SKF AB
STO:SKF B
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
178.9
238.8
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SEK.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
SKF AB
You don't have any saved screeners yet
Welcome to this conference call on the first quarter results. As in the last couple of quarters, we will use video instead of the traditional telephone conference. [Operator Instructions] Today's speakers are our President and CEO, Alrik Danielson; and our CFO, Niclas Rosenlew. With that very brief introduction, I will leave the word to Alrik. Please?
Thank you. Good morning, everybody, and welcome to this conference. I'm pleased and proud to stand here today after yet another strong set of results. During the first quarter, we saw strong sales and demand growth. Organic sales increased 8.6% in the quarter. Sales were significantly higher in Latin America and Asia and relatively unchanged in Europe and North America. We're also managing significant headwinds in terms of higher costs for logistics and material and a negative currency impact, affecting our operating results by SEK 1.3 billion. Despite this, we delivered a very solid adjusted operating result of almost SEK 2.8 billion, representing an adjusted operating margin of 14%. We are already working actively to implement price increases, both in industrial and automotive to compensate for rising input costs. The first quarter is historically lower in terms of cash flow generation. The sharp increase in demand in the quarter contributed significantly to higher accounts receivables. And as a result, cash flow was lower than last year. All in all, another real strong set of results, which we are all very proud of. The Industrial business delivered a very good performance with a record high 16.3% adjusted operating margin compared to 15.5% last year. 5.4% in organic sales increase, really good. Compared to last year, sales were significantly higher in Asia and Latin America, relatively unchanged in Europe, Middle East and Africa and in North America. SKF's great strength is our ability to meet needs of almost any rotating application. One of the most demanding for bearings, although you might not think so is in agriculture. Farmers need their machines to run without downtime through mud, dust, grime, dirt and water. Tilling machines and seeding machines are just 2 of the applications that rely on a multitude of bearings in order to perform. This is also an area where we have been most successful in developing and delivering what we call application-specific solutions. Solutions that are designed, engineered and manufactured to meet the specific needs of a customer. The key to why we are successful and has been doing so well in our offers in agriculture is straightforward. Our engineers maintain an unrelenting focus on the needs of the customer, without overengineering for the sake of it. We're going to capitalize on the speed of value -- in the value chain, taking ideas from design to manufacturing in a matter of days, not months. Sourcing and manufacturing at competitive rates and being able to combine the SKF bearing and seals technologies in a way which is unmatched in the market, especially in an application with such a harsh operating environment, that is absolutely key. What makes this a really interesting area as well is the ability to market and price these solutions based on the value they generate for the customer. We price the bearings on their performance and on the uptime they enable not based on manufacturing cost plus kind of markup. When you look at this slide, you can see what I mean. Through our engineering and sealing offer, we can essentially engineer an agri hub, which is specified to meet the needs of the individual farmer. The larger the farm is, the higher needs and expectations on the bearing and therefore, also the value of the bearing to the farmer. Smaller farms of lower requirements and their agri hubs are engineered to a different performance level. Remember, it's about performance levels, not quality. The quality is always the same, top. This slide is the one that's really great to be able to show you. As you can see, there's no doubt the value of this application-specific offers in terms of direct impact on the business. In 10 years, sales has gone from SEK 100 million to over SEK 1 billion. Once more, it's really in the last years or so when it's really taken off as we have invested more in our engineering and manufacturing capabilities. The same approach is now also being implemented in food and beverage, metals, fluid machinery to name a few. Another part of the business that's growing well is our fee and performance-based Rotating Equipment Performance business. By offering a combined service, including bearings, seals, remanufacturing, lubrication and of course, condition monitoring and analysis, we are able to offer a completely new business approach. Customers pay for uptime and machine performance. Process industries are really where this setup works best. And we will have yet another win with a pulp and paper company in Brazil. As you can see, it's a 5-year deal, which includes a full SKF offering. And just to give an idea of the scope of the contract, it includes over 3,000 connected analysis points. The automotive business continues to perform well. Strong organic sales growth of almost 17%, with an adjusted operating margin of 8.9%. We're also seeing continued strong growth in electrical vehicles. The car on this slide is the NIO ES8, a full-size 7-seater, all-electric SUV. And with those words, I leave the word to you, Niclas.
Thank you, Alrik. And if we turn to the next page and go through our financials. First of all, let's start actually with sustainability. Sustainability has -- is something that we've been reporting on for many, many years. It's also an integral part of SKF's strategy, our operations and our business. And we will now actually start to report on sustainability on a quarterly basis, just as part of our normal quarterly report. And what you see here is a snapshot of that report. As you can see, we've seen a strong increase in our cleantech revenues during the last couple of years. They've increased from SEK 4 billion in 2018 to SEK 7 billion for the last 12 months. This includes revenue from, for instance, renewable energy, wind, electric vehicles and other similar segments. We are also making good progress towards our target of being carbon neutral. Here, it's demonstrated by the reduction of Scope 1 and Scope 2 CO2 emissions. And furthermore, our accident rate has also continued to consistently come down over the years and over the quarters. Moving on to our sales development in Q1. Sequentially, our organic sales continued to improve, with quite consistent progress since the trough in Q2 2020. Compared to last year, our net sales decreased by 1.1% in the first quarter. Organic sales increased by 8.6% compared to last year, as Alrik mentioned earlier. The currency effect, as you see by this difference on sales was substantial at negative 9.6% in the quarter and the largest effects came from the dollar, the euro, renminbi, the Indian rupee, the Brazilian real and the Russian ruble. The recent quarters have, as we all know, been extremely volatile with significant swings in demand. This has actually put our organization and the whole value chain to a real test. And we are extremely pleased to say that we've managed to serve our customers well in this quite tough situation. Our improved flexibility and our low cost base have also materialized in excellent profits and also in strong margin resilience. In Q1, we've seen increasing cost inflation on both components and on logistics as well as a significant currency headwind. Despite this, our operating margin -- our operating profit was SEK 2.8 billion, and that corresponds to a margin of 14%. This is actually an increase -- an improvement of 1.2 percentage points compared to Q1 last year. We are continuing to invest in innovation. We continue to improve our competitiveness, continue our push within sustainability, and we are adapting our operations and our ways of working. This has continued to deliver good results as we see now in our Q1 results. So all in all, Q1 was strong, and we continue to transform our business. So our profits improved despite headwinds from currency and increased material and logistics costs as we continue to invest in innovation and competitiveness. So let's go through the profit bridge. Firstly, the currency impact was strongly negative at SEK 761 million compared to last year. We also saw strong headwinds from increased prices on materials, components and logistics, amounting to SEK 537 million compared to Q1 last year. But then on the other hand, our organic sales and manufacturing volumes contributed with a positive SEK 780 million. And if we zoom in on this within organic sales and volumes, price was positive and mix was neutral. And then our cost development continued to be good, and costs were SEK 735 million lower than last year. So to sum up, our operating profit improved to SEK 2.8 billion, a 14% margin, despite SEK 1.3 billion in headwinds from currency and increased material and logistics costs. So in Q1, we experienced global supply chain bottlenecks, resulting in increasing costs, logistics costs, also longer lead times as well as material cost increases. It's pretty natural in this environment, and we have a good track record of this. We do continue to take action on pricing to offset this cost inflation. And while the net impact, if you look at the cost inflation, logistics cost, material costs versus pricing impact, it was negative in Q1, and there could actually be a mismatch also in single quarters going forward. We do expect our pricing actions to offset inflation over time. Zooming in on our performance within Industrial. The organic net sales increased by 5.4%. Sales for Industrial was significantly higher in Asia and Latin America, while sales were relatively unchanged or was relatively unchanged in both EMEA and in North America. The adjusted operating margin for Industrial was a record high, 16.3% compared to 15.5% last year. And cost reductions contributed positively here. While then on the other hand, cost for material, components, logistics as well as currency had a negative effect in the quarter. For Automotive, our organic sales increased strongly by 16.7% in the quarter. Sales were significantly higher in Asia and in Latin America, and sales was higher in EMEA and slightly lower in North America. We've been successful in delivering on the higher demand to our OEM customers, and this is something we are pleased with in these volatile times. The adjusted operating margin reached 8.9% in Q1 compared to 6% last year for Automotive. Moving on to net working capital. It was 30.2% of sales at the end of the first quarter, and this was percentage 0.7 percentage points higher than at the end of the first quarter last year. We had an increase in receivables and to a lesser degree, we also had an increase in inventories and payables compared to Q1 last year. And as Alrik commented earlier, this increase, especially in receivables was a result of higher customer demand. Moving on to cash flow in Q1. Excluding acquisitions and divestments, it was SEK 0.7 billion negative compared to SEK 1.9 billion positive last year. The decrease compared to last year is mainly explained by higher working capital, driven by higher volumes in the quarter, especially towards the latter end of the quarter. And the cash flow for the last 12 months is SEK 2.6 billion. Commenting on the balance sheet. We continue to have a strong balance sheet and very solid liquidity. The net financial debt amounted to SEK 1.5 billion, and the net debt-to-equity ratio, excluding pensions, was 10.2% at the end of the quarter. So to sum up, in Q1, we continued to implement our transformation journey. We had good sales growth. We had improved profits, and we had stronger margins. We continue to regionalize our business, consolidate and automate our manufacturing footprint. And we announced consolidation of operations, for instance, in Italy as well as continuing to expand capacity in China. When it comes to our Q2 outlook, demand has improved quite consistently since the trough in the second quarter of 2020. And we expect net sales to continue to grow, and we expect net sales to reach pre-COVID levels in the second quarter of 2021. And with that, I hand back to you, Alrik.
After close to 7 years as CEO, this is my last quarter. As the Board announced in January, Rickard Gustafson will be joining as President and CEO at the latest by 1st of July. My last working day with SKF will be the 30th of April, ahead of Rickard joining the business. And in the meantime, the Board has appointed Niclas Rosenlew, as interim CEO in addition to his current role as CFO. To all colleagues, customers and shareholders, thank you for your support during these years, making all that we have done possible. Now we will continue with Q&A. Patrik, please.
Please note, the Q&A will be conducted by the webcast only. [Operator Instructions]I will now hand the floor over to Patrik Stenberg.
Thank you, operator, and thank you, Alrik and Niclas. We'll now go through all the questions that you have posted. And the first one relates to our guidance for Q2, and it's posted by Andreas Koski and several others. You are saying that you expect net sales to reach same levels as in Q2 '19. Can you clarify if you expect the absolute sales level to be in line with Q2? Or if you expect your organic sales volumes to be in line with Q2?
Yes. I'll take this one, Niclas here. Thanks, Andreas. This is organic. That's a short answer. So we do see us coming back to pre-COVID levels. And it's measured in organic sales.
Thank you. Another question that has been posted by several others are about semiconductors. How are semiconductors shortages impacting you in Q1? And how do you think it will impact in Q2?
Okay. I'll take that one. Yes, it's an interesting question. There's a lot of debate about it. In the first quarter, it's been very slight. The delayed deliveries because of customers standing still in production lines because of the semiconductor shortage is very, very small. It's insignificant. You've seen how strong the growth was anyway. When we look at forward, it's difficult to say. When we look and talk to our customers, it seems like yes, there's a lot of discussion about it. But most of them are sort of managing anyway. So it's very hard for us to be absolutely clear on how much impact really will be out there. But we think that there will be probably some minor effect in Q2, too. But as far as we understand from our customers, it's also -- I think we see it also in interviews with automotive CEOs. Yes, they're worried, but it's not clear for them also.
Thank you. Moving on to another question posted by Jason with Redburn and several others as well, Jefferies, for instance. Can you help us just understand the gross cost side of the equation? How do you see the SEK 537 million in raw materials and logistics cost of [ opening ] both in second quarter and full year. Are we talking about SEK 2 billion for the year? And similar to 1 quarter through? Or is the current quarter above the average for the year? Or will it get even worse? Lots of questions.
Yes. James and others. If we zoom in on the SEK 500 million and a bit more for Q1, we just explained that. So you can say that half of that in rough terms is related to raw materials, input costs and then half is logistics. And if we take that half, which is input cost of raw materials, roughly half of that half is kind of price inflation while then the other half is, call it, mix related. So that maybe gives you a bit of kind of insight into the dynamics here. And then the other half is logistics, and that's various things. It's, of course, I mean we've all seen and read about container shipment costs going up and so on, but there's also custom stuff and so on. So I would say the important thing here is that we are taking action. We have taken action already, and we continue to take action to mitigate this, and we are pretty confident that we'll be able to mitigate the impact. Then it's a bit hard to kind of speculate exactly how raw material prices will develop quarter-by-quarter here going forward, but we are taking action, and we believe this will pay off. So I'll leave it with that. Maybe I'll...
No, just to clarify, when Niclas says mix, it means we have been selling relatively bigger bearings compared to before, both in automotive and also when we say larger bearings to wind, for instance, the material content goes up, and this is what Niclas means when he says mix. Just to clarify.
Yes.
Thank you. A question then about Industrial. The Industrial performance and growth is really strong. What do you expect for the second quarter?
Well, what we see, as we have said, we see a strong development. There is -- it is really -- the customers are asking for product. And when we talk about -- when you see the inventories going up, for instance, there's a lot of material now on ships going out to customers, et cetera. And in the Industrial space, the demand is strong at this moment. So there's a good development to be foreseen.
Thank you. Next question. Can you please give us some flavor on the cash flow development in the quarter, which was perhaps lower than what we would have expected.
Sure. If I take that one. Yes, so the main thing with the cash flow is that it's demand-driven. And I mean, throughout Q1, we saw an increasing demand, increasing sales. We saw strong sales towards the end of the quarter. And of course, that resulted in higher receivables. We have not seen any problems with getting paid. And our DSO, for instance, is at a very healthy level, and we see it continuing like that as well. So it's really a timing question and demand, high demand-driven thing that is behind the cash flow. So we had a SEK 2 billion negative from increased receivables. And then we had, give or take, SEK 600 million negative from increasing inventories, and both of these are demand-driven. So strong demand.
One of the things that I think we've done well, which we should actually be pleased in the way that we have a little bit more cash inside the company is that if you see and when you saw Niclas showing the development previously in the chart, you can see that we started to buy already this autumn to sort of expecting that we were going to see an increase by buying materials already this autumn that we were expecting to see a stronger development to be prepared. So there's no money lost.
And I mean, all in all, we see this as a positive. I mean as said, we are also positive about Q2 and the outlook here. And of course, we want to serve our customers as well as possible and it, over time, will pay off to have a bit of inventory and also see receivables going up.
For a business like ours where we are all over the world with this thesis, this is what you should expect. And if you look at SKF, the cash flow is our forte, and it will continue to be our forte.
Thank you. And we move on to the next question. It comes from Klas at Citi. Car production in the quarter was up around 13% and you did close to 17%. China car production up nearly 80%. Can you give more exposure to Europe and North America -- do you gain more exposure to Europe and North America, sorry? So this must be driven by good product mix. You have a pretty strong position in parts of electric vehicles. Was this the driver behind the outperformance?
I think actually, we are doing well now and not the least in Asia. We are doing really well now in -- with new products, and you've seen not only the volume development, but also the profitability. We're doing well in the vehicle service market, where we have worked diligently also to be the one who actually can deliver. If you remember last time, I told you that during the COVID, we never closed down. We were always there to deliver, and that is also paying off right now. So yes, and of course, we're strong at electric vehicles. And that is helping us at this point as you see that they are growing so strongly as part of the fleet. So all in all, I think we're on a good track on -- in the automotive side and the customer wants our products. And it's -- we have new interesting launches coming in with new hub units and new transmission bearings and new solutions for electrical vehicles. So there's a -- it's coming to fruition, the hard work for many years.
Thank you. Moving on to a question from Andy at JPMorgan. Can you provide some guidance or help on how to think about the cost development in the coming quarters? Raw materials, logistics and usual labor cost inflation. I would also like to thank Alrik and wish him all the best for the future, from Andy.
Thank you, Andy.
So Andy, if I comment on this, and it goes a bit back to what we just discussed. What we saw in the first quarter was SEK 500 million of increased costs coming from these categories. So raw materials, logistics. If we take those ones first and that explains roughly half raw material, half logistics. The actual inflation component is not the full SEK 500 million, but it's actually a smaller part. Then there's this mix thing, which Alrik clarified also, which is us selling more wind, for instance, and more automotive. And here on this particular point, we are working on this mitigated. For instance, pricing, there's other actions taken as well, and we are quite confident that we can offset the impact over time. Then when it comes to labor cost inflation, I mean, yes, we are back to a, I can say, a more normal world compared to 2020. So we do see labor cost inflation, essentially salary increases. And I would say nothing unusual there back to kind of normal world, again, compared to 2020.
But Andrew, I would all like to just stress this that it is a strong demand in the marketplace. There is around the globe, and that gives a player like SKF a good possibility to actually have a good performance going forward in many ways, sort of compensating for this inflation that worries us, of course, all of us. So please understand there's a good possibility now. And I'm confident that the way SKF has always done it, we will do it again.
Yes. And of course, on labor cost inflation, I mean, that is something that we have been managing and will continue to manage. I mean the salary increases are what they are. But then, of course, we look at this holistically and continue with the transformation that we've been discussing in the past.
Yes. Look, we are investing SEK 3.6 billion. And of course, you will continue to see results on how SKF is structured from this -- also this year.
Thank you. Our next question comes from Ben at Morgan Stanley. Again, thank you to Alrik. Alrik, thank you for our time as CEO and best wishes. Just in general terms, i.e., your experience of business over decades, are you surprised at all that Europe and North America Industrial sales are flattish? Would you not have expected some more momentum by now? Is this just a delay because of lockdowns? Or is it evidence that a recovery outside China is falling?
So my personal feeling is that, no, I'm not surprised that it's been taking -- that China was first and Asia was first. I mean look at how the COVID has developed. And when you are in China now, and I tell you, I have first-hand information because my son lives in China. And basically, life is back to normal in a different way than it is in Europe and North America. But look at it, look at the U.K., look at North America coming quickly out of it. Look at all the stimulus that's in the marketplace. It's -- and look at how all governments are now starting also in Europe to have real plans on how they're going to open up. I think this is now going to come. And when I look at -- when we look and talk about how we see us coming back to pre-COVID level in Q2, this is actually what we see also in the way our customers are requiring our products. So I wouldn't say it's stalling. It's just a little bit behind.
Thank you. Moving over to Bank of America and Maddy. Can you discuss trends in general industrials? Which end markets are lagging? Can you discuss trends in aerospace? How it's still contributing about 8% within Industrials? Does it mean you have seen very limited impact on the business? What percent of business is derived from rotation as a service model now? And what are the challenges you're facing in executing here? How are customers responding to you on this? Quite a few questions.
So that's a big one, Madhvendra. But it's relevant. And I say yes, of course, we've seen the effect on aerospace during the COVID period, it's been -- was down. But right now, we see it coming back very strongly. During the COVID, helicopters and other areas were strong. Now also civil aviation is actually coming back. If you look at the U.S., for instance, it's in some routes now, it's difficult to even get a seat. So of course, we believe that aerospace will recover as soon as the pandemic loses its grip on it, and we are back to normal. And we have worked hard also in aerospace to get business and become the preferred supplier to many of our customers. And I think they have had a very -- we've prepared well for taking good -- this opportunity when it comes back also into SKF as very accretive. But the business that is derived from -- I think we talked about this last quarter, it's growing fine. I had one example now. One example we have -- it's coming -- and it's coming a little bit also helped by the COVID crisis in a way because to go from a traditional transactional model to having a fee-based business model, there is an understanding -- there must be an understanding from the customer to understand that while eliminating the waste in the value chain, that's how you can truly create value together with a supplier. And as we are now visiting the customer digitally, as more and more customers understand that there's a benefit to hook up to SKF. And you saw just this example from Brazil, there's almost over 3,000 connected points at the customer that we suddenly manage their whole plant to give them insights on exactly what's happening inside of their machines. As this is now coming on everybody's agenda, it's very, very -- the inroad so to speak, to make everybody understand that it's the fee-based model that's going to come. And you know my conviction, it's going to be like this. This is just a matter of time. And that's why during my years, I've been pushing it so hard because, in a way, if you understand, you eliminate the intrinsic difference of interest in the value chains by going from traditional to fee-based. And Patrik can tell you more about this, if you are really interested and you have still not grasped it. So it's growing fine and it will grow more in the future and the pandemic has sort of pushed it to make it more evident to everybody. And the challenges of execution are the same, always when you make change in management, it's about making your own people understand how to do it and feel comfortable about it, and it's about making the customer understand the fantastic benefits. And why do we talk many times about Brazil? Because in Brazil, we started this 20 years ago. And it's enormous development. It's becoming contagious. Seven years ago, we started all around SKF, but it's becoming contagious also in the rest of the world. But of course, we -- in the rest of the world, SKF and our customers are a little bit behind in this setup because so far, we are the only ones. But I'm sure that soon more companies will come up with a similar kind of business model.
I will also comment on this. I think, I mean, it's -- we see quite a broad-based recovery in Industrials. And I mean you are right, Maddy, that I mean, aerospace is one of the few, which is not on a growth path yet. But as Alrik said, I mean, it's not like the -- it's a complete black hole, and we also see recovery in aerospace. And then, I mean, some of the -- a reason for our strong growth in Latin America is exactly what Alrik is saying that the fee-based models are more broadly adopted there, and it's really supporting our business there. So it's good.
It's a way of taking market share.
Thank you. Moving to Deutsche and Gael. May I ask how big in the Chinese exposure of your wind business? Oh sorry, I'll say that again. May I ask how big is your Chinese exposure of your wind business today? And what trends do you see of that? Some history experts are increasingly talking about the risk of a major catch down in the Chinese wind market in the second half of this year.
I don't know if we talk about China, specifically the numbers as far as our exposure to wind, but you know how strong and how much we have been growing in wind in the last years. And there's a fantastic development with very close cooperation with winning both gearbox manufacturers and windmill manufacturers in China, and we're planning to continue our expansion into this. And yes, there may be, of course, settings going up and down. But I think when I look into it, China is very committed now to the environmental turnaround. And with the kind of technologies that we have presenting, not only with investments in large bearings, but also in midsized vehicles and also the RecondOil sort of technology, I see a very, very strong interest. And I see a lot of customers really want -- even though I haven't been there physically for a year now, remotely I have participated now and when we inaugurated our new factory, and I see a lot of enthusiasm in our team and with our customers around renewable energy as such in China. So without telling you that there will not be a sort of set down in the second quarter. I think generally, we can say that China is really betting on renewable energy going forward.
And we also not only betting, I mean, we are also investing time into renewables, and it's been a good trajectory, and we're quite confident that there's more to come. But of course, as you say, I mean, ups and downs occasionally, but over time, this will...
But my assessment, we're really strengthening our position with our Chinese customers around wind.
A question from Goldman and Daniela. Do you expect to continue to invest into working capital in the coming quarters? Or how should we think about cash conversion for the rest of the year after the negative Q1?
Well, I mean, it's almost like we hope that we will do this because it's all about increased sales and maintaining good service levels to customers. Of course, over time, this will then stabilize. But if we think about this short term, yes, there might be a bit of a buildup going forward also. And as you know, from the past, I mean, Q2, we do have a bit of seasonality where we tend to build up. But over time, this -- we do see things, of course, then normalizing.
And I would say that a lot of what we have in work -- partly what we have of this excess is on ships going to customers. And of course, that you will see converted into cash during the next quarter. So of course, if you look at SKF, we haven't any customer losses. Our customers are paying us. We're growing. This money will come into SKF as it always does. So you can look a little bit in the mirror and see what happens and you will see it coming back, so to speak.
Yes. Another question, a bit more detail from Andre at Crédit Suisse on -- and the question is, can you please provide details on the SEK 676 million negative other noncash items? And the SEK 446 million other lines in the cash flow from operations? On working capital, when do you expect receivables cash outflow to reverse given receivables were driven by growth in Q1? Why did payables not follow to a similar extent?
Yes. I would say, on the other, just a general comment, there's an element of FX in there. So a relatively big element of currency, negative. And then there's a smaller portion of payouts for restructurings that we have announced previously. And I think on the receivables, I mean, receivables absolutely, as discussed, driven by growth, so SEK 2 billion of the impact came from that. I think payables, of course, follows a slightly different sequence. I mean, it's not like we buy exactly when we have the sales, but we buy over a longer period of time. And as Alrik mentioned here in the beginning, we started buying already a bit in advance back in the full anticipation of growth.
And I think also it's fair to say that, I think we've been good at securing materials for SKF during this upturn. And you can understand that's not the time maybe when the thing is you need to get the whole hands on the material to push your luck too much on actually delaying payment or trying to negotiate extended payment terms. So Niclas and I, we have a little bit of an argument because we say, well, we have to be better at extending our payment terms. And I agree, I fully agree. And I think we will do that. I'm sure you will see to it now that I'm gone that it will be done. But at the other side, I think it's prudent of us actually to be the one who actually secures deliveries at this point. So you should basically see this as a positive. It's not -- we know what we're doing, so to speak.
Yes. And Andre, I mean, exactly, as Alrik said. I mean, on receivables, I think we have potential to improve. It's not bad, but we absolutely have potential to improve, and we'll look into that. And then on -- specifically on the other SEK 446 million, as you mentioned, there's an element there of the -- we repaid and refinanced our bond and there's an element of FX related to that repayment of bond which is a one-off negative in Q1.
Thank you. Moving on to Seb at RBC. As your Q2 guidance implies, sales around SEK 22.5 billion and that includes FX effect, how much of the 16% sequential increase is volume, how much is price? By how much will SKF need to raise prices for an average wheel bearing to compensate for steel cost increase this year? I think some of them have been answered already.
Yes. Yes. So the Q2, again, is organic. So that's excluding the currency impact. And I think again, we're not commenting specifically on what price will be going forward. But as discussed earlier, we are working on a pretty broad front, of course, with price as want to. And you know from the past that we have a good track record working with pricing. That's also a reason for us being quite confident that over time, we can offset some of the costs going up.
And again, please remember, there's a strong demand in the marketplace. And that makes it more feasible actually to have a discussion where these kind of cost increases will be shared through the value chain.
Another question on pricing from Klas at Citi. What is distribution pricing running at right now? And when do you think OEM pricing can kick in? I appreciate you don't want to discuss pricing in open forum. But will distributing pricing be stronger in the second quarter versus the first quarter? And when can we see OEM pricing kicking in? Third quarter or do we have to wait until the fourth quarter?
I think that you can say -- you understand this Klas, already that when you talk to distributor level, it's more of a price list dependent pricing. And of course, we have already announced an increase, we're working on following this. And as you say -- as I said, the demand in the value chain is strong. So there's good acceptance, and I'm sure that the things that we are preparing will be accepted due to this. When it come to OEM customers, it's a little bit more tricky, as you know, it takes a little bit more longer time. It's more that you have a contract, yes. But on the other hand, when there's a need for increased deliveries, et cetera. There's usually an understanding that when you come with a plea for please help me for a completely reasonable cost increase that I have to be able to serve you well, the customer has a good understanding and you reach agreements. And I am completely confident that in this time, there will be no difference in this. So I am confident that you will see there may be a discrepancy during a quarter, et cetera. But you -- I'm convinced that you will start seeing some of the -- and we -- and honestly, I already see it since some of it coming in already now and throughout the year. So my assessment, we will compensate this, this year.
Thank you. Klas continuing, but on the cost side this time. Logistics costs should go down through the year, but raw materials could accelerate given your inventory turns. There is always a lag. At current spot prices, what kind of levels can we look at -- look into the second half of this year?
Yes. And I think maybe going back to the big picture and not answering specifically, Klas, your question on spot prices. And the impact going forward. I mean we work with both the cost side and then pricing and other actions, of course. It's business as usual, and we expect things to even out for us on the results side over time. And as Alrik said, I'm quite confident that we can fix it during this year, almost regardless of where the spot prices go as long as they stay within somehow reasonable limits of course.
We don't want 2007 back. And I agree with you, and I think that you mainly believe in yourself in the lags and we're on top of this. We are well inside -- we know exactly -- we have very tight dialogues with our customers. We know exactly how this is driven. And we have it on the top of the agenda. I can tell you that in all meetings, in all discussions. And there is a very confident team behind saying we are confident we will manage this in a good way. We won't disappoint you.
Thank you. And we have a set of questions from Lars at Barclays. I believe we have answered all of them. So we'll move on -- and they were on raw mats, they were on price and on our ability to offset raw mats with price. So we move on to a question on the temporary savings from last year. How much of these savings do you think will reverse in the second quarter of this year? And should we assume a similar cost headwind from raw mats and logistics as in this quarter? I'm trying to understand what the net cost development can be for the second quarter.
Well, on the -- we had -- as we discussed in the bridge, I mean, SEK 700 million a bit more in cost down activities benefiting us. And these are really mostly permanent. And of course, there's an element of travel, for instance. And being still at a very low level, and we expect that to start to creep up. But all in all, you can say that the major part of that SEK 700 million is really permanent. Very much in line with what we, by the way, discussed throughout Q2 to Q4 last year when we discussed temporary and permanent. And then I think the kind of headwinds from raw materials, logistics, we've discussed. So maybe we don't comment on that now in addition to what we've already said. I mean, we are quite confident that -- as discussed that we can offset it over time, a quarter or so, there might still be a discrepancy.
A little bit more longer term question from Olof at ABG. Can you talk a bit on how continued savings from the ongoing investment program into your correction platform, both during the rest of the year and also in the years to come?
Well, I think this is -- I mean, it's very much on track if we think about what we call the world-class investments, SEK 3.6 billion investment that we have in the plans for this year. I mean that's very much in line with what we have been discussed in the past, for instance, in the Capital Markets Day, and there's really no big surprises there. So that's on track. And as you know, I mean, we do expect quite good returns on those investments, the 3.6% and going forward also maybe even higher levels. So we see good returns. We expect good returns also going forward from those investments.
Thank you. A specific question from Eirik Melle from [ BDL ] on pensions. Can you quantify the P&L impact of your pension adjustment, please? Is it around SEK 500 million?
Not entirely sure what this refers to. But If you think about our pensions, I mean, we have, give or take, SEK 15 billion in net pension liabilities. And these pension plans are closed. And of course, what we see in the quarterly results is that they -- the SEK 15 billion moves a bit up and down, really driven by mostly interest rates. So now, for instance, in Q1, with interest rates growing somewhat up, the pensions went down. And then we, of course, have a portfolio here of investments, too, against the pensions. And that also moves a bit with the market. But maybe....
No effect on P&L?
No, no. No.
No effect on P&L. This is equity. This is in the balance sheet.
Yes.
So this is how you should see this. There's no P&L effect on these variations.
Another question from James at Redburn. Can you talk about whether the daily average demand in April is similar, higher or lower than daily average demand in March globally and with any regional color you like?
I think James, we'll duck this April. I mean what we see overall is that the demand now is very much supporting what we see for Q2. So the outlook is the demand and the outlook goes hand in hand. As I said earlier, I mean, within Q1, we did see a bit of an acceleration towards the end of the quarter and the Q2 outlook is back to pre-COVID levels.
And -- but the demand is strong, James. It's really strong. And I think it's partly driven, of course, by an expectation of the COVID crisis, but there is an underlying very, very strong solid demand from most customer segments, I would say. It will give the effect that we talked about, but I'm less worried about demand this quarter, if nothing unforeseen happens, actually. So I can give that as my nose in the marketplace.
A question from Gael de-Bray at Deutsche on our margin target. All told, with rising inflation and the reversal of COVID temp savings, is there any much upside left to the current 14% margin levels? If yes, what will be the drivers?
It's a good question. I mean, 14%, we are quite happy or very happy actually with that margin. Do we see upside from here? Yes, we see upside from here. And then we talk about longer term, and we go back to kind of the whole transformation that we are going through as a company. The investments that we are making in the factories, competitiveness of our products and so on and so on. So yes, absolutely, there's upside and we are working on that.
And I think if you look at SKF, one of the good things, I think, and soon I will be looking from the outside is that yes, there's not these ups and downs. We -- despite the fact that market moves up and down, SKF has a solid, strong step-by-step improvement of profitability and market shares. And you see it coming step-by-step. It's quite predictable. And everything is set for this to continue. And when you hear Patrik and Niclas talk about the different building stones on how we're working through the value chain, this is where it's going to come from. And that's the way I see it. I'm confident that as a shareholder that I will continue to be very happy with the development.
Thank you. Finishing up here, we have a couple of minutes left. One question from Kepler and William. I guess the comment about increased costs. You have achieved a very positive development on your gross margins from 27.4%, up to 28.9%. Can you explain a number of the main drivers for the uplift? Is this mainly mix? Or have there been any reallocation of costs?
On the reallocation, the short answer is no. If you've looked at us over time, what we did now in Q1 was that we took out R&D from gross margin and are showing it separately. But we haven't really reallocated any cost as such.
They're still in there. And you see it, it is what I tried to say before. It is the development of the underlying business and how we are gradually having more technology content in our products innovation, slimmer value chain. This is what drives it.
Thank you. Final question comes from Guillermo at UBS, relates to EVs. Comparing scaling into electric vehicles, do you see competition heating up?
I think that we will see more of that coming may be in the future, still so that these bearings are really sophisticated and an electrical motor for a vehicle, it's sealed for life and there could not be any currents going through it. And they are high-speed sophisticated bearing. So we are in a real good position. Of course, there is competition, but I don't see it heating up. I see more the demand being extremely strong and that customers are seeking more and more our support going away from maybe in the beginning, I was looking for the bearing in a catalog to actually saying, "Hey, when now I'm going to expand this, I need a true partner around the rotating shaft." And one of these examples was actually in the car or the picture, that -- where we have been working closely with them since they started actually. And now when it's taking off, of course, it is paying off. And the reason is we are working in a true partnership. So it will -- there is competition, but I still think that it's a very, very good opportunity going forward for SKF. You will see a lot of good development there.
With that, I believe we conclude the Q&A session. So thank you all for listening in, and thank you for posting all the questions. A couple of finishing words from Alrik, perhaps?
Yes. Thank you very much for your kind wishes. And I must say it's been a very, very stimulating and good relationship with all of you during these years when now where we don't meet in person as we used to do, but -- also in the past. And I want to thank you for this. And I've learned a lot from you. And a lot of the things that you have told us, I hope that we have implemented in the way we communicate to you. And I'm sure now under Niclas, Patrik and Rickard and not the least to say, Theo, our Head of -- our press -- Head of the Press, that you will see this continue. And thank you very much, everybody. And thank you, every SKF employee that is listening in. SKF will always be in my heart. SKF will be successful, and I am so happy and grateful for having had the opportunity to spend 25 years of my professional life in this company. Thank you very much.