Ladies and gentlemen, good morning to you all. Very welcome to this conference call for the presentation of SKF's half-year results 2011. This teleconference will take one 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 Communications, and myself, Marita Björk, Head of Investor Relations. Tom will start by presenting the results, and then after this, there will be a Q&A session. Over to you, Tom, please.
Thank you very much, Marita, and, hello, ladies and gentlemen. I'm delighted to be able to make some comments re garding the half year report for 2011, which we published earlier today. The second quarter was in line with our expectations and guidance. Sales developed positively and were up some 14.2% organically, and 18.6% if I include structure, which, as you know, is mainly Lincoln. So it was a very good development indeed, which meant that despite the strong impact and currency impact on our sales, which brought them down over 12% in Swedish krona, we had our highest sales ever for the group.
The very good demand development we saw, which held up through the quarter, combined with the actions we've been taking, meant that we could again deliver a record operating profit and record operating margin and a good cash flow. We must remember that we faced some strong headwinds in the quarter from higher raw material costs and from currency, which had a negative impact of some SEK 500 million on our operating profit, which was some SEK 100 million higher than we expected going into the quarter. The result development shows that the steps that we have taken to strengthen SKF, and the actions we're taking to offset headwinds, such as higher raw material costs, are paying off. We gained some important new business in the quarter from Bombardier Aerospace for their new aircraft, from MAN Diesel & Turbo for an important new development in magnetic bearings.
And we started a cooperation for the industrialization of a new hybrid flywheel system with Volvo, and we signed a strategic partnership agreement with Masteel. So a lot happened in the quarter, and these are just a few of the new businesses and agreements that that we made during the quarter. As planned, we are stepping up our activities in research and development, and their investment in R&D is up over 20% in the first half. We launched a number of new products, many of which help our customers reduce their environmental impact. And we signed an agreement for a new university technology center with Chalmers that will focus on sustainability. I'm sure that you're picking up a very interesting theme in what we've been doing during the last quarters, and that is an increased focus on research and development within the environmental arena.
With many of the new products and services we launch, and a lot of the development work we are doing, is focusing on helping our customers reduce their environmental impact. Now, let's get back to the second quarter and give a few more details around that. Organic volume grew by a little over 12% in the quarter compared to last year, which was very good. And again, it was well-balanced among all the main regions, except Latin America, and there, it was basically due to us, not due to the market. We introduced a new warehousing operation, including systems, et cetera, midway through the quarter, and it had a number of startup problems. We're on top of them, and we're nearly back to the right level, but it did impact our sales in the second quarter in Latin America.
From a group level, this did not have a major impact at all, but of course, it affected our Latin American sales. Let's turn to the other regions then. I'll start with Asia. We saw a very good development in the region, with our sales up nearly 17%, with a similar development in our main markets there as China and India. In China, our growth in our sales was to the fluid power, metals, and the railway business in the industrial market, but also good growth we saw in light vehicle market and in the vehicle service market. In India, the main segments of growth were renewable energy, railway, industrial gearboxes, as well as two-wheeler trucks and the vehicle service market.
I've got to say we had a good positive development in all the other main markets in the region as well, particularly in our sales to the two-wheeler market in Indonesia. In North America, we saw a continued good development overall. From an industrial viewpoint, the main segments of growth were fluid power, or I should say, pumps and compressors. We call it fluid power, internally. Pumps and compressors, construction equipment, agricultural equipment, and mining equipment. I must say, we don't see any positive development yet in our sales in North America to the renewable energy sector. They were down. We have a very good development also in our service division, with our distributor sales going very well, with little effect from the destocking, which has affected our sales in previous years.
In the automotive business, our sales to the car industry developed very much in line with our expectations in the market and really were pretty much unchanged year on year, but a little bit lower than the first quarter. We had a very good growth in our sales to the vehicle service market in North America. Switching over to Europe, our strongest growth from an industrial viewpoint in Europe was to highly similar segments as in North America: fluid power, industrial gearboxes, agricultural equipment, and construction equipment. The aerospace business is also showing a good, steady, positive development. Our sales to industrial distributors in Europe are developing very positively as well. We are yet, however, to see a recovery in our sales in Europe to the renewable energy sector.
But as I said last quarter, there are signs that towards the end of this year, they may start to develop more positively. Our sales to the car industry in Europe were lower, as we expected, going into the quarter, and we had a continued strong development in our sales to the truck industry. So put that together, overall, a good volume development in the second quarter, and as I said earlier, in line with our expectations. For the first half of the year, our sales are up organically by 17.6%, and if I include the structural changes, which is mainly Lincoln, by over 22%. Just on the lubrication systems, I can say that it's developing very well, and the activities to bring into SKF are well underway. Lincoln itself continues to develop very positively indeed.
I hope that those of you that were able to join us at the Capital Market Day in Berlin, in May, were able to get a better feel for what is the lubrication business. Another point, you will see, if you've had a chance, in Enclosure 5 of our report that we just issued, that we've broken out the effect of amortization on our operating profit, in a line there, so you can see the effect of amortization. And that amortization, which was a little more than SEK 50 million in the quarter, of course, is mainly Lincoln, but there's the other effect of amortization from the other acquisitions we've made there. So you'll see that in Enclosure 5. Let me turn over to manufacturing. Our level in manufacturing was significantly higher in the second quarter this year compared to last year.
In fact, we actually run it just a little bit higher than the first quarter, to enable us to manage what we see as our stoppages during the holiday period. Which, when we built some inventory and then finished goods, which we need to have to manage the normal shutdown in the third quarter. Let me turn now to our profit development. As I said earlier, we faced higher raw material costs in the quarter due to the higher base prices that we've got for this year, but also higher surcharges compared to last year. Scrap prices, in total, if you look in the market, are some 25%-30% higher than they were in the corresponding period last year. And as I've said many times, we have actions in place to offset higher raw material costs, and these actions are working.
Just to remind you, there are three actions: reduce our costs in our operations, work on our sourcing, and of course, increase prices. You see, we've had a positive price mix of 1.6 in the quarter, and I can tell you it was positive in all of our divisions. We've moved list prices in all regions during the first half, and of course, we address our prices to other customers as well. I must say, I said this last quarter, but I confirm, I think the team has done a great job in managing all these activities, the reduced cost, the sourcing, and pricing, to offset the higher raw material costs we faced in the quarter. We've done it. We've offset it, as we said we would.
If I look at the current view, we will, on raw material, we will continue to see higher raw material costs as we go through the year. The surcharges we have for scrap we're facing from our steel and component suppliers are significantly higher than this period last year, and of course, higher than the average of last year. Let's look at the operating profit. Operating profit is a little bit over SEK 2.6 billion was strong, and meant we had a 15% operating margin in the quarter, both records for the group. For the first half of the year, our margin is 15.3%, which is up from 13.1% last year. In that operating profit, of course, there's the investments we're making in our business, and we said we would be investing in our business.
I mentioned earlier, we've increased our investment in R&D by over 20%, and you'll see also we've increased our sales and administration costs. And I can tell you, we've increased our investment in people with over 300 new frontline people having joined the group. And I can tell you there's more planned and on the way to come into the group. Switching to the divisions. All divisions had a good performance. Service division up at 15.6% operating margin, industrial business division at 13.6%, and automotive division at 8.1%. And it shows that the steps that they've been taking to launch more products to support their customers, reduce their costs, combined with a good demand situation, are helping the results, especially the results in service and industrial.
I am pleased with the division margins, I must say, in the quarter, especially when you consider the currency headwinds that they've, that they faced, as well as the other headwinds. You know, the currency headwinds mainly hits the manufacturing units, especially the transactional, and it has the biggest effect in the industrial division, but there's also an important effect in the automotive division. Switching to cash flow. Cash flow was good in the quarter. We built some inventory, as you can see, in the quarter to manage the summer shutdown, which brought inventory up to 21.7%. But overall, the cash flow was good, and the inventory will come down during the summer. That's normal. It's a normal pattern there. So let me move on to the outlook for the third quarter.
A lot of external factors in play at the moment in the external market, with different views on the macro development. I, I don't want to go into this, what's happening in the macro area, but against the background that we see, which is really an uncertain background, and it makes it more difficult to forecast. As we see it just now, we expect a continued positive development in demand for the group in the third quarter. And we must remember, though, as you look at the third quarter this year and compare to the third quarter last year, that the comparisons year-over-year are getting tougher. And I want to say also, the third quarter last year was not a normal third quarter for the group because we saw a good growth in our business last year.
I think one thing you can see is we're back to a more normal seasonal pattern in our business. So to the group sales, will be slightly up sequentially and significantly up year-on-year. And as you can see from our report, we expect Asia to be higher sequentially, and significantly higher year-on-year. North America, slightly up sequentially, but higher year-on-year. Europe to stay at the same level sequentially, but will be higher year-on-year. And finally, Latin America back to a more normal pattern after the warehousing issues and significantly higher both sequentially and year-on-year. When I look at the divisions, industrial will continue to develop positively both from a sequential viewpoint year-on-year.
We see all the main industries for the industrial business continuing to develop positively, but we're still cautious about wind energy in the third quarter, and that's why we see a flat sequential development for wind energy. Our service division will continue to develop well, and the automotive division will be flat, sequentially due to our expectations that the especially in the car business, that when you look at the picture across the three different regions, Europe down a little, in the third quarter, and U.S. and Asia up a little, that has one effect in automotive division. And of course, the vehicle service market, we see, will be flat, also as we're in the summer season in many of our main markets there. But overall, overall, even though it's flat sequentially, automotive division will be higher year-on-year.
So put that all together, it means a positive outlook for the group from demand slightly up sequentially and significantly up year on year. From a manufacturing viewpoint, we'll keep the manufacturing level of the second quarter into the third quarter. So we'll keep the same level we ran the second quarter in the third quarter. But of course, because of the summer shutdowns in our plants, in absolute terms, our production is lower, but the absolute daily production rate will be similar to the second quarter. Some financial input for you. We expect financial net to be around SEK 175 million in the quarter, and taxes around will run around the 30% level.
Our forecast for additions to plant and property, you'll see we've dropped that down a little bit to around SEK 2 billion, which is a little bit lower than we forecast at the start of the year for the additions for this year. I think we're a little bit too aggressive in our earlier forecast for the step up in our investments, because we d id SEK 1.6 billion last year, and this is a big step up. We're not delaying anything, it's just it's taking a little bit longer to step up to the, the new level. So what does all this mean when looking at the third quarter?
First of all, I think it's important, we'll be back to a more similar seasonal pattern in our business, and we've not really seen that during the last two, three years because of the start of the downturn, 2008, the big downturn, 2009, and recovery in 2010. So we're back to a more normal seasonal pattern between first half of the year and second quarter, third quarter. The, if you look at the outlook, the positive factors, demand is slightly up sequentially and significantly up year-on-year. And it, it's important that with the mix of the business, we will have a slightly positive mix in our business because of the industrial business doing better than automotive.
Our manufacturing, however, will be lower from an absolute viewpoint in the third quarter this year than in the second quarter, but of course, still up well year-on-year. From a headwind viewpoint, we've both the currency impact, which is a minus SEK 400 million in the third quarter versus last year, and of course, higher raw material costs. If you look sequentially for currency, I would say currency will be similar impact on our operating profit in the third quarter to the second quarter, but raw material costs will be higher in the third quarter than we saw in the second quarter. We will continue our steps to invest in our business during the third quarter, so that will be a little bit higher run rate. Let's close up now and then take questions.
In closing, I'd say second quarter was a very strong quarter for the group. Continued good sales development, continued expansion in our operating margin, and getting to record operating margin, operating profit. We've gained some important businesses, agreed a number of important partnerships, and continued the investment in our business to support our long-term profitable growth and our initiatives. We also have a positive outlook for demand for our products in the third quarter. Before I close, I just say I hope you've seen we've a new format for the quarterly report, and I hope you like that new format there. Marita and her team have tried to make our quarterly report a little bit easier to read and include some more information, such as the outlook graphs, amortization, and our profit, et cetera, et cetera, in the report there.
We welcome your feedback, so please feel free to give her a call when you have some time on any comments or suggestions on the report. But I think it's a good step forward in the report. With that, I'll close my introduction, and I'll pass back to you, Marita, and we'll take some questions.
Thank you very much, Tom. Now it's time for the Q&A session. Please state your name and company name. Please go ahead.
Ladies and gentlemen, if you do have a question at this time, please press star one on your telephone. And to cancel your question, please press the hash or pound key. Once again, that is star one to register a question and the hash or pound key to cancel. There will be a short silence while participants register their questions. Our first question comes to the line of Nick O'Dea. Please go ahead and announce your company.
Good morning, everyone. It's Nick O' Dea from JP Morgan. Wanted to ask three questions, please. First of all, could you talk us through the year-on-year development in the automotive margins? It's a rather big step down. Just sort of wondering how we should see this margin development going forward. Secondly, on the inventories, I saw an inventory build sequentially of about SEK 1.2 billion. Just wondering how much of that is due to the currency, and what has changed on the lines? Previously, I read in the outlook statement that the manufacturing would be roughly flat sequentially, as well as demand sort of being slightly up sequentially. Wondering what has changed here in the inventory build. The third question is around the outlook statement. Sequentially, you got it up a little bit. As far as I understand-...
The third quarter is always down a little bit from a normal seasonality perspective. So should we expect it up a little bit, adjusted for normal seasonality? Is that the correct understanding, Tom?
Okay, let me take, thank you, Nico. Let me take them. In AD, if you look at AD's development, yeah, there was a drop-off, a, as you rightly point out, in the margin, second quarter versus first quarter, and of course, versus a very strong second quarter last year. Couple of factors in there. If you look at the business, the mix of business within the division affected them a little bit in the quarter. Look at the vehicle service market business. The vehicle service market was somewhat lower for them in the overall, in the second quarter versus the second quarter last year. So the mix of business was a little bit more to the truck and the two-wheeler business, rather than to the car and the VSM business. So that affected them somewhat.
Second, the currency affected them quite a bit, especially the transactional currency, impact there. If you take the total SEK 500 million in currency impact in the group, roughly half of that is transactional, half of that is translation. And of course, the transactional bit hits the manufacturing units, industrial clearly, but also to the automotive bit. So it was the combination of these two factors that affected them. How does it look overall? You know, automotive used to have a pattern some years ago, which was something like, you know, 60% or nearly 2/3 of the profit first half of the year, 1/3, second half. That's changed a lot there. But even so, they still get a little bit more profit in the first half of the year than they get in the second half of the year.
So the balance is a little bit, if you take the full year profit, a little bit more than 50% in the first half of the year, a little bit less than 50% in the second half of the year, and I expect that to pattern, similar pattern this year. And going forward, just on that automotive there, if you look at the car production figures, you can see that the third quarter for car production is seen to be a little bit higher in North America and Asia than the previous year. But in automotive, sorry, in Europe, somewhat lower than previous year. And some of that is the seasonality in the business, there, but also, you have the...
I think if you look at registrations that's been taking place in Europe, we're a little bit more cautious than what we think for the car business in Europe. Let me switch on to the inventory side. Yeah, as you rightly point out, there was SEK 1.2 billion in the balance sheet increase in inventory. Some 25-30% of that was due to the currency, and the rest of that was due to the buildup that we make as we go into the summer shutdown there. You rightly point out that as we were going into the quarter, we said that we would keep manufacturing level more or less the same as the first quarter.
We actually took it up just a little bit there, which maybe put a little bit more inventory in so that we can manage as we look through the summer, so we can manage this summer shutdowns there. So there was nothing special there. We expect that inventory to come out in the third quarter there. When you go into the outlook in terms of volume, yeah, I mean, there is the slight up sequentially. That is the underlying development that we see. There will be some effect from a seasonality, which is mainly actually much more in the European market than it is in elsewhere in the world. So that's changing, that seasonality overall.
But if you look at in normal patterns that you've seen, you've normally seen our sales, even if we've been up sequentially, slightly down third quarter versus second quarter. The big factor at this time you must look at, though, is what happens bringing it back to Swedish krona. There will be somewhat less impact bringing the local sales back to Swedish krona in the third quarter than we saw in the second quarter. Our best guess, if we give you a view at the moment, and this is extremely difficult to judge, but our best guess is that when you go from local currencies back into Swedish krona, it will be something between 5% and 7% negative impact from that.
Very clear. Thank you.
Compared to the third quarter last year, of course that is. Okay? Is that okay, Nico?
Absolutely. Thank you.
Thank you so much.
Thank you, Nico. Next question, please.
Our next question comes from the line of Fredric Stahl . Please go ahead, and I'll see your company.
Yeah. Hi, it's Fredrik here from UBS. I was just thinking, looking at your, you know, the end markets and, and the arrows there, and I was thinking, I was gonna ask you, within industrial OEM or industrial, you know, heavy segments or five-way or, or general, if you could give us some more detail what's happening within those arrows. Are there any end markets where you're seeing a trend that's different from what you're highlighting on the high level that you give us?
No, no, not real. I mean, we're seeing quite a broad-based one in anything that's significant for us. And it's actually interesting that if you look at the statement, we looked out also from the industrial division, how the sales developed in the industrial division in the first half of the year. It was actually quite difficult to break that out into different areas because we were seeing in most of the end markets of any significance, nearly all the same markets, any significant, we were seeing good growth there. As we go forward, we'll try to break that out, at least in the sales development, a little bit more, because maybe we'll see different patterns from a regional viewpoint and from a segment or industry viewpoint. But I've got to say, in all these main markets, it's going, it's going well.
We don't see any big, big change in them there. If I take the only one I would put in there is the energy, which is, which we break out anyway, separately. And there in energy, we've seen, as I said earlier, our sales down a bit in North America, no real development in Europe, up in Asia, is still there. And I still don't see a positive development going forward in North America. And I think Europe will be towards the end of the year before it comes.
Can I ask you on the energy side there, have you seen any changes in the competitive environment that could explain, you know, the slow recovery?
Apart from, you mean competitive environment from our customers, or-
No, from for yourselves.
For ourselves. I mean, there's everyone talking about the investing in wind energy, and they're gonna grow their business, and some are gonna double their business, et cetera, et cetera. But we must remember that in the total wind energy business, we are the leading supplier into that industry, especially when you take all the other factors into it there. So, I don't see any major change in the competitive environment at all.
Thank you very much, Tom, Marita.
Thank you, Fredrik. Next question, please.
Our next question comes to the line of James Moore. Please go ahead and name your company.
Hey, good morning, everybody. It's James at Redburn. Three questions, if I could. One on price versus raw material, please, Tom. Would you just be able to characterize whether the second half is meaningfully easier than the first half? Because you ramped up prices during the first quarter, and they should be at a sort of more of a full run rate, I would have thought. But then again, you made some changes last year, so that may not be the case, and scrap steel prices have perhaps come off a bit from the April peak. I know they're up year on year, but would it be fair to say that the second half net impact is easier than the first half, or is that not the case? Secondly, I just look at your industrial division and the drop through.
The incremental margin there was running very high, at the 60%-70% level for the last three quarters, and that's dropped to the mid-20s in the quarter. And other than currency, I wondered if there was anything going on specifically in the second quarter margin there. Then finally, you say SKF will return to the normal seasonality. And when I look back since 1990, the group has done a margin that's been 1.5 points better in the second half than the first half.
Mm.
Is that what you mean by that?
Good one. Let me take them one by one. Price versus raw material. I think one of the things, as you rightly point out, the scrap prices have come off their highs that we saw earlier in the year, there at the moment. But remember, from the time of the highs there to the time we see it in our income statement, there, it takes a couple of quarters before you get it all the way through into our income statement there. So we will still be affected in the second half of the year from the higher prices that we've been paying in surcharges, in the first part of the year, especially earlier part of the year. So we still have some impacts of that going through.
I don't think it will become dramatically easier, but I don't think it will become worse at all. I think we'll be able to manage it as we've done it before. In terms of the ID development, yeah, I think it's, we're well aware of that on the drop-through there. The major impact was currency into them. They stepped up some of their investments in the business and the R&D in other areas, but the major impact on them was currency, due to the big transactional effect that we saw, and but also due to the translation effect. So the big impact to them was currency on the drop-through there. In terms of the normal seasonality, yeah, it's a good point you raised there. It very much depend...
If you actually look at the pattern, what you normally see is we have a very strong fourth quarter. That's been a more normal season pattern, if you go back over longer periods of time. You see, if you take out the last three years, I didn't go, I must say, all the way back to 1990, but I went back 10 years when I was looking at that. You normally see sales drop off a little bit in the third quarter versus the second, and come back up strong in the fourth quarter. And then you see, rightly, as you pointed out, profitability being, I mean, really, normally second and fourth quarter are our best profitability, margin-wise, in the group.
I'm only looking just now, normally after the third quarter, because I think with the uncertainty that's out there in the business, I don't want to call the fourth quarter until we get closer, 'cause there's lots of things that can happen if one looks at the macro environment during the third quarter, and I think I don't want to call how I see the fourth quarter at the moment. So my comment versus normal seasonality is much more relevant to how you see the third quarter versus second quarter.
Thanks, Tom. That's very helpful. Could I just follow up on the currency? Could you say how much the 500 breaks by the business is giving this transaction impact?
Roughly, I still think it's roughly around 60% of the total amount into the industrial division. Then you've got automotive taking a little bit more, 25%-ish, roughly, and then service to 15% or so.
That's very helpful. Thank you.
You're welcome.
Thank you very much, James. The next question, please.
Our next question comes from Colin Gibson. Please go ahead and announce in your company.
Hi there, it's Colin Gibson from HSBC. Couple of questions, please. First of all, obviously we saw a significant volume deceleration in terms of year-on-year growth in Q2. Equally, obviously, that's business as usual at this point in the cycle. And so as we look at, a quarter-on-quarter deceleration from 20% year-on-year volume growth to 12.5%, 13% year-on-year volume growth, how should we see that? Is, is that in line with what you see as being a, a normal picture for this point in the cycle, or, or did that surprise you, in, in terms of the, the speed at which it came off? And was there any difference as you went through the quarter? Was June weaker than, you know, April or May, for example? That's the first question.
Second question, big preoccupation of investors over the past quarter, as you know, has been the state of demand in the Chinese economy. Insofar as you have a view into end customer demand in China, did you notice any slowdown as we went through the quarter? And also, do you have a view on where distributor inventory levels are in China at the moment? Thanks very much.
Okay. If you look at that. First of all, the volume overall, I've got to say, if I'd given you a figure at the start of the quarter, it would have been somewhere around 12%-13% I would have given you from volume at the start of the quarter. I didn't give you that. So the volume was not different to what we expected, and it is due to the fact that comparisons are becoming tougher, and I did highlight that going into the quarter. And I think also you see in the third quarter as well, Colin, that I mean, again, we've got a tougher comparison in the third quarter, 'cause it was the third quarter last year when the broad industrial business started to really kick in. So the comparisons become tougher.
So yes, the deceleration in the year-over-year volume growth is the pattern that we expected to see, and we highlighted that in one of our earlier ones, when we showed you one of our curves in sales. We expected that deceleration. We still expect, as I said, significantly higher year-over-year, but it's clear that the deceleration of that volume is there, volume growth is there. Did it change during the quarter? It's interesting that if I look at our daily sales rate, our daily sales rate in June was not dramatically different or really any different to what we saw in April or in May or that. So there was no drop off as we went through the quarter, there at all, yeah. Now, that goes first to China. Two questions on China.
One is the end user demand situation. It's clear for us that the growth rates in China is easing off. It's somewhat. You can see that if you look at the statistics. You can see that if you look, everything that's coming out from data or from comments down there. With this, having said that, industrial production was still pretty good in the second quarter. I think actually in, I do it from the top of my head, in, June, it was something like 14%, was the figure that came out there. So still a good level. I would say what we see from an end user viewpoint is clearly, our automotive end user demand situation is somewhat lower because of the ease off in the production.
The growth rate in cars, in terms of production, is not as strong now as it was before. It's still positive, but not as strong. Heavy trucks down there, which is not a big market for us at all, we're not really in that market, is not growing, in China in the second quarter. But the other markets, I must say, have been okay, for us down there. So, yes, I think China is, in terms of growth, still very positive. And our Chinese growth was similar to the Asian Pacific growth in total.
So from that viewpoint, we still see very good growth in our business down there, but it's clear, with the economy easing back a little bit, the growth rate will be somewhat lower than what we saw a year or so ago, and also, again, the comparisons become tougher. From an industry viewpoint, no, we don't. If I would like to talk China and then distributor in total, if I could, Colin. If I take China, no, there is nothing that we see that inventory of our products is high in the Chinese markets at all.
On total, if I look at industrial distribution inventory worldwide, no, we've done that check round, and, and bar the fact that USA, there's still some little carryovers, more or less over, little carryover, inventories we don't see are, in discussions with our big distributors, and we've spoken to a lot of them during the last quarter, there is no big overstocking of inventories there.
Okay, that's great. Thank you.
Thanks, Colin.
Thank you, Colin. Next question, please.
Our next question comes from Peder Frölén . Please go ahead. Your line is now open, and announce your company.
Yes, good morning, Handelsbanken. Hi, Tom. Hi, Marita. I want to get back to the inventory build. I mean, lead times are getting crazy again, and my take is really how much did this inventory build, the overproduction in the quarter, help you in terms of profitability? If it's three quarters of the SEK 1.2 billion and you do the math, it should be helpful on the profitability in the second quarter, I guess.
On that question also, given a lag in the scrap pricing affecting U.S. manufacturer, giving lead times getting crazy, looking at demands, they still seem to be okay and growing. Is it fair to assume price increases through the distribution again after the summer, and is it fair to assume that they once again could be pretty high? That's my first question. I'll get back with the second afterwards. Thanks.
I thought there was two questions in there.
Yeah, but everybody puts three, so I do two and half, right?
Okay, fair. Let me look at that. No, I mean, the, the pattern in production, actually, if you go back last year as well, look at the, the report for last year, you saw, I think, and I do from the top of my head again, we put something over SEK 1 billion in reported figures and inventory in the second quarter last year. So it is normal for SKF in the first half of the year to produce a little bit more than we sell, and in the second half, especially in the third quarter, to produce somewhat less than we sell. So there's no difference there. So I don't see this as overproduction helping our results, et cetera. It's a normal pattern, there with it.
We must also remember that, as you rightly point out, supply issues, getting supply into our operations, so we have some raw material. Our raw material inventories went up as well. Our component inventories went up, which has no effect in production there, so no value effect in that. And that's in order to recognize that demand. I mean, supply of raw material and components is becoming a little bit tighter in the market. So when we buy them in, it hits our inventory, but we don't get any value added from that there. And we expect inventories to go down somewhat into the third quarter there. If I go to the scrap issue there, the price increases. I have no comment on further price increases to make there.
I do think, though, the point you raised, the scrap levels are where they are at the moment, and there are different views on what will happen to scrap prices going forward. I don't expect let's see how that goes during the summer. But we have no plans to further increase prices at this moment in time. But doesn't mean to say we won't do it, but we will, once we've announced it to the market, we will tell you. But there's nothing I can say beyond what we've already announced.
Okay, perfect. On the automotive volumes, I mean, up a bit sequentially, I guess, a percentage point or so, and if you try to extract the car of that and have a decent assumption of the rest of the parts in automotive, it seems that you are growing faster than your market and official statistics. You mentioned that you're still growing in China. I guess that might be some market share there, giving you your sort of ramp up. Is that also the case in North America and in Europe? Or what do you actually explain this maybe better sequential volumes for the car part of auto than the statistic shows?
Yeah, I think exactly. I think in Asia, clearly, and especially in China, we are growing well ahead of the marketplace in terms of percentage growth there. So that's clear market share gains. And also, where we're increasing our presence with local Chinese producers there, so getting more business from them as well. If you've taken the I'll just take car business in Europe and North America. North America, I think we were broadly in line with the market. In Europe, we did a little bit better than the market.
Yeah. That's clear.
But also, if you take Automotive Division in total, I've got to comment, the truck business was very strong in automotive business, continued very strong. And we see that as you go forward, that type of growth, the growth rate in the truck business is very, very strong. End of last year, first quarter, the growth rate was very good in the second quarter, but not as strong as the first quarter. And we think the growth rate will be good in the third quarter, but again, not as strong as the first half of the year.
Mm. Very clear. Thank you. I get back in line.
Okay, thank you.
Thank you, Peder. Next question, please.
Our next question comes from the line of Guillermo Peigneux. Please go ahead. Your line is now open, and announce your company.
Hi, good morning. It's Guillermo Peigneux from Morgan Stanley. Hi, T om. Hi, Marita. A couple of questions from my side. First, regarding automotive and the Japanese earthquake impact, have you tried to understand the figures, adjusting for the impact of the Japanese earthquake in the whole supply chain? And, secondly, when it comes to the outlook statement, obviously you're seeing flat automotive, and I was wondering whether that actually means that adjusting for the recovery, that you're gonna be seeing some of these in markets because of the adjustment after the earthquake. Is that meaning that the rest is slowing down, or is just basically your, let's say, impact-adjusted outlook statement?
It's hard. If I take the first one, I don't see that we can see directly what impact the Japanese earthquake has had on us. We don't see any specific impact we can see directly, and that's also because if you look at car production, especially in Europe or in North America, it's difficult to break out how much of that is due to them adjusting their production levels due to the Japanese earthquake, or due to the end market demand. If you look at registrations in Europe, for example, just take June registrations. Registrations were down 8% or so in June. All major markets were dropping there. So it's difficult to break into exactly what it was.
It's clear that the biggest impact on vehicle production due to the Japanese earthquake was related to Japanese manufacturers, both in Japan but also in China, in Europe, in America, et cetera. So it is a little bit difficult to break that all out. When you look at our outlook for automotive, in total, it's a combination of the fact that the cars and the vehicle service market we see being relatively flat sequentially, there, and that the truck business while still growing, the rate of growth will be somewhat less than what we had seen in the previous quarters. It'll still be growing, and it can't keep growing at what it was doing because it's a classic V-shape recovery, and in a V-shape, it has to taper off at some time, there.
And it's a combination of all of that that comes in to make automotive flat.
Okay, thank you. And then maybe a follow-up on pricing. I mean, we're moving up from 1.3% to 1.6%. Would you expect that to continue to be up towards 2%, third quarter, second half?
I think we'll still have a positive... I mean, it's clear we still have a positive price mix. And as I mentioned earlier, Guillermo, I think one thing you see, and you can see that with our outlook statement as well, is that we expect a somewhat more positive industrial market, which is Industrial Division, Service Division, than we see in the automotive business. So we get a little bit benefit from the mix between the divisions, at the moment, and you'll see a little bit benefit that also in the third quarter.
Okay, thank you very much.
You're welcome.
Thank you, Guillermo.
You're welcome.
Thank you, Guillermo. Next question, please.
Our next question comes from the line of Johan Eliasson. Please go ahead, announce your company.
Yeah. Hi, this is Johan Eliasson, Schroders, Stockholm. I was just wondering if you could repeat this, what you said about the auto margins. Did I understand you correctly when you said that the higher share of truck business implied somewhat slightly overall margins in the Automotive Division?
I mean, if you look at the Automotive Division, the Automotive Division is made up of four primary businesses, the sales to the car industry, sales to the vehicle service market, sales to the truck industry, sales to the two-wheeler industry. The vehicle service market business was down in that, and the truck business was growing significantly. So when you add that together on a mix of the business, if you take aftermarket business and car business being at one end and then the other business being up, then it means that you have a somewhat negative mix in that business.
But the highest margins, I guess, would then be from the aftermarket?
Of course, yes, absolutely.
Yeah.
Absolutely.
Perfect.
Okay, Johan.
Thank you very much.
Thank you.
Thank you very much, Johan. Our next question, please.
Our next question is from the line of James Moore. Please go ahead.
Oh, I wasn't expecting to come back around so fast, but a follow-up question on industrial demand, if I could?
Yes.
I know that the volumes effectively ended up where you thought two, three months ago. But in between, we've had a lot of positive surprise coming out of the industrial environment from other companies. And we've heard a bit about Japanese bearing companies perhaps struggling post-Fukushima, and some potential share take for you, Schaeffler, Timken, et cetera. Is there anything you can say on that, as to whether there's something that SKF is seeing that perhaps meant that your growth has not surprised as positively as some other industrial companies has? Is it the wind side? Is it something else?
Better forecasting. I mean, we called the market better, probably. I mean, really, seriously, we looked at the market there, and we could see what was happening, and it was clear that what we said going into the quarter in terms of an outlook, we saw that the automotive was the area that would be affected much more in Japan. And we saw that by increasing our activity level in the market and by doing things, that we could do things well in the industrial business. And if you look at the industrial business, I mean, we had 18% growth in our organic growth in our industrial business in the second quarter, some 16%-17% in our service division. I mean, that's very strong growth, way ahead.
I think the factor that brings the group down a little is the fact that automotive only went with 6%. So no, I think really we called and I think the market was good. And I'm not going to comment, are we gaining market share as a result of this? I think we are performing somewhat better than the market, though, generally at the moment.
Okay. Thank you.
Thank you very much, James. The next question, please.
We have another question from the line of Peder Frölén . Please go ahead.
Oh, perfect. Okay, two easy ones. Just as a recap, the amortization you mentioned, is that the difference of SEK 49 million? And is that all related to the inventory of Lincoln Industrial? That's the first question. The second one might be slightly more tricky. The raw material, the gross effect on your P&L, QoQ, could you help us with that number? Is it SEK 100 million, is it SEK 200 million, somewhere in between? Roughly, how much did it actually hit you more in the second quarter versus the first? That's it.
Okay. If I take the amortization... The amortization that you have here is not the inventory effect in the second quarter. That SEK 49 million is... I mean, remember when we told you when we took Lincoln, we would have some amortization estimate of around SEK 140 million for the, the-
Okay. No, no, okay, I get you. But was there any inventory revelation left after the-
No, no, no. No, no, we took, as we said earlier, we took just all of that in the first quarter, so there's nothing there. So the amortization in there is the Lincoln, plus of course, there's some amortization from the other companies we acquired.
Yeah.
The inventory effect is not in that there at all.
Perfect. Yeah.
What was the other question? Sorry.
I mean, the raw material, the input cost for you, how did you try to quantify broadly how much it affected you quarter-over-quarter on a gross basis? You mentioned that you managed to offset, but hitting you on the P&L, was it 100 or 200 more?
We—as you know, Peder, we don't give out that figure there, but it was more in the second quarter than the first quarter, and a lot more than last year there. And it's, of course, we don't give that figure for a lot of good reasons.
Mm-hmm
... that we don't want to have that visible.
Okay. Perfect. Any restructuring cost or anything worth mentioning in the quarter? I guess not, but-
No, no, nothing worth mentioning in the quarter. And going forward, we have nothing on our list just now, but I would still put something in toward the end of the year.
Yeah.
You never—you always need to do things to keep your business in good shape.
Yeah.
I would just say to put something in towards the end of the year.
That's clear. Thanks again.
Thank you. Bye.
Peder, our next question, please.
Our next question comes from the line of Mats Liss. Please go ahead and announce your company.
Yeah, hi, it's Mats Liss, Swedbank. Just a couple of easy ones, I guess, from me, too. First, regarding the outlook, you normally put some flavor on the percentage-wise growth you expect in the third quarter, if you could do that, please. Secondly, about the inventories in the supply chain, if you, well, if they are more in line with the underlying demand, and that is, well, that you don't expect any help from the buildup there.
Mm-hmm.
Yeah, I'll start with those.
Yeah. If I take on, on the growth, I, I don't want to give a figure in that there. What I can say again is, that it will be significantly higher year-on-year, but clearly, as you've seen, and I think it was mentioned earlier, I think it was, one of the earlier calls, when you see the, the comparisons, it becomes tougher as you go forward. And if you actually look at that one from a historical viewpoint, you can see we had very strong growth in the third quarter last year. And that's why I mentioned earlier that the, the, the change we saw in the pattern was last year, when industrial really kicked in a lot in the third quarter, last year. So the, the comparisons become tougher. So therefore, the year-on-year figures become tougher to keep there.
So you've seen a drop-off from the fourth quarter last year, and it went up in the first because of a low first quarter, 2010, dropped off in the second, and it's clear that it's become tougher from a comparative viewpoint. We still expect it to be significantly hard, but it becomes a tougher comparisons figure. But I don't want to give anything on that. On inventories in the supply chain, I would say, no, I don't see that there's any dramatic overstocking or understocking or that in the supply chain, so I don't expect any effect from that.
Coming back to the first one there.
Mm-hmm.
Would you say it's demanding to show a positive volume growth in the third quarter also?
It's what it is. I mean, a positive volume growth in the third quarter, yes, absolutely. And as I said-
Yeah
... it'll be significantly higher year on year. So and you know roughly how we calibrate that, so you can figure out where it's be. But it's tough. As I said, the growth rates are easing off as we go through a first quarter to second quarter, so you can see that trend. So that can help you-
More, more in a single digit, territory, maybe.
I'll leave it, I'll leave it for you, Mats, to do that.
Yeah, sure. Thank you. And, well, then about FX, just to mention, the situation maybe have turned a bit more positive during the last couple of weeks there. And, I just wondered what- which kind of currency rate you use in your full year forecast? And, maybe if, well, if there are hedges impacting your forecast also that's sort of... Well, just if you could give some more flavor regarding the FX.
Tony will do that. I'll ask Tony to talk a bout that.
Yeah, when we do the outlook for the currency effects, we base it on the rates the last few days, you could say. Of course, we also put in volume assumptions and profit assumptions for in which countries and which currencies the profit will come, et cetera. There are always a lot of uncertainties in that respect. Basically, the most updated information we have.
Of course, hedges affect that as well.
And hedges. But we don't have much effect-
No
... of hedges,
No
... it. It's limited figures.
Yeah.
Okay, thanks a lot.
Okay, thank you, Mats. And the next question, please.
Our next question comes from line Arnaud Brossard. Please go ahead. Your line is now open, and announce your company.
Hello. It's a question not just on Q2, in fact, it's about the automotive division, which for several years, in fact, has shown a profitability significantly below the other divisions. I was wondering if you see this as the fair reflection of how tough or challenging this market, this end market is? Or if you see something you could do on the cost structure or on market consolidation to dramatically change this?
Mm-hmm. I said, I mean, it's clear that the automotive... I mean, it's clear that any business that you have, you have some businesses below the average of the group and some above. And it's clear automotive is a more challenging business environment. I think the automotive team have done a great job to lift the margin up to new levels in terms of how they operate. So I really think that the getting up to the 8.5%, 8.6% average margin for the first half, that's a good step up that they've made within it. Going forward, what can we do? Yes, of course, we must work on one side on cost, continue to work on costs.
They've done a great job with moving production away from Europe into other countries, and they'll continue to work on that. Secondly, the mix within the business, making sure that we take advantage of the more profitable parts of the business, like the vehicle service market, over a longer period of time, and making sure we grab that, and making sure we bring new products to the market that will help us. And thirdly, I think an important element there is, I see the trend in the environmental arena is a very important trend in the automotive. And we've put a lot of investment into developing new products for the environmental arena, to help our customers reach their CO2 emissions in the vehicles.
You see a couple examples of them in the report, with a new lightweight hub unit, with a new double clutch unit. Double clutch transmissions are a very good way of reducing CO2 emissions and taking out energy losses in the drivetrain. The lightweight hub units, of course, unsprung weight is very important in vehicles, and that can help you reduce CO2 emissions. So I think driving that, in that agenda, as well, is very important. Automotive, as I said, 8.5%, 8.6% at the moment, that's not the final area. We're still working to improve automotive division, and we still have steps to do on cost, on mix, and on taking advantage of the new environmental arena to work to get a better margin in that business.
I see. And would market consolidation be something you would consider as well?
I think with our position in the, in the automotive market and our position as a company, it's somewhat more challenging to do certain steps there. However, if there were certain areas that could be brought into the automotive business, that maybe would enable them to widen their scope, maybe go to more modules or systems, to the market, that's things we will look at.
All right. Thanks.
Thank you.
Thank you, Arnaud. The next question, please.
We have another question from line, Guillermo Peigneux. Please go ahead. Your line is now open.
Hi again, it's Guillermo Peigneux from Morgan Stanley. Just to follow up, maybe, in terms of, let's say, the growth year-over-year for the third quarter, given your current outlook statement, are you leaving the teens finally? Are we going towards, probably the long-term, growth target that you have in your guidance?
I think, as I said earlier, I don't really want to go into the figure there, but it becomes that the comparisons become somewhat tougher year on year. It's still positive, it's still growing, it's still going sequentially, it's still gonna be significantly up year on year, but it does become tougher in the third quarter, the comparisons.
Okay. Thank you.
Thank you, Guillermo. And next question, please.
We have no more questions from the phones at this time.
Okay, so then this brings us to the end of the conference. We thank you very much for participating. If you have more questions, please do not hesitate to contact me. I will be available for questions right after this call.
Yep. Thank you very much, everybody, and I take the opportunity to wish you all, a good summer. Thank you.