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SKF AB
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Good day, and welcome to the SKF Third Quarter Report 2018 Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Patrik Stenberg. Please go ahead.
Thank you. Good afternoon, and welcome to this conference call on the third quarter results. As usual, the conference call will take about an hour. We will spend some 20 to 30 minutes on the presentation and after that, we are open to take your questions.Present today are CEO and President, Alrik Danielson; our Senior Vice President and CFO, Christian Johansson; Carina van den Berg, Director of Group Controlling and Accounting; Theo Kjellberg, Press and Media Relations; and myself, Patrik Stenberg, Head of Investor Relations.With that short welcome, I will hand over to Alrik. Please.
Thank you very much, Patrik. Welcome to this conference where we are going to talk about a record strong third quarter from SKF. The third quarter was a strong quarter with good sales growth, solid margins and a strong cash flow. We saw continued growth in both our industrial and automotive businesses.Sales grew organically by 7% and our operating profit was SEK 2.6 billion and it is the highest operating profit reported in SKF for the third quarter. The operating margin was 12.2%. We have reduced our inventories during the quarter as we announced already in the beginning of this year that we were going to do and we had a very strong cash flow of SEK 1.6 billion.If we now turn to the next page, the industrial business continues its strong performance with an operating margin of 14% and organic growth of 9%. We saw significantly higher sales volume in our 3 largest regions: Europe, North America and Asia during the quarter.If we now turn to the next page, I can talk about the automotive business, that delivered an operating margin of 7% and sales grew organically by 2% despite a drop in European car sales resulting from, as we know, the implementation of new test cycles and a slowdown in truck sales in Asia.If we look at the next page, we can talk about our performance targets and as you know, we have 5 financial targets covering organic sales growth and operating margin in the income statement and net debt to equity, net working capital and return on capital employed on the capital side, all targets are valid over a business cycle. We are currently making progress in all of them. As in Q2, we met or exceeded the targets for growth margin, net debt and return on capital employed. In the third quarter, we have reduced our inventories and we are starting to make progress towards our target of new working and net working capital. We are now at 29%. So there is still yet lot of hard work left before we can reach the 25% target, but we are on the way.If we turn to the next page and talk about geographies, we can see that we had continued growth in Europe, I think with 6%. We saw strong industrial demand with significantly higher volumes in most industries. We are talking about industrial drives, railway, agriculture, food and beverage, marine and aerospace. In total, automotive volumes were relatively unchanged in Q3, but there were large differences. We saw significantly higher volumes for trucks and slightly lower for cars due to, as I said, the implementation of the new WLTP test cycle.Asia grew by 11% with industrial, significantly higher demand in most customer industries. Industrial drives, energy, heavy industry, railway, industrial distribution were significantly higher. Automotive volumes were slightly higher than last year with higher volumes for cars and the vehicle aftermarket while we saw significantly lower volumes for truck sales. Organic sales grew by 8%, a strong 8% North America. We saw significantly higher industrial demand. It's industrial drives and aerospace, energy, agriculture, food and beverage, railway, distribution, industrial distribution. Significantly -- all is significantly higher. In the automotive space, volumes were higher with significantly higher volumes to both trucks and cars.In Latin America, volumes were relatively unchanged compared to last year and this is valid for both our industrial and our automotive business.If we now turn to the next page, talk a little bit about -- give you highlights of innovation. And as you know, this is the only assurance against irrelevance going forward, so I'm proud to give some examples of what we are working on. During the summer, we have entered into a development partnership for the industrialization of fiber optic sensing systems. Fiber optic sensing technology is an extremely exciting opportunity as it enables bearings to become process and quality control instruments. We have worked for some time to develop these sensors and by taking this next step, we will be able to speed up the process of integrating these into customer applications.If you take the next step, we talk about new tapered roller thrust bearings that we're just launching for the oil and gas industries to continue to push the limits of technology, as you know. To meet the demands of leading top drive manufacturers, we have developed a new generation of tapered roller thrust bearings. The first one in this category to join the Explorer family of high-performance bearings products. With higher load ratings and bearing rating life extended by up to 300%, the new bearings are ready for the next generation of larger non-powerful top drives. They can also be used to optimize the reliability of existing designs. We are sure this is going to have impact.If you then move to you, this is all I have intended to say.
Thank you, Alrik, and good afternoon to all of you. I will take you through the details from top to bottom. If you turn to next page, I will start with sales.Net sales increased by 14.6% in the third quarter with organic sales growth for the eighth quarter in a row, strong growth in our industrial business in all 3 large regions and most customer industries, and our automotive business still growing despite some headwind in the quarter. So organic sales increased by 6.9%.Currency effect on sales was strongly positive in the quarter, 7.8%, with the largest effect coming from the euro followed by the dollar and the Chinese renminbi. The structure component was almost none and related to a smaller divestment transaction.If you turn page, operating profit by quarter have shown a positive trend since the second half of 2016 and the operating profit in the third quarter was SEK 2.6 billion, some SEK 630 million higher than the third quarter last year. It's the highest operating profit SKF has reported in a third quarter in the history and it's also the third highest quarter itself, only beaten by quarter 1 and quarter 2 of this year.The 12 months moving value was SEK 10.2 billion by end of the third quarter and it's the first time ever that SKF has been above SEK 10 billion in operating profit for a 12-months period.So if you turn to next page, taking you through the operating profit bridge for the quarter, which as usual will take some time. So I ask for your patience here. We had a small positive effect from a minor divestment, which generated a loss of SEK 2 million last year. The currency impact was positive SEK 161 million compared to last year and as I commented on sales development, the single largest positive currency effect on sales is from the euro. Result-wise, however, I'm sure you know, we have negative effect from the euro which mean that the strong euro impact our operating margin negatively and has done so in the quarter.Our operational performance increased by SEK 469 million year-over-year corresponding to a leverage of 36% on net sales. Contributions from organic sales and manufacturing volumes increased by SEK 816 million including positive effects from sales volume, from price mix and from fixed cost contribution from higher production volume. It also included a negative effect of about SEK 100 million. Due to that, we reduced our finished goods inventories in the quarter.The improvement trend on pricing that we have seen in previous quarters continued and contributed clearly positive. Mix was also positive since our old industrial business grew stronger than automotive and our distribution business was strong. Cost development in the quarter gave a negative effect of SEK 347 million year-over-year, the material cost increased by SEK 160 million versus last year and the higher material cost is due to delays in cost-saving projects, a negative mixed consumption effect and to sale tariffs.Cost inflation was around SEK 275 million and included higher utility costs due to the warm summer. Remaining cost items sum up to positive SEK 88 million and I will mention some of them. We had extra cost related to that we run production on high capacity utilization. This we have talked about also in previous meetings. This quarter we also have the new import tariffs on bearings from China to U.S. that was introduced this summer and has increased our import costs. And we had also cost related to implementation of industrial footprint projects and to R&D and IT developments.We had a gain on sale of assets in the quarter reported here in the bridge and last year as we talked about last call, we also had cost from customer settlements within automotive of SEK 190 million, which has not repeated this year.So you cannot take some comments to the guidance on the bridge for quarter 4. We expect to see a continued positive effect from price mix in quarter 4 with a similar year-over-year effect as in quarter 3. Inventories, we will continue to reduce our finished good stock and we expect a negative year-over-year effect on operating profit of about SEK 120 million and on the cost side, material cost impact, we expect to remain at SEK 160 million. We will see more cost-saving activities implemented, but steels tariffs will increase somewhat.Cost inflation will also remain on similar level as high energy costs will remain and then we expect some additional increases from bearing import tariffs due to volume and then the impact on footprint, R&D and IT will remain also in quarter 4 as these are good and improve our efficiency and pricing power for the future.Also last year in the fourth quarter, we had items affecting comparability of a net of negative SEK 75 million with restructuring costs offset by the gain we closed our German pension plan, and we forecast restructuring costs in quarter 4 this year of some SEK 75 million, so a neutral bridge effect. So all in all, materials, cost inflation and other costs would add up to some SEK 750 million in the bridge. That was a long one.So if you turn to next page, performance by customer group, industrial organic net sales increased in industrial by 9.2%, sales was significantly higher in all our 3 main regions: Europe, Asia and North America. Operating margin was 14.3% compared to 13.5% last year, and the contribution from increased sales and manufacturing volumes was positive together with the clearly positive effects on price mix.Organic sales and the automotive industry grew by 1.7% in the quarter. Sales in Europe, as you have heard, were impacted by lower sales of course in light trucks as this WLTP test cycles were introduced. And also we saw lower sales on trucks in Asia. Operating margin was 6.8% compared to 3.9% last year.And last year in automotive also included the customer settlement cost of SEK 119 million and beside that automotive profitability was impacted mainly by import tariffs and material costs as mentioned on the bridge slide.If you turn page, income statement for the group, good development on our operating margins. Quarter 3 was 12.2%, increase of 1.7% versus last year, and 12 months we are at 12.1%. Gross margin same level as last year, S&A expenses as a percentage of sales decreased 1% to 12.9%. The financial net was SEK 253 million negative and impacted by the debt repurchase which had a net financial effect of negative SEK 73 million and this was communicated to you in a separate press release.Taxes in the quarter negative SEK 753 million, giving an effective tax rate of 32.1% and this was impacted negatively by resolving tax on dividends. If we exclude this effect, tax rate was 27.8%.We have a very good trend on earnings per share. EPS increased by 46% in the quarter and was SEK 3.35. For the last 12 months, we are at SEK 15.5 versus about SEK 9.8 a year ago.If you turn page, cash flow. We had a strong cash flow in the quarter. Excluding acquisitions divestment, it was SEK 1.593 billion in the quarter compared to SEK 880 million last year, improved cash flow due to higher operating profits, positive working capital contribution mainly. And on the 12 months period, we were at SEK 5.8 billion by end of quarter 3.If you turn page, net working capital. We are at 29% of sales at the end of the quarter, so 0.4% slower than the third quarter last year, and this rate shows also negatively impacted by currency. And we see good progress when it comes to inventories and trade receivables with sequential improvements on both.And as we have communicated to you since the first quarter telephone conference in April, we are reducing our finished goods inventories still with good availability in order to keep our service levels to meet customer demand.If you turn page, in July we announced the divestment of linear and actuation business. We are very pleased with the outcome of this transaction. Total consideration is SEK 2.75 billion on a cash and debt free basis and we expect this transaction to close at the end of the year. And the linear and actuation business contributed last year with sales of SEK 2 billion and hired about 1,200 employees.If you turn page, net debt-equity ratio still very strong, reduced further to 60% by end of the quarter, excluding pensions further reduced to 25 and by end of the quarter the net debt was about SEK 20 billion, a reduction by more than SEK 11 billion since quarter 1, 2015.Next page, in September we issued a new 7-year bond, SEK 300 million Eurobond, in order to extend our maturity profile. It was well received in the market and the coupon rate for us was the record -- for SKF, record low of 1.25%. We used the proceeds to repurchase parts of the outstanding bonds with maturities of -- in 2019 and 2020 with higher coupon rates as you can see on the slide.If you turn page, finally then I come to the guidance for 2018. We expect the financial net to be about SEK 225 million negative and based on exchange rates of the end of September, currency impacts on the operating profit is expected to be relatively unchanged compared to last year and based on the exchange rates will be on date October 23, the effect would be about SEK 60 million positive.For the full year, we expect a tax rate of about 28%, and as we had communicated to you before, we are increasing our investments in property, plant and equipments. For the full year, we now expect to see additions to plant and property of SEK 2.6 billion for the year and previously we had a guidance of SEK 2.4 billion.So with that, back to you, Alrik.
Thank you, Christian. Well, just to summarize, we turn to the next page, yes. The third quarter was a strong quarter with good sales growth, solid margin and strong cash flows. We saw continued growth in both our industrial and automotive businesses. We grew by 7% and our operating profit was SEK 2.6 billion, is highest that we have had so far in the third quarter and operating margin of 12.2% with a cash flow of SEK 1.6 billion. So I think that summarizes well what has happened. And we saw also that our industrial volumes were higher and slightly lower automotive volumes year-over-year as we have explained previously why this, but still a growth.So if we take next page, I would say, just to read to you the SKF outlook for the second good order, so demand compared to the fourth quarter 2017 as we have, the demand for SKF's products and services is expected to be slightly higher for the Group, including higher demand for industrial and slightly lower demand for automotive. Demand is expected to be significantly higher in North America, higher in Asia, relatively unchanged in Europe and slightly higher in Latin America.And with those words, well, I handover back to you, Patrik.
Thank you, Alrik. Thank you for the presentation and now we are ready to take questions. So operator, please.
Thank you. [Operator Instructions] We'll now take our first question from Klas Bergelind from Citi.
Klas from Citi. A couple of questions, please. First one is on China. It seems like China is growing above 11.2% in total Asia and this is despite automotive slowing. Now you're guiding for higher demand in Asia year-over-year which is still solid given that automotive is likely to see further weakness. It seems like you're pretty confident there on China on the industrial side into the fourth quarter. Can you talk about what you're seeing in China at the beginning of the quarter, any reasoning on China when you set your guide here in the fourth quarter? I will start there.
Well, I think what we see is, of course, what we say exactly. You put it very well, we see a continuous solid development on the industrial side and we see a certain weakness that has started in the Q3 and that continues into Q4, exactly that you say, but that we see that the total will still be positive.
But in terms of automotive, how much sequential weakness can we expect there?
Yes, it's -- what we see is basically what we have guided for. I have no additional sort of comments at this point. I understand that the uncertainty is maybe increasing, but this is what we see.
Yes, I guess, I'm just curious about the -- whether industrial is guided flat sequentially in Asia and then obviously against that you will have automotive taking a big leg down. I was just trying to understand roughly the magnitude, but -- yes.
Yes.
All right. The bridge, Christian, raw material moving higher again and also wages and then you have tariff costs. Are you including the tariff costs in the raw materials or is that outside and how much was it? And could you help us with the wage bill in the quarter and how it developed in the first half as a reminder just so we can understand the delta?
I mean, tariffs, you can say we've 2 types of tariffs. I mean, first you have tariffs on steel, so steel imports to U.S., that's part of material. So that's one of the explanations why we are at SEK 160 million. When you're talking about tariffs on importing products from China to U.S., that is not in material, not in cost inflation, it's in other.
Okay. Got it. And so what was the clean raw materials bill then or impact?
Sorry?
What was the clean raw materials impact?
I mean, the clean -- as I said, the main -- the drivers behind that we are worse than the guidance that we gave is mainly not underlying raw material. If the tariffs is also that we have and that's difficult for us, we have SEK 7.5 billion raw materials a quarter, the mix of products that gives the consumption a mixed effect, that was negative in the quarter and then we had also some delays in cost savings and some of them comes back in quarter 4 as I said. So that's my comment on that.
Okay. And then the wage bill?
Yes, the wage bill as such, I mean, obviously which is part of the cost inflation, underlying cost inflation, I wouldn't say that -- obviously, we have some valuable salary schemes that are getting better outcome, let's say when we do well, but the underlying wage inflation is not changing significantly.
All right. Then moving on to price mix. I get this to 2.3% solid and you are managing to compensate obviously for the cost hikes in the quarter, but you're up against tougher comps year-over-year as the price mix turn positive in the fourth quarter and now you are saying that year-over-year we will be similar in the fourth. So is that just OEM contracts are gradually coming through at higher price points or are you hiking spot prices again, just to understand how pricing will move sequentially?
I mean, you said 2.3%, we didn't say 2.3%.
I know that.
So I don't comment on that. We have -- as you see, we have a good development on price and we a have good mix in it and the delta that we have in quarter 3, we expect to see also in the fourth quarter.
But you are hiking again or is it just OEM contracts coming through at high price points?
You have always a mix in a big structure like gas, I mean, a global business.
There is no real difference in the way it has been playing out during the previous quarters in this dynamic.
We will now take our next question from Andre Kukhnin from Credit Suisse.
Christian, thanks very much for running through the details on the other line, on the cost line, the bridge components. Could I just double check something, what was the bottom line that you gave for Q4 for the kind of material cost inflation, other impact, et cetera add up to and then my line broke up.
SEK 750 million.
Sorry, SEK 750 million?
Yes.
Okay. And that's SEK 160 million materials and SEK 275 million of cost inflation similar to Q3, but the SEK 315 million remaining, is that combination of Unite and restructuring?
I mean, I think I gave you quite some details and comments on that and, I mean, we have obviously -- as previous question, we have the import costs from China to U.S. on products getting there as I said. We do have also what we do, I mean, you said Unite, we do other things, I would say mainly other things on IT for the future. We have e-shop activities, we have other things integrating the recent year's acquired companies in our common systems to gain efficiency. And we have also R&D step-ups that we have done during the year that are giving us a number of nice product launches in the time to come here.
Right. The reason I am asking that is SEK 315 million is quite a lot on the bridge because as you said, you already had some restructuring of SEK 75 million in Q4. So do you have same restructuring, that's 0 on the bridge, you had Unite already in the last year, so presume as no income. But basically what you are saying is that if the tariffs and other IT and R&D investments that are creating this extra SEK 300 million something?
Yes, I mean, and we have SEK 19 billion of costs in a quarter. So -- and obviously, when it comes to our ambition and I mean not everything you invest in the future goes over the balance sheet. So obviously IT, R&D and so on, these are good costs. And these are things obviously that we control ourselves all the time. So these are conscious decisions that we are guiding for. And obviously, if we have a business that is contrary of this, we take other actions.
Got it. I appreciate that, and as I said I really appreciate detail. Just on the inventory impact which you have clarified, how much did you reduce the finished goods inventory on like-for-like basis in Q3?
In line with guidance.
SEK 300 million?
Yes.
Okay. And just last question, much broader one, I guess, Alrik that's mostly for you. Just on the portfolio actions, you've obviously done quite a series of divestments and have generated proceeds from that, you've been generating cash. What is your thinking on portfolio kind of from here and not kind of really trying to step away from kind of next quarter and even from just next 12 months, but more broadly are you thinking about SKF on a 3-year view from here as more kind of bulked up through acquisitions or is there a more streamlining of portfolio to be done?
I think that you see that we have had an opportunity, we stand strong, we have taken over the years since I joined more than SEK 11 billion of strengthening our balance sheet and strong position, and we have an opportunity now to look for opportunities going forward, both how we can invest in our activities, in our factories and in R&D as Christian has mentioned, but also look at acquisitions in a different way, of course.
We'll now take our next question from James Moore from Redburn.
I got 3 if I could. Maybe I could just start with the cost development line. Obviously, it conflates quite a lot of moving parts, but if we were to take out the raw material impact and the reversal of one-offs, could you talk a bit about the underlying cost inflation in the third quarter? I'm primarily trying to understand the degree to which you've already had R&D, IT and tariff ramp-ups in the third quarter and how much you're signaling that they're incremental in the fourth versus the third. That make sense?
I don't think -- I can't -- you get into such details and I'm not sure I can give it to you. I mean -- and I comment a lot on the material development and the parts that brings us to the SEK 160 million and there we're flat in Q4, seeing somewhat more steel tariffs because I think they're volume related, some of more cost reduction on that line. I think the main driver on the cost inflation versus previous guidance is that energy prices are up and that's not unique to SKF and that will remain as we see. We might consume some more volume wise, but I mean that's the driver in that. And I will say on the other costs, the sequential impact, you have a sequential negative impact on the import of product as I said. For the rest is not a significant step up on that, some but not that much.
And on pricing, I understand you don't want to give price mix. I'm not going to try and ask it directly, but maybe you still -- and you said that the year-on-year impact is better than last quarter. Would you be able to quantify whether it's 10 bps better or 50 bps better? I'm a bit lost as to where we are since you stopped talking about it.
I mean, we have -- on pricing, we don't give that. You can calculate this. You get so much of details from us on the volumes and on the stock developments and so on. So you have a receipt somewhere?
But you can also see that in the marketplace, as I said before, there is still -- there is no big changes of what became a similar kind of situation that we have delivered in the past.
And finally, let's go to back to China. When you look at your different end markets that you give at a global level when you look at those in China, do you see some that are still growing sequentially, some that are flat, some that are down? A lot of companies are talking about deterioration in September versus July and August in general industrial in China and some concerns going into the fourth quarter. And I just wonder whether you're seeing some big positives in some areas like wind or rail, for example, offsetting some underlying weaknesses in shorter cycle parts of that business. I wonder if you could peel the onion a little bit, just give us a flavor of what you're seeing.
Yes. It's -- I think the guidance is pretty clear of what we're doing. And of course, there are always fluctuations between months, et cetera, in different businesses because of their dynamics. But what we see is what we guide for. I -- we're still positive on China the way we had -- in Asia the way we had guided.
That wasn't really the question if I could and then I'll finish, but just sequentially, if you look at the last few months, has life come down a bit? I'm not talking year-on-year which is your guidance and what you're talking about. Just in terms of running rate, are you seeing a...
No. We -- you can understand that given the fact that we look quite positively on continuous sales into Q4, you can understand that it sort of continues.
Maybe I should add one more comment on the cost question that you have asked. And your -- we have also in quarter 3, year-over-year the SEK 190 million from last year on customer settlements in the bridge.
Yes, which will drop out in the bridge in the next quarter.
Yes.
Understood.
We'll now take our next question from Andrew Wilson from JP Morgan.
I just had a question again on capital allocation, but slightly from a different perspective. There has clearly been a lot of progress made on the cash profile and, Alrik, I think you have talked before about seeing kind of the strongest sustainable cash flow, less cash going forward. Can you just talk about how you think about it in terms of share buybacks and the dividend and returns because, I guess, we haven't seen a lot of big M&A and I'm not necessarily sure that that's been a part of the strategy, but just thinking about how you think about M&A versus potential capital returns because clearly, we're in a significantly better position from the balance sheet than we were 12-18 months ago?
Yes, I think you said it very well. We have worked hard to focus our business and create a strong base for moving forward as far as investment in our business, in developing R&D and innovation and also look at acquisitions. And I wouldn't argue that -- I wouldn't say that we're not looking at acquisitions. I think that's a clear part of our strategy going forward. And you know what SKF has as a dividend policy, et cetera, so I think you can expect a good development in all of these areas going forward.
And in terms of the potential for the buybacks or for return at some point if targets don't come along?
Yes, well, in the end, it's going to be the owners who decide what we do with the money we have if there is excess after we have made investments and acquisitions and so forth. So SKF forte has always been a very, very strong cash flow and I think this is one of the good things with SKF and this is really positive. So sooner or later either through higher returns or higher dividend, it will come back to the shareholders. So I think SKF is a good bet for the future.
We'll now take our next question from Matthew Spurr from Exane BNP Paribas.
I just wanted to come back to tariffs and price mix. You talked about price mix being a similar level assuming you mean in terms of year-on-year improvement to Q3, but you've clearly got tariffs going up. So when do you plan to offset the tariff impacts both on products and steel, and how long do you think that's going to take before you can basically recoup that or do you not, do you expect us to take that on the chin?
No, but tariffs are offset as we speak, but I mean -- and I'll say it has fully recovered when we enter into next year. You usually get some delays with the big OEMs even though this is an obvious thing for them. So it's compensated.
We'll now take our next question from Andreas Koski from Nordea.
I just have a question on the other operating income line. It was positive by SEK 141 million and historically it's been around 0, closer to 0. So could you just explain what's in that line in this quarter?
Yes, I mean on that line we get some various currency effects on transactional flow, with internal transactional flows, but we also have this quarter --I mean we work with our footprint, we work with -- we are selling assets and doing things around our footprint. So this quarter we have a positive effect from, as I said in the comments to the bridge, of asset sale.
And can you quantify the asset sale?
I mean, it's the main part of what you see there.
That's an option.
Yes.
[Operator Instructions]. We'll now take our next question from Lars Brorson from Barclays.
Just to follow up on your SEK 315 million tariff expected impact in Q4 or rather tariff, most of it, it sounds like. Can you just elaborate on what assumption that is based on? Do you assume a 25% tariff on items listed in the section 301 level 3 or do you apply a different tariff rate and that just to get SEK 315 million number, please?
Yes, I wouldn't say that the SEK 315 million number is the majority, is the tariffs, it's not, it is not. And I don't know section numbers, but the ones I referred to other ones on imported products for U.S. from China.
Yes, I know it is. I just wonder what tariff rate you have applied as your assumption to the SEK 315 million number.
Yes, I don't have that in mind.
It is the tariff that is applied to this -- to the bearings, which is the number that you mentioned.
The 25%?
Yes.
And that's a net number. Do you have a gross number, how much are you offsetting with prices? I appreciate your point, Christian, that you expect to be fully recovered next year. I wonder what gives you confidence on that.
Yes, but there is a dynamic of increasing prices of course as you always do and then there is a negotiation as you understand. First technique, mitigating actions with trying to stock up before the actual tariffs come into play. And then you negotiate and as they come to the end of the year, we will have compensated everything. And this is what we see here.
And how much are you redirecting sourcing out from China to other jurisdictions?
Of course, we're doing whatever we can to sort of see where there are capacities to reroute, et cetera, but it's actually a little bit longer to do that, but of course, we are.
[Operator Instructions] We'll now take our next question from Markus Mittermaier from UBS.
Can I bottle up a little bit and sort of look at the different geographies and your guidance on underlying growth versus market share? What sort of the dominating element in those 2 at the moment as you look at your different regions and if you could split it between auto and industrials, that would be really helpful?
Well, in a quarter in the bearing business, it doesn't go like that. And it's -- the changes are slower than just thinking that you will have market share changes over a quarter. So these are businesses that we have taken and orders that we have and the kind of sentiment we see in the marketplace, which has been positive.
No, no, I understand. But so like out on a higher level, is there any sort of material changes that you expect or that have happened on platforms in cars, for example?
Yes, well, you we see for instance that we have discussed before, remember that in the past we were trailing a little bit behind, doing several years in the U.S. and now you see we have a strong growth in the U.S. and the supports that we have a good momentum in the OEM automotive market in the U.S. for instance as you see in our guidance.
Yes, so the positivity on China is largely underlying market. There is no sort of quarter-on-quarter change in sort of market share, so it's really underlying that you're...
It's not like that, no.
We will now take a follow-up question from Andre Kukhnin from Credit Suisse.
I just wanted to double check on the tariff question. I guess, what you are guiding for Q4 reflects the Section 301, List 3. Right?
I have a document here. It's 301 and 232.
And so in the last one, I think that's 301, I think there is a structure there that sort of starts with 10% and then ratchets up to 25% tariff from 2019. What you said earlier about passing through to the OEMs, do you think you'll be able to pass it through straight at 25% to the OEMs from beginning of 2019? How does that work?
Yes, then this is how we see it and this is sort of the market dynamic that there is a both the market that supports this and also a reality in the way it's discussed with customers that we can actually compensate this, yes.
But is there always a lag or is this just the time to discuss this at the end of the year and then from start of the year you will get the whole thing offset.
Well, this is why it's not binary and this is why -- otherwise it would have been binary we would already have done it by today. It's a discussion and it's an understanding and we are doing, we're mitigating, having brought in materials a little bit ahead of the tariffs as well. But the main thing that I think is interesting if you look forward is that we will compensate.
And the last one I had was just on the divestment that you made, could you give us any idea on the profitability of that relative to the group, is it kind of similar or higher, lower, so that we can get our models right?
Sorry, can you repeat that once more time, please?
It is about the divestment that you made. I just wonder if you could give us some idea of level of profitability of that business relative to the group so that we can get the number.
Yes, it's aligned with SKF.
Got it.
But maybe -- and then we have to stop that if it's not clear, but only tariffs in the way the bridge is built. What we talk about on the cost is the cost. And the compensation obviously comes in price mix if that has not been clear.
No, that's clear. Yes, that's absolutely clear below. Yes, make sure we reflect that in the 2 sides, yes.
We'll now take our next question from Erik Golrang from SEB.
I have one question only. Obviously, the financial markets are a bit more concerned about what will happen to demand maybe going into 2019. So I wanted to get an update on your cost structure now. And I realize there is a lot of moving parts to this one, but if we assume that you disregard what happens to currencies and raw materials and so on and sort of that you at some point will be taking mitigating actions, what will your leverage be on, let's say, a 10% negative organic growth next year or a single quarter?
No, that we don't have an answer to, but I think if you look back, SKF has quite a good track record when it comes to work on cost. So I mean if you take the different pieces there, we should of course, in your scenario, we should see steel prices and raw material prices coming down and when it comes to take care of our own productivity, I think we have different measures to do that and [ hopefully the cost flag system ] is in different countries when it comes to our factories and obviously we have well filled time banks, we have different countries having systems where you share cost with the state and the employees and so on, and then, yes, you will see some restructuring obviously in such a scenario and to a hindsight than what you've seen in the last year or so. And then also and we have talked about that many times also that what we do on the footprint in terms of consolidating our industry footprint is not a short-term action, but it gives also effects when it comes to the cost downturn.
We have been good at this if you look, so there's a good preparedness. We're prepared.
We know how to do this.
But overall, you'd expect to develop in a similar way as you've done historically?
We guide for the fourth quarter as we've said, yes.
[Operator Instructions] We'll now take a follow-up question from James Moore from Redburn.
Just a quick follow-up if I could on the SEK 138 million other income that was discussed earlier. That gain, is that booked in EBIT in one of the 2 divisions or is it in the central line? Just trying to allocate it.
It's to the last spot in industrial.
We'll now take a follow-up question from Lars Brorson from Barclays.
Just to follow-up on the tariff question, but more with regards to your footprint in China that is selling into the U.S. Obviously a couple of acquisitions a few years ago, GBC, PEER as well means you still have today a pretty sizeable footprint and selling out of China into the U.S. Can you remind me what that number is, how much of your U.S. sales is manufactured in China?
So we don't give that kind of detail. But as you can see, it's manageable. It's relatively on the total a small amount.
Is that 5%?
You have my answer.
There appears to be no further questions at this time.
Okay. Thank you so much for listening into this conference call. And with that, we conclude today's event. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.