Good morning, ladies and gentlemen. This SKF conference call for the half year of last 2010 will last about one hour, and here at SKF are our President and CEO, Tom Johnstone, our Executive Vice President and CFO, Tore Bertilsson , Senior Vice President, Group Communication, and myself, Marita Björk, Head of Investor Relations. Tom will start by giving a presentation of the results, and then there will be a Q&A session. Over to you, Tom.
Thank you so much, Marita. Good morning, everybody. We've just released our report for the second quarter of 2010, which shows a very strong quarter for the SKF Group. In fact, a record in terms of operating profit and operating margins. The combination of higher sales, increased manufacturing level, and the actions that we've taken to reduce our cost level, and we continue to take to manage our costs, have all combined to enable us to deliver this very good result. In particular, the automotive division delivered very strong profit figures, but overall, I think we had a good performance in all of the divisions. Our sales volume was very strong and somewhat better than we expected earlier in the quarter, driven by a continued very good demand in the automotive business and a somewhat better demand in our industrial businesses.
I think the comparison to last year, when the second quarter was our weakest quarter, does help the growth figure, but overall, at over 16%, it was a very good growth. We kept our daily manufacturing level at around the March level during the quarter, which means we had a higher total in the second quarter than the first, of course, and, of course, significantly higher than the second quarter last year. As I said last quarter, I think that the steps that, which we have taken to make SKF more resilient in a lower demand scenario are paying off as demand improves. And we must remember that although we see good growth in the second quarter, we are still not back to the volume levels we had in 2008.
In fact, if you look at it overall, we're still operating around the 2006 volume levels. So I think the results we're seeing at these levels are very encouraging. During the quarter and at the start of this quarter, we took some very important steps to continue to invest in our business. We're opening three new SKF Solution Factories, one in Germany, one in France, and one in Russia, bringing their total number to 12 worldwide. We're getting a very positive response from our customer to these investments. They can more visibly see the knowledge we have and can bring to them to help them improve their business. So we will feature these SKF Solution Factories as one key part of our capital market day in Gothenburg in August. At the start of last quarter, we opened the two new factories in India.
I mentioned them at the last report. At the start of this quarter, we opened the new factory in Tver, in Russia, where we will manufacture railway axle bearing units for the Russian railway. It is the most modern railway bearing factory in the world, and with many, many new manufacturing innovations. This factory, like the two factories in India, is built to the new LEED standard and will use something like 40% less energy and something like 40% less water than a normal factory. It will be one of the first factories in Russia and in Europe to be made to the incentivized standard. We also opened during the quarter, the very first phase of our new global technical center in Shanghai, in May, as many of you who were there with us will remember.
This center will form part of our global network of technical centers, along with our operations exist in Europe, USA, and of course, the new center we opened in India at the end of last year. During the quarter, we also gained some important business, and I can't highlight just one of them. I think that the new unit we will deliver to the i-StARS start-stop motor alternator for Valeo is a very important new business and underlines the commitment we have to deliver new products and solutions which are not only environmentally friendly in how we manufacture them, but also help our customers reduce the environmental impact during their operation. This new unit is used on the Valeo i-StARS system, which reduces CO2 emission in the cars in which it's fitted.
So some important steps to strengthen SKF in the future remain in the quarter, and they really focus on four key areas. One, building our knowledge and bringing it to our customers with the SKF solution practice. Two, investing in new manufacturing facilities in faster-growing regions. Three, investing in product development and innovation close to our customers. And four, to gain new business, building upon our environmental focus. I think these are all good for the future development. But, let's get back to the quarter and give you a little bit more information on the development we actually saw during the quarter. I'd like to start by going through the volume growth of the group and comment per region and business. As I said earlier, volume was better than we expected earlier in the quarter, and by far the main reason was our automotive business.
Both cars and heavy trucks were much better than expected. Our automotive division had an organic growth in sales of nearly 24% in the quarter. We also saw good growth in the service division, with organic growth of some 17%, with all regions except North America doing, growing very well for them. In North America, it is a overeating of destocking in the distribution channel, which, as I said last time, will go on through next year as well. The industrial division moved back into growth, up some 7%, driven by strong demand in Asia, some improvement in North America, but Europe was still down a little, primarily due to the aerospace and renewable energy segments being down year on year. I'd say, when I look at them, both these segments show signs that the decline has leveled off in them....
In the quarter presentation, you will see the development of each of the regions, our sales development in each of the regions. So let me go around the world and make a few more comments. Let's start with Asia. Here we had a very strong growth, up some 36%, something similar to the first quarter. China and India are the main drivers, but we also see good growth in other markets such as Indonesia, but really quite broad-based in Indonesia, in Asia in total, sorry. In China, the main segments doing well are renewable energy, industrial gearboxes, food, power, railway, and the car industry. In India, we also had a very strong growth and with a similar growth in the segments as we see in China. But here also trucks, there are trucks, two-wheelers, railway, renewable energy, food, power, doing well.
If I move over to, to Latin America, where we also see strong growth of 24% in the quarter and year to date, with, of course, Brazil being the main driver. The automotive business is very strong in Brazil, and segments such as paper, cement, metals, oil and gas, food, etc., are doing well in Brazil. In North America, we saw a good growth into double digits, despite the fact that our service division was down due to the earlier mentioned destocking. The car and heavy truck business was very strong in the quarter, and in the industrial market, our sales, particularly in construction equipment manufacturing, was very strong, but also food, power, agricultural, and medical were doing well.
We still see a weak aerospace business in North America and a slow recovery in renewable energy in North America. Moving over now to Europe. Let's start with Central Eastern Europe. We see good development here, with markets such as Russia, Czech Republic, Turkey, just to name a few, doing well. In West Europe, we had a strong development in the quarter in the automotive business, with all segments, cars, trucks, construction equipment, and vehicle service market doing very well. In particular, we see a strong recovery in Europe, in our truck business growing very rapidly. The car business is up year-on-year due to the high production this year compared to last year, but production was a little bit lower in the second quarter compared to the first quarter, and it will be still lower, even more, in the third quarter.
I feel we start to see the effect of the ending of the incentive programs in many markets, with Germany, France, and Italy being the main ones. In the industrial business in Europe, industry and segments such as food, power, agriculture, pulp and paper, machine tools are developing well. However, as I mentioned earlier, we have a weak renewable energy business and a weak aerospace business. This looks to have leveled out in Europe, so I expect some improvement in this as we go towards the end of the year and into the start of next year. All in all, in the quarter, very good volume development, with strong growth in Asia and Latin America, growth in North America, and now the growth in Europe also. In terms of production, we increased the level as we went through the first quarter.
I mentioned that last time, and we kept the March level during the second quarter, which means we're producing ahead of sales to build some inventory for the summer shipment, an inventory of around 700 million SEK in the quarter. I would say that we're back to a more normal pattern with our production and sales. When we look at the comparison of the growth in production, we must remember that we compare the fourth quarter last year, when we were running production well below sales, to a quarter this year, when we're running production ahead of sales. Means production this year in the second quarter was up somewhere in the mid-20% year-on-year. There is increased production without the corresponding increase in people. Therefore, there is leverage in our manufacturing, and this you see in our results.
We still have some 2,500-3,000 people in short-time working, but the hours they are not working is less and less as we're increasing our production. And where they're in short time is mainly in the larger industrial, side. Short-time working saved us around SEK 60 million in this quarter. Restructuring, the restructuring program we announced before gave us around SEK 220 million savings. So this means a combination of these two is around SEK 280 million, savings in particular, are normal. In the third quarter, we will still have some more savings from the restructuring, and of course, a little bit less in short time. So around a similar amount as, because you may be a little bit less than what we saw in Q2 compared to anomalies.
But remember, in the third quarter last year, we already had some 300 million SEK for restructuring and short-time working. Let me switch over to price mix, which in the quarter was a little negative and in line with what we expected. It turned out very similar to what we've seen in the previous couple of quarters. What's interesting, though, in the price mix is each division was positive in price mix, so due to the intra-divisional mix, it was slightly as a negative. And I expect a similar pattern in the coming quarter of price mix around the zero, which means slightly above or slightly below zero. Regarding the raw material costs, we've. If I look at in the results, we've not really seen the full effect of the surcharges from our suppliers due to the sky-high scrap prices, yet.
It's not really through to the inter figures. We have some effect, but not the full effect, and that's because it takes time to come through from us getting it to come through into our, into our results. Staff, I would say, at the level just now, is somewhat lower than it was just a couple of months ago, but it's still well off on the average of last year. And I think that in the third quarter, raw material will be somewhat like a headwind. Turning now to some financial issues. The financial net was similar in the second quarter to the first. It was around SEK 192 million. A little higher in debt, but there's nothing strange here. And going forward, we expect around SEK 175 million.
Taxes in the quarter were broadly in line and should be around 50% going forward. Currency effect on our operating profit has changed, and we had some negative SEK 150 million in the quarter. A little bit better, so SEK 50 million better than our guidance, and that's due to the major currency changes that took place during the quarter, and it's mainly also an effect of translation. Currencies are changing a lot, which makes forecasting a little bit more difficult at the moment. But as we look at it just now, we expect a limited effect from currency on our operating profit in the third quarter compared to the third quarter of last year. If I go for the full year, it'll be around a negative SEK 250 million.
And that's, of course, based on how we see currencies just now and, and our current assumptions. It's interesting, though, if you look at the currency in the third quarter, it will be a little bit negative compared to the level we had in the first half of the year, even if it shows as unchanged compared to the third quarter last year. Cash flow was good in the quarter, over SEK 1.1 billion. The normal seasonal impacts of building inventory before the holidays and the higher accounts receivable due to the higher sales had some negative effect, but this is normal in the second quarter, and we'll get some of that back as we go through the third quarter. So let's move on to the third quarter and look at the volume outlook.
Overall, we expect a good growth in the third quarter compared to the third quarter last year for all regions and all divisions. If we look at daily sales, then the sequential development will also be slightly higher than the second quarter. But of course, you know, we have holidays there during the third quarter. So the absolute volume will be a little bit lower than what we saw in the second quarter, even if it's up from a daily rate. And that's a normal seasonal out here for the holidays there. We'll also see a similar effect in our manufacturing, up a lot year-on-year, significantly year-on-year, but down in absolute terms a little bit, compared to the second quarter due to the shutdown in manufacturing for the holidays.
Let me go a little bit more detail on the volume, go through region by regions. We expect Asia and Latin America will continue to be strong for us. I think there'll be a little less growth year-over-year than what we saw in the first half, but it'll still be very robust. In China, we see that the growth is still very good, and we expect it still to be very good, but we expect a lower growth than the level we saw in the first part of this year due to the measures being taken by the government. That will affect this. For example, in the electric car business, the growth will not be the same as we saw in the first part of the year. A similar picture in India.
We also expect that North America will see strong growth, even if the restocking continues with the distributors. And we see that due to a continued good development in the car business, where production will be up some 20% year-on-year, and we expect a good demand also in the industrial segments, similar to what we've seen in the second quarter. In Europe, Central Europe will continue with the good development, and then I think we'll see a little bit improving industrial business in West Europe. But if I look at the within automotive, we'll see a good truck business, a good electrical business due to the equal service market business, but car will have the trend shift, which I mentioned earlier. If you look at car production for West Europe, it will be down some...
The forecast we see is down some 14%, third quarter this year compared to third quarter last year, which means it's down some 20% due to the level you saw in the second quarter. So I mean, obviously, holiday has some impact, but it's clear that production is going down in the second half of the year in the European car light truck market. I think also in Europe, we must closely monitor the effect the government fiscal actions may have on demand. And I think it may have some damping effect on any recovery in Europe. So again, strong volume growth year-on-year in the third quarter, but we'll keep our eye on what happens in Europe in the coming months.
Of course, the car business will be affected in Europe with lower production levels. Let me summarize. I think we delivered a very good second quarter, and the result shows again, as I mentioned earlier, the steps we've taken and continue to take to make SKF more resilient to changes in our business are giving results. We're investing in our business, a few new sourcing factories, a three new SKF factories over the last few months, and the faster growing markets support this. All regions are now moving into growth for the group, and although there is this uncertainty in Europe, we expect continued good growth in the third quarter.
So to summarize the outlook for the third quarter, I think the things you should consider looking at that, sales volume will be higher year-on-year, but a little bit lower in absolute terms compared to the second quarter, due to the holidays. Similar picture in manufacturing, significantly up year-on-year, but a little lower in absolute terms compared to the second quarter due to the holidays. Price mix will show a similar picture as the last three quarters and will be primarily affected by the intra-regional mix. Raw material will be a little bit more headwind in the quarter as it comes into our system, more than it was in the first couple of quarters. We will have a...
I mean, currency will be more or less unchanged compared to the third quarter of last year, but it will be a little bit lower because of the previous quarters there. So I think overall, though, a good demand situation continuing into the third quarter for the SKF Group, with significant high growth across all divisions and all regions there. So I think we will stop there and maybe handle some questions there. So back to you, Linda.
Okay. First call is from the line of Tricia. We can go ahead. Yeah. Thank you, ladies and gentlemen. If you do have questions at this time, please press star one on your telephone keypad. To cancel the questions, please press the pound or the hash key. Once again, it's star one to register for any questions, and it's the pound or the hash key to cancel. The first question comes from the line of Nico Dil. Please go ahead and state the company name and location.
Good morning, everyone. It's Nico Dil from JP Morgan. I'd like to ask three questions, please. First of all, I'm a bit confused around sort of the automotive division outlook. You've highlighted that Europe is going to be down sequentially, potentially around 20%, while the whole automotive division from your outlook seems, appears to be relatively unchanged. Wonder, sort of what the delta is here to, to make it relatively unchanged? Second question is, around construction equipment in the U.S., you highlighted actually it was improving quite nicely compared to the last quarter. Wondering sort of where this is coming from and what the sequential improvement is. And thirdly, I'm really trying to understand sustainability of the margin in the automotive division. Quite, quite high this quarter. Wonder, sort of how we should think about this going forward.
Thank you.
Good questions, Nick. I would say that what I've quoted on in the European automotive business or the car business, was what will happen to vehicle production. Of course, our effect will be a little different than that due to the mix of business, there. We must remember, though, that when we move away from that, we will still see growth here, and good growth in the car business in North America. We'll see good growth in trucks in North America. When you look into the European market, the vehicle service market continues to grow. The truck market is growing very, very strongly, and we will still see growth from the automotive team in the Asian market. These other areas enable us to be relatively unchanged when you balance all these elements together, there.
So I think also Asia comment, that the growth will be up. I think vehicle production in Asia is forecasted up, I think, year-on-year, something around 6%, which is a lower growth year-on-year than what we've seen before, and maybe down a little in the second quarter, but there'll still be a good growth year-on-year there. So I think it's just when you add all the elements together, Nick, you get that, with mainly the European car like truck market being the one where production will be down quite considerable compared to the second quarter and also compared to the third quarter last year. I can take the margin one on automotive, as I noted it just now.
I think, automotive has done very well in getting the full effects of the cost reduction, within automotive. We also get the effect of the fact that they produce a little bit more in the first half of the year and have the summer holidays there. If you remember in the past, before we went into this downturn, we used to have a situation where we had something like 66% of the automotive profit in the first half of the year and 40% in the second half of the year. I think we're back to a more normalized pattern now. So I think the overall, margin development is very, very positive. But of course, it's normally perform better in the first part of the year and the second half, and I think we're back to a more normal pattern there.
Thirdly, if I take your question on construction equipment in North America. What basically happened during 2009, is you saw that many of the construction equipment manufacturers had big downturns in their business due to the fact that there was heavy destocking taking place also through their channels there. And we've seen strong growth come back in that area as they've ended the destocking both themselves and within their channels. And we've seen that in many of our customers, the demand going up. But actually, particularly the bigger customer over in North America is coming from Caterpillar, which is going very, very well for us at the moment. Is that okay, Nick?
Absolutely. Thank you.
Okay. Next question, please.
The next question come from the line of James Goodall . Please go ahead and announce the company and your location.
Yeah. Hi, everyone. It's James at Redburn Partners. Just a couple of questions, if I could, Tom. Firstly, on overproduction. I'm guesstimating here, but I'm presuming you overproduced by something like 8% in the second quarter. Is that broadly right? And if so, how do you see that developing into the third and the fourth quarter? And then maybe just a little more color, if we could, on the automotive margin, where you beat consensus by 33% at the EBIT level, and I think a lot of us got that wrong. Your revenues were up SEK 500 million against the first quarter, and your EBIT was up two hundred or so million. Within automotive, where has been the particular margin uptick? Is it a real mix, or is it across the board, and how has that developed?
Still not really understanding how the second half looks for the automotive margin picture.
Sure. Let's take automotive first, then I get back to overproduction. I mean, the automotive has. I mean, if you look over the last few years, we've been spending quite a bit of money in automotive to restructure that business to put it into a more sustainable profitability level, and taking steps out of the loss-making business, et cetera. I think we're getting the benefit of that, but I've got to say also, the new businesses, the mix of business with the vehicle service market doing well, et cetera, these businesses are developing very positively for them. We must remember in the second quarter, for automotive, demand paid off very, very well for them, and they developed very, very strongly. And as you look forward, oh, and they also produced, yeah, I'll come back to your overproduction in a second.
They also produced well for the summer when you have some summer shutdowns there. So I think going forward, you should look at automotive moving back to the more normalized pattern that we used to have, James, if you remember, which is more like 60% profit first half, 40% profit second half. But I think it's clear that the steps that automotive have taken is to move them to a more sustainable level. I think the level in the second quarter is somewhat higher than the more sustainable level based on what they've done, because a lot of the mix figures, mixes in their favor there. In terms of overproduction, as I mentioned, we, you know, our sales volume is up 16%-17% in the second quarter.
I mentioned our production in the factories was up mid-20s% there. Of course, they're again, slightly different volume figures there, if you must remember that when you look at it, but there was some increase in production. And that you saw in our inventories, because our inventories were up SEK 700 million. And not all of that is production thing. There is raw material content. There's a higher cost of raw materials sitting in inventory, etc. But some of that or the major part of that is to do with the production that we do ahead of the summer sale. So there was some overproduction. Going into the third quarter, I expect there to be some underproduction in the third quarter, which is a normal seasonal pattern.
We're back to a more normal pattern now. So we look at the underlying fields as we work to take in the next year. But there's a more normal pattern again, in terms of how we run it. After the last couple of years being a little bit different due to what was happening in the market.
Great. Just a quick follow-up on scrap steel. I thought you might be a bit more optimistic, given that it's given up most of its year-to-date gains. Is it still costing?
Yeah, it has given that up, but of course, the average still is much higher than the average of last year. Yeah, and so our surcharges are still in a delay. And you must remember, when we buy scrap, it takes a few months before us buying it, it kicks through into our figures. There's a delay in what happens in the scrap prices, for one. And second, it takes time to go through our system as well. I think that if we look going forward, if it stays at the level it is, then it won't be as much of a headwind as we thought, to be clear, James. But that will be driven a lot by the demand situation, in particular, the demand situation in Asia.
So let's see how that goes during the summer. But the average is still higher than it was during last year at the moment.
Great. Thanks.
Thanks, James.
Next, next question, please.
The next question comes from the line of Oli Bridge. Please go ahead and state your company and your location.
Hi, yes. A couple of questions, really. I mean, one is we've had a bit of talk about seasonality. And, I mean, normally in my view, you get the best margin through in the fourth quarter. I was sort of wondering if that would normally be the case. You also talked about sort of destocking in North America, and you expect that to continue. But, perhaps you could talk a little bit about the seasonality in the service business and whether that's sort of normalizing and whether you expect that to do well over the summer months while everything else is sort of shut down. And finally, if you could just sort of give us an update on pricing. I mean, you talked about raw materials prices. We know you've put prices through.
How are they sticking, and what further plans do you have?
I think the pricing, the increases in prices that we've made are sticking in the market. They're coming through, they are sticking in the market, and we'll see that effect as we go forward. If I look at the seasonality, actually, the second and the fourth quarter are normally our two best quarters in the group. The fourth is biased a little bit more because of the fact that we have somewhat more of an aftermarket business in the fourth quarter, especially into areas like North America. For the second and fourth, they are two best quarters, and I think that type of seasonality, I think, is go back to more normal pattern with that.
The only effect it could have a little bit in the fourth quarter, but let's wait till we get there, is the fact that the destocking in North America can affect another. But I think let's wait till we get through to the fourth quarter. In terms of the service business, yeah, the service division, I think, is developing quite well. I think if someone asked me the question earlier, well, what could happen to the service division, business demand improvement, and there's a sales improvement there. One of the things that if you look at that, what you see is the mix of business that we've got. It's North America is destocking and not developing for them, and the rest of the world is developing.
Because North America is pure aftermarket, and other areas of the rest of the world are a balance between aftermarket and OEM, then that affects the margins a little bit there as well. But I do expect the service business to continue to develop positively. We see positive signs in that. So it should develop positively during the summer and into the fourth quarter.
Thank you very much.
Thanks.
Thank you. Our next question, please. The next question comes from the line of Peter Warren Please go ahead and state your company and your location.
Yes, good morning. Peter Froelen with SocGen. I would continue on the production. You talked about this overproduction in the second quarter, also the mix of the normal seasonality and in fact match up with demand. But if you talked about underproduction in the third quarter, but that would be the result of a different seasonality, but still positive compared to what demand level. I think that what the answer said, if we confirm that, how we can understand that. My second question is related to pricing. As you mentioned, positive raw materials, but a negative traditional, maybe we should try to take that a little bit more and be positive with the third versions.
Finally, do you order, do you order by inflation in mind, that the market somewhere around 5% better, maybe, in the third quarter or so, as we, as we, first one, we check the reality. Is that what you would expect to see that all fourth quarters once again, next one?
Yeah. If I take the manufacturing, we're back to in a more normal pattern in our manufacturing. If you go back to previous years, where we do overproduce in the first part of the year, normally to prepare for the summer dip. That's the type of pattern that we had this year. And normally, in the third quarter, our normal pattern says we produce a little bit less than our sales due to the summer holidays, because we produce more during the first part of this year. And I think we-
That is the overproduction in the second quarter. Is that enormous? Is the second or less, between cutting out enormous is?
Yeah, that's a good question. I mean, the 8% is clearly a combination of two things.
Yeah.
On, the pattern overall is normal, but of course, when the comparison you get to the previous year, we must remember, in the second quarter last year, we were underproducing versus sales. So therefore, when you do the percentage changes between, production between the second quarter of last year and the second quarter of this year, then you have, A, the effect that we normally produce a little bit more in sales, and B, the effect that we were underproducing versus sales in the second quarter last year. So we don't normally overproduce by 8% in the second quarter, yeah. The reason the percentage figures are distorted due to the fact that in the second quarter last year, we were underproducing versus sales.
Very clear.
Okay. Then on price mix, the price mix average. If you look at each division had a positive price mix, but because of the very high automotive being up some 24%, industrial, for example, only been up from 7%. It therefore meant that the negative intra-divisional price mix was something between 1 and 1.5 points. That means if the volume of all three divisions, if all three divisions had grown by 24%, let's say, then we would have had a positive price mix, 1 to 1.5 points better than what you see just now. Is that clear?
Very clear.
Okay. Is that everything, Peter?
No, the third one was related to the demand in quarter four, 2022, about pricing power analysis made to be for the underlying daily. The safe rate would be some time in September, so in the second quarter compared to the third. Is that what we talk about also, looking at the third quarter?
I don't want to get into the percentage figures, because I've been wrong the last couple ones there. I don't want to get into the percentage figures of how the third, second was versus the third, how the third will be better than the second. But it will be, as we've said, slightly higher sequentially, taking away the effects I've seen earlier.
Perfect. Thank you.
Okay. Thank you very much. Next question, please.
The next question has come from the line of Colin Gibson. Please go ahead and announce your company name and location.
Hi, Colin Gibson from HSBC. Just one question really, because I had a couple of others, but they've been asked already. And that was on aerospace. Tom, you went out of your way to mention aerospace as a weak area in a couple of aspects, during the second quarter. And I suppose in a way that stands that in some contrast to the picture we hear from most of the aerospace sector. You've got, for example, the OEMs still locked in at peak production rates really at the moment, for example. So I'm wondering what in particular is weak for you guys in the aerospace area, and whether you can give us any more color there? Thanks very much.
Colin, what we've seen, Colin, both in our airframe business and our aero engine business, is that the demand level from our customers in the first part of this year has been somewhat lower than it has been in during last year. I mean, aerospace didn't go into a drop off at all, in the first part of last year, and it has come down. Yeah, so it's at a lower level just now, but as I did say, we see signs that it is leveling off at that lower level.
Is there any more-
I expect it to start to improve towards the end of this year and the first part of next year.
Is there any more of a sense you can give us than is that, you know, civil aviation versus defense? Is that-
It's mainly.
OEM versus MRO?
Yeah, yeah. It's mainly, it's mainly civil aviation for us, and it is linked to, I think also e-elements that will be going through 2006, 2007, 2008 and first part of 2009. I think there was a high inventories in 2008 there. So I think we are seeing some effect of that as well.
Perfect. Thanks a lot.
Thanks, Colin.
Next question, please. The next question comes from the line of Daniela from Cisco. Go ahead and announce your company name and location.
Hi, it's actually Sam Edwards from Goldman here in London. Just one question, please, Tom. I'm just interested on your view on the European auto, whether the levels you talk about are you taking a view on the market with the end of scrappage incentives and the like, or whether it's specifically what you see from your European customers in terms of the level of downturn that you're in?
Sam, what we see and also if I look at external forecasts, then if you look at that for the European market, you will see, if you look at external data and I think what we see as well, you will see that production is planned to be down to the forecast for the third quarter, something like 14% in West Europe, year-over-year. Which means your level would be down 20% compared to the second quarter level. And that's not just my view on the intent, it's also backed up by external input as well.
Okay. The reason I ask is that there seems to have been, specifically from a number of other auto suppliers, talk about things actually being a bit better, certainly during the second quarter and looking at production schedules into the third and fourth. I was just wondering what your sort of experience is, relative to, say, expectations three months ago on automotive?
Yeah, we expected automotive to be weaker in the second half, but as I mentioned earlier, one of the reasons why we had a better volume in the second quarter was automotive held up much better for us in the second quarter than we expected. And you saw that in Europe as well. Absolutely, in Europe. It was it was better in the second quarter than we thought going into the quarter. What I'm basing the outlook on is based not only what we see from our customers, but also what I get from external sources as well.
Okay, lovely. Thanks very much.
... Question, please. Once again, ladies and gentlemen, how many of you have questions, please? So one on the telephone, Keith Adam, it's inaudible. Thank you. The next question come from the line of Ben Maslen. Please go ahead, and state your company name and your location.
Good morning, everyone. It's inaudible from, electronic spot. Two questions please. Can you talk a little bit about where you think your customer inventory levels are?
Again, what? I can't hear you.
Is that better?
Yes.
Hey, sorry. Good morning. Sorry. Not enough coffee. Two questions please. Can you talk a little bit about where your... you think the inventory levels are with your key customers and your distributors? As the economy has picked up again, do you think people have, you know, restocked in line with demand or ahead of demand? Or would you say that they're still very cautious, keeping their inventory levels fairly lean? Just how much restocking is going out in your key sales channels, I guess, that's the first one. And then secondly, on the pension, it just crept up a little bit, relative to the balance that you had at the end of 2009. Is that just currency or is the underlying liability going higher? Thanks.
If I take the inventory levels then, if I look at it in total, obviously in the inventory levels, there is, of course, there's been an adjustment in our sales to our customers more at the end of their restocking. But I don't think there has been any significant in restocking or significant overstocking. I think they are being quite prudent, despite the industrial customers, definitely. Some of the distributors, of course, having cut back, will take a little bit more inventory on board as well. But there is nothing to say that there is a big inventory build taking place in the market that you see.
Okay.
On pension, I'm sure Tore, you want to comment on that.
Yeah. For sure. There is a combination of factors, some currency effects, but also more importantly, the change of assumptions in terms of interest rates used to discount the liabilities, that that's more accounting related things. So you will see with these new rules on pension accounting, that pension liabilities will switch from quarter to quarter, basically, depending on the updated assumptions you put in.
Thanks for that. Thank you.
Okay. Next, next question.
The next question comes from the line of Michael Hagmann. Please go ahead and state your company and your location.
Good morning. It's Michael Hagmann at Nomura. I was just wondering if you could elaborate a little bit about the slowdown that you're seeing in China and in India. Where do you see the biggest shift in momentum? And are you seeing, in certain cases, also a contraction in demand going forward? Thanks.
Yeah. Okay, Michael, we've not seen a contraction in demand, as a reduction in demand, but what we've seen is a reduction in the level of growth in some areas. If I take, for example, China, one good example in that is in the car business. We're not seeing that growing to the same degree as it was in the first quarter of this year. Similarly, in India, if I look at areas like two-wheelers, et cetera, we're not seeing it growing to the same degree as we saw in the first half of this year. So it's a general easing in them there. But I've got to say, we're talking degrees in what is exceptionally strong growth. I mean, we grew in both China and India. We're talking in the 35%-40% type growth in these areas.
So from that viewpoint, if it eases off a little bit, it's not, it's not a tremendous change that we're seeing there as well. So still, a very, very good growth. And remember also, in the second half of last year, that the figures were somewhat better in the second half of last year in these areas in terms of growth, so the comparisons become tougher as we go forward as well. So yes, we're seeing some easing back, but it is not a dramatic change, and it's still very, very good levels of growth, and I wish I had that type of level of growth in Europe.
Would you be willing to take a guess on what the growth rates would be in the second half of China and India?
For us, or for the market?
For you.
Yeah, I know what I expect them to be, but I don't give an outlook for that way. But they won't be the same level as we've seen in the first part. It'll still be very, very strong growth.
For the market?
I think the market will, as I've said, ease off the level of growth in the second part of the year, a little bit. That's it.
Right. Thank you.
Thank you, Michael. Next question, please. We have no further questions at this time, so I'll hand back to you. Thank you.
Okay.
Sorry, we just have a question from Roland. Please go ahead.
Yeah, the follow-up then. You get the most impact by country, is that on a, on a regional basis, like, industrial and then by the others, or, or is it-
The normal split. The normal split, yeah.
Perfect. On the cost side, is there a negative effect on, like the function or the day you brought in? What is that, like, versus the growth or the negative contribution?
I think something similar, you should look at it that, before the second quarter together.
Okay. Thank you.
Okay. Okay.
We have two more questions now coming from the lines of John Moore from UBS. Please go ahead.
Yeah, just a quick one, if I could, on the normal Q2 seasonality. I look back on the last 10 years, it ranges from SEK 300 million- SEK 100 million drop on the second quarter at the group level. Do you have a view on what the normal seasonal drop is?
Oh, sorry, I missed it, what you started with. I heard you say normal seasonality change, but I missed the first part. Could you start again, please?
Sure. Just a question about the third quarter revenue picture versus the second as a seasonal drop, which you normally see. Looking back over the last 10 years, I've seen it a range of SEK 300 million-SEK 800 million, and you talk about sequential growth being up a little bit, seasonally adjusted. I'm just trying to get a feel for what you think the normal seasonal drop of revenues is from the second quarter into the third at the group level.
Yeah. I think take out of the statement, James, and I don't want to give a sales figure or a volume development there, as well. Of course, it will have some effect, as you mentioned earlier, in Console. I don't think Console will be much different from what we saw in the second quarter effect on this, the top line there. So I think you do your own calculation that way, and use what we've seen in the past there.
Okay. Thanks.
No, thank you, James. Is there any more questions?
Yes, we have another question coming from the line of Matt Miksic. Please go ahead and state your company name and location.
Yeah. Hi, Matt Miksic, with Barclays. Just a couple of follow-ups, I guess. First of all, in the margin, I guess we will see, I mean, change from mix, indicating higher industrial production, well, growth within the industrial division, aside from that, because normally that would mean higher margin. But if you could give me some comments regarding that. And the second is about price increases, if you could update, you know, on the long term or implement the price increases for the second half?
Yeah. You, I mean, as you say, on a normalized business, you would normally get that with if industrial's a little bit better and automotive doesn't go the same way, you would normally get that type of pattern there. I think in terms of the margin that you mentioned there, but you must remember also, as we go into the third quarter, that we run the, as I said, the production at lower absolute levels than what we saw, for example, in the second quarter. So that, of course, in that, I think total for the group. So that has some effect from a normal fixed cost absorption that you would see there as well.
So, the mix will move a little bit towards our favor, but of course, then you've got the normal seasonality that you see in the margins into the third quarter months. In terms of pricing, I would say from a pricing viewpoint, that the actions that we've put in place, all the price increases that we've put in place, during the first part of this year around the world have been done. And, we are of course in discussions where we need to with customers regarding how we see input costs and price discussions with them to address that. I would say there's nothing more on pricing at the moment. There's no other major initiatives that I've got right on the table at the moment.
Okay. Thanks. Bye-bye.
Okay, thank you. Are there any more questions?
We have no further questions at this time. Thank you.
Okay, that's brings us to the end of the conference. Thank you all for participating. If you have further questions, you're welcome to contact me by email or phone. Thank you and goodbye.
Thank you. Thank you, bye-bye.