U.S. markets open in 8 hours 58 minutes

Edited Transcript of SKF B.ST earnings conference call or presentation 23-Apr-20 6:00am GMT

Q1 2020 AB SKF Earnings Call

50 Goteborg Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of AB SKF earnings conference call or presentation Thursday, April 23, 2020 at 6:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alrik Danielson

AB SKF (publ) - President, CEO & Director

* Niclas Rosenlew

AB SKF (publ) - Senior VP & CFO

* Patrik Stenberg

AB SKF (publ) - Director of Group IR & Competitive Intelligence and Head of IR

================================================================================

Conference Call Participants

================================================================================

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Andreas Juhani Koski

Nordea Markets, Research Division - Analyst

* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* James Moore

Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research

* Lars Wauvert Brorson

Barclays Bank PLC, Research Division - Director

* Olof Cederholm

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Sebastian Kuenne

RBC Capital Markets, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 Report 2020 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 23rd of April 2020.

I would now like to hand the conference over to first speaker today, Mr. Patrik Stenberg. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Patrik Stenberg, AB SKF (publ) - Director of Group IR & Competitive Intelligence and Head of IR [2]

--------------------------------------------------------------------------------

Good morning, and very welcome to this early conference call on the Q1 results. Speaking today is our CEO, Mr. Alrik Danielson; our CFO, Niclas Rosenlew, and as usual, we will start with a presentation about 20, 25 minutes. And after that, we will be ready to take your questions.

On that note, please remember to limit yourself to about 2 questions at a time, otherwise, get back in queue. And we -- might I remember you -- remind you to post your name before the question because we do have some problems with the voice recognition with this conference call this time around. I apologize for that.

With that introduction, Alrik, please.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you very much, Patrik. Good morning, everyone, and welcome to this presentation of our fourth (sic) [first] quarter results. We have delivered another very strong set of results despite falling demand connected to the COVID-19 pandemic. Our cash flow generation is strong, and we have continued to invest in innovation, optimize our operations and reduce costs. Sales were impacted across most regions by both government and post closures as well as by lower underlying demand. Net sales fell organically by almost 9% to SEK 20.1 billion. Sales were 10% lower in Asia, 9% lower in Europe, 12% lower in North America, and almost 4% higher in Latin America. Despite this development, the adjusted operating margin for the first quarter was strong at 12.8%, in -- exactly in line with last year with an adjusted operating profit of SEK 2.572 billion. Cash flow was also strong with almost SEK 2 billion.

If we turn to the next page. The industrial business continued to deliver good operational performance on lower sales. The adjusted margin was 15.5%, which is in line with last year despite a drop in organic sales of almost 7%. Sales were significantly lower in North America, lower in both Asia and/or Europe.

If we turn to next page. The automotive business, which in Europe was significantly impacted by customer closures for the middle of March, delivered an adjusted margin of 5.7% in line with last year's performance, despite a fall in organic sales of over 13%. Sales were significantly lower in Europe, North America and Asia and relatively unchanged in Latin America.

If we turn to the next page. We saw a decline in organic sales of 8.6% compared to last year with net sales of SEK 20 billion. Sales in North America were 11.7% lower. Sales to aerospace and to agriculture, food and beverage industries were relatively unchanged, while sales to all other industrial segments were significantly lower.

In Europe, organic sales were 8.8% lower than last year. Industrial demand was lower than last year and automotive volumes were significantly lower. Within industrial, sales to railway and to the agricultural, food and beverage industries show growth, while industries of highway, off-highway, heavy industries, aerospace as well as the energy and industrial distribution were declining compared to last year.

Organic sales in Asia decreased by 10.4% with lower industrial demand and significantly lower demand for automotive. We saw strong development in the energy industry and in Marine, while most other industries declined compared to last year.

And in Latin America, sales grew organically by 3.5% compared to last year. We saw slightly high industrial volumes and relatively unchanged volumes in automotive.

If we turn to the next page. Well, precautionary measures by authorities and lower customer demand is impacting many of the regions and industries in which we operate. First and foremost, focus is always on creating a safe working environment. For us, this means implementing new ways of working in some areas. In this (inaudible), you see that we are running here in our test center for large-size bearings in Frankfurt, we do it remotely, no people on site. We have adjusted our production output at many of our sites. We were closed for about 1 week longer than normal after the Chinese New Year. But thanks to a lot of the hard work from our team in China, we were able to reopen on February 10.

We've also seen closed sites in India, Italy, following decisions by authorities and closures of some of our automotive plants due to the fact that many of our customers have been closed. During the end of March, we experienced a sharp drop in sales of 25% compared to last year. This is a high level of uncertainty regarding -- there is a high level of uncertainty regarding future demand. We're planning for different scenarios, of course, and we are taking appropriate actions to make sure that SKF emerges from this situation as an even stronger company.

Here, we see a picture from the factory in Tudela, Spain, which recently became our second completely CO2-neutral manufacturing sites. Together with the factory in Steyr, Austria, the 2 factories have reduced their combined annual CO2 emissions by some 22,000 tonnes. And here, you can see the solar panels on the factory roof.

If we turn to the next page. Increasing demands on planned performance puts increasing pressure on machinery. To avoid unnecessary downtime, equipment needs to be monitored more often. As less time and resources are available for manual workaround, automation is crucial. Now there's a new way to achieve reliable rotation and a new way to purchase it from SKF. SKF Enlight collection IMx-1 sensors allow you to build an automated machine monitoring system powered by cloud-based IoT solutions and AI-driven analytics. It is wireless, easily scalable and connected to SKF Rotating Equipment Performance centers. If you just call, anybody listening, to SKF, it will be delivered as a kit with remote instructions how to install it.

With these words, I'll leave the word back to you, Patrik.

No, sorry. Now it's you.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Alrik. Good. And if we turn to the next page, please. And starting off with net sales. So net sales decreased by 5.5% in the quarter. Organic net sales were 8.6% lower than last year. As Alrik mentioned, for industrial, we saw a decline in organic sales by 6.7%, and automotive declined 13.2% in the quarter. The currency effect on sales was positive in the quarter by 3% with the largest effect, as usual, coming from the dollar to euro and renminbi.

We turn to the next page, please. We've seen a significant slowdown in growth since the peak back in Q2 2018. During this time, we've continued to invest, invested in innovation, in competitiveness and also adapting our operations to a lower growth scenario and reducing our cost base. So looking at the operating profit development, we've been quite successful in this process.

In the first quarter, we delivered an adjusted operating profit of SEK 2.6 billion, which is actually on par with last year despite the decline in growth.

We turn to the next page, please. So taking you through the operating profit bridge for the quarter. Firstly, we had a negative small, very small effect from divested acquired companies of SEK 21 million. The currency impact was a positive SEK 146 million compared to last year. And then in terms of our operational performance, it was SEK 273 million lower year-on-year. Organic sales and manufacturing volumes were SEK 575 million lower and then we had a negative effect from lower sales and production volumes. But on the other hand, both price and mix were positive in the quarter. Cost development was good. We continue to see higher realized cost savings than cost increases, resulting in a positive net contribution to operating profit in the quarter of SEK 302 million compared to last year.

If I take the opportunity to provide some perspective on the bridge for Q2. So from M&A, we expect no material impact from price mix. We do continue to expect to see some positive impact and then what comes to cost development in Q2, we do expect to continue to offset cost inflation with cost savings.

If we then move to the next page, please. Here you see the performance by customer group in the quarter. And if we start off with industrial, our organic net sales in industrial decreased by 6.7%. In North America, sales were significantly lower. Sales in Europe and Asia were lower, while then sales were slightly higher in Latin America. For Industrial, the adjusted operating margin was 15.5%. So pretty much the same level as last year when it was 15.8%. Good cost performance contributed positively to the result, while lower sales and production volumes had a negative effect in the quarter.

If we then spend a minute on Automotive. Organic sales in Automotive declined by 13.2% in the first quarter with significantly lower sales volumes in North America, Europe and Asia, while sales in Latin America for Automotive were relatively unchanged. The automotive business had an adjusted operating margin of 5.7%, which is again in line with last year's 5.6%. The result was negatively impacted by lower sales and production volume, offset by good cost performance.

If we turn to the next page, please, and talk about cash flow. We are maintaining a strong cash flow trend despite having increased our investments in manufacturing significantly over the couple of last years. Cash flow in Q1, excluding M&A, financing activities was, as Alrik said, almost SEK 2 billion. So SEK 1,930 million compared to SEK 830 million last year. The increase in cash flow is mainly due to reduced working capital. The cash flow, excluding financing activities for the last 12 months, was SEK 6.8 billion.

We turn to the next page, please. So net working capital as a percentage of sales was 29.5% at the end of the first quarter, which was 0.5 percentage points lower than in the first quarter last year.

And moving on, next page, please. We do have a strong balance sheet. The net debt-to-equity ratio continued to improve and was 57.6% at the end of the quarter. The net debt-to-equity ratio, excluding leasing and pensions, was 7.5%. We saw an increase of SEK 1.5 billion in provisions for post-employment benefits, so pensions, in the first quarter, and this was mainly due to actuarial losses on planned assets and currency effects. So the losses were primarily related to the asset values decreasing in line with market.

SKF's financial liquidity is strong. We have about SEK 16 billion in cash and committed but unused credit facilities.

And then if we move on to the next page, please. What comes to demand outlook, we are, of course, impacted by the fact that the industries and regions in which we operate are being impacted initiatives by authorities, and by SKF's customers related to the spread of the COVID-19 virus. As a result of this, the significant level of uncertainty, it's not feasible to provide a reliable demand guidance for the second quarter.

Turn to next slide, please. And then finally, some additional guidance for the second quarter. We expect finance net to be about SEK 250 million negative including IFRS-16 effects. For the full year, we expect a tax rate of around 29%. And as you know, over the last 3 years, we have consistently increased our investments. And we have and are accelerating our investments in property, plant and equipment. And in 2020, we expect to see additions to plant and property of around SEK 3.3 billion.

And with that, I give the word back to you, Alrik.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thank you very much, Niclas. And apologize for forgetting you. I'll never do that again.

Well, if we summarize, I think we can all be proud of a very strong quarter where we delivered a good strong performance continuously and despite lower sales. It is, of course, a result, I think, of hard work for a long time and understanding early that something was going to happen, so we could find new ways of working and focus very hard on cost reduction at the same time as closing -- keeping close contact with customers. We delivered a stable operating margin as we have stated, and we have more than offset the cost inflation by savings.

With our strong financial position, we are continuing to invest in our manufacturing. We're also continuing to invest in technologies that enable our fee-based offering, machine learning, data analytics and, of course, condition monitoring using cloud and edge computing technologies.

Looking into Q2, there's a high level of demand uncertainty, as I think everybody can understand. And we are taking every step to make sure that SKF emerges stronger than ever when markets eventually recover.

With this, I thank you for listening into the presentation, and I hand over to Patrik.

--------------------------------------------------------------------------------

Patrik Stenberg, AB SKF (publ) - Director of Group IR & Competitive Intelligence and Head of IR [6]

--------------------------------------------------------------------------------

Thank you. And then with that, we are ready to take your questions. And again, might I remind you to clearly state your name and also limit yourselves to 2 questions.

After that, and if we have time, you're more than welcome to get back in line.

Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Your first question comes from the line of Andre Kukhnin from Crédit Suisse.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [2]

--------------------------------------------------------------------------------

It's Andre from Crédit Suisse. I really want to understand the operational gearing in the quarter better. The SEK 575 million impact, that you showed, demonstrates about 30% drop-through. I think you were showing high numbers before. So could you maybe talk about the components of that in terms of what you did in manufacturing versus underlying operational gearing? And I have a second question after that.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [3]

--------------------------------------------------------------------------------

Well, so Niclas here. I mean on a very high level, as you saw, of course, I mean, with net sales organically down 8.6% or 5.5% reported. I mean we had the -- we have a negative impact on profit, of course. But then I would like to kind of tune in on the cost side where we have a positive impact as discussed. So we have -- this is not a one-off, per se. We have been working, as we've discussed in previous quarters as well, quite a lot on just improving our cost base, cost efficiency in general. And as Alrik said here, I would say now in hindsight, have been pretty timely with seeing the market changes, and this has contributed, I think, to our cost efficiency, you may call it that. So there's no magic to it. It's just hard work and over time.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [4]

--------------------------------------------------------------------------------

Sorry, Niclas, I must have misled you. I was just thinking about specifically the minus SEK 575 million that you have on the profit bridge for organic sales and manufacturing volumes component before the cost development. Or does that include the cost savings?

--------------------------------------------------------------------------------

Patrik Stenberg, AB SKF (publ) - Director of Group IR & Competitive Intelligence and Head of IR [5]

--------------------------------------------------------------------------------

(inaudible) No, the SEK 575 million does not include the cost savings. It includes the drop-through on the sales numbers. It does include the effect we have from the manufacturing, also taking into account the fact that we actually reduced inventories this quarter, as opposed to Q1 last year when we actually built finished goods inventory. So we do have a headwind from inventory adjustments in that line as well.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [6]

--------------------------------------------------------------------------------

Right. So that's why -- so the question was kind of the SEK 575 million has no positive manufacturing impact. It implies operational gearing of about 30% on the SEK 1.9 billion sales drop. I guess do you see that kind of ratio as normal as going forward? Because I think back solving the profit bridge in the past quarters on growth or declines, we kind of talked more about operational gearing of 40%, 45%.

--------------------------------------------------------------------------------

Patrik Stenberg, AB SKF (publ) - Director of Group IR & Competitive Intelligence and Head of IR [7]

--------------------------------------------------------------------------------

No, we have done well and adapting our cost base in manufacturing. We have a good level of capability in the manufacturing operations this quarter as we did last couple of quarters as well. So, yes.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [8]

--------------------------------------------------------------------------------

Andre, this is Alrik here. And you have to also understand that, of course, as -- if this situation becomes tougher, it will be tougher to keep this kind of gearing.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [9]

--------------------------------------------------------------------------------

Right, as more cost on fixed. My -- I just also wanted to follow-up, if I may, on Niclas' comment on cost development in the second half where he said to continue to offset inflation. Clearly, you more than offset inflation in Q1 by that SEK 300 million, if I bridge the bridge correctly. So I just wanted to double-check that message for Q2, whether that's part of the bridge you expect to be so as to remain at around SEK 300 million? Or to actually become 0 as a net kind of offset of the cost?

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [10]

--------------------------------------------------------------------------------

Well, as you understand, all understand that, I mean, most companies are taking quite a lot of actions, which are beyond and over what's, you can say, normal of what we've seen historically. And so are we, as SKF. So it's a bit tricky to exactly put a number on it what exactly it will bring and what sort of cost benefit we'll see in Q2. But let's say like this, we are working quite hard on it. And maybe it can be a bit -- seen as a bit of a careful, cautionary comment to say that we continue to offset inflation. I think that's the long-term goal for Q2, we are working on more.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Your next question comes from the line of Sebastian Kuenne from RBC.

--------------------------------------------------------------------------------

Sebastian Kuenne, RBC Capital Markets, Research Division - Analyst [12]

--------------------------------------------------------------------------------

Sebastian Kuenne from RBC here. Good results, as I can see. A key question for me would be the cost savings that you stated, so maybe a similar question to the one before. The cost savings, what is your estimates for now for Q2 and for the year as a whole based on the restructurings you already announced? I mean do we expect another SEK 300 million then in the coming quarters? Or is that even accelerating as you adjust capacity further? That's my first question.

And then another thing that puzzled me a little bit. We've heard from other companies that as long -- as soon as they have a lot of service activity, pure service activity, they see margin pressure because it's so difficult to get the engineers on the site. And this does not seem to be the case with SKF. I was wondering if you expect a deterioration of the situation of getting people to the site and maybe see more pressure from the servicing sites.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [13]

--------------------------------------------------------------------------------

Thanks, Sebastian. So I'll take the cost savings, and Alrik, you can take the service question. So again, if we put it into perspective, the cost side, we've now, for a number of quarters, taken out cost, so improved our cost efficiency. And we absolutely work on continuing down that same path going forward. And as we discussed in the last quarterly call, there is quite a lot still that we see, that we need to do and can do. So we'll continue to work on that. Of course, now in these times, we will take out costs over and beyond maybe what you can say is the normal trend. But it's just quite hard to say exactly how it will look like in Q2 specifically.

--------------------------------------------------------------------------------

Sebastian Kuenne, RBC Capital Markets, Research Division - Analyst [14]

--------------------------------------------------------------------------------

But exactly of the cost savings apart from the volume, what's happening? Is that a similar number then -- because you know how many people you are releasing. So you have the numbers in front of you.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [15]

--------------------------------------------------------------------------------

Yes. No. So it's a, it's a good point. It's more than just people. Of course, we work on the people side, but there's a lot of other costs as well. I think as discussed in the last call, IT, for instance, and then other parts of the operation, which is not just people. So we don't want to give an exact number. Again, our -- the kind of theme that we are working on is that we are going to offset cost inflation, and now we talk about slightly longer term. But of course, as said, for Q2, there will be a lot of extra measures taken as well, but a bit hard to say exactly what number that will lead to.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [16]

--------------------------------------------------------------------------------

And then you have to understand the reason is that this is day by day. This is -- we have never seen this before when one factory is standing still. Now the automotive is trying to start-up. So then we are starting up again to support their start-up. How long will it last? It is very uncertain. So it's not meaningful to give you figure. So please understand, it's not that we don't want to.

And when it comes to the service side, first of all, we have a lot of value service. We are booked up to our customers through Internet, monitoring their machines, et cetera. This has been -- we have been able to do -- continue to do this, I mean, continue to deliver to both products and services to the aftermarket during the first quarter. We have also worked a long time on actually being able to give assistance remote by not being there, et cetera. So -- and then we have a global network. So actually, we've had seen during the first quarter situations where there was an issue in -- for instance, in India, that would normally be attended by specialists from Europe, but now the Indian specialists could themselves, without traveling, so to speak, help the customer. And the similar things, actually situations where other service companies have not been able to help our customers, but we, with a general knowledge around the rotating shaft, have been able to support the customer, even sometimes beyond our normal field of expertise. But this is all before the real lockdown, if you understand. When we're talking about India, as the examples before. Now the Indian engineers are not even allowed to visit the customer and the customer in most cases in India is closed.

--------------------------------------------------------------------------------

Sebastian Kuenne, RBC Capital Markets, Research Division - Analyst [17]

--------------------------------------------------------------------------------

But to simplify, you have less problems because you have more local service engineers. So no one traveling in?

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [18]

--------------------------------------------------------------------------------

We don't have this mass service. We don't have this mass with its high impact, knowledge services. It's not that we go out and service the old paper mill, for instance. We come with our engineers with high pack impact knowledge around the rotating shaft, and that's labor-intensive, less people who need to move than other service companies maybe. Because we see this situation that you say that it's difficult to get an expert from other area from one geography to another geography. But due to the fact that we are very well spread around the world, with the good knowledge around the road taking shaft everywhere, these global or international moves have not been needed. But again, I'm talking about the first quarter.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Your next question comes from the line of Olof Cederholm from ABG.

--------------------------------------------------------------------------------

Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

It's Olof Cederholm with ABG. I have a question on demand, which is, of course, very difficult. But you mentioned a negative 25% late March, is it in any way possible to talk about differences between the 2 segments? And also if this run rate is a good reflection of -- so far in April. And just some more color on what you've experienced.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [21]

--------------------------------------------------------------------------------

And what you see is, of course, with the automotive and aerospace segments, there's a very close -- basically the OEM market, it's a very close short value chain. And there is an immediate effect, you can say, when the customer stops, you stop immediately, and you see very short, very quickly, you see the effects of the real market. In industrial side, there's more industrial dynamics. It's more myriads of customers behind. The effects you see are slower. So you can say that we saw the real effects of the final demand, very quickly in automotive and aerospace, and we are seeing it slower in industrial. And then you can look at things, you can yourself understand that there's no sort of magic in this. If you look at, for instance, Vietnam, if you can look at the activities at garage as the activity level of garages is quite well. It correlates with our sales in a downturn. It comes a few weeks after. In an upturn, it usually comes quicker when the garages starts repairing again. And as we say, we still believe that segments like wind and agriculture which are still needed, and then they are very prioritized for many -- in many areas, will be continuing. The whole thing now depends on how quickly the world opens up again. And you can understand that this is a day-by-day endeavor. Right now, we're working to prepare to support the intended start-up of automotive in Europe, well, we just have to see how it goes.

--------------------------------------------------------------------------------

Sebastian Kuenne, RBC Capital Markets, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Absolutely. And could I also ask about China specifically. Are you -- some others are indicating that China is really back on track, it's a strong recovery, and we're not too far off from sort of pre-COVID levels of demand. And is that your view as well?

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [23]

--------------------------------------------------------------------------------

Well, without being specific, I can say, there are some segments, like we said, wind and others where the government is stimulating that will most probably be strong. There is right now a catch-up effect after the lockdown in China. There has been a sort of lack, especially, you could say, on the heavy vehicle side. And there are some recovery catching up on car sides as well. But the underlying, if you say general machinery, we see clearly that China is suffering from not having access to the export markets. And you have to realize China is not to open up yet. You cannot travel freely from one area of China to the other. And people are not completely back to normal. So how much this is sort of a reaction to the lockdown that has been, and you are not coming back and then what happens. And how much is this a real recovery that could last now? That's still to be seen.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Your next question comes from the line of Andreas Koski from Nordea.

--------------------------------------------------------------------------------

Andreas Juhani Koski, Nordea Markets, Research Division - Analyst [25]

--------------------------------------------------------------------------------

It's Andreas Koski from Nordea. So my first question is on the EBIT margin. So you have an adjusted EBIT margin that was unchanged from Q1 last year despite an organic revenue decline of 9%, and that came as a surprise to me. So could you explain what you have done to be able to achieve this? And how large part of the measures taken that are sticky?

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [26]

--------------------------------------------------------------------------------

Yes, Niclas here. So I think you should see this as a kind of a longer scene than just one quarter. Again, if we go back to the previous quarter, second half of last year, when we also saw a decline in top line, we talked about the same theme that we have, over time, been working on, obviously, timing, the market upturns and downturns, that's an important thing because there's always a lag to some of the actions taking effect or being seen in results. And then secondly, continuously working on the, call it, cost efficiency. So it is more of a theme that we expect to continue to work on and also deliver results on over time. Of course, now in these times, we did take some measures in March, specifically that took costs down. But I would say the impact on Q1, per se, wasn't massive. There were some extraordinary measures, maybe, but not massive. Of course, in Q2, we expect to see a bit more. But as you can hear, I don't want to give an exact number that out of the good cost performance, x% was one-off and y% was something that we expect to see in the future as well. But it's more geared towards the -- also expect to see in the future.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [27]

--------------------------------------------------------------------------------

And on the mix side, you can see -- you can understand that as automotive OEMs go down quicker, and industrial comes down a little -- has been coming down in a different pace; OEMs, when they stop, then you don't deliver to them. You can understand that we have had a positive mix effect as well. We want to work hard to keep the mix effect also going forward. But of course, that has been a support in this quarter.

--------------------------------------------------------------------------------

Andreas Juhani Koski, Nordea Markets, Research Division - Analyst [28]

--------------------------------------------------------------------------------

Yes. Okay. And when it comes to the short-term activities and maybe governmental support, could you say what you receive or what you are doing on that side? And how that will develop in Q2? Because as you alluded to, Niclas, there will be a positive delta when it comes to short-term cost savings support in Q2 compared to Q1.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [29]

--------------------------------------------------------------------------------

Yes. So what comes to different government support, there was very little in Q1 and of course, then can expect there to be some in Q2. We do, of course, in all the markets where we operate, we do look into this. And of course, appreciative of the support, say, when the factory is completely closed or something like that. We have people on short-term -- working short-term or part time, quite a few around the world. And in some places, there is some support for that; in some places, there's not. So maybe the easiest way just to look at it is that, I'll say, avoiding an exact number is that, yes, we expect and hope that there will be some in Q2, very little, if anything at all in Q1.

--------------------------------------------------------------------------------

Andreas Juhani Koski, Nordea Markets, Research Division - Analyst [30]

--------------------------------------------------------------------------------

Okay. Just to clarify, it sounds like a large part of the savings that you have been able to take out, have been taken out disregarding on the volume development. It's more the long-term efficiency programs that you have been working with. So assuming organic growth would have been flat, we would have seen a higher margin this year compared to last year because you still have had the cost savings.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [31]

--------------------------------------------------------------------------------

Yes, yes, exactly.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Your next question comes from the line of Andrew Wilson.

--------------------------------------------------------------------------------

Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [33]

--------------------------------------------------------------------------------

It's Andrew Wilson from JPMorgan. And couple of questions. First one, please. Just on -- I guess, trying to understand the levels of inventory in the various distribution channels, and just whether you think you've seen any indications of prebuying, perhaps in Europe ahead of some of the shutdowns? Just trying to get an understanding of sort of why you feel that, that might have happened? And also what do you think inventory levels are like in, in the chain, at the moment, please?

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [34]

--------------------------------------------------------------------------------

Well, if -- our inventory levels are compared to demand will, of course, depend very much on how demand is developing. So it's very difficult to answer. But I can understand, if I were a industrial distributor, for instance, I would, of course -- and I had money, I would take a precaution not to sit with that are out of stock going into a situation where I understand that there will be some disruptions in the value chain. So I would argue that probably, as we don't see sort of a boom of hurting or anything like that. But I would assume that they have not cut back on their stock levels at this point, I wouldn't do it if I were there. Now, I mean, also we have seen the ability in some markets where we have been able to actually deliver and maybe some others have not been able to deliver for x and y, z reasons. It's also a situation where we hope to be able to strengthen our position going forward. So I think that there is a normal stock level. But of course, if that is a high stock level, low stock will now depend on how demand develops during the next few months. But I don't see any earning or bloated levels like some years ago when we had this very seasonable -- seasonalization with end year bonuses, et cetera. I don't see that.

--------------------------------------------------------------------------------

Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [35]

--------------------------------------------------------------------------------

That's helpful. And then just thinking about the net working capital at SKF and the way that you're thinking about managing that. I mean as we kind of look at the Q2 and I guess in advance of the year, but the Q2 specifically, are there any, I guess, areas of concern within the working capital, whether it be collections, whether it be how you're thinking about the inventory? And then just kind of to that point, how are you thinking about perhaps using the working capital that the SKF can fund relative to some of their competitors in terms of just trying to take share in this period?

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [36]

--------------------------------------------------------------------------------

Yes, exactly. So we look at ourselves, and we see we are financially strong, and we are working very hard, you can understand, to preserve that strength. Cash is the blood of the system, so we need to preserve that. So we're working very hard, meaning we're scrutinizing our customers, seeing -- working very hard to see that we minimize as much as we can and the losses on the accounts receivable side. What is going to happen? It's very hard to forecast, of course.

As far as our own working capital inventory, et cetera, you can also understand we're using whatever we can now going forward to sort of convert that into -- to cash and use that to be even stronger.

And then as Niclas has said, now it's also a time to take advantage to actually accelerate some of our investments in more flexible, cost-efficient and automated production and to be coming out of this even stronger from that point of view. And also, it's interesting how the R&D and innovation teams sort of step up to the occasion, and they see now, wow, now there are some trends that we've been looking at this digitalization of the value chain that we have been working so hard to convince some customers that they should join us in. Now suddenly, it becomes much easier. So there's an enormous push, of course, on the technology side, and we will not take -- we will not reduce our activities or our best on new technologies. And so there is -- even there is -- even accelerators in times like this.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from the line of James Moore from Redburn.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [38]

--------------------------------------------------------------------------------

I've got 3. And yes, if it's okay, I'll go one at a time. Firstly, wonderful EBIT, given the demand and can I come back to the excellent 16% organic drop-through. And really the topic of Andrea's cost feed question, which is about what is temporary savings versus more structural savings? And you've done a lot of automation action in your time since you've been running the company outright. Do you think that SKF's fixed cost versus variable cost structure of the company has actually changed over time, such that you've become a more variabilized business and might we even put any percentages on that?

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [39]

--------------------------------------------------------------------------------

Well, you know the theme that what we've been working on since -- at least since my tenure, very, very diligently and of course, as we become more flexible, it's going to be like you say. And I argue, yes, of course, this is part of it, but it's not only that. It's a complete change of culture in the company you see today. We have a much leaner, more direct organization. We are constantly reducing indirect spendings in automating and working more in one -- as one compared to having many different units that have extra sort of back office, if you understand that kind of cost, et cetera. So it's more than just automation. But you're right, I mean our ambition now is to accelerate this trend. And our vision is clearly to become more nimble, more flexible in all and more customer-oriented than ever. But to give you a number, I guess (inaudible).

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [40]

--------------------------------------------------------------------------------

Yes. That's very helpful. And secondly, your 25% volume drop in the last 2 weeks of March is very helpful. I'm going to be greedy and ask if you could help us compare and contrast China, Europe and the U.S.A.. I mean I would guess, maybe even a small positive for China, the worst in Europe, maybe at minus 30% and maybe a minus 20% for the U.S.A., but that's just a guess based on what I hear from other people. If you're able to present any color on that, it would be helpful.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [41]

--------------------------------------------------------------------------------

The problem here, James, the problem here is that it is so fast. This has been interesting to see how a factory, that was actually closed last week, it's now operating at half speed, for instance. A business, that was looking to have a resilience, was suddenly down and other businesses like on the agriculture side, that suddenly you are surprised to say yes. Now there are some customers are waking up so that the harvest season is going to come in a few months, and they need to start repairing, which they haven't been able to do before, et cetera. So it's so dynamic that if you take the answer I gave earlier, when I say, yes, we see, of course, China where we have been operational in China trying to come back. And we see there a sort of a catch-up from the lockdown. We see that. However, we also understand that there is no way that China will not be affected by not having the exports market that they have. And what is going to be the government's ability to compensate for that, partly if they can. And then you look, you talked about the U.S. Of course, the U.S. is behind the curve as far as shutdown compared to Europe. But how fast will it go? And how quickly will they be able to open up again? So it's the flavor of the day, this is the problem. That's why I can't really help you more than -- you know, James, you're an intelligent man, you have a lot of contacts around the world. You will see this unfolded and there's no magic to it. You will see it.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [42]

--------------------------------------------------------------------------------

Yes. And it's -- I mean as Alrik said, it's just amazingly dynamic and as we all know, what the world has changed a lot in just in a month here, and it will in the next month as well. Of course, directionally, if you ask now, I mean, we said -- gave a minus 25% end of March. And what you said, James, directionally now is probably right. I'm not saying the exact numbers, but just the dynamics between the regions. But is that a good indication of how it would look like in May and June, remains to be seen.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [43]

--------------------------------------------------------------------------------

That's very helpful. And lastly, just a quick technical question. Do you see anything that suggests a meaningful change in raw material costs in the coming quarter? Do you have a view? Do you expect another sort of headwinds there?

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [44]

--------------------------------------------------------------------------------

Not really. No. No.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

And your next question comes from the line of [Emaad] (inaudible) from Bank of America.

--------------------------------------------------------------------------------

Unidentified Analyst, [46]

--------------------------------------------------------------------------------

Just a bit more details on your servicing side of business. What percentage of the business currently are you able to service remotely? And if the push come to show, how high can you take that number to? That will be the first question.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [47]

--------------------------------------------------------------------------------

There's no figure on that in this way because it's not -- for us, it's not only about services. As a service, it's also about products and deliverables of different kinds. So when we go in and serve somebody, we also deliver products together with the services and so forth. So it's a very complex question to give you any meaningful number at this time, especially with the uncertainty we have. But I can tell you, I think that there will be a push for utilizing more our off-line -- sorry, online services in the sense that we can connect to any machine in any part of the world, and monitoring and tell you how it's doing based on our knowledge around the rotating shaft.

And I believe that when we come out of this crisis, this is going to be more sort of after than ever before. And some of the conservative companies that have previously said, "Ahh, I do it the same way as I always have done it, in a manual the way, going around, checking my machines, et cetera." I think they're all sort of now looking at how can I now work in a completely different way. And here, SKF is ready with our R&D centers. These are remote centers where engineers and technicians are sitting, where you can hook up your machine to this. So we are now leveraging this, of course, of reaching out to customers and saying, hey, you are not already hooked up to SKF If you want to improve your reliability, we can do it and we can actually send you a kit that you can just install yourself, to your machine and then you, through Internet, hook up to SKF, and you will get expert advice. And then, of course, with the intention to deliver also products and real services when that is possible to get. So without giving you a number, because I can't, as you understand, I believe that the digitalization of the value chain will get a push from the situation.

--------------------------------------------------------------------------------

Unidentified Analyst, [48]

--------------------------------------------------------------------------------

But like if you could give some indication whether half of the services you could provide can be done remotely or not? Something like that. That would be helpful.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [49]

--------------------------------------------------------------------------------

Yes. But you understand, if I can do a service, but I can't deliver a product, part of the value of what I'm actually doing is not there to be captured. So I can't answer you. It depends on -- in a normal situation where supply chains are open, I think this is going to be an eye opener for many of our customers and potential customers that we have something you need to offer. But to tell you now that in this very difficult time to give you an estimate on this, it would not be prudent.

--------------------------------------------------------------------------------

Unidentified Analyst, [50]

--------------------------------------------------------------------------------

Second question I had was around your supply chain plans, given such huge level of disruptions in the global supply chain, have you had any plans to make any changes in like have more local source or even ultra-local source sourcing in big countries, is something -- and also intra countries?

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [51]

--------------------------------------------------------------------------------

Yes. Yes, you can understand. We have been, and I think we've been quite informative around this. We have -- due to digitalization automation, it is now possible to have region-for-region kind of supply chains. And already before the outbreak of this crisis, this was a clear intention of ours to supply Asia out of Asia, Europe out of Europe and Americas out of Americas, meaning really distributing our supply chain, which is today Europe-centric for historical reasons. There is, in my mind, now with an accelerated understanding that this is probably a good idea. So yes, we are accelerating this activity. However, saying that it's not done in a month. It's not -- this is still a thing that happens over many years. But yes, we are accelerating these activities.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Your next question comes from the line of Lars Brorson from Barclays.

--------------------------------------------------------------------------------

Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [53]

--------------------------------------------------------------------------------

Just a couple of quick ones from me. I was a bit late on the call, so I apologize if they have been answered. But Niclas, just on raw materials and the impact in your EBIT bridge, can you just confirm that there was SEK 100 million positive impact in the quarter? And can you also just give us a sense for your expectation for Q2 in absolute terms based on current raw material prices?

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [54]

--------------------------------------------------------------------------------

So shortly on Q1, yes, that's correct. But then it was, from a profit perspective, offset by the inventory. And on Q2, again, as I said earlier, we don't today foresee a major impact from raw materials.

--------------------------------------------------------------------------------

Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [55]

--------------------------------------------------------------------------------

Sorry. Just to be clear, when you say offset by inventories, that's obviously a different part of your EBIT bridge, just to be clear?

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [56]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [57]

--------------------------------------------------------------------------------

Right. Secondly, if I can just clarify your comment on positive price mix in Q2 in your EBIT bridge or expected, is that both price and mix? Or maybe I can ask a bit differently. Is the positive mix view for Q2 partly based on what you saw in the last 2 weeks of March, within that negative 25%?

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [58]

--------------------------------------------------------------------------------

Well, so the answer on price and mix is yes to both. So both were positive. And I think Alrik commented on it earlier. I mean it's a bit hard to say whether it's driven by the last 2 weeks or the first 2 weeks or whatever, I mean, it's the total Q1. Of course, we do see a shift -- or we did see a shift in certain customers buying significantly less and then some segments continuing on a reasonably good level. So that's really driving the mix. And you can imagine, for instance, that automotive, certain customers stopped buying or shut down completely in the latter part of the month. So that had an impact on the mix also. But I wouldn't read too much into it. I mean the numbers are not massively large or massively different from what we have seen in the past either. So price/mix positive and both components slightly positive.

--------------------------------------------------------------------------------

Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [59]

--------------------------------------------------------------------------------

So the dynamic, just to be clear, that you saw in Q1 where OEMs are stopping production or gradually coming back, but the distribution channel more stable, particularly in automotive, you would think still holds true as you see it down in Q2? I appreciate it's very volatile dynamics, but that's your current assessment.

--------------------------------------------------------------------------------

Alrik Danielson, AB SKF (publ) - President, CEO & Director [60]

--------------------------------------------------------------------------------

Yes. Well, you can understand, it all depends. If sales of vehicles comes very strong back, you will have a normal mix. If it's still so that what will come first is actually the maintenance of vehicles. You will see that part of the business coming back faster. And it is -- of course, we have a better profitability with maintenance of vehicles than in the direct deliveries to the OEM. So it's -- if you go out and put your ears to the ground and listen to what really happens out there, you would yourself sort be able to have acquire good view of the reality because it's like that. We -- as I said, maybe you missed that, but we see a correlation between the activity system and the garages, for instance, with our sales. And when it goes down, it takes a little bit longer before we see it coming down. But when it goes up, it goes quite quickly and the customer starts ordering quickly. So it depends now how quickly, for instance, in Europe, the country is truly open up for repairs of cars and vehicles and so forth and people start moving around more.

--------------------------------------------------------------------------------

Niclas Rosenlew, AB SKF (publ) - Senior VP & CFO [61]

--------------------------------------------------------------------------------

Yes. But I mean, of course, directionally, you are right that the business was driving mix, whether it's aftermarket or not, and OEM or not, so on and so on. And then it really depends on how Q2 develops. We do expect price mix to be positive in Q2 as well, of course, hard to say, but that's our expectation. It goes without saying that if the downturn takes longer, the price element will be harder and harder to keep positive.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

There are no further questions at this time. Back to you, Patrik.

--------------------------------------------------------------------------------

Patrik Stenberg, AB SKF (publ) - Director of Group IR & Competitive Intelligence and Head of IR [63]

--------------------------------------------------------------------------------

Thank you so much. Thank you for the call. With that, we'll leave it. And if you have any upstanding questions, please give me a call, and then we'll try to sort them as we go. Thank you and keep well.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stand by.