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SKF AB
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Ladies and gentlemen, thank you for standing by, and welcome to the SKF Q1 Report 2019. [Operator Instructions] I must advise you the call is being recorded today, Thursday, the 25th of April 2019. I would now like to hand the conference over to your first speaker today, Patrik Stenberg. Please go ahead.
Thank you. And good morning to all of you and welcome to the SKF Q1 conference call. As usual, we will spend about 50 to 60 minutes on this call. We'll start with a presentation by our CEO, Alrik Danielson; followed by our CFO, Christian Johansson. And just for your information, we also have 2 other people present in the room here. We have Carina, heading up our accounting and the financial department; and Theo Kjellberg, heading our media department apart from myself. With that, I hand over to our CEO, Alrik. Please?
Thank you very much, and thank you for listening in on today's conference call. Well, the first quarter was a strong quarter with solid margins and a strong cash flow. Despite a moderation in growth that we've seen during the quarter, we delivered good operating profit of almost SEK 2.7 billion, which, in fact, is a record amount for the first quarter in SKF. The positive pricing and efforts to reduce our underlying cost base continued to show results. Our operating margin was 12.5%. This despite higher raw material costs in the quarter. Cash flow was SEK 684 million, a significant year-on-year improvement, but still a focus for us to continue to improve during 2019.We turn to the next page. I'll talk a little bit about the industrial business. Our industrial business continued its strong performance. In Q1, we saw increased sales volumes in our 3 largest regions: Europe, North America and Asia. Organic sales grew with 3% and operating margin reached 15.4% in the quarter.We turn to the next page -- that next page, a few comments around the Automotive. Well, you know the Automotive business remained resilient in the sense that in the -- despite the fact that the organic sales declined by almost 6% due to, foremost, lower car sales in Europe, Asia and North America, we had an operating -- we reached an operating margin of 5.5% in the quarter.We turn to the next page and talk about our targets a little bit. Last year was a very strong year, as you know, for SKF. We had record sales, record operating profit and record cash flow. And I'm pleased to say that 2019 has come off to a good start. We are seeing a moderation in growth rates, but we are delivering a solid performance in Q1, as I mentioned, with 12.5% operating margin and with good return on capital deployed. The net debt ratio increased somewhat to 57% due to the implementation of the IFRS 16 rules on leasing, but it's still well below the target of 80%. And I am convinced that we will continue to improve this figure going forward.And we are making progress in reducing our net working capital. At the end of the first quarter, we were at 30%, which is an improvement compared to last year, but still above the target of 25%. So as we've mentioned, as I mentioned, there's still more work to do, but the plans are in place. And during the forthcoming year or years, we will -- I'm actually convinced to reach this target. We just switch to next page and talk a bit about the regions. We saw stable revenues and high level in the first quarter, and Europe grew by 1%. We saw a good industrial demand with higher volumes in most industries. And if we talk about the Automotive, volumes were lower, of course, in Q1 compared to last year, with relatively unchanged sales in Europe for trucks, and significantly lower sales to light vehicles and slightly lower sales in vehicle service margin.Organic sales were overall flat in Asia, with the Industrial sales slightly higher demand and Automotive volumes were lower than last year, with significantly lower volumes for cars, lower volumes for trucks and significantly higher volumes for the vehicle aftermarket, which is, of course, a positive.In North America, sales were relatively unchanged compared to last year. We saw higher sales in Industrial segments. Sales to aerospace, energy, agriculture, food and beverage and were all significantly higher. Sales to industrial drives, heavy industries and off-highway were higher, while sales in Industrial distribution were slightly higher. Automotive, on the other hand, were significantly lower, with higher volumes to trucks and significantly lower volumes to car and aftermarkets.In Latin America, sales grew organically by 2% compared to last year and we saw slightly higher volumes with Industrial and higher volumes to the Automotive segment.If we turn to the next page, well, let's talk about some of the highlights of -- and I have 2 highlights to mention in this conference call. One is that we have inaugurated a new tapered roller bearing factory in Changshan in China, previously operating across 3 sites in China and now we have consolidated the 2 into 1 modern and efficient site. You see the picture here on the screen. And this new Changshan factory employs approximately 600 people. This is an important step for SKF, where we're able to bring our 3 brands, SKF, PEER and GBC together, combine R&D and manufacturing and competences, and strengthen our position with the industrial drives and Automotive segments in China.If we turn to the next page to talk a little bit about the Industrial side. We, together with Siemens, during the Hanover fair, we launched SKF and Siemens cooperation in the MindSphere. As you know, the MindSphere is a comprehensive IT platform for managing your industrial assets. And SKF and Siemens are working together. So if you are using MindSphere, you can automatically connect the SKF condition monitoring equipments into your facility and get the benefits from both the foresight and the insights that SKF can give you about the conditions of your machine. And of course, this is an important step of making the condition monitoring accessible to a wide range of customers. And of course, we will continue this kind of development and promoting the condition monitoring throughout the world.And with those words, I actually finish my part. And I give the word to you, Christian.
Thank you, Alrik. And good morning to all of you. The picture on this slide show the remanufacturing services that we have started up in Colombia this quarter. It's really nice that the SKF rebase are contributing to the circular economy. And then we then turn to this page and I will go through the economy of the quarter, starting then with sales. Net sales increased by 3.5% in the first quarter. Organic sales grew by 0.3%. Industrial grew organically by 3%, with, as you heard from Alrik, growth in all the 3 main regions and the growth in most of our Industrial customer industries there. Automotive, we saw a drop in organic sales by almost 6% in the quarter due to lower volumes in Asia, Europe and North America, mainly on IT, but also in the aftermarket. Currency effect on sales was positive in the quarter by 5.7%. Largest effects, as usual, coming from the U.S. dollar, the euro and the Chinese renminbi. Structure component was negative 2.5% related to the divestment of linear recreation last year.And if you turn page. Operating profit by quarter have shown a positive trend during the periods that are covered on this slide and also in the first quarter of '19. Operating profit, SEK 2.658 billion, which is then higher than the first quarter of last year and thereby also is our best first quarter result for SKF in history.So if you turn to next page, I will take you through the -- turn to next page, please. Thank you. Taking you through the operating profit bridge for the quarter. Firstly, we had a negative effect then from the divested companies, mainly the linear recreation business of SEK 49 million. The currency impact was positive SEK 220 million compared to last year. Operational performance decreased by SEK 138 million year-over-year. Organic sales and manufacturing volumes increased by SEK 216 million, including positive effects from price/mix as well as negative effects from lower sales volume, also negatively affected by lower production volumes versus last year. And the year-over-year effect from change of finished goods in inventories was SEK 60 million negative in the quarter. Price/mix impacted positively, both pricing and from mix. Cost development. Costs were SEK 354 million higher than last year, and this is more than SEK 200 million better than what we discussed at the last conference call. So we are very pleased with our cost management in the quarter. We see good cost flexibility, less product expenses than what we discussed at that time. And we see more cost reduction effects than we forecasted, while we also, on the material costs side, we see some of larger negative effects than what we guided for.Some comments to the second quarter guidance then to the bridge, M&A side, lost results from divested companies, about SEK 50 million. Price/mix, continued positive effects we expect from price/mix also in second quarter. The stock side, we expect to see a slight reduction on finished goods inventories in the second quarter versus where they were in the first, which then will give a negative year-over-year effects in the bridge of about SEK 20 million. On cost development, we foresee in total about SEK 400 million higher costs than last year, consisting of cost inflation, about SEK 225 million, material costs, around SEK 150 million negative and we also see somewhat higher restructuring costs versus last year, it's about SEK 30 million.So if you could turn to next page, performance by customer group. Industrial, organic net sales increased by 3%, increased in all our 3 main markets. Operating margin was 15.4% compared to 15% last year. Increased sales and also price/mix positive. While we had that as we have said, then higher material costs and lower production volumes that they impacted negatively in the quarter.Automotive, negative organic sales development by 6%, primarily related to car sales and weak across all the 3 main regions. Operating margin, despite of that, 5.5% compared to 7.7% last year. And obviously, negative effects from lower volume and increased material costs, offset by pricing.So if you turn to next page, the income statement for the group. As we've said, the best quarter 1 result to date. The moving 12-months margin trend is now at 12.8%. Gross margin unchanged versus last year, 25.5%. And selling and admin expenses as a percentage of sales was also stable, SEK 13.2 million versus SEK 13.1 million last year. Financial net, SEK 260 million, and this includes the accounting for leases, effects of IFRS 16, about SEK 30 million negative. Taxes in the quarter, SEK 661 million, given an effective tax rate of 27.1%. Earnings per share, SEK 3.77, which is exactly the same as last year. And on the 12-months trend, then we remain at -- we are at SEK 16 versus SEK 12.7 last year.If you move to cash flow on the next page. And if you have that excluding then impacts from M&A, we were at SEK 820 million in the quarter compared to SEK 254 million last year. And the improvement mainly related to then lower working capital, lower taxes paid and also that we had implemented the IFRS 16 accounting.We should also highlight then that we continue to invest in property, plant and equipment on a higher pace than in previous years. So if you take the cash flow excluding M&A impacts, for the last 12 months, this has increased then from SEK 4.3 billion last year same period to SEK 6.5 million -- billion after the first quarter's SEK 2.2 billion increase. And that then includes an increase of CapEx of some SEK 450 million. So we have, I would say, certainly a strong cash flow performance.Next page, please. Net working capital, 30% of sales by end of the quarter, 1.7 percentage points lower than the first quarter last year. And this was positively impacted by lower stock levels as well as the divestments and negative by the exchange rate development.Turn to next page. Debt equity ratio was 57% by end of the quarter. And the main reason for the increase is the implementation of IFRS 16 where we have a SEK 3 billion asset debt position now. And that net debt equity ratio excluding lease then was unchanged. We also had the increases in provisions for post-employment benefits in the quarter. And that net debt, excluding pensions, that was further reduced and it was down to 12% by end of the quarter.If you turn to the next page, you have the guidance for the year. And for the second quarter, we expect the financial net of around SEK 240 million negative, including then the IFRS 16 effect, exchange rates, currency impacts. Operating profit, SEK 110 million positive compared to second quarter last year based on the end of March rates. And based on the rates from April 23, it's positive SEK 160 million. Tax rate, guidance unchanged to 28%. And the additions to property, plant and equipment also unchanged, SEK 2.8 billion for the year. So with that, back to you, Alrik.
Thank you, Christian. Well, just to summarize, if we take the last page here. The first quarter was a strong quarter with solid margins and strong cash flow. Demand in the first quarter developed in line with our expectations. And organic sales looks relatively unchanged compared to last year for the group. We continue to see positive pricing, and our efforts to reduce our cost base have shown results. I'm pleased to see that the operating profit at almost SEK 2.7 billion is the best Q result for SKF so far today. Our operating margin was 12.5%, this despite higher raw materials cost in the quarter. Cash flow was SEK 684 million, a significant year-on-year improvement, but still a focus for us to continue to improve. Entering the second quarter, we expect to see slightly lower volumes compared to last year, including relatively unchanged demand for Industrial and lower demand for Automotive. With those words, I thank you. And I leave it back to you, Patrik.
Thank you, Alrik. And now we are ready to take on your questions. [Operator Instructions] With that, I'll hand it over to you. Operator, please?
[Operator Instructions] The first question we have comes from the line of Andre Kukhnin from Cr?dit Suisse.
I'll limit myself to 2. Could you tell us, please, what was the raw material headwind in Q1 2019?
Yes. It was -- we guided for SEK 108 million and we came out of SEK 230 million. And I will say it's not the guidance when it comes to pricing and negotiation results and so on was, I will say, accurate, fully accurate. What we have seen is a somewhat negative consumption and mix effects, which is difficult to forecast. It's a mix of products and components as we produce and in which factories and in what volumes there. So we had a [ delay ] versus guidance when it comes to that.
Got it. And secondly, could you tell us whether you have communicated further price increases to customers and distribution in Europe, U.S. or elsewhere year-to-date?
Yes. We -- there is a communicated list change here in Europe, that's -- and otherwise, this is -- as we -- as I say always, this is a dynamic thing. And of course, there is a myriad of different customers all over in different countries with different lists. But the major one is what's happening now in Europe.
And if I may just follow up. I mean, is this sort of a similar magnitude to last year? Or just trying to assess how pricing kind of develops '19 versus '18.
Yes. Well, I would say that it's similar, but on the other hand, it's always dynamic. It's very -- pricing is depending on what segments will grow, what are the customers as always. But I would say is SKF I think we have proven that we manage our pricing well and that there is a strong possibility for us to compensate for cost increases and get paid -- reasonably paid for our products. And that continues.
The next question today comes from the line of Gael de-Bray from Deutsche Bank.
So 2 questions, please. The first one is really a follow-up on the pricing side. I mean, material costs have been pretty high now for a few quarters. And surely, we should start seeing some lower pressure here in the next few quarters. So I was wondering how this could impact you and your peers pricing intentions really. I mean, don't you actually expect a greater reluctance from customers now on the pricing side given that volumes are expected to be flat to slightly down and material costs should also be down? So that's question #1. Question #2 is on the cooperation with Siemens and the MindSphere platform. Could you elaborate a bit more about this one? I mean, what exactly MindSphere brings you that you did not have before? What's basically going to be risk on Siebel for running the data analytics? And what's the monetization approach between you and Siemens?
Well, if you start with the first -- this is Alrik here. If we start with the first question. With a less buoyant overall demand for components, there will be, of course, an expectation also from our side that there will be a diminished sort of price pressure from our supply base. And that will, of course, in a way, translate to the same kind of behavior with our customers. That's nothing more than normal. And our intention and the way I think we have proven that we have the ability is to keep that difference between costs and price that gives us a reasonable margin. And that dynamic, I see no change going forward. When it comes to MindSphere, there is going to be -- it's a little bit like when we started with Customer Link in the beginning of -- the end of the '90s -- beginning of the '90s. If you remember, you go into a customer and they had 20 different computers logging into different kinds of suppliers. And in the end, it came to be an Internet-based integration with your system. And that's how you deal with orders with the customer. This is going to be the same. I think that Siemens MindSphere is an excellent platform for you to sort of hook on your factory and you will have a one comprehensive system under which you can sort of manage your assets throughout the value chain, even in parts where SKF has no role to play. For us, this means that, as soon as you have implemented MindSphere, there is no extra hassle or cost or anything for you to actually immediately start working with SKF to improve your efficiency with our services and products that we can supply to you. And for us, together with Siemens, this means that the system becomes much more comprehensive also for Siemens. Immediately, anybody who goes with the MindSphere can automatically starts benefiting from the SKF reliability systems support. And that's what I think is happening.It was interesting to go to the Hanover Fair this year to see how in a few years, it's gone from a product kind of fair, still it is a product kind of fair, but where the buzz is, the buzz is where you see this different kind of joint initiatives for digitization and to promote the new technologies quickly into the marketplace. And I foresee that the you would see more of these kind of partnerships between different kinds of suppliers into the digital space because that's the only way to sort of get a real good impact.
The next question today comes from the line of Ben Uglow from Morgan Stanley.
I had 2. And Alrik, could you say a little bit about just the trends you are seeing in China at the moment? In the first quarter, obviously, Industrial was quite good, and Automotive, less good. Are there any signs -- as we move into 2Q, are there any early signs that stimulus efforts and government initiatives in China are beginning to take hold and benefit your business? So that's question #1. Question #2. I don't know how to pitch it sort of succinctly, but Alrik, you've done this for a long time. When you look at the cycle as it stands today, we've had a couple of down years, a couple of up years. Is this just a growth pause? Do you feel that it's just a very temporary growth pause and we kind of go back to business as usual? Or do you see classic signs of a more significant down cycle? How are you viewing the current growth moderation?
Well, if you take the China question to start with. When we put the ears to the ground in China, we realize that there's a lot of discussion and there's a lot of things happening. And you could also follow in the global press how there is a several sort of activities in place in China. There will be, I am convinced, in the short run a lower activity, but that there is a clear understanding that the Chinese government will try to prop up the activities and not least a lot of focus to -- if there is a agreement between the U.S. and China, that will, of course, be positive, both on sentiments and the way also the customers in China see their business going forward. But you see how we guide, and this is how we see it. And when you look at the business climate, it's interesting, even though -- when you look at the uptake that started in 2016, it was really broad based, it was really global. Right now, when we see the relatively weaker sales in Automotive, for instance, but it's also been more or less global. Yes, there are some Latin America and so forth. But on the other hand, on the -- you see also certain sectors coming very strongly certainly, and that there is a technology shift in many areas of the economy. They are also sort of keeping a structural demand. Look at aerospace. Aerospace is very, very strong going forward, and we see that probably going on for several years because what you see there is, actually, technology shifts into new engines, more efficient engines. And what I see also is that there is a bigger interest that in a long time for technology cooperation with end users and with OEM customers where there is an understanding that the pace of upgrading your product portfolio, your gearboxes, your machines is actually increasing. And that's a positive sentiment, if you understand. There is more interaction on the technical side than I've seen in the long, long time, and that is something that has a potential to in the midterm propel growth. But that's more or less what I can say.
The next question today comes from the line of Andreas Koski from Nordea.
I have 2 questions as well or I have 3, but I will limit myself to 2. I'm sorry if I missed this on the call. But on the balance sheet, the inventory seems to be off by SEK 1 billion quarter-on-quarter. So how much did you bill to finished goods inventory during the quarter? Or did you say what kind of impact the inventory change had on the EBIT bridge in the quarter?
Yes. I said that. But we bid quite significantly last year, and we have bid a little bit this year, so you have the downside that we have a negative effect in the P&L of some SEK 60 million.
Sorry about that. And then the second one is for you, Christian, as well. And it's actually related to the annual report. When looking at the cost structure or you present I think it's in Note 7, expenses by nature, there, you have other expenses line that increased by 29% in 2018 compared to 2017 and compared to sales increased from 22% to 26%. Maybe you do not have the answer on hand. But I would like to understand why that cost line increased that much.
Yes. We will provide you with a written answer on that outside the meeting.
So could I do now the second question then? And that's actually on your volume growth. Would you say that your volume development in the first quarter was in line with your outlook of relatively unchanged?
Yes.
The next question today comes from the line of James Moore from Redburn.
I want to -- can I follow up on Andreas' question just then on the demand? Because I think I heard you mentioned that volume was negative. Obviously, there's a range, minus 1, plus 1. I guess is that what you're talking about that the negative end of the range for the development in the quarter? First question.
We have our guidance relatively unchanged. It's plus minus 2. So it is within that range. So as you said, it's negative. You know the info there, but we don't give you more -- exact figures.
Yes, that's fine. The second question, as many of the others, I wanted to ask -- I have been asked how much the structural issues in the company relates to your switch from transaction-based to fee-based model and your efforts to sell more sensors like the IMx-1 and the IMx-16Plus. Could you update us? I know it's early days and these things will take time. But could you update us with whatever KPIs you look at as to how that's developing in the marketplace?
Yes. As you recall, we said to you during the -- to all of you, to all that one of the measures that we will show you in the beginning now is, of course, how many of these -- how many assets do we have hooked up to SKF. And I'm not going to update you exactly on the number today. We will do that together with Patrik. But of course, it's growing. You can imagine that it's growing. It's a very good development. And it's -- this is the future. The future is to connect your assets and to be able to understand what's happening in them. And SKF is in a very, very good path on this. And you know how with the new sensors, you mentioned the IMx-1 and we have the data apply that we launched now, it becomes very easy and it becomes relatively unexpensive that makes it possible to be something that everybody can benefit from. So yes, it's growing. We will update you regularly on this, but it's very positive.
And the fee-based model?
Yes. The fee-based, yes, it's growing all the time. I have no specific numbers on you, but you know my absolute conviction that this is the new way of doing business, not only in Automotive, but in many areas. And when you present this to a customer, and they understand that there is a win-win in this, they all see this is a very interesting product. It's still in the beginning, yes, but yes, it's developing very favorably.
The next question today comes from the line of Graham Phillips from Jefferies.
My 2 questions are. Firstly, on Industrial. And you look at the second most important market after distribution. It's one called industrial drives. And I want to focus on your downgrade really on the outlook. What actually is the end markets and impacts that are going on regionally in industrial drives? Exactly what are these? Because it had been one of the strongest end markets in Industrial. It's now fallen off the cliff in terms of little barometers that you give.
Well, I don't think it's falling off the cliff. I mean, you are using very strong language. What happens here is, when you look at industrial drives, it's one of those segments where you have everything from small gearboxes to different electrical motors and larger gearboxes and so forth. Not the big ones for wind and so forth and, of course, this is a segment that is a little bit you notice what you see the small things that are happening underneath the but also a segment that is -- has industrial dynamics, meaning as now supplies come more in line with demand, while many of these customers they maybe had a little bit of extra stock during the end of the year and now they are looking to compensate maybe. But I don't see any of the kind of words that you are talking about. We see this as still a good market.
But I mean in terms of the actual sort of I don't know customers or end markets, clearly, it's different than the other end markets or customers related to the end markets?
If you can imagine, industrial drives is everything from -- in any factory, in any operations and even in supermarkets, you have gearboxes, you have small electrical motors, you have all kinds of pulleys and things like that, and these are the sort of the industrial drives segments. And as an OEM, because this is, of course, mainly through the OEMs, this is the kind of myriad of customers that you have all over the world and then it's differentiated to a lot of underlying businesses.
Okay. But in terms of the outlook downgrade, I mean distribution also seems to be downgraded in terms of the outlook. What would be the impact to margins of the division?
Well, as we see it, I think we're -- as you can hear from us, we still believe that we will be able to compensate. We are looking at costs. We have had a good price/mix. And we will continue to do a good performance also next quarter. So I don't see this in the similar way as you do.
The guidance is relatively unchanged on Industrial.
Yes. I guess I'm just looking at these little customer industries that you give on each as the second page of the -- I'm sorry, the fourth page.
Remember also that the second quarter last year that we relates the guidance to was the clearly strongest sales quarter we've ever had in SKF.
Appreciate it. It's a tough comp, yes. And just finally then. The second question is around net working capital. I mean I know you've got this target of 25%, and obviously, it's good to have something that as a reach to get to. But how realistic is it? And what sort of volume assumptions do you make about the market? And what sort of KPIs or not KPIs, but what sort of incentives to line managers have they been put in place in order to get there? Because it seems a little bit unrealistic that you've been not able to achieve it or get close to it.
No. We don't see it as unrealistic, but obviously, it means that we need to work a little bit differently. And we have described I think you attended the Capital Markets Day, we went through some of the initiatives and we continue to implement this one. So I mean, if you take first quarter is also a seasonally one where we usually bear the bit on inventory levels and you have that. But I mean, the overall assumptions, it's more of a normal market, it's not -- relates to some high volume or so. It should be under normal circumstances. Then you should also note that the in first quarter, the 30%, which is clearly better than last year, also have a negative FX effect. I mean, by the exchange rates at the end of the quarter. So I think we see good underlying development on net working capital there. We even strive towards the 25%. It will take some time, but it's certainly realistic.
The next question today comes from the line of Andrew Wilson from JPMorgan.
Two questions from me, please. On the MindSphere tie-up with Siemens and kind of the potential behind that, I'm just interested in terms of how you see sort of SKF's position versus your competitors in terms of the level of connectivity and kind of how you're moving forward with that. That's the first question, please.
I'm absolutely convinced that all -- everybody is going to work in this direction. But I like to think that we are -- from our -- in our industry, in the absolute forefront and have been so for a while. And I think it's unrealistic for all of us, if you understand the bearing people, gearbox people, whatever have you, the people making paper machines with steam, so we have our own platforms and different platforms. There will be some platforms that in the end will be the one that people use to monitor their entire factories, et cetera. And I think that Siemens is going to be definitely one of them. And there, SKF is in there ready and you as a customer, you can start benefiting from day one. And I think this is the kind of dynamics that you see in this, and that's very positive.
And for my second question. Just thinking about capital allocation. Obviously, the balance sheet when we look at it kind of IFRS or pensions, either way, it's clearly a lot stronger share than it's been for a long time. Kind of how should we think about the portfolio or should we think about potential cost return in time as you obviously continue to see good levels of cash generation?
Well, cash has always been a forte at SKF, as you know. I always argue, so interesting, bad time, good time, SKF is usually delivering excellent cash flows. And from our operations, we are absolutely convinced that this will continue. And the investments we do are, of course, to increase our competitiveness. So we're doing investments and we're using the capital in a wise way which will improve our competitiveness and our growth potential. At the same time, of course, we are now -- after a while, during a relatively a period where we have now strengthened our balance sheet, we have the resources, we're also looking at what can we do to improve our portfolio going forward and looking at acquisitions and so on. A small wonder in this quarter and we're now looking at that as well going forward. But cash flow will always be a good -- it could be good for SKF and look how we have strengthened our balance sheet during the last few years and giving us this kind of financial muscle to continue to defend our positions and improve our situation.
The next question today comes from the line of Klas Bergelind from Citi.
It's Klas from Citi. Sorry, I was late on the call. Can you please repeat the question what you said on the cost line SEK 400 million expected for the second quarter I think. And how is that other line moving within that, IT and R&D, et cetera? You guided for that to be SEK 110 million this quarter and that's price positive again. So how will that line develop as we go into the second quarter? It was positive now in the bridge I think. And do you think -- when you go into the second, how will that develop, please? I'll start there.
Yes. If you start, the SEK 400 million on the year-over-year and the other costs part of that is eliminated. So it's -- we don't we have -- I mean we are quite proud of it. We know what we have to do. We have our investments. We have footprint work. We have things we are taking on to strengthen us for the future. We have IT, as you know. And we do this and proceed with these plans, and we still do it within -- with much less cost impact on what we thought. So what we have there is we see more restructuring costs. So the SEK 400 million is lower cost inflation. We are seeing costs coming out. We have SEK 150 million when it comes to material, which is improving. I mean we see less negative effects on the material side. We should also remember that in the SEK 150 million, we do have some import tariffs also that we didn't have. I came in in the mid last year. So in Q2, still, we have a year-on-year effects on import tariffs. So material is improving and cost inflation improving and then some restructuring. That's what we have.
All right. And my second one is on North America. And again, sorry for being late on the call and maybe you talked about this. But growth was lower than I thought. Guidance, also a bit lower than I thought. And we know trucks is weaker, but it feels pretty widespread across Automotive and also on the Industrial side. Could you tell us a little bit more what happened in the quarter? And obviously, we're hearing that things are looking a little better at the start of the quarter as the trade issues with China seems to abate. But any color here on North America would be very helpful.
Well, what we see is -- if you -- we've had a solid growth in the Industrial business during the quarter. And then what had been a little bit dragging it down is like, for instance, we see in oil and gas, our customers now are burning inventory during the quarter. We see even some distributors, even though we don't have this, that they buy a lot in the end of the year, we see some distributors taking advantage of new tools to not -- to be able to sort of burn inventory. But when we see their sales out of our distributors, it's still strong. And then there is some ag. In the agriculture business, we see some weaknesses and so forth. But otherwise, it's been a strong Industrial sales also for us in the U.S.
On the Automotive side, yes, it is. Cars down and trucks stable, and that's what we've seen.
The next question today comes from the line of Anders Roslund from Pareto Securities.
Could you elaborate a little bit on those cost savings going forward and also how you look upon the production level in the second quarter?
Yes. I mean, on costs side, you probably have seen that in the reports. We have reduced headcount seems quite a few quarters now, and we see effects from that coming through. I mean we have also all the initiatives we have with footprint and investments and so on, which has a cost component in that. So we are quite positive too that we did see good cost management also going forward. I mean, it all depends on how volumes goes and so on, but we are certainly on the ball and I hope you can see that also as we do in the first quarter.
And then on the production level in the second quarter.
Yes. Production level obviously year-over-year is down.
Yes. But you won't take out more inventories now or you tried to be in line with sales?
I mean, we have -- if you talk about service levels and where we are and so on, we feel we are quite balanced. We have an ambition as I said in the bridge that we take -- you see a slight reduction of the stock levels in the second quarter with a small negative impact on that. So of course, we are trimming stocks in for the products, lines and segments where we see weaker demand. I mean, obviously, we are working on that in Automotive and naturally with the volume developments that we've had there.
And this time, Anders, what I think we've done, as you will remember, we've been focusing this all the way from actually from second quarter last year. So this time, it's not like we're coming into a situation where we are taken by surprise or anything, and we're doing this in a good structured way. And that's one of the benefits you see also in the way we're looking at how we are managing -- also in the past in the quarter, but also going forward.
[Operator Instructions] We have a follow-up question here from the line of Graham Phillips from Jefferies.
I wanted to focus on Automotive, and I know in the past, you've given us some guidance about where you platform wins were going to lead to some outperformance against the market, particularly into the '16, '17, '18. Can you talk about anything like that, that may be coming in the coming quarters or years, to the extent that where the underlying level of order of production, you should be able to outperform or do you think you'll be in line with the underlying Automotive production?
Well, as you remember, we talked about -- there's been a while where I think we were under performing in the car segments in the U.S. for instance. And I think that we've shown lately during the last year or so that as we -- as I already said in 2015 that we were going to work on this and we were coming back at that. And that's the kind of cycles you see. And I think that if you look at what's happening now in the Automotive both on innovation, both on electrical drives, et cetera, drivetrains, I think SKF is absolutely well poised to have strong position going forward in the Automotive in all regions in the future. So I'm positive about this. Having said that, I mean, as you know, these are slower movements, takes more time before it's actually -- it's not a thing about the next quarter or so.
No, I understand. And just on the aftermarket, again, the vehicle aftermarket has been a source of pressure really in terms of bearing use, bearings lasting longer and so on. Is there anything here that you can point to where, again, the market may turn around or we just again expect to sort of keep continue sort of weakness in that end market for you?
I mean, we're working diligently to look at the right channels to market. And like all markets, they are developing, and we hope to work with it. And as you saw, for instance, in the quarter, we had very positive development in China. We had less positive development in the U.S., et cetera. But we will do our utmost to keep our turf and both on products assortment and channels to market to keep our turf in the Automotive. Having said that, as you rightfully say, our bearings are really good and they last a long time.
The next question today comes from the line of Erik Golrang from SEB.
I have one question. On the cost development, it appear that it's also fourth and the first quarter. You came out stronger than expected on the -- as compared to what you guided in terms of costs. So my question is the guidance you now provided for the second quarter, is that something that is continuously updated, or is that stemming from something -- some bigger planning work you did earlier on last year? And to what extent does the stronger development relate to headcount coming down or at a quite good pace given where volumes still are? And could you say anything on where headcount is expected to go from here, et cetera?
That's a lot of details. But I mean, if you take the guidance for the second quarter, I mean, obviously, we work with rolling forecast ourselves. And you can say that's on the same level as year-over-year as what we've had in the first quarter. It's slightly higher than what relates so that we have some smaller one-offs in the first quarter, we don't expect to repeat it. But I mean, we -- and on the headcounts, sorry, we don't have to share with you. But I mean, you see the trends and how we are working on that and how we -- I mean you can take a longer perspective on that also. And you can see that on white collar, we hadn't moved up during the strong part of the cycle. We've kept that and we work diligently on that with productivity from that level as well. So I mean, you will see a positive cost developments from here SKF going forward, that's clearly our ambition, and we are confident we have been through that.
And always, when we do our -- when we try to look into the next quarter, of course, we're working with the latest kind of information we have in the company. And lately, we've been -- if you see the last year or so, we've been actually quite accurate with our forecast for the coming quarter. I hope it will continue like that.
And remind me the reason, the key reasons for the better than expected outcome in the prior 2 quarters. What's that on the cost side?
No. I mean, we have had quite a lot of activities accounting to IT, to footprint, factory moves, to investments where you have project cost and so on which is obviously comes on top of overall the normal business. And we have been able to carry through those activities in a more cost efficient way and it's one main item. And then as a said, we start to see costs going out. Organizational costs coming out.
And the last question we have today comes from the line of the Alok Katre from Societe Generale.
Just one really. On the auto side, I mean, clearly, the guidance, you've kind of elaborated quite well. Just wondered whether you are starting to see some indirect effect of the slowdown in the autos given how important this is for the general Industrial side of thing. I'm just trying to sort of go back and if we see the oil and gas softness in the U.S. in 2015, '16 and how that kind of spread a bit more wider than what people perhaps imagined initially. So just trying to understand if this is what we're seeing from the autos, that there's slowdown across your customer base.
I would say that that's what we feel. I mean, my comment about oil and gas previously was just that we see some of our customers in the U.S. burning inventory as they had a -- to be sure that they were getting the materials, they order a little bit more than they needed, and now they are sort of burning a little bit of inventory. What we may see, of course, intuitively is, of course, if there's a lower demand for cars, there will eventually be a lower demand for steel. And maybe that's one of the first effects that could come. But I don't say that I can see that today yet.
Thank you. With that, we thank for all your questions, and we will be readily available to answer more of them on the phone. So thank you for participating in this conference call.
Thank you very much.
Thank you.
Thank you very much. That does conclude the conference call for today. Thank you for participating. You may all disconnect.