materials, they will be a little bit higher in the third quarter last year.
And that's, if you look at it, surcharges in the third quarter are lower than the average of last year, and also lower in the third quarter last year. But what we will see in our books is the surcharges we got right at the end of last year, beginning of this year. So, that plus the slightly higher base prices that we're paying, will mean that our raw material will be a little bit higher. And as normal, we will continue to drive our three actions to offset raw material impact, which we've done successfully so far. And you know that we'll use other sources of supply and improve our sourcing, we'll reduce cost, and we'll increase prices.
I'd just like to, on the prices, remind you that we have increased list prices by around 4% in both Europe and U.S. from July first. And so we'll see some impact there as we go through the third quarter. So in closing, what does it all mean when you look at the third quarter for us? Well, again, I think a good comparison is to compare the third quarter with the first two quarters. And if you look at it from a demand situation there, volume will be somewhat similar to the first two quarters as we see it just now, but we will reduce manufacturing compared to what we were doing in the first part of the year. So it will be for somewhat lower than in the first two quarters.
In closing, I think we had a pretty good first half of 2012, especially when you look at the uncertain and changing business environment, and the way we've been able to react to it. We've also taken some important new orders, continued to invest in our business, and launched our BeyondZero portfolio solutions. Now back to you, Marita, and then over to questions.
Thank you very much, Tom, and let's go on with the Q&A session.
Ladies and gentlemen, if you have a question for the speakers, you need to press zero-one on your telephone keypad, and you'll enter a queue. This is zero-one. We have a first question from Mr. James Moore from Redburn. Please go ahead, sir.
Good morning, everybody. Good morning, Tom.
Good morning, James.
I have three questions, if I could. I gather you're thinking of a major IT overhaul and investment. I wondered if you could give us some feeling for the timing and the cost, and whether that would be CapEx or OpEx. Secondly, when we talk about the destocking in the third quarter, are we talking about the same sort of SEK 300 million-SEK 400 million picture that we saw in the fourth and the first quarter, excluding currency?
Thirdly, I wondered if you could talk about the EU fine and the comment that you expect a material impact of the group numbers as to what you see as size or timing, or some way we could look at other industries to get a feel for whether that's a very large four-digit number or whether it's something that's smaller than that?
Okay, then to the three issues. The IT overhaul. Yeah, the project has now started, and we've reached the, the agreement to what we need to do in the IT overhaul. We're working on the planning and timing. This is a multi-year project. It's not something you're buying in one year or two years. We're talking six, seven years sort of a project. And of course, within that, there are costs, both external and internal cost. And what we're working right now on to get a better shape, we, we know the overall frame, but to try and give you a view of how it will look in the different periods, what we're looking at is 3 things. One, what other activities will we cut now in order to, to cut that and be able to, to run the program underway?
Secondly, which quick wins can we get? Because there will be priorities in how we do things, and that will give us some quick wins. And then thirdly, of course, the timing and sequencing of the different events and rollouts that we will do over a number of years. Because all three of these are still in their final stages of preparation, I don't want to give you a figure just now, on that, James, because we still are working during the summer and the rest of this year in putting together these elements there. The reason we raise it just now is just that we have already entered into agreements with people to work with us to do all that planning, et cetera, and that may come out.
We wanted you to be aware of it, but I can't give you more accurate figures just now. Some will be CapEx, and some will be a little bit of CapEx, and some will be OpEx within that. So I can't give you more on that just now, but I will keep you informed as we get more details round about it there and give you some more granularity on that figures there. In terms of the inventory, inventory in the—I could just maybe say that in the second quarter, if you remember, we thought we would put a little bit of inventory in to manage this summer there. In fact, in six months, we didn't do that.
There was a slight decrease, but it was minor decrease in inventory in the second quarter, for us, and that was due to the fact is when you're adjusting manufacturing, you never go get that always precise, there. So, going through the third quarter and the fourth quarter, I expect to see a little bit of inventory out in the, in the third quarter, a couple of hundred, something like that, and then a little bit more in the, in the fourth quarter as we look at it just now. Going to the last question on the EU, I can't really say much more than what's in the report at this stage, because...
And the reason we raise it now is that we do believe that the investigation, as you know, is ongoing in the EU, and we do believe that they have got the substantial information. But beyond that, I cannot say more on timing issues and on exact extent of the issues there, to give you any guidance on that. All I can say is what's in the report, James.
Okay, thanks. So just to come back on the destocking.
Yeah.
When we get towards the end of this year, if you've done that, do you think that the level of inventory, while it'll still be above your longer-term target, do you think the bulk of what's had to be done is done, or do you think that there's another element of destocking that comes in 2013?
Yeah. It's a good question. I would say that we still believe we need to become more capital efficient and move towards our inventory target, and we'll take a little bit more step towards that during 2013.
Okay. Thank you very much.
Welcome, James.
Thank you, James. The next question, please.
First we have Mr. Guillermo from UBS. Please go ahead, sir.
Hi, good morning. Three questions, if I may. Could you comment a little bit on the legal fees that are associated to the investigation? And also on this particular regard on the antitrust, maybe which regions and industries are being investigated? And then, last question, would you be seeing more cost cutting as we move through the year, or more restructuring announcements from you?
Yeah.
Thank you.
Let me take that, Guillermo, thanks. Let me take the last one first, cost cutting. Yeah, I mean, as I mentioned earlier, we've taken the first step, and we're looking at our footprint more based on how we see the market developing longer term. And I would expect before the end of the year, not so much in the third quarter, but in the fourth quarter, for us to take some additional one-off costs to address our cost base there. I can't scope it at this stage, maybe a few hundred, but it's not bigger than that that I would expect us to take. Going back to the EU, as we put in the report, we've got the EU antitrust. We've got the EU investigation underway.
We're answering questions in U.S., and we're also answering issues, and we've had that in Korea. I cannot do more than that at the moment and say that legal fees, there are legal fees there, but I don't have the figure in the top of my head. The legal fees that we've done so far, but I don't have that figure in the top of my head.
Do you think your pricing behavior will be altered in some, to some extent, through the investigation, or? BGB is doing, is still doing the same kind of approaches to the market when it comes to pricing as we move forward?
The pricing is based on the value you deliver to your customers, and we work very hard to justify the value we deliver to our customers, and that, and that we do. And that's how the customers decide what the value is. So we will continue to work on delivering value for the customers and getting paid for that value that we deliver to our customers there. The investigation will not change that.
Okay, thank you.
Thanks.
Thank you very much. Next question, please.
Next question comes from Mr. Peder Frölén from Handelsbanken Capital Markets. Please go ahead, sir.
Yes, good morning. Can you hear me?
Yes, sir.
Yes, good morning. I want to dig a bit deeper in the inventory and then the destocking. If you look at the past couple of years, you have seen sort of an inventory build in the second quarter by maybe 700 to 2 billion, depending on a bit of the demand situation between the first and second quarter. I would like to know what's sort of the normal inventory build in volumes, Q1 to Q2, in order to try to understand how much the inventory cut or the manufacturer actually affected the EBIT margin in the quarter and what to expect ahead. Or even you can just tell us how much it affected. It was 300, 400, 500 million, somewhere there, I guess.
Yeah. It's if you look at it, the last year, if I compare it to last year, in the second quarter last year, I think actually, and I do from the top of my head, in reported currencies, we put SEK 1.2 billion-
Yeah, that's correct.
Yeah. But we said that some of that was due to currency. So you were more in the 900+ level, if you exclude currencies, et cetera, out of that, from my memory, there. And clearly this year, we didn't put hedges in, and, and, and we were, as I said, very, very slightly down, but it was nothing to talk about down compared to the first quarter. If you actually look, maybe I could maybe do it a little bit differently to answer your question. If you look at the gross margin. The gross margin, if I look second quarter this year versus second quarter last year, the gross margin is down some 3.7%.
Yeah.
Percentage points, yeah. If you look in that, roughly 1.5 percentage points of that are due to the one-offs and the higher R&D spend. So 1.0 is the one-offs, 0.7 higher R&D spend. So that you take that 1.5 away, that means roughly 2% difference. That 2% difference, because it comes very much from what we've been doing in cutting our manufacturing there. If I really look into it, so a little bit lower sales has an impact of a little bit. The rest of it is to do with the, the manufacturing cut we did. Because the price mix we got positive, and the currency positive were there to offset other inflation items and the, and higher raw material costs, et cetera. So that swing was roughly... Basically, the drop-down was basically driven primarily by our manufacturing breaking.
So SEK 350 million then, roughly. Okay, that's very, very clear.
It's actually a bit more than that, actually, because there's other savings you get in other areas. There's a bit more than that.
Okay, very, very clear. I think that's all for me, actually. Thanks.
Welcome.
Thank you, Peter. Next question, please.
Next question comes from Mr. Sebastian Grötter from Citi. Please go ahead, sir.
Hi, good morning, gentlemen. Two questions, if I may. The first one is just to come back on your inventory to sales target of 18% and the fact that you want to reach this target, I don't know, within maybe the next two years. But just wonder if you need to reduce the production further to get that, or it's just you need to better manage the supply chain? Second question is about China, and if you can give us some color about how the business is doing over the last few weeks, I mean, in June and early July. Have you seen any further improvement, or it's just a stable state at the moment? Thank you.
Yeah. Okay. Let me take the inventory first. The inventory is, there are three factors we need to do to get to the level. I mean, at the moment, we're reducing production in there. But to be clear, you can't just keep running that. You hit the most important point, which is we need to look at the total, we call it demand chain, from customers all the way through to our suppliers. That requires us to get better information from our customers, and that we're working hard on, and especially with our distributors, we're getting a much closer link to understand the real demand situation that they're facing and trying to take out the sort of buffers of inventory.
Secondly, it's about flexibility in our manufacturing, and we've a number of projects underway in that area to improve the flexibility and planning in our manufacturing, which will mean, of course, that we will reduce production, but we won't impact the service level because we'll be changing how we do the manufacturing and improve the flexibility. And the third is working with our suppliers in order to get our suppliers able to support our demand situation much better. So to your point, it will be a combination of, of course, production in absolute terms needs to be lower than sales in order for you to reduce the inventory. But the medicine is not just about breaking production. You have to look at the demand chain in total. And that works on...
That means it's not just a couple of years job, it's a few years job to get us there. But we really believe from the projects that we've been running in the last 12 months, some of which is the results we're seeing already now allowing me to change. We believe by the projects that we're running, that we can get down to that 18% level in our business. Switching to China. China, what we saw, as I mentioned earlier, is a little bit of improvement in the quarter, but not what we expected, and that was also towards the end of the quarter, beginning of this year. But to be quite honest, there's a lot of uncertainty down there still, and I know there's a lot of actions being taken by the government.
There's changes in the rates, et cetera, being taken down there to try and move the demand situation there. I believe the demand situation will improve down there as we go through the year, but the rest of the year. But at this moment in time, I we are saying that we see basically from a sequential viewpoint, all of these are being roughly flat because we're being a little bit more, let's say, cautious in how we look at things just now, because we need to see that continued over a period of time. Remember, at the end of the first quarter, we saw a similar trend at the end of the first quarter, an improvement as we came out in the first quarter, and that trend didn't continue in the second quarter.
Therefore, I would like to wait till we're through the third quarter before I can see is there any more traction in the business there?
Thank you.
You're welcome.
Thanks, Sebastian. Next question, please.
Next question comes from Mr. Martin Prozesky from Bernstein. Please go ahead, sir.
Good morning, everyone. Just three questions from me, please. The first is on price mix, and price mix has been pretty stable for the last few quarters. You know, in eight or nine, when we saw a big volume of clients, price mix was very strong. Can you give us a sense for how you think about price mix over the coming quarters? Do you think that improves or, you know, with commodities coming off, we see actually a weakening in pricing? So can you just give us your sense there? Then on auto, obviously, volume's down a bit more than in Q1. Margins kind of weaker. Is the margin decline mostly demand, or is it also kind of restocking like we had earlier in Q4, Q1, you know, in the previous periods?
And then lastly, on wind, good order in the quarter. Is that indicative of broader strength that you're seeing from the wind manufacturers, or is it just a one-off?
I can take the last one quickly there. I think it's, as you say, a good order, actually, a very good order for us there. I don't believe it's a total indicative sign of end market behavior. It's new technologies that's coming in, and a new design of concept of wind turbine that's coming in, or a new design that's coming to the market. So I don't think it's indicative of the end market doing. And I think our renewable energy growth that we're seeing, which is particularly in Europe, is very good, and I think that, but that is not indicative of the end market. It's indicative of business that we're gaining in that market.
If I just maybe widen wind energy and talk a little bit wider than that, and maybe talk about North America and Asia on wind energy. In India, we've seen a weak wind energy business, in the quarter, and we expect that weakness to continue. In China, if you remember before, I'd said that, right at the start of the year, that I expected in the second half of the year, the wind industry would improve quite a bit in China. I think now that we will see a little bit of improvement, but not any substantial improvement in the wind business in China towards the, the second part of this year, from what I can see just now, there. Switching to North America for wind, we've had a very good first half in the, in the wind business.
It's not a big part of our wind business, to be clear, but we've had a good first half. But with the tax credits not being renewed yet, I think the wind business in North America will be impacted by that. Then I go back to your other question, automotive. Automotive is a combination of two factors that's impacting them. The major one is, of course, demand, because of the fact that they are seeing production going down. They're breaking their production and their operations, both to take out inventory and to manage the lower demand situation. And going forward, as you saw, we've indicated that we expect cars and trucks to be down.
Cars will still be good in North America, but Europe will be a factor for them, as will trucks be a factor in Europe and India, by the way, in trucks, for them. So it's a demand situation, which means they're breaking their manufacturing. But there's also a mixed situation, which is related to the fact that the vehicle service market is not holding up as well for them at the moment as we've had in the past for them. So they are affected a little bit by a mixed situation just now. So it's demand from a volume of manufacturing and a little bit in mix due to VSM. If I go to your first question, now back to that, the price mix situation.
It's been very good, and I think particularly the last four quarters, you saw a step up in our price mix there. We must remember, though, at this moment, what we are seeing in price mix, and we've seen in the last four quarters, particularly, part of that is an intra-divisional mix. That means automotive not doing as well as industrial. The two industrial businesses, Strategic Industries, and RSS. So the industrial business is doing better than automotive gives us an intra-divisional mix. In the first quarter, that was about one percentage point, as it was in the second quarter. As we go into the third quarter, that intra-divisional mix is still there, but it will have less of an impact year on year because we already started to see that impact during last year.
So we'll see less of an impact on the intra-divisional mix there. So that will bring down the price mix a little bit. On the other side, the steps that we've taken on pricing will give us a little bit better, but I don't expect to continue at that level of price mix going through this quarter, next quarter, due to the intra-divisional mix not being quite there as strong.
Thank you.
Thank you, Martin.
Thank you, Martin. Next question, please.
The next question comes from Mr. Arnaud Pinatel from Exane BNP Paribas. Please go ahead, sir.
Hello, everyone.
Yes, hello.
I have a question first on your M&A policy. We talked about the automotive business area, which is definitely weaker than the other ones, probably a much tougher end market. Is one of the priorities of your M&A policy to make acquisitions in other business areas to dilute or reduce the weight of the automotive end market for the group? That would be a first question, and the second one is on antitrust. Sorry, can you please help us assess the potential impact of the U.S. and Korean ones compared to the European one?
... I'll take that last question first. I can't give you any more information. I'd love to be able to do that, but I can't give you any more information on the investigations and what's in the report. I'm sorry to the extent of that, because we were not at that stage to be able to do that with them. With either the EU or in U.S. at the moment, we are answering questions in U.S.. So from that side, I cannot give you any more than that, unfortunately. If you look at if I go back to the acquisition situation.
If I look at acquisitions, and you look at the, I think it's 22 acquisitions we've made over the last seven, eight years, eight years, roughly, then 21 of them have been in the industrial arena and focused in the industrial arena. And that you will see continuing. Our high focus is in the industrial arena, there, which therefore means over time, we've already diluted the... To use your word, diluted. We've already reduced the impact of automotive in our business as a group, and that is part of our step. We're not saying we will exit the automotive business. We need to work to get the automotive business back to where it was before, which is higher single-digit operating margins, and that we'll continue to do. But acquisitions in that arena are not high on our agenda at all.
The only area we've, the one we made as an acquisition in the automotive arena, was for the vehicle service market there. So we're not looking in that arena per se. We're looking much more to support our industrial businesses.
Okay, thank you.
Thank you, Arnaud.
Thank you, Arnaud. Next question, please.
Next question comes from Mr. James Moore from Goldman Sachs London. Please go ahead, sir.
Yes, hi there. It's actually Aaron Ibbotson from Goldman Sachs. I basically just got one clarification, and apologies if you feel like you've answered this. But when in your guidance for this, and apologies to come back to it, the manufacturing level, it's slightly lower compared to the second quarter, but correct me if I'm wrong, this is sort of normal seasonality. You would generally have lower manufacturing level in the third quarter versus the second. So are you actually saying that you will have a bigger drop seasonally than you would normally have, or are you effectively guiding for your normal seasonal drop in manufacturing level in the second quarter? Thank you.
I mean, if you look at it also from a slightly lower from the second quarter, but also compared to last year, we're going to be lower than last year. We normally have that normal seasonality within there. So I think it's a little bit more than a normal seasonality. Because, you know, remember as well, we also have... We're having a step-by-step less of an impact on seasonality, both on our sales and on our manufacturing as we go more global with our business. So the seasonality impact that we had 10 years ago is somewhat less just now, which is also one of the reasons why we don't put in our outlook now anymore, adjusted for normal seasonality, because the normal seasonality is not the same as it used to be.
And just as a follow-up with this, if you take your Q3 manufacturing level, then, as a base, and coming back to the previous question on your guidelines for inventory levels moving downwards, do you feel like you need to underproduce relative to sales going into next year? If we want to assume that volumes will be largely flat as well, or do you think you can achieve that with other measures?
I think our view is that we want to continue to work to take inventories down within it there. The two elements are within the inventories. One is the raw material components, et cetera. And of course, that will be one impact, especially as we work to improve our links to our suppliers to bring inventories down there. The second will be something in manufacturing. How much will the manufacturing be running a little bit lower than sales or not? I cannot judge at this moment in time, depending on the demand situation as been how we see it just now. But definitely as we go through this year, both in the third quarter and the fourth quarter, we will plan to reduce inventories in both these quarters.
Exactly what that impact that will have in manufacturing next year is too early to say.
Okay, thank you.
Thank you, Aaron. Next question, please.
Next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead, sir.
Yeah, morning. Morning, Tom. Morning, Marita.
Morning.
A few questions, please. Firstly, on the U.S., Tom, we've seen slightly weaker industrial lead indicators over the last month or so. Maybe you can talk a bit about what you see in the U.S., how your customers and distributors are behaving, any changes you've seen over the last few weeks? Secondly, just on the inventories, getting them down to 18%, is that fairly broadly spread across the business, or is the kind of reduction more skewed towards the auto or industrial side of the business? And then just finally, on automotive, which is struggling, I guess, in terms of the margin relative to last year, can you just clarify how the weakness is split by truck, auto, OE, and VSM?
And then maybe on VSM, just a bit more color on, you know, why that is softer. I would have thought it would be quite stable.
Okay, let's take U.S. first. If I look at U.S., we still expect a good situation. If I take automotive cars in U.S., we still expect a good situation in cars in U.S., in the third quarter. We still, you know, we're going ahead of the market. I think I mentioned production of light vehicles is up 25% year-on-year. But we must remember, by the way, that there was an impact last year in the second quarter due to the tragedy in Japan. So I mean, the year-on-year comparison figures are distorted somewhat, both in Asia and in North America, particularly there. We still expect the vehicle production to be up in the third quarter, the light vehicle or a top light vehicle production to be up in the third quarter, year-on-year.
So from that viewpoint, we expect... I think that will be okay for us. In trucks, there's a lot of signs that trucks is easing off a lot in North America, but as you know, it's not a big business for us. Off-highway, we've been growing quite well in off-highway. I would say going, and sequentially, I would say, going forward in off-highway, our view is it will be relatively flat, sequentially in off-highway. And in general, industry as well in North America, we're not seeing the same growth as we saw earlier in the year. It's clear as we went through the second quarter, we saw that. That means that that's why the sequential bit is easing off in North America.
When it comes to industrial distributors as well, demand is okay, but the rate of growth is easing off quite a bit in there as well. That's why we've taken this guidance down year-on-year a bit for North America, there, and we've also kept it flat at the level where that was before. It's been going up quarter-on-quarter. We don't see that going up quarter-on-quarter there. Energy, I mentioned earlier, is going to be down. I think renewable energy in the second half. Inventory will be both. Will be both automotive and industrial, maybe a little bit more industrial, I would say there, but both automotive and industrial in total there.
In automotive, we see if I look at the businesses around the world, then I would say that North America, as I mentioned there, is doing well for them, being in good growth for them, due to the new business we've taken in automotive. It is cars that are down quite a bit in Europe and trucks are down quite a bit in Europe. For us, it's a big driver, and trucks in India that's down for us, that's a big driver in their business. They're the big ones that's impacting their business in total. Then VSM, of course, VSM is down in Europe and North America. North America, from what I hear, it's very much in line with what's happening in the market.
That we're not losing share of our customers, whether some of our customers are maybe losing a little bit or not, it's difficult for me to judge at the moment, but we're not losing share of our customers in North America. There is a market. In Europe, the market is weak for us there in Europe. And I think probably in Europe, we're underperforming the market a little bit, I've got to say, in the European market at the moment there with it. And that could be to which distributors we've got versus others, et cetera. We're probably underperforming a little bit the market in Europe, but it is, it has been weaker for some time in Europe, and it's been...
In North America, it's been up and down, I've got to say, quite a bit, quarter and quarter, but it's down at this moment.
Great. Great, color. Thanks, Tom.
You're welcome. Welcome, Ben.
Thank you, Ben. Next question, please.
The next question comes from Mr. Guillermo from UBS. Please go ahead, sir.
Hi, again, good morning. Just to follow up on pricing. How much of the price increases were already implemented through Q2, or the impact was just basically negligible?
Yeah, in Q2, there was no real impact at all. The price increases have kicked in from now, Guillermo.
Okay. Thank you.
You're welcome.
Thank you, Guillermo. Next question, please.
Next question comes from Mr. Peder Frölén from Handelsbanken Capital Markets. Please go ahead, sir.
Yes, hello again. Just to follow up on the inventory. We saw an inventory build of almost anything, SEK 160 million quarter on quarter, in Swedish krona terms. What was the volume number there?
Yeah, the volume was very, very slightly down. So more or less flat, just a little bit down in volume terms. So what you're seeing there is currency.
That's fine. Okay, given how the quarter ended, and compare that to your statement in the beginning of June, what has actually surprised you the last couple of weeks of the quarter and the first couple of weeks in Q3? It seems like the U.S. is reading a bit less strong than you maybe had expected, and that also count for Asia as well, or is that the right reading of your mindsets?
No, I would say the thing, I wouldn't say surprised, but the thing that's changed a little bit, I think, yeah, U.S., if you'd asked me probably at beginning of June, I would have expected U.S., what I'd seen, having just come from there as well, that it's continued a little bit up sequentially. So U.S. has eased off a little bit. That's the only thing I'd say that's changed from the beginning of June. Asia is broadly in line with where we thought. Europe is broadly in line, Latin America. And U.S. didn't impact us in the second quarter. Sorry, U.S. didn't impact us in the second quarter. It was more looking forward.
I think what's happened at the end of June and the beginning of this here is what's made me a little bit more cautious in U.S..
Okay. That's fair. Thanks.
Thanks, Peter.
Thank you, Peter. Next question, please.
I remind you, if you want to ask a question, you need to press zero one on your telephone keypad. There are no further questions at this time. Please go ahead, speakers.
Okay, thank you very much.
I'm sorry, 3 just came online. Would you like to take them?
No problem. We take them.
Okay.
We take them.
Next question comes from, Andreas from JP Morgan. Please go ahead, sir.
Yeah, good morning, Marita and Tom. My question is mostly on the outlook, and basically, you generally talk about the flattish Q3, but you highlighted a number of things in Q2 that were still very strong, but you expect them to be weaker in Q3. What exactly is getting better in Q3, or is that outlook still a little bit optimistic, given what you see into the quarter end in early June? And the second question on what you do in your business, given we're in kind of a flattish world with little growth. Obviously, you said you work on pricing, you do some restructuring. Is there anything else you have changed in your business in terms of travel, investments, hiring, to protect profitability? Thank you.
Okay. Let me take that last one first, and then I'll come back to the outlook, if I could, Andreas. Yeah, clearly, travel, cutting travel, hiring, all these elements are under tough control. We have a program in SKF we call the 3C program, which means the 3 Cs, you focus on, firstly, customer, secondly, cost, and cash. And why we do it that way is customer, you should spend more time out with the customers, so cut internal meetings, cut strategy, but cut, cut all the things that don't, you, you're not out with a customer, that stop you being out with a customer. Of course, cost is what do we do in the manufacturing, discretionary spend, travel, meetings, hiring. Do you need these individuals? If you need individuals, can you keep them temporary, et cetera. All these things are in place.
Also in place is short time working or should I say, reduced working in a number of operations. They're using time banks, using short time working, using big different vacation days. All these elements are in place to try and manage the cost end of, end of that. And then the third C is cash, of course, and focus on the cash rates, make sure we manage the inventories, but also account receivables. And within that, we're looking at delaying investment or when do we need to do certain things with investments, et cetera, there. So all these things are in place. On a more positive side, though, linked to the customer, a big push, we can see more and more interest from customers on products that help them reduce their energy consumption.
The BeyondZero portfolio is very positive in helping customers reduce their energy consumption. Yes, it has an environmental impact, but it does that through reducing energy many times their energy consumption area. So there's a big interest in this just now. So we are stepping up our activities also into the first C in that area, there. If I switch to your first question on outlook, Andreas. Now I would say the outlook, what we see, basically, yes, you saw it went through the quarter, but Asia didn't develop as well as we expected, nor did Europe there. And as you look at it now, and if you actually look at the arrows there, you see Europe down, Asia, North, and I talk sequentially there, North America and Asia, flat, and Latin America, up a little bit there.
So we're around the flat level for the group when you add all that together there. But I've got to say, there is a lot more uncertainty. You must be aware there's uncertainty, and things changed a lot during the last quarter, and things could change a lot during this quarter just now. So from us, what we see, just now is that we think we will stay round about the same level that we are just now. It doesn't mean it's exactly zero. It could be a little bit up or a little bit down, but round about that level that we're at just now, yeah. Does that help you, Andreas?
Thank you very much.
You're welcome, sir.
Thank you, Andreas. And, are there any more questions?
Yes, we have a question from Mr. James Moore from Redburn. Please go ahead, sir.
Yes, hi. Just two follow-ups, if I could. I wondered if you could say where you are on R&D and sales investments as a proportion of revenue in the quarter or the half, and where that's going to, whether we, because I know you lifted your R&D to sales ratio, Tom, whether that's hit the level you want to keep it at, or whether you still want to sort of move forward to higher numbers.
On the restructuring, I just want to get a sense for whether this is part of a longer-term, more significant 2012-2015 European manufacturing footprint change to, to get out of Europe, or and whether we're going to see higher rates of restructuring in the next two to three to four years versus the last two to three to four years, or whether you'd expect the kind of the normal historic run rates of, of charges.
Yeah, on R&D, we're 2.5%-2.6% of sales just now, and that's roughly the level we should run it for some time. I don't see it taking up significantly going forward. It'll bounce around that level, maybe 0.1 or 0.2-
Okay.
But round about that level, there. And that, of course, in the half year is up something like 0.4 or 0.5, up in the half year, year on year, 0.7 in the second quarter. If I go to restructuring, I mean, clearly, over a longer period of time, we need to adjust our manufacturing footprint, but we're not looking at any big dramatic bangs in that. It will be more the normal step by step, year by year, taking the steps that we need to do over the next three, four years to change our manufacturing footprint. Especially in an industrial arena, we have more of our manufacturing still in Europe.
Therefore, over a period of time, we will need to, step by step, adjust that into the areas where the growth is much more and where the demand is much more. And the reason we did not do that earlier, you could say, "Why, why didn't you do that five years ago?" Quite basically, we didn't have the manufacturing footprint in place in Asia to be able to do that. We didn't have the factories that we could move stuff into. Now we have these facilities, now we're able to make these moves there. And the industrial arena is a more complicated arena to do it due to the number of items that you've got there. So you've got to have the demand in that market to be able to justify the move there.
So that will be a more normalized SEK a few hundred million per year. I don't see anything bigger than that, James, but yes, over a number of years.
Okay, thanks.
Welcome.
Thank you, James. Is there any more questions?
Yes, we have a final question from Mr. Sebastian Grötter, Citi. Please go ahead, sir.
Hi again. Just a follow-up, quick follow-up. I mean, you mentioned a slight underlying improvement in Q2 profitability or operating income, if we exclude the one-off charge. Just wondering, what do you see for H2? I mean, if we ignore the fact that manufacturing level is going down in Q3 or slightly down in Q3, what's your thinking? Should we continue to see some underlying improvement, given maybe the tailwind on pricing or costs taking out, or other tailwinds you can see?
... Yeah, I mean, in the third quarter, if you look at it, you've got volume, sales volume is gonna be somewhat similar to the second quarter. You've got manufacturing gonna be lower, slightly lower compared to the second quarter. You've got the headwinds of raw material, but some tailwinds of pricing and currency. So you've got to balance all that. And I mean, I see a similar type development third quarter to the first half year in the group. But there are many things that can change during the quarter, but a similar type deal, because factors are more similar. If you look at it, the volumes are not dramatically different, but the manufacturing being a little bit lower.
Okay, thank you.
Okay.
Yes, is there any final question?
No, there are no further questions at this time. Please go ahead, speakers.
Okay, now we thank you very much for participating in this telephone conference, and goodbye to everybody.
Thank you so much. Bye-bye. A big push, we can see more and more interest from customers on products that help them reduce their energy consumption. And the BeyondZero portfolio is very positive in helping customers reduce their energy consumption. Yes, it has an environmental impact, but it does that through reducing energy, many times their energy consumption area. So there's a big interest in this just now. So we are stepping up our activities also into the first C in that area there. If I switch to your first question on outlook, Andreas. Now, I would say the outlook, what we see, basically, yes, you saw it went through the quarter, that Asia didn't develop as well as we expected, nor did Europe there.
As you look at it now, and if you actually look at the arrows there, you see Europe down, Asia, North... I talk sequentially there. North America and Asia, flat, and Latin America, up a little bit there. So we're around the flat level for the group when you add all that together there. But I've got to say, there is a lot more uncertainty. You must be aware there's uncertainty, and things changed a lot during the last quarter, and things could change a lot during this quarter just now. So from us, what we see just now is that we think we will stay round about the same level that we are just now. It doesn't mean it's exactly zero. It could be a little bit up or a little bit down, but round about that level that we're at just now there.
Does that help you, Andreas?
Thank you very much.
You're welcome, sir.
Thank you, Andreas. Are there any more questions?
Yes, we have a question from Mr. James Moore from Redburn. Please go ahead, sir.
Yes, hi, just two follow-ups, if I could. I wondered if you could say where you are on R&D, and sales investments as a proportion of revenue in the quarter or the half, and where that's going to? Whether we—because I know you lifted your R&D to sales ratio, Tom, whether that's hit the level you want to keep it at, or whether you still want to sort of move forward to higher numbers.
On restructuring, I just want to get a sense for whether this is part of a longer-term, more significant 2012-2015 European manufacturing footprint change, to get out of Europe, or whether we're going to see higher rates of restructuring in the next two to three to four years versus the last two to three to four years, or whether you'd expect the kind of the normal historic run rates of charges.
Yeah. On R&D, we're around 2.5%-2.6% of sales, just now. And that's roughly the level we should run it for some time. I don't get taken up significantly, going forward. It'll bounce around that level, maybe a point one or point two-
Okay.
But round about that level, there. And that, of course, in the half year is up somewhere like 0.4 or 0.5, up in the half year, year-on-year, 0.7 in the second quarter. If I go to restructuring, I mean, clearly, over a longer period of time, we need to adjust our manufacturing footprint, but we're not looking at any big dramatic bangs in that. It will be more the normal step-by-step, year-by-year, taking the steps that we need to do over the next 3-4 years to change our manufacturing footprint. Especially in an industrial arena, we have more of our manufacturing still is Europe. Therefore, over a period of time, we will need to step by step, adjust that into the areas where the growth is much more and where the demand is much more.
The reason we did not do that earlier, you could say, "Why, why didn't you do that five years ago?" Quite basically, we didn't have the manufacturing footprint in place in Asia to be able to do that. We didn't have the factories that we could move stuff into. Now we have these facilities, now we're able to make these moves there. The industrial arena is a more complicated arena to do it due to the number of items that you've got there. So you've got to have the demand in that market to be able to justify the move there. So that will be a more normalized few hundred million SEK per year. I don't see anything bigger than that, James, but yes, over a number of years.
Okay, thanks.
Welcome.
Thank you, James. Is there any more questions?
Yes, we have a final question from Mr. Sebastian Grötter, Citi. Please go ahead, sir.
Hi again. Just a follow-up, quick follow-up. I mean, you mentioned a slight underlying improvement in Q2 profitability or operating income, if we exclude the one-off charge. And just wondering, what do you see for H2? I mean, if we ignore the fact that manufacturing level is going down in Q3 or slightly down in Q3, what's your thinking? Should we continue to see some underlying improvement, given maybe the tailwind on pricing or costs taking out, or other tailwinds you can see?
Yeah, I mean, in the third quarter, if you look at it, you've got volume, sales volume is gonna be somewhat similar to the second quarter. You've got manufacturing gonna be lower, slightly lower compared to the second quarter. There, you've got the headwinds of raw material, but some tailwinds of pricing and currency. So you've got to balance all that. And I mean, I see a similar type development third quarter to the first half year in the group. But I... There are many things that can change during the quarter, but a similar type deal, because factors are more similar. If you look at it, the volumes are not dramatically different, but the manufacturing being a little bit lower.
Okay, thank you.
Okay. Yes, is there any final question?
No, there are no further questions at this time. Please go ahead, speakers.
Okay, now we thank you very much for participating in this telephone conference, and, goodbye to everybody.
Thank you so much.