Good morning, everybody, and welcome to these nine months results. We welcome you all here and all of you who are linked in by phone. I would like to present our President from SKF here, our CEO and President and CEO, Tom Johnstone, our CFO and Executive Vice President, Tore Bertilsson, and Ingalill Östman, our Senior Vice President, and myself, Marita Björk, Head of Investor Relations. Tom Johnstone will start with a presentation of the results and also about new targets and our new acquisition, and we will then be ready to take questions, first from the floor, and then from those of you who are linked in by phone. The presentation will take around half an hour or, and the Q&A session half an hour or so. Thank you. Over to you, Tom.
Thank you very much, Marita, and good morning, everybody, and welcome to this press conference for SKF. Thank you so much for your flexibility with us changing the time at short notice, and I'm sure you understand why when you've seen our press releases this morning. What I want to do is go through three different sections. I'll talk a little bit about the nine-month report and outlook, how we see the business developing at the moment. Secondly, I'll go into our new financial targets that we've set and some of the activities and initiatives we have for our new financial targets. And thirdly, give you some more information around the acquisition that we made, which is a very important acquisition and very much in line with our strategy in total. So let's start with the nine-month report.
If you look at it clearly, you can see it was a very, very strong report from SKF in the, in the third quarter. Strong operating profit, a record operating profit of over SEK 2.3 billion, record operating margin at 14.9%. Very strong report, driven by the activities we've made to reduce costs in our business, but also the fact that we see volume, coming back both on our sales side and our manufacturing side, and some move towards a positive mix in total. Our profit before tax at SEK 1,950 million includes the SEK 150 million we told you about, for the write-down of the vendor loan that we had with So- with Tobacco, so that's included there. I think also what's very important is a strong cashflow.
Strong cashflow of over SEK 1.9 billion in the quarter brings us up to over SEK 3.1 billion cashflow in total for the year so far, for the nine months so far. So strong, strong cashflow from the group as well. I said the business developed positively in the quarter. You can see that from the organic sales volume sales development, 19.3% for the group. And you can see all three divisions developing positively. But now the service division was the largest growth, followed by industrial division and the automotive division. The automotive division clearly is coming against tougher comparisons as we see it going forward. But also, in addition, we must remember that we're seeing some easing off in the car business within the automotive side. I'll come back to that a little bit later.
Looking forward, as a headline to Q4, you can see that we're continuing with positive outlook, and we see that our sales will continue to be significantly higher year-on-year in the fourth quarter, compared to the fourth quarter last year. We'll keep the manufacturing at the level we had during the third quarter in total, which, of course, means it's significantly up year-on-year. Some key highlights from the quarter. We announced, actually announced at the Capital Market Day in August, the two new factories that we're putting in place in one in India and one in China, to strengthen our footprint there and to support the growth in these markets.
We're investing in heat treatment in our North American operations, and of course, we've continued to open our solution factories to bring our services and our products, offering more to our customers. We now have 14. Well, actually, today, we now have 15 worldwide, 'cause we've just opened the 15th on Friday last week in Canada there. We opened two during the quarter in Turkey and the U.K., and now also we opened just last week, the 15th in Canada there. If I look also from a customer viewpoint, I picked a couple of, three highlights out there from a customer viewpoint. Firstly, we're continuing to get more business in condition monitoring and especially in WinCon, with Gua, in China, which is a very good business we've got for condition monitoring.
We have been working, as you know, over many years to document the savings with our customers, and it's clear that this is working and is a benefit for us in the market, and is a benefit for our customers, because we've now documented over $2 billion worth of savings with our customers, which is a tremendous level of savings. And we'll continue to use that, and actually use it more and more in our business going forward. We've launched a number of new products, and I'll talk about them. And then a couple of important things from a sustainability viewpoint. Our new office in USA, our head office in USA, has received the Platinum Award for sustainability, which is a LEED certificate, which is one of only 60 buildings worldwide that has that award.
A new factory we only opened last quarter in Russia has already achieved the gold standard for from a factory viewpoint, which is an excellent performance as well. And last, but certainly not least, we're in the Dow Jones Sustainability Index for the 11th year in succession, and the FTSE index for the 10th year in succession. If I look at some of the new products, I won't go through all these new products. You see them in the presentation that we've launched. But you can see behind that that we've got a strong activity of continuing to bring new products to our customers, bringing together our platforms to develop new solutions, but also with a strong focus on sustainability. I'll just take one example. If I take the one up the top, the low friction X-Tracker hub unit-...
That is able, is for a wheel bearing on a vehicle, and is able to reduce the weight, but also save up to 1.3 grams of CO2 emissions put on a car if it's fitted in all wheels. So we're bringing more and more new products to the market with a sustainability focus on them. Let's move on and talk a little bit about the result, and I'll walk through it. Volume is up 19% in the quarter, which means year to date, we're up some 13.4% in volume, so a good, strong development in the quarter for us. If I look at that in sales, it was 19.3%, and that's because, of course, we moved back into a positive price mix. Price mix was 0.3 for us in the quarter.
I just wanna comment on that a little bit later. If I look then at year to date, 13.2, and if I look on a geographical basis, what you can see now is stronger growth in Europe and in North America compared to last year in the quarter. So you see that the European business and the North American business has strengthened for us on a year-on-year basis during the quarter. And that's because last year, many of the big industrial businesses were still going down, and now they've started to improve for us in this quarter. And also, we still have a good automotive business, especially in North America. Asia, actually, at 34% growth in the quarter, was very much in line with what we saw in the first two quarters of the year.
So if you look at this, when I look at the year to date, you'll see the year to date is 34% for Asia, i.e., as well. Going forward, we see some signs that that level of growth will not continue. We had some benefits, especially in our industrial business, in the third quarter, being strong in the Asian region. And you'll see also, as I say, when I look at the year to date from a geographical viewpoint, that the growth in Europe is now into 4%, whereas if I go back and look at the third quarter, we're at 12% growth. So you see the growth is becoming better in the European area year-on-year.
If I look at the components and net sales and look at that over a longer period of time, as I said, after two quarters of negative price mix, we moved back into positive price mix in the third quarter, and that's because the divisional mix between the divisions was in our favor. It is a mix factor that's there. We had some negative mix within that 0.3 as well, and that negative mix was within the divisions, where some of the segments which have a lower price were doing better than the segments with a higher price, especially in areas like industrial. For example, the heavy industry segments, wind energy, et cetera, hasn't really come up as a percent of that division yet. It's only starting to come.
So that meant within the divisions, it wasn't as strong, especially in industrial. But overall, 0.3 for the group, I think, is good to move back into positive territory in total. As I said, profitability, if I look at operating profit development, up to SEK 2.3 billion, which is a level we've never been at, and beat our record that we did on the second quarter in total, and which means the operating margin at 14.9% was also a record for the group, in total, and brings us to some 13.9% year to date, or 13.7, including the restructuring we took in the, in the first quarter.
If you look per division, what you can see there in the trends per division, is that automotive's maintained its good record from an operating margin viewpoint, 8.5% in the quarter, which is in line with what it was after six months in total. But you see both industrial and service improving in margins. Industrial, nearly up to the 13% and service is up to 14%. So good improvements from a margin viewpoint in the divisions as well, in total. Which means, then, when you look at the summary, sales of SEK 15.4 billion, 14.9% margin, I think a good, strong quarter and a good, strong nine months for the SKF Group.
One thing that you can see in the quarter is that the inventories went down quite a bit, went down to 20.2% in the quarter. But I've got to say, there are two factors behind that. One is the better sales in the quarter as we look at that, but secondly is currency. If I take the currency effect out of it, our inventories didn't change a lot in the third quarter. And you may say, "Why is that during the summer quarters, you didn't bring the inventories down?" It's because of the good demand situation that we see in the focus that we've got on service level to our customers.
But secondly, also, we are seeing more and more supply difficulties into our factories on component supply and our ability to manufacture, which means we're running higher inventories in our, raw material components area. And thirdly, of course, inventories are getting a little bit higher in terms of cost because we see raw material costs going up in total there. So, in fixed currencies, we're not a big change, but of course, we're, we're helped a lot by the currency change and the higher sales there to bring it down to 20.2%. We'll continue to work on that, going forward, but clearly, from our viewpoint, focusing on service to our customers is very important in this market situation just now.
Cash flow was very strong, as I mentioned, over SEK 1.9 billion in the quarter, makes it over SEK 3.1 billion year to date, and the return on capital employed was 20.7% on a rolling twelve months. If we actually look at that on just the nine months and annualize the nine months, we're just under the 24%, 23.9% in total. So we're very much in line with our targets there as well. Net debt reduced, of course, with the cash flow, and our debt structure is in good shape. You can see that we've got one debt repayment to make in 2011, but then the next one moves out to 2013 in total.
Let's talk a little bit about the outlook and how we see the outlook, and maybe I switch onto the arrows is the best way to do that in total. Actually, doing the arrows this time was relatively easy for us across the divisions and across the regions. There, we can see that we're slightly higher in all areas, but significantly higher year-on-year. And you see Europe has moved from being what we thought was a sequential development in the third quarter, relatively flat, to now coming up a little bit, driven by the industrial business. We've seen a little bit improvement in the aerospace business as well. So driven by these businesses there. Automotive, we don't expect significant change from what we saw in the third quarter.
North America, still slightly higher, and Asia and Latin America we see continue to develop positively, but probably the level of growth easing off a little bit into the fourth quarter. Overall, though, we will still be significantly higher year-on-year. I don't think we will see the type of volume growth in the fourth quarter that we saw in the third quarter in total, but it will, because we're coming against tougher comparisons now, because we saw the recovery starting in the fourth quarter last year. From a divisional viewpoint as well, as I say, fairly straightforward, slightly higher in all divisions and significantly higher year-on-year. If I look at the segments, and let's walk through them, how we see the outlook. I'll start at the bottom of the picture. Trucks, we see a continued strong development in our truck business.
We still see strong growth in Europe, which is a major part of our truck business, and in North America, which is a small part, strong growth. The other segments you can see, industrial distribution, general OEM, et cetera, are developing positively from a sequential viewpoint, there. And I think the change you can see very much from the last quarter is aerospace and energy have now started to develop, we can see. We are starting to see growth in both these areas, moving from really a relatively flat development before that. Cars and railways, we expect to continue to be relatively flat. Let me talk a little bit about the car business and what we saw.
If you look at our sales in the third quarter into the car industry in Europe, we were relatively unchanged, our sales, but vehicle production was down in, in Europe in the third quarter versus the third quarter last year. Our sales were relatively unchanged due to the mix of models we were on. The models we were on did a little bit better than the, than the average of the marketplace there, and that was middle-class vehicles and certain vehicles which also are going into the export market. So we did a little bit better than the, than the average. I expect vehicle production in the, in the fourth quarter in Europe still to be down year-on-year. The latest figures I see from an external forecast is around 8%.
USA, I think vehicle production will be a little bit up, but car production will be a little bit up in the fourth quarter and up a little bit in Asia. But when I look at it overall for us sequentially, we think we'll be relatively flat. The railway business, we also think sequentially will be flat, which is a better Asian business and a weaker railway business in the European market. Moving on to other areas for guidance, I would say tax level stay around 30%, financial net around SEK 175 million minus, of course. Then exchange rates. We've seen quite a change in exchange rates during the third quarter. It didn't affect us so much in the third quarter because of our hedging and because of the balance that we have there.
But if you remember, last quarter in July, we said in the fourth quarter, we expected a positive from exchange rates for the group of around SEK 100 million. Now we see a -SEK 50 million in the fourth quarter. So that means we've seen about a SEK 150 million swing due to the currencies from the beginning of July through to how we see it just now from us. So instead of a positive in the fourth quarter, we see a negative of around SEK 50 million, which will bring the full year negative to SEK 400 million in total. So currencies is having an effect, of course, on businesses, and that's something you would expect watching the currency development in total. And you've got to look at that level as you think into next year as well.
I mean, if we take the rates just now into next year, you can see a similar figure per quarter going into next year, in total. In terms of additions to plant and property, you can see we're just about SEK 1.2 billion after the first nine months, and we'll probably be a little bit around SEK 1.6 billion, which is a little bit higher than we said before. We said about SEK 1.5 billion, but nothing strange there in total. So if I summarize going into the fourth quarter before I move on, I would say you will see sequentially, volume for SKF going up a little bit, up a lot year-on-year. Us keeping our manufacturing at the same level, roughly as the third quarter, which means up a lot year-on-year.
So these are positives that we see there. In terms of some headwinds, one headwind you're going to see clearly is the currency, which is not only a headwind year-on-year, but a headwind fourth quarter versus the third quarter, which will have an effect on us there. And also, we can see raw material costs starting to come as well. You started to see that in the third quarter, raw material costs coming into our business. Higher raw material costs, you will see higher raw material costs going into our business also in the fourth quarter. And at the moment, it looks like that for next year, but it's too early to judge that at the moment. So summary, strong third quarter, positive outlook with... For the fourth quarter in total.
Let's move on to the second item on the agenda, which is the new financial targets, a subject that was very hot at our capital market day. Lots of questions on the new financial targets. Let me talk before I go in and go through the financial targets. Let me talk a little bit about the process at SKF and how we did this, and I've mentioned it to many of you before. We work a strategic process in the SKF Group to really look and see that we have the actions in place in all of our operations, in all of our regions, before we decide on what the targets should be, and these actions are in place to support the targets. We've been going through that process during this year, seeing that the business is developing more positive.
We've been going through that in place, and we now have in place the actions in our operation to support the targets going forward, which I think is very, very important. If you look at the performance of SKF, and I put it in one picture here in total, you can see basically against our previous targets of 12% operating margin levels, growth of 6%-8%, 24% return on capital employed. If you look at them against our performance, and especially our performance coming out of the dip major downturn last year, I think you can say we've achieved the targets that we set ourselves, and we set ourselves these targets in January 2007. So it was time for us, as we started during this year, to look at the next step for SKF.
How do we raise the bar in performance for the SKF Group in total? And we've done that process. We've been through the work within SKF, and that's where we come up with the new targets, to raise the bar in terms of operating margin to around the 15%, in terms of growth to around 8%, in terms of return on capital employed to 27%. But we keep our inventory target at 18% because we still have that target to achieve. That's one I can say I've not ticked off yet. Let's look at some background into what is in our thought process when we're setting these targets, which I think is very important. What we see going forward is the world recovery will continue in the coming years.
Yes, there's some uncertainties, and you can see uncertainties with macro data that you get out just now. But over a period of time, over the few years, the recovery will continue from our viewpoint there as well. But it will be very uneven, with Asia strongest, clearly in terms of growth, and Asia becoming an important part, an increasingly important part for SKF. With areas like Central East Europe, Latin America, growing, but not growing maybe with the same speed as Asia. But the big economies like Europe, USA, Japan, et cetera, growing, but not with the same speed there. So you're going to see a mix of growth around the world, but what we do see is a recovery going forward.
We believe with the approach that we are taking in SKF, and we can see it already, in terms of combining together the platforms and taking a very focused approach, segment to segment, that we can perform a little bit better than the industrial production growth going forward. We've done it in the past. We see we can do it going forward there as well. Also, because of this uneven growth and because of the focus that we've put in place in SKF, we will see certain businesses growing better than others. So Asia, which was 23% of the group last year, is roughly 25-26% of the group today. Because of the growth, will clearly grow in the coming years above 30% of the group's turnover.
The industrial business will grow, not just because of the acquisition we've made, but because that's a focus that we've got there. It will grow. We will continue to focus on the aftermarket business, as well. So these areas will grow, within the group in total. Our strategy to make the growth and to drive the growth going forward is the strategy we've had in place. We're not changing strategy. We strongly believe that our strategy, that we have to combine together the platforms and segments, to have a strong focus on the customer, to develop new products for our customers and bring them to our customers, is a winning strategy. And we've seen that over the years, and we believe that can continue to be going forward. But we must take steps to strengthen our platforms. We must take strengths...
Steps to strengthen our position in many of the faster-growing markets of the world. So it means investing in these areas to support that. Of course, at the same time, we must focus on costs and manage our costs in a good way and bring in right people for SKF. Our long-term strategy, as I say, hasn't changed, but we've put three big initiatives to really push this a little bit more, put an extra emphasis on our growth, and to achieve our targets going forward. First of all, we must achieve profitable growth, and we must accelerate our profitable growth within SKF. Secondly, we must continue to focus on our cost, our cost base, reduce cost, and eliminate waste. And thirdly, we must invest in growth.
You can't just get the growth just by matter of saying it's going to be there. You must invest in that. Let's go into each of them in one by one. But as we do that, we will keep the focus on what we're doing in SKF Care for the sustainability and operating as a group, as one SKF. Let's go into accelerate profitable growth, first of all. First of all, we will continue to strengthen our platform segment approach to the market, investing in resources to support that. That is frontline resources, engineers, specialists to work with our customers, service people that can support the development of our business, product specialists, but also frontline sales organization. And also investing in tools to support them from an IT viewpoint, which is very important.
We will increase the development, intensify the development of new products and launch of new products. New products, especially with the green, focus, with the green agenda, which is very important for us in total. Thirdly, I mentioned earlier that value-based selling or documented solutions was a very important, program for SKF, with over SEK 2 billion in savings over the last 10 years documented for our customers. We are now bringing that more and more into the organization and using it in all our customer areas because we really believe that that value-based selling is the best way to drive our business, in total. With a focus on aftermarket, the service business is key to us. How can we increase our service business within SKF? We're taking steps to strengthen that in total.
Of course, we're making with a clear part of our plan, this, this plan to make acquisitions to strengthen our total platform offer. You see with the first step towards it today. Reducing cost and eliminating waste is also important because you can't just accelerate. You've also got to make sure you keep your business well under control as you do that. As many of you saw during the Capital Market Day, we've made significant progress in using manufacturing excellence, a manufacturing excellence philosophy in SKF, and bringing it in to basically release the knowledge of our people and use that knowledge to eliminate waste in our operations. We are now taking that same philosophy that we have in manufacturing into the other business processes, into the other parts of our business....
So bring it into our demand chain, bring it into innovation, bring it into how we operate with our customers. That will help us eliminate waste, make us more efficient, more effective, and reduce our cost of doing business. What it's basically about is focusing on delivering value to your customer, and if steps that you're doing in your business doesn't add value, why are you doing it? We must take them out. But it's very much about letting our people find ways to do that in the business. Secondly, clearly, we must continue the process to move our manufacturing and our sourcing into best-cost countries. We've made major step forward in our automotive business, and you'll see us doing more and more of that in our industrial business. And you can see that also with the new factories that we're putting in place there.
One of the things we talked about a lot at the Capital Market Day in our automotive business is what we call ICR, integrated cost reduction. We have a major initiative in SKF to basically look at our products and see in our products, can we take cost out? How can we take cost out of our products? Do you sometimes have too many elements within that, that doesn't have a value to our customer? Focusing very much on cost reduction on our products there. Thirdly, investing for growth is very important there. I mentioned earlier, more sales and engineering resources is very important for us. We will put in place, clearly, additional factories to in the growth markets. You've got the 2, the Dalian and Mysore, already announced. Be clear, over the coming years, you will see additional factories in place.
We're already having a plan what we need to do in different areas, which means that our additions to plant and property will go up to more the depreciation level going forward, in order to support that growth in the business there. Thirdly, we will continue the step for solution factories. We have a plan to double the number we have just now. We have 15 now with the opening last week in Canada. We will take that up to 30 in the coming 2-3 years. And we must sow the seeds for the future by investing in research and development, and we're also strengthening our research and development in India and China.
As you know, we plan to accelerate the activities down there and bring both operations up to something like 400 engineers in India, 400 engineers in China, going forward. These are the initiatives that we will drive much more in SKF to support the strategy, to support the growth, and to support our targets. Now, how do we... When we looked at that and we looked at the plan, we wanted to look and see, how do the targets look in a longer term perspective? I show here the operating margin of the SKF Group right back to 1990. And if you look at it, what you can see is that if you go back in the 1990s, we operated around the 7% type margin.
If you average out, you take away some of the big restructuring steps that we took during that time frame. We raised the bar at the beginning of this decade to something around the 9%. We raised the bar again to the 12% in SKF, and we're operating around that. What we're now doing is raising the bar one more time to the 15%. We believe strongly that the strategy we have in place, the actions we have in place, support us moving to this 15% operating margin target.
Now, some of you may be sitting and saying, "But Tom, you did 14.9% in the third quarter, so have you really raised the bar much?" I'd say that our development in the third quarter was very strong, was very good, but you're in a little bit of a sweet spot at the moment because you've got the benefit of volume coming in. You still have the costs at the lower level, and as you invest to develop the growth going forward, you need to invest something in research, in, sales and administration costs to get the, the longer term growth, going forward. You can't keep driving it without investing there as well. I believe this is a clear raising of the bar of performance for the SKF Group, in total.
In terms of growth, I looked at that as well, and I went back and tried to look at growth, which I know includes price mix in it here, but over a longer period of time as well, there. And you can see that it's been quite erratic, but much more stable in the last 6, 7 years, excluding the big downturn in 2009. And therefore, putting the bar at around the 8%, I think you could say, if you look over the previous years, and I take out the effect, by the way, of a vaco in this picture. Looking at in the previous years, you may say that's not that ambitious, but I would say, with how you see industrial production develop going forward, to do 8% growth, excluding major acquisitions, small bolt-on acquisitions would be in there.
The smaller ones we make is in the 8%. But big acquisitions excluding, doing that consistently, I think is a good growth and an aggressive growth target in total. So these are the new targets for SKF. I think from my viewpoint, it raises the bar. It raises the bar in profit, it raises the bar in growth, it raises the bar in return and capital employed for SKF, and we have the actions in place to be able to to deliver on these going forward. But remember, these are long-term targets. They're long-term targets that we're focused on, but I think it, as I say, it shows an improved performance for SKF in total. Let's close by talking about the acquisition of Lincoln or Lincoln Industrial in total there.
I wanna go back a little bit and talk a little bit about the philosophy of why lubrication for SKF. As you know, we have a clear vision to equip the world with SKF knowledge, to take our knowledge to our customers, and we've defined the knowledge with the three dimensions: our geographical coverage, our presence in about 40 different industries worldwide, and the technology platforms that we have in SKF. Let's look a little bit more about the platforms. We see these platforms as working together in a very coherent way, in a very important way, to develop new solutions for our customers, but help our customers manage and reduce friction. That's what it's all about. The bearing with the seal, with the lubrication, with the services, with electronics, is helping our customers manage and reduce friction.
We have a lot of knowledge in how to help our customers manage and reduce friction.... So we need to have a leading position in all these platforms. Lubrication is one such platform, which is key in the ability to support us, able to manage and reduce friction. Using the right amount of lubricant in the right place at the right time helps you reduce friction, and all of that means reducing energy costs for our customers. If you look at lubrication systems, what are they about? It's about improving performance and productivity for our customers, improving reliability for our customers, reducing their maintenance and service costs. Because an automatic lubrication system ensures you only put the right amount in. You don't have to manually lubricate the system, and when you manually lubricate anything, you normally over-lubricate it.
You put too much in because over an average time, it will be right. Too much at the start, too little at the end. An automatic lubrication system puts in the right amount, at the right place, at the right time there as well, and will help our customers reduce their energy consumption. You have a number of different types of systems that you can use to have an automatic lubrication system to ensure you put the right lubricant in the right place at the right time. The market, in total, is a market something above 20 billion SEK worldwide. It's a market which has got, I'd say, two basic systems, a system that puts oil in or a system that puts grease in. Similarities, but different systems. Some areas it's much better to use oil-based lubrication, some areas it's better to use grease-based lubrication. And there are many...
It goes across a broad base of industries, from heavy industry through specialized general industries, through marine, machine tool, et cetera. Many, many different industries. SKF moved in really to the automated lubrication systems market in 2004 with the acquisition that we made of Vogel. And since then, we've made additional acquisitions to complement the total platform for SKF. And we have our main manufacturing; we have in Germany, we have in Finland, we have in Argentina, we have in Japan. So that's our footprint in terms of manufacturing. Lubrication systems, these automated lubrication systems, is around 3% of the group today, roughly in that area. And it's got a better margin than the industrial division on average, a little bit better margin there. So it's an important business for SKF.
If we looked at this, we saw that with our focus on the platform, with our focus to manage and reduce friction, we need to take another step in the lubrication systems business. And we've been working on that for some time, and we saw that Lincoln Industrial, which is part of this Lincoln Holding Group, was absolutely the right partner, very complementary from SKF in total there. If we look at it from a manufacturing footprint, which I'll show in a second, it's very complementary. If we look from a sales viewpoint, it is very complementary to SKF, and from a technology viewpoint, there's a lot of complements. We are more in the oil-based systems. We have grease-based systems, but we're more oil-based. They're more grease-based with some oil-based systems there in total there.
I think also when we've been focusing on Lincoln, we can see that it's a Lincoln with Lincoln is a company with a very consistent and strong financial performance, and you can see that in the figures that they've got. A turnover of around this year, close to $400 million, with a 24% EBIT margin, is a very, very good margin in this business there. They've also generated good, good cash flow there. And when we look at it, and we looked at the company and acquiring the company, we saw that that could add real benefit to SKF due to its complementary nature, which therefore means the synergies that we see will be much more in the go-to-market rather than on the manufacturing structure in total.
And we see synergies there, and I can talk about that a little bit there. If you look at Lincoln business in total, from a geographical viewpoint, roughly 50% is in North America, whereas the major part of our business is in Europe. They have something like 25% in Europe. They have something like 20% in Asia of their business and then some additional business. And look at the footprint. You see there in North America, 3 plants in USA, 1 in Canada. And remember, our plant is down here in Argentina from that viewpoint. Yes, we have some... They have a plant in Germany and in Czech Republic, and we have our plants in Germany, Finland, and France. But that's not a major overlap. They're in India and in China, and we're in Japan.
So from a complementary footprint, from a manufacturing, and this is engineering resources as well, we are very complementary in total, and as I say, also from a sales viewpoint, there. If you look at the businesses that Lincoln have in total, they have, and you'll see up here in the left-hand side of the product assortment, they're the automated lubrication system, and this is their names. We've just taken their picture at this moment, not to change at all. This is their picture there. You see the automated lubrication systems at one side and handheld lubrication systems at the other side. Their main focus is in the segments, heavy construction, construction equipment off-highway, agricultural, mining, wind. Whereas we are much more focused on areas like machine tool, marine, metals, printing there. So again, a complementary nature in total.
Also, these handheld devices, they're much more focused on the aftermarket, with tools and equipment to the aftermarket, both the industrial aftermarket, but Lincoln have a strong presence in the vehicle aftermarket in USA, in products we don't handle at all there. So they work directly with garages, with greasing equipment, with hoses, with reels, et cetera there. And that's an important thing. It opens up that business for us in the aftermarket in USA in total as well. So good product portfolio, good complementary nature when it comes to segments, complementary when it comes from a manufacturing viewpoint. And to be clear, it's very much in line with our acquisition strategy. It will be accretive, year one. It is very much an integral part of our industrial division, because it'll be part of our industrial division.
We'll bring together our existing lube systems business and their lube systems business. We'll bring that together and make it part of the industrial division in total. And of course, it will be a, as I said, EPS accretive in total. So it fits in and ticks off all the boxes that we've been seeing for many years are important for our acquisition, strategy in total. So in summary, again, the same slide, it fits in very, very well with what we see, as being the right acquisition for SKF to strengthen our lubrication business. One question you'll have is: How do we see synergies going forward? As I said, synergies will predominantly be in the go-to market.
What we see is around 5 years' time, we would see synergies having an operating profit effect of something around SEK 55 million on an annual basis, there in 4 or 5 years' time, because it comes much more from a sales side there as well. Which means if you're looking at that, you're talking something like 8%-9% of the margin on the existing business of Lincoln bringing in, which I think is a good step forward as we leverage that in our business going forward. Lincoln, I believe, will be a very important acquisition for SKF. However, it is still subject to regulatory approval, so we still have to go through the approvals, so we can't get to do anything until we get the approvals. It will go through approvals in Europe and USA, there.
Of course, we were working to get that done as quickly as possible, so that we can then start the process of bringing Lincoln into the SKF group in total. Let me try to summarize then in total, what we've presented today. First of all, strong, very strong quarter, the third quarter for SKF. Strong operating profit, record operating profit, record operating margin for SKF, strong cash flow and good positive outlook. As I said, going forward, look at the outlook with seeing sales sequentially somewhat better, significantly better year-on-year, manufacturing level, relatively unchanged. Some headwinds coming from currency, clearly, and from raw materials there. We've launched today our new financial targets, which are well anchored in the organization, and they're long-term financial targets.
They're not targets to achieve tomorrow, they're targets that we will achieve as quickly as we can, but the longer term, targets for the SKF group, and we've made, I believe, a significant and important acquisition to support SKF group strategy going forward. I think I'll close there and put myself open for questions.
Thank you very much, Tom, and now it's time for questions. And I think we will take some 30 minutes more, so we take 15 minutes, question here, and then 15 minutes, from those who are linked by phone. So please go ahead with the first question.
Thank you. Johan Trocmé from Nordea. You'll be very pleased, Tom, that I won't ask you about financial targets today, for obvious reasons, so we'll skip that one.
Thank you.
Looking forward, do you see any additional targets, potential targets for SKF in the pipeline? And if so, do you see any constraints from a balance sheet point of view, given the size of this acquisition?
Sure. I think it's a very good question. I think it's clear that we don't expect in the very short term, but in the next 6-9 months, to be making additional acquisitions. There, some smaller ones we can manage there, and additional significant ones, no. But, so our focus will very much be on getting this acquisition closed, getting it into SKF, during next year. But with our strong cash flow, with the strong cash flow of, Lincoln, going forward, maybe not in the first part of next year, but going forward into 2012, et cetera, yeah, I think we still need to take steps there. But let's close this one, then get it in, get it integrated there.
As I say, a small bolt-on come, yes, but we can do other ones going forward due to our cash flow generation.
If I can just quickly-
Yeah
... add another completely separate question. When it comes to the pricing environment, we have heard from various sources out there in the industry, that not all competitors have matched all your price increases to date. Yes, we seem to have seen a very firm price environment judging from your financial performance. Do you see anything changing there in terms of competitors' behavior or any concerns that you may have that pricing could see any unfavorable trends at some point?
No, I mean, it's clear it's a tough and competitive market out there. That's clear, and I would say it's not getting less competitive in the marketplace there. But we have seen moves from our competitors on pricing in the market, and also more recent moves from competitors in pricing in the marketplace as well, there from list price viewpoint. But I would say it's a tough pricing environment, but it's no tougher today than it was yesterday. Yeah.
Hi, Tom. Hi, Tom, it's Frederick here from UBS. Just a quick question on Lincoln. Maybe you can give us some more financial details to, you know, give us some flavor to-
Mm
... to what kind of a company it is. Maybe, maybe what the 2009 performance was like.
Yeah, they were down in 2009. I would say I'd go back, 2009, they saw a drop-off in their business down, something similar to what we saw as a group in total. Their sort of performance dropped off, but not so much. The margin only went down a few points there, because they're not so vertically integrated as a company there. So they saw a few points lower margin than we see just now in 2009. But they had strong, very strong profit and performance in 2008 there. So they've rounded back in terms of profit very quickly. Even if their sales in 2010 are not quite back to their 2008 levels, their profit is more or less back in that level there.
Thank you.
Now, they've got a good, strong performance of financial... a good, consistent, strong performance over a number of years, and we've been watching them for a number of years.
... Peder Frölén, Handelsbanken. A couple of follow-ups on Lincoln. Could you please help us with the simplified split on divisions here? I guess the absolute minority is industrial, but it seems to be at least some part within the auto side and the-
Yeah-
that profitability vary.
We will keep it in the industrial division. There's even that vehicle aftermarket that we will put it. What we will do is, and of course, remember, we still have to close this from a regulatory viewpoint, but our view is what we will do is bring our lubrication system business together and keep it together for some time before we decide how we do things going forward. So it will be in the industrial division.
Okay.
Even the vehicle aftermarket bit will be in the industrial division.
Perfect. And on financing, maybe you and Tore could help us a bit. What are the financing criteria currently? What type of interest rate are we talking about?
We have credit facilities in place, as you know.
Yeah.
We have cash in the balance sheet, so we use both of them. I don't know if you want to add anything, Tore, or not? No.
Oscar Stjerngren from Mann. Hello?
Hi. I can hear you.
You can hear me? A couple of questions on the development in the quarter.
Yeah.
Can you help us, please, with how you saw the seasonal growth, the seasonally adjusted growth in the third quarter with the second, how large do you think it was? And secondly, you lifted production slightly during the quarter, which is contrary to your initial indications. Can you help us and walk through the month-over-month development?
Sure, sure.
Yeah.
It's difficult to say month-to-month due to the seasonality in that, but we did lift it because what we saw as we went through August, we could see it towards the end of August, that the demand was continuing very good, and it continued good into the fourth quarter. Therefore, we knew we had to take our production up somewhat to get the service level there for our customers there. So it was, as you say, going into it, we thought we'd keep manufacturing level relatively unchanged, adjusted for seasonality. It was up a little bit in the quarter compared to the second quarter, and we'll keep that level in the fourth quarter there. In terms of the seasonally adjusted figure, I can say sequentially, we continued to grow.
When I take the seasonal adjustment out there, I don't have the figure off the top of my head, but which it was quarter-on-quarter.
Yeah, hi, Mats Liss , Swedbank. Just a couple of questions there. First, regarding Lincoln, if you could give the split between equipment and,
Yes.
Aftermarket.
It's about two-thirds automotive, automated lubrication systems, one-third, roughly, the tools and equipment side, from my memory.
Yeah. And, I mean, given the strong EBIT margin within Lincoln, I guess it will add some 0.4% to your EBIT margin. It's a bit conservative to raise the EBIT margin 15%.
So there you want a new target. I've just given you a new target, and you want another new target? Thank you. No, I would say you must remember one thing, Matt, when you bring it in. First of all, when it was at 24 just now. Once you bring it in, and then you take PPA and other factors into account there, because you then have to amortize these elements there as well, then it supports the target of 15%. It'll be a little bit better. But remember, you've got to look at it. It will be 5% of the group, roughly, in total there, so it doesn't make a huge difference. We're talking points there. So no, it supports the target, it supports the strategy.
Yeah, thanks. And then, about the development during the fourth quarter, I guess you mentioned that, percentage-wise, you expect some improvement in sales, but, is it high or low teens, or what do you mean?
Yeah, I don't. I've given up giving teens figures and single digit and teens figures there as well. But I, to be clear, I don't expect the year-on-year growth to be the same as we saw in the third quarter, to be clear. Yeah, because we already saw the fourth quarter last year improving, so I don't expect it to be at that level.
Okay, and finally, about the pricing, you mentioned the raw material prices-
Mm.
Coming up, and have you well implemented any price increases?
We've not announced or anything more than what we has announced earlier this year in terms of price increases, and maybe I can talk a little bit more about raw material. What we saw in raw material in the second quarter, if you remember, the surcharges went up quite a bit in raw material. Then they eased off at the start of the third quarter, but now we see the surcharges going back up, and we've seen that as we went gone to the end of the third quarter and into the fourth quarter there. There is a delay from us getting the surcharges till we see them in our business, and we can see that now starting to come in.
The higher raw material costs came in in the third quarter, and we see in the fourth quarter there'll be higher raw material costs in the fourth quarter versus the third quarter. And I think that's important when you're looking at the fourth quarter versus the third quarter. If we look at that to try and calibrate as best as I can, yes, volume will be slightly higher, manufacturing level will be roughly the same. And then mix will be a little bit in our favor. But then you must look at currency will be negative to us fourth quarter versus third quarter, and raw material will be negative fourth quarter versus third quarter, as well as versus the previous year there in total.
Hi, Anders.
Okay, Anders, come over here. Yes.
Yes, Anders Roslund, Ålandsbanken. I have two questions, one regarding CapEx, your CapEx for 2011-
Mm.
and also how you look upon the CapEx-driven demand overall.
Mm.
How does it look like?
Sure.
in the industrial sector?
Sure. First of all, we'll raise our CapEx up in 2011 versus 2010. We'll, as I said earlier, we'll finish 2010 around the 1.6 billion SEK there. We'll go up more in line with depreciation next year, as we see just now, but let's come back to that when we get to the full year report on that there. I think that's an interesting question you raise in CapEx. We're not seeing a major CapEx explosion in the marketplace there. We're not seeing tremendous CapEx development in the market. But for customers of ours who are funding or let's say, supplying the CapEx market, we're not seeing that.
Is that something you think will come, or is it?
That's a good question. I think, again, if you remember, when I said about the financial targets, I said world development will continue, but with some uncertainties. I think there is a quite some uncertainty, so some people probably will be somewhat more cautious.
Okay.
Mm-hmm.
Thank you.
Peter.
Yes, some clarification. You mentioned the raw material, of course. Was the raw material cost higher in the third quarter than the second one?
Yes.
It was, but nothing substantial.
Not exactly. No, it started the trend going up-
Yeah.
and we saw more towards the end of the quarter there, but it will be higher still in the fourth quarter versus the third quarter.
Okay. And secondly, production versus demand in the third quarter. You, you-
We didn't do any major change in our inventories in total. The percentage-
In line.
Exactly. Broadly, the percentage change was greater in the third quarter than the inventories, but again, it was due to the fact that we had lower production than sales last year there. But broadly speaking, we didn't change inventories in the third quarter, so broadly in line.
And if you look at the price mix-
Mm.
and look per division
Mm.
Was there any big changes here, positive in all, or?
No. I can tell you quite openly that the industrial business was a little bit negative in price mix in the quarter, in total, and that was due to the fact that their mix of segments, the ones that were doing well were the less profitable segments for them, I should just say.
Mm.
They had a little bit negative price mix in the industrial business, yeah.
Okay, just, a sort of long-term question. On the financial targets, long-term financial targets, I guess this are to, looked upon as an average over time.
Yes, over time. Yes, absolutely. Absolutely. Which means that, yes, we expect some things to be above them. Okay?
Thank you.
Should we take maybe some from the phone now, Marita, do you think? Are there any more in the room?
Questions? No.
We can take some from the phone.
Yes, and we are ready to take the questions from the phone.
Thank you. Our first question comes from the line of Ben Maslen from ML. Please go ahead with your question. Your line is now open.
Yeah, morning, everyone. It's Ben Maslen from Merrill Lynch. Two questions, please, Tom. First, just on raw materials, what you're saying in terms of a kind of negative hit in Q4 sounds a little bit different to what you were saying, I think, in Q2. Given that we've seen steel costs come down a bit over the summer, isn't that more of a positive for the end of the year, or will that help you going into 2011? That's the first question. And then just currency, I know you've given guidance for Q4, but is there any way you can give us a sense of the negative currency impact that you expect for next year, given your delayed hedging effects? Thank you.
I would say in raw material, actually, what you... If you actually look at raw material, and remember, we're talking about surcharges onto us just now, not base price changes just now. If you actually look at scrap prices, and you look at how that's developed over the last few months, scrap prices have actually gone up. So surcharges have actually gone up as you go through the, the, third quarter, not down, Ben. And we see at that average level, now we see for the fourth quarter, it's a higher average level. Based on what we see today, it can change month to month, because the, the, the surcharges change month to month. If we take what we see just now through the fourth quarter, it's a higher average surcharge than in the, in the, in the third quarter.
I've got to say, we are not changing base prices for our key business just now. That's something we will discuss in 2011, Ben.
Okay.
In terms of currency, I mean, as you say, we've seen from what we saw, we expected in the fourth quarter, we expect a +SEK 100. We saw a -SEK 50 now, so that's SEK 150. It's hard to say exactly what it will be next year, but if you say... If we, if we use everything with current exchange rates and assumptions, you're probably talking SEK 600-ish at the moment, next year, something like that.
Great. Okay. Thank you.
Thank you.
Our next question comes from a line of James Moore from Redburn. Please go ahead. Your line is now open.
Yeah. Hi there, everybody. I've got a few questions. Tom, would it be possible to put a percentage on the third quarter overproduction and say how much it affected the margin from the absence of the usual summer underproduction? Secondly, could you just be clear on the Lincoln PPA effect? And assuming margins, say, at 24%, how big is that PPA effect? And maybe come back to some of the new targets in a second.
If I take the first one, there was no overproduction in the third quarter. As I said earlier, we kept the production and sales. There was relatively little inventory change in the third quarter. Due to the demand situation, we kept the production up to support us in the fourth quarter. As you say, you could have been a little bit down in underproduction in the third quarter. We chose not to do that, but there was no overproduction in the third quarter, to be clear. In terms of PPA effect, I've got to say, I'll come back to that when we close. Because we can make certain assumptions just now, but we must remember that at this moment in time, Lincoln and SKF are competitors in the marketplace.
We're bringing someone in, so therefore, we don't have access to all information in that company, a lot of information in that company, and then when we go into it, we do a detailed study there. So we will do that PPA study, and tell you it when we close it. So I can't tell you that just now. Just when you're on Lincoln, though, I could clarify one point. I mentioned earlier the synergy savings for Lincoln of being $35 million. I meant US dollars, just to be clear, there, because with the figures we quote are in US dollars for Lincoln. So the synergy savings on an annual basis in 4-5 years will be around $35 million, just to be clear. James, and your next question?
On your new targets, you've lifted to 8%, which is quite strong. What do you expect for growth in emerging markets versus U.S. and Europe? In terms of longer-term growth, what's the differential?
No, quite, quite different. I mean, just look just now at our growth during this year. You see, markets like Asia growing 34% for SKF. Markets like Latin America was a little bit lower in the third quarter, but it's been up at 20-25% in total growth. So these markets are growing much more compared to Europe, which is in single digit, or U.S., in single digit growth. And as I said earlier, I would see Asia coming up above 30% of the group sales in the coming few years.
So do you expect the differential of two-speed global growth to be bigger going forward than it was, say, 2003 to 2008, when that was already quite big?
No, I don't expect it to be bigger, no.
Why the higher growth rate?
Because actually, if you look at our performance, we actually achieved a higher growth rate than 6%-8% over the period 2003-2008.
Okay. Very clear. Thanks.
The next question, please.
Our next question comes from the line of Nico Dill from JP Morgan. Please go ahead with your question.
Good morning, everyone. Nico Dill from JP Morgan. I wanted to ask you three questions, really. One, on the 15% margin target. Wanted to get a bit of clarification on what your flexibility is on this margin target going forward. You've had a pretty good downturn with margins higher than expectations. Sort of wondering, in a normal upturn and downturn, what do you expect that deviation to be from the 15%? Second question is really around the cost coming back. You highlighted some costs could come back, especially on the SG&A side. Wonder how much you want to invest going forward to achieve that 8% growth, let's say, over the coming couple of years?
Yeah, I think I don't want to give a range of the 15%, what will be above it, what will be below. As you rightly point out, Nick, if you look basically and take away the restructuring last year, we operated at an 8% operating margin. So you can say in the last downturn, there was a five-point swing from the peak to the bottom, operational-wise, taking away that there. I'm not saying you can use that going forward, but that's what we did historically, so I won't give a swing in that way. In terms of SG&A, clearly, we will need to invest some more platform, segment, resources, et cetera. But remember, the sales go up as well. It doesn't mean to say we'll see a dramatic change in the percent ratio towards sales.
I think we're at something like 13.6% year to date, and we operated a little bit above 14% last year. I don't see us changing dramatically in that sort of ratios there, but it will mean more money because as sales go up, you put more money and more people on the ground there as well. But we won't see a dramatic change in, in the ratios, a few percentage points, there.
Okay. But if I, if I then go back to your traditional operational leverage, I don't see a real dampening in that case to the operational leverage that you've had historically. Is that a correct understanding?
Mm-hmm. Yeah, I don't see any root change to the leverage we've had before.
Okay.
Not anybody. But remember, 'cause we will need to invest more also in new facilities in other areas as well, Nick.
Mm-hmm. That's very helpful. Thank you.
Thank you.
Next question for you.
Our next question comes from the line of Guillermo Peigneux from Morgan Stanley. Please go ahead with your question.
Hi, good morning. It's Guillermo Peigneux from Morgan Stanley. Maybe just a couple of questions on Lincoln. First, am I right to assume that after this acquisition, your market share will be over 20%? And secondly, on the sustainability of the 24% margins of Lincoln, could you sort of give us a little bit of maybe a flavor on how the margins reacted to a high inflationary environment, i.e., higher prices, higher petrochemical prices? And then, last question regarding, well, your current outlook for growth mix, which basically is very much tilted towards Asia. I was wondering whether you could give us some flavor about how happy are you with your production asset base. Is that...
Is your production asset base matching that growth perspectives you see in the market, or would you be relocating more plants towards emerging markets?
I think it's clear that I wouldn't say you should look at... I'll take the last question first, relocating more plants to that market. I think what you can say, Guillermo, is that we will need to invest more production in that market to get a better balance of our sales and revenues in that marketplace in total. So that's definitely something that we, we'd look at there. In terms of the sustainability of the margin of Lincoln, let's come back a little bit more to that once we've closed the deal on that. But I've got to say, they've had very good and strong performance and good margin over a number of years. So from my viewpoint, I'm quite relaxed with their margin development. And what was your third question, your first question?
It was about the market share. Is SKF together with Lincoln getting around about 20% of the market?
I don't want to comment on market shares, et cetera. What you can see is we're very complementary. I think that's important. Complementary from a geographical viewpoint, complementary from an industry viewpoint.
Okay, thank you very much.
Thank you, Guillermo. Next question, please.
Our next question comes from the line of James Moore from Redburn. Please go ahead with your question.
Sorry, I've already answered my question. I've already asked my question and have an answer, so I don't need to ask another. Thanks.
Okay, our next question comes from the line of Roddy Bridge from Société Générale. Please go ahead. Your line is now open.
Hi, so just a couple of things. You mentioned some inefficiencies, I think, at your sort of plant due to problems getting from suppliers. I was wondering if you could let us know whether that had any meaningful impact on your profitability during the period, and how you see that resolving going forwards? The other thing is, I remember in the dark, distant past, that quite often Q4 used to bring some sort of distortions from distributors, stocking patterns, et cetera. I was wondering if you could just sort of give us a little bit, how your thoughts are and what you're expecting from distributors within your forecasts, and how you see their sort of inventory standing today?
Sure. Good. I would say the inefficiencies of our suppliers delivering into us didn't really have any effect on our financial performance, but had an effect on our inventories there. Because, I mean, we were holding, pardon me, inventories of some products and not all the components to do the finished product there. So no meaningful effect at all on the result, but some effect on our inventories there. In terms of distribution, that's a good question. I would say from an inventory viewpoint, I think our distributors are in pretty good shape in most areas of the world. Still, as you know, in the old story, USA still has high inventories. So we could see USA inventories coming down into the fourth quarter into during next year, et cetera.
I don't expect any distortion in our sales, in the fourth quarter due to people putting in inventories, et cetera, there as well. So I don't expect to see any boost in our distribution business this year. Maybe we've had that in previous years. I don't expect to see that this year.
Thank you very much indeed.
Thanks, Roddy.
Thank you, Roddy. Next question, please.
Our next question comes from the line of Colin Gibson from HSBC. Please go ahead with your question.
Hi there, it's Colin Gibson from HSBC. Two questions, please. The first is on the demand outlook, the volume outlook, and split into two parts. First of all, you talked earlier about price mix, particularly for the industrial division, and you said that heavy demand segments haven't really recovered yet. Do you have any visibility at the moment on when you think those segments might start to recover? And secondly, for the automotive division, what do you think the outlook for automotive production is for 2011? Do you think that's improved at all since you spoke about it at the Capital Markets Day? And then the other thing I wanted to ask about was your new strategic emphasis on growth. Does that have any implication for your payout ratio?
If so, have you thought about it? Can you communicate anything at this stage? Thanks.
On the last one, I can't communicate anything on it at this stage. It's a board decision that will be made in January there. But our basic philosophy in our dividend policy doesn't change on that side. Go back to the price mix. It's a good question there. Yeah, you're right. In the industrial side, what we saw was the general industry segments doing better than the heavier industry, wind energy, et cetera, during, in fact, during all of this year, within the industrial side there. Also within the industrial side, areas like the Asian region doing a little bit better than the other regions there, and that has an effect on their price mix in total. Going forward, yes, we're starting to see some improvement in the heavier industry areas as well.
That's starting to come through somewhat for us there. I still expect a little bit more overweight, though, in terms of a demand from the smaller industrial segments than the heavier industrial segments there. So there's still a little bit of headwind in for them in price mix in total. Regarding automotive production, there, I would say we've not changed so much our view into next year. And I've got to say, the automotive production outlooks that we get from external people are changing quite rapidly as we go through. So I would say that we do see, if I take towards the end of this year, we do see Europe being down some 7-8% in light vehicle production.
We do see North America probably being flat or a little bit up in light vehicle production in the fourth quarter. And in terms of Asia, being up a bit in year-on-year. And all these are year-on-year figures I give you there for the quarters there at the moment. But I don't want to give more on 2011 until we get there.
Okay, Tom, thanks a lot.
You're welcome, Colin.
Thank you, Colin. Next question, please.
Next question comes from the line of Arnaud Brossard from BNP Paribas. Please go ahead. Your line is now open.
Hello, everyone. Tom, can you please explain why Lincoln has a modest vertical integration, as you described? Can you just describe the business model, if possible, to understand this point? Can you also remind the proportion of aftermarket in Lincoln? I heard you said it. I didn't hear what you said exactly.
Yeah.
Finally, is this acquisition a sign that you may move the proportion of your product platforms in the group? My question, in fact, is, what's your target or rough target of sales breakdown by product platforms between bearing sales, lubrication, et cetera?
I mean, if I take the last one first, clearly the acquisition does move the split between the two, because it brings in something quite close to 5% of sales in a non-bearing platform, so it does change the mix. It's it... I mean, we want to strengthen all of our platforms going forward. We don't have a clear target as to say, bearings will do this or or do that, because we do see opportunities to strengthen our bearing platform as well there. So I don't have targets in that in total. In terms of the aftermarket split, what I said was that if you take tools and equipment versus automated lubrication systems, it was something like two-thirds automated lubrication systems, one-third, roughly in that area, tools and equipment in their business. But you raise an interesting question.
That's one of the things that, Lincoln has. They have a stronger aftermarket, or that is working with what's called system houses, a network than we have. We have a much more direct business. They have a much more working with distributors and system houses. System houses are people with expertise in a local market or a local area, who put together the components, and then will make a finished, complete system, taking certain components and piping and other things in there. So they've got a higher percentage of their sales in that dimension than we've got, which is we, we're more a direct sales area. And that's another very good complementary area that it brings into us there. In terms of the integration, the $35 million that we expect four or five years, which you highlight as being modest.
We must remember that the bulk of that is in the frontline sales area there, and that is what we will see going forward there. There's not a huge... There are efficiencies within there, but it's more a sales-based integration that we've got there. And I think it's an achievable target, a clear target that we have there. Is it a dramatically aggressive target? No, but it's a definitely achievable target with action to have in place.
Thank you very much. Just a clarification, my comment that vertical integration was modest was just referring to a previous comment you made about the leverage-
Sure.
-the operating leverage at, SKF.
Sure.
I forgot... At Lincoln. I forgot just one question. Is there any restructuring charges which we should expect at Lincoln or at the whole group?
Not anything significant at this stage that we can see there. Let's see, going forward, that that's something we've not got on, on, on top at this stage.
All right. Thank you.
Thank you, Arnold. The next question, please.
Our next question comes from the line of Michael Hagmann from Nomura. Please go ahead with your question.
Hello. Two questions, if I may. I would first like to follow on the sustainability of the profitability of Lincoln. If you could explain maybe a little bit more what their edge is, which allows them to have these high margins. I'm still a bit unsure, you know, is there patents or whatever? And the second question is on the return on capital employed. If you look at it, you're raising it from 24%-27%. You're raising the margins from 12%-15%. That suggests that you expect a lower capital return going forward. Is that correct? And if so, why is that the case? Thanks.
That was a good pickup, Michael. I expected that question at some stage. No, I think it's clear that going forward as well, in the coming few years, we will need to put some investment into our operations in order to support the growth in the faster growing regions, et cetera. So from that viewpoint, you could say we raised that a little bit more, but I think we've taken it with the investments we're gonna need to put in to support the growth going forward there. We see that's a realistic ROCE target at this stage there. Why does Lincoln have such good margins? As I say, I think what very much is their model in going to market is not...
As they have good technology, they have strong technology in total, there, and especially with the heavier focus on grease applications, but also their go-to-market model is very good. Using these system houses, using the distribution, but also having this one-third, which is tools and equipment into the aftermarket. All that combined together gives them a better, let's say, mix of business than, say, we've got in ours, and that's what it also is very attractive from a, from a complementary viewpoint for us. Does that answer, Michael?
Yes. When you say put more money to work, that's been in fixed assets?
In fixed assets. Yeah, I mean, clearly, we want to bring down a little bit the working capital going forward, but also you must remember, when you go in areas like Asia, et cetera, generally, these areas have a little bit more working capital in terms of doing the business. That is, credit days are a little bit longer than, for example, we see in West Europe, et cetera, there. So there is a little change in how you see some of the working capital, there as well.
Thank you.
Welcome.
Thank you, Michael. Next question, please.
Our next question comes from the line of Joakim Eliasson from Sheffield. Please go ahead with your question.
Yes, just a quick question on this Lincoln acquisition. Do you expect to close it before year-end? And, is there any specific area where you think there might be an issue with the antitrust authorities?
Yeah, I mean, we, when you're someone the size of SKF and with Lincoln, with their position, of course, we have to go in North America and certain markets in Europe there to go for regulatory approval. That's a normal process. I mean, of course, we will work everything we can to close it by year-end, but I cannot say we will do that. We will let you know when we close it. I mean, clearly, we will do all we can to close as quickly as possible, because then we can start working with the company. At the moment, we can't do anything till we get there.
So I don't want to give a forecast when that would be achieved, but be sure we will work as hard as we can to do that, and I can also tell you that we've already registered this today with the authorities, so we've already started the process going.
Okay. Thank you.
You're welcome.
Thank you, Joanne. I think we have time, 15 minutes, but I think we continue, if we have still questions on the line.
Okay.
Our next question comes from the line of Klas Bergelind , from RBS. Please go ahead with your question.
Hi, it's, it's Dan Cunliffe here. A question on your sales targets, eight percent. If you look at the last five years, about 3.5% has been price mix. And given that obviously you, you're shifting, I guess, in terms of auto, becomes a lower part of your mix, so your price mix goes up. I guess in terms of your new target, of, of 8%, how much is price mix in your assumption, and how much is kind of more weighted towards stronger volume growth?
... The price mix will, I would say the last couple of years, I would say, before 2009, the price mix, as you rightly point out, has been much stronger for us. Driven, not just by the mix business, of business, but driven also by the fact that we saw much, much higher raw material costs, so we moved prices in the marketplace there. That's not a normal figure, so I'd say price mix will go back to the more normalized figures that we had before there. So from my viewpoint, it is more volume and less price mix than we saw in the last 2007-2008 time frame.
So we're looking at 2% really, as opposed to the 3.5-5%
I would say you're looking more... I mean, we don't have that split down in that, but, our price mix before was more in the 1-2 area there.
And that's not gonna be impacted by the lower mix of autos from obviously the shipping?
Yeah, but I mean, it, there's also mix in different areas and different segments where you go there. So I would say that's a more realistic level. And of course, then you will have some intra-divisional mix as well, but let's see how that develops going forward.
Okay, thanks.
Thank you.
Thank you, Charles. Are there some more questions?
Our next question comes from the line of Erik Pettersson from ABG. Please go ahead with your question.
Thank you. Good morning. One question, my apologies if it's been addressed previously. The new margin target of 15%, could you mention how the different sectors or divisions are contributing to that? Are there any particular sectors you expect to be more contributing than the others?
We didn't, we didn't go into divisional targets, and we don't normally do that. We keep it at the group level. But again, as I said, when we expect to develop the industrial business more, we expect to develop the aftermarket more, then clearly they are the businesses that will have a more of an effect. But remember, you also have aftermarket within the automotive side as well, within the automotive division. But we didn't give the figures in the divisions, Eric.
Okay. Thank you.
Thank you, Eric. Next question.
Our next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead with your question.
Hey, just a quick question on the multiple for Lincoln. It looks pretty attractive, attractive to us, given, the recent history of acquisitions, in the sector and, where the, sector is trading right now, and that's without the control premium. Could you just give some color on, why the vendor was, happy to sell at this price, given the synergy potential as well?
I think it was, I think a positive negotiation from both sides, we could say.
Okay. And maybe somewhat related to that, would you say Lincoln has been consistent in terms of growth with SKF over the last five years? Did they deliver 6%-8% as well?
No, they, they had different growth ones. They've also... It's a good, good question you raised that. They've also taken some steps themselves to make some acquisitions in previous years to strengthen their product portfolio much more in the North American market, place as well. So they've seen good growth, there. I don't have the exact figure every single year in the top of my head, but they've seen good growth, and I would say at least in line with what we've seen in SKF.
Okay. So they're consistent with the 8%-
Yes.
that's being sold to.
Yes, exactly.
Okay. Sorry, just a very small one as well. In the quarter, in the other line of EBIT, that was surprisingly sort of positive, I think 62. Was there anything unusual there?
Currency, Tore tells me.
Okay.
Totally due to currency.
Okay.
Okay?
Thanks very much.
Thank you, Andre. And next question, please.
We have a follow-up question from the line of Guillermo Pena from Morgan Stanley. Please go ahead with your question.
Hello. Good morning again. I guess I'm gonna get no answer to this, but I wanted to ask about the timing or phasing of the synergy. You said year five, but when would you start to see some benefits from the integration and the sales start sort of synergies?
I would say you will see not so much year one. You'll start to see it kicking in year two, three, four, five. That's a progression I would look at, Guillermo. And the reason being, year one, you bring a company and you work with a company, and because we're seeing it much more as a sales, not as a cost base, there, I would say you'll see it starting from more year two going forward.
And then, check with you again, there's no production overlap whatsoever that you can exploit there?
I mean, clearly, if you look at them, they have got some, they've got manufacturing in Germany, we've got manufacturing in Germany, and that's something we'll look into going forward, but there's no decision made on that.
In those SEK 35 million, that is not included?
The SEK 35 million is our synergies in total that we expect to achieve, but there's no major manufacturing synergies in there.
Very clear. Thank you very much.
Thank you.
Thank you, Guillermo. Are there some more questions?
There are no further questions registered on the phone.
Okay.
Okay. Any further questions from the floor?
Okay, yes.
Yeah, one more. One more from the floor here.
Yeah, just a short one regarding you mentioned the restructuring charges, and I guess normally you have SEK 200 million-SEK 300 million a year, and I just wonder if there is any change to that?
There's no change to that in the longer term viewpoint. I've nothing on the table right now for the fourth quarter, but it doesn't mean to say there won't be something in the fourth quarter. We'll let you know if we've put something in the fourth quarter. But going forward, yeah, look at that, a few hundred a year. Absolutely. Thank you, Matt. Okay, I think that's all the questions there. So thank you very much to everyone here in Stockholm. Thank you very much to everyone on the phone for taking part. Thank you.
Thank you very much. And, well, Tom, you have some meetings with media now.
Yep.
But Tore will be able to take questions if you have further questions. So thank you very much. Bye.