AB SKF (publ) (SKFRY) Q1 2024 Earnings Call Transcript
AB SKF (publ) (OTCPK:SKFRY) Q1 2024 Earnings Conference Call April 26, 2024 2:00 AM ET
Company Participants
Sophie Arnius – Head of Investor Relations
Rickard Gustafson – President & CEO
Niclas Rosenlew – CFO
Conference Call Participants
Andrew Wilson – JPMorgan
Daniela Costa – Goldman Sachs
Max Yates – Morgan Stanley
Mattias Holmberg – DNB Markets
Rory Smith – UBS
Anders Roslund – Pareto Securities
Klas Bergelind – Citi
Andreas Koski – Exane BNP Paribas
Sophie Arnius
A warm welcome to SKF Q1 2024 Earnings Call. For those of you who I haven’t had the opportunity to meet with yet, my name is Sophie Arnius and I joined SKF end of February as Head of Investor Relations.
For today’s event, our CEO, Rickard Gustafson and CFO, Niclas Rosenlew will take us through the highlights of the quarter, where the ongoing transformation of SKF is showing in a more resilient and competitive company and of course, there will be opportunities to ask questions after their presentations and there are two ways to do that. (Operator instructions)
So without further ado, it’s our great pleasure to hand over to you, Rickard.
Rickard Gustafson
Well, thank you very much, Sophie and warm welcome to the team and good morning, everyone and thank you for joining us for this report out. This quarter marked another step towards a more resilient and competitive SKF. Key to our competitiveness and long-term success are our innovation spirit and application engineering capabilities. This is something that will come back to later in this presentation.
But first, let’s focus on our first quarter numbers and I am very pleased to report yet another resilient performance. Net sales came in at SEK25 billion and we delivered a strong adjusted operating margin of 13.4%, which was somewhat ahead of Q1 last year. The margin improvement, clearly demonstrates our improved resilience given that organic growth shifted from plus 10% in Q1 last year to negative 7% this year.
This is a result of both our ongoing strategic transformation initiatives as well as from more tax collectivises to manage the business cycle. Key tax activities includes decentralized accountability for pricing, portfolio pruning and cost management. In parallel, we continue to execute in our strategy, including investments in regionalization and in building competitive value chains, this to ensure that we’re ready to quickly ramp up production once demand bounces back. And when that happens, we are well positioned to capture profitable growth opportunities. All in all, I am pleased with our strong quarter performance in a more challenging economic environment.
When it comes to our geographical regions, organic growth in India and Southeast Asia was slightly positive, driven by strong performance in heavy industries and light vehicles. In Europe, Middle East and Africa, most industries saw negative growth, while two key segments, aerospace and railway, contributed positively. Americas was impacted by a combination of OEM destocking and us actively exiting low-performing businesses.
Here we see a potential to broaden our customer base and industry exposure and this is a top priority for our new leadership in the region and it’s actually great to now have Manish Bhatnagar in place to develop our American business further.
China and Northeast Asia had a mixed development, with wind sharply down, a continuation of what we have seen in prior quarters, while other industries developed more favourably, actually being at last year’s level or even above. So let’s take a deeper look into China, which is a good example of our ability to create competitive and intelligent value chains.
As you can see on this slide, our localization rate in China has increased by 10 percentage points since 2021 and this has allowed us to swiftly adjust the volume outputs and improve our flexibility to better respond to changes in customer demand. Our local value chain also enables swifter assortment optimization. As an example, we are now refocusing on heavy industries to offset the weaker wind sales development in China. We are also targeting growth opportunities supporting green industries, such as battery equipment producers and vacuum pumps for semiconductor industries.
Moving on to our industrial automotive business segments; again, I am happy to report that our robust industrial business, representing more than 70% of net sales, continued to perform well in the quarter. As you can see, we managed to maintain a strong adjusted operating margin above 16% despite the safe decline of some 7%. Again, this is explained by our active and ongoing focus on business cycle management, in combination with strong price mix development. The adjusted operating margin for automotive business improved 6% and this demonstrates our progress towards 8% annual target in 2025 from the ongoing portfolio repositioning.
Now, turning to our strategic execution; we continue to diligently work on implementing and execute on our strategy, increasing our efficiency and reducing fixed costs. Key focus areas in 2024 are firstly, further optimization of our supply chain and footprint, driving regionalization, manufacturing excellence and footprint consolidation.
Secondly, managing and restructuring our portfolio, active pruning and pricing, assortment simplification and new product introduction for profitable growth and thirdly, gearing up for intelligent and clean growth, driving decarbonization and circularity.
A common theme across these priorities is innovation and let me share a couple of exciting examples on this. We are a global leader within railway. This is an industry that represents 5% of our sales and we have been outgrowing the market in recent years. Here we constantly drive innovation in close cooperation with our customers for enhanced fleet efficiency and reliability.
High speed is an important and demanding segment within railway, where we said bearings are critical. As an example, for this segment, we recently developed new ceramic bearings for railway drives, delivering increased reliability and lower maintenance costs. Customers also value our condition monitoring offers as they enable additional efficiency and reliability. Here, we recently launched new monitoring capabilities for gearboxes.
Turning to another example, capitalizing on the growing demand for sustainable solutions; to gear up for intelligent and clean growth, investments in decarbonization, high speed rotation and low friction products and services are key. We have developed a bearing tailored for the robotics industry with reduced CO2 manufacturing footprint of 70%. This is equivalent to 130 tons of emission savings per year.
Looking at the end customer application, this bearing also enabled an additional CO2 reduction of some 20%. So sustainability is a really core element of our strategy. Therefore, I am very happy that I received top sustainability ratings, both from EcoVadis and from CDP. This demonstrates that we are making progress in our sustainability efforts and that we are strengthening our position as a sustainability leader.
But before I hand over to Niclas, let me put our journey in a broader perspective. We are transforming SKF into a more resilient and competitive company and as you can see, we are now delivering a consistent margin performance, regardless of demand fluctuations. Our decentralized accountability has been key to increase agility and to accelerate execution of our strategy. Based on this, I am convinced that we’re well positioned to capture profitable growth when market conditions improve.
So on this positive note, I will now hand over to Niclas to explain our Q1 performance in more detail. So Niclas, over to you.
Niclas Rosenlew
Thank you, Rickard and good morning, everyone. As Rickard mentioned, we are pleased with the progress we are making and the financial performance in Q1, where we improved margins despite declining sales. On the note of sales, the soft market conditions that we experienced in the second half of 2023 continued, as you can see, also in Q1. Sales amounted to SEK24.7 billion, and this is down from SEK26.5 billion a year ago. Year-on-year volumes continued to decline, and this was partially offset by continued good price mix execution.
Compared to last year, very much as Rickard mentioned, sales declined organically by 7%, and we had almost no impact on sales from FX or from M&A. While of course 7% is a significant decline, it’s worth noting that we had a significant variation in sales performance between different industries. So for instance, wind declining sharply, while on the other hand, aerospace and rail growing.
Moving on to profitability, we delivered an adjusted operating profit of SEK3.3 billion in the first quarter. The adjusted operating margin was 13.4% compared to 13.1% last year, and this is a strong performance, not least considering the sales decline, must say that the teams have done a great job managing the business in this softer demand environment.
The improvement, very much as Rickard commented on, is explained by our efforts to adjust our cost base to lower volumes, a continued positive effect from price mix, and then our work to improve or exit low margin businesses. If we take a look at the bridge step by step, we can see that the net effect from currency was a negative SEK300 million, and this is mainly related to our relatively high cost base in Euro countries.
The sales decline had a negative impact of SEK430 million and this was driven by lower sales and manufacturing volumes, partly offset by continued solid price mix. Total costs declined by SEK550 million, where materials and energy contributed positively, logistics was slightly positive, while then personnel costs impacted slightly negatively. On the note of personnel costs, we had a salary inflation, which continued at a relatively high level. On the other hand, we had a positive impact from the efficiency program that was concluded in last year. So all in all, the teams did a good job managing the profitability by taking down costs, continue to work with pricing, and manage the portfolio.
Moving on to cash flow, cash flow from operations came in at SEK1.8 billion, which we see as a pretty normal level for a first quarter. As you can see on the graph to the left, cash flow was down versus Q1 last year, but we need to keep in mind that last year we had a unusually high or strong cash flow for the first quarter. This year, we saw a typical seasonal pattern as receivables and inventory in general increase in the first half of the year, while it’s then the opposite in the second half. So I am very pleased that we have made good progress over the last year, taking down inventories, even if inventories are still too high and the work continues to take them down.
Looking at overall networking capital as a percentage of sales, it went down from 32% to actually over 32% last year to just below 31% this year and 30% to 31% is a pretty normal level looking back in time, but we do see potential to reduce it even further. And on that note, our longer term networking capital to sales target is 25% and to be able to reach this level, we need to continue with our regionalization efforts and also additional working capital activities. So all in all, it was a solid cash flow in the quarter, and we will continue to work across all businesses to further improve it or improve the networking capital with a special focus on inventories.
Moving on to our balance sheet, continues to be strong and our liquidity to be solid. Net financial debt amounted to SEK7.8 billion and this is, as you can see, a significant reduction compared to last year and roughly on par with Q4 last year. However, note that last year we paid a dividend of some SEK3 billion or so in Q1, while this year we paid the dividend in early April, so in Q2.
When it comes to return on capital employed, we have seen a positive trend with an improved return on capital over the last year. The 12-months rolling return on capital employed was 15.1%, driven by solid profits compared to 13% last year.
Finally, before handing back to Rickard, turning to our outlook; outlook in the second quarter of 2024, we expect a mid-single-digit organic sales decline year-over-year and for the full year 2024, we maintain a low single-digit organic sales decline outlook and this again compared to 2023.
And with that, I hand back to you, Rickard.
Rickard Gustafson
Great, thank you, Niclas. I am pleased to conclude that our first quarter performance marked another step towards a more resilient and competitive SKF. All in all, we delivered a strong performance with an improved adjusted operating margin year-over-year. We continue to execute on our ongoing strategic initiatives with a focus on optimizing our supply chain, including regionalization of our manufacturing footprint, managing and restructuring our portfolio, for example, product development to capture growth in targeted industries, and gearing up for intelligent and clean leadership, capitalizing on the ongoing sustainability transformation.
So with this, I thank you sincerely for your attention and I now will hand you back to the safe hands of Sophie.
Question-and-Answer Session
A – Sophie Arnius
Thank you, Rickard. We will now open up for questions and let me remind you on how to ask a question. (Operator instructions) So let’s start with the first question and it’s from the telephone line and it is from Andy Wilson at JPMorgan. Andy, please go ahead.
Andrew Wilson
Hi, good morning, everyone. Thanks for taking my question. I’ve got two, if that’s okay, one short term, one longer term. I’ll start with the short term one. I just wanted to try and understand or better understand the impact that you’re seeing in terms of the China wind business because I think we’ve seen this for a number of quarters and apologies if I should know this, but when will that sort of pretty brutal by the looks of it, year-on-year headwind kind of drop out of the base i.e., when does that China comp start to be a little bit more comparable, because you obviously point to some of the China businesses actually growing year-on-year. So just to try and understand that, please.
Sophie Arnius
Rickard, do you want to take this one?
Rickard Gustafson
Be happy to. You’re right. We have for now a number of quarters in a row experienced a rather negative sales development in wind in China. We’re talking significant numbers. We’re talking negative 50% or there or thereabout and we don’t really see when this is going to change and when this will end, but now into the third quarter with this development, but if we allow ourselves to exclude wind for a while, the other industries in China have a more — a very different development where we basically would have a small positive organic growth if we exclude wind from our numbers in China.
Clearly, as I’ve tried to say in the conference call, we are taking actions and we’re redirecting our efforts to other growth opportunities and heavy industries to compensate for this and then of course we are continuing to work within wind. We still have a wind business and we’re ready to ramp it up once demand comes back, but right now, short term, we don’t see any change to this.
Sophie Arnius
And Niklas, yes.
Niclas Rosenlew
Just to add to your question, the technical part of it, the sharp drop started in Q3. So from Q3 onwards, assuming everything else equal, we are out of this year-on-year effect.
Sophie Arnius
And you had another question also for us.
Andrew Wilson
Yes, please. Yeah, I wanted to ask on the strategic objectives, I think it was the priorities for 2024. But on the second one, the manage and restructure our portfolio, I was just hoping you could kind of give us, I guess a little bit more color in terms of how wide ranging that is, kind of what’s on the agenda there. Is it something similar to what we saw with the aerospace businesses in terms of strategic review? I appreciate it might be difficult to give specifics, but just a little bit more color around kind of the scope and the thinking around that would be interesting because I think that’s a really interesting development.
Sophie Arnius
Niclas, do you want to start with this one?
Niclas Rosenlew
Sure, sure. No, you’re right. And we are looking into this when it comes to portfolio, both from a strategic and a tactical point of view. What we did within aerospace was more in the bucket of strategic actions and the answer is yes, we are also looking into other opportunities and maybe reshaping the balance of our portfolio moving forward.
I have nothing to report today, but you can rest assure that that is work that is ongoing and I hope that in not too distant future, we can share some details on what thinking and how we see how we’re going to evolve our portfolio in certain segments.
On the tactical side, there’s more an ongoing active activity and this is one of the key reasons why we have been able also to uphold our margins in low volume environment. The teams are actually working on pricing and pruning, as we’ve discussed in a number of times, but also driving commercial excellence, more pricing rigor. We are looking into assortment simplification, which is rather massive in our portfolio. That also holds a lot of simplification opportunities in that regard. But it’s also forward leaning and forward looking where we tie our innovation into new innovative products and solutions that would enable us to grow in our targeted segments. So we have a broad kind of view on the portfolio management, both strategic and tactical.
Andrew Wilson
Thank you very much, that was really helpful.
Sophie Arnius
Thank you, Andy and we will continue with a question from the webcast here and it’s from Daniela Costa at Goldman Sachs.
Daniela Costa
And it’s about India here. Why is India not growing much for SKF, given the climate here in our industrials locally for most industrial companies? And Rickard, do you want to take this one?
Rickard Gustafson
Yeah, we are growing, hi Daniela, by the way. Yes, we are growing, as you saw, even though rather modest as for the India and Southeast Asia region. We don’t break out the countries in isolation, but we do see a maintained strong demand. We have big expectations and hope for India longer term, given that there is a strong economic development in that region, but also our portfolio in India today is somewhat more tilted towards automotive than industrial. So that’s maybe why, they really doesn’t connect with your numbers that you sit with. But clearly one agenda of the team and also that’s with the new leader Mukund (ph) is also to broaden our exposure to industrial verticals in India and we see significant opportunities there for profitable growth.
Daniela Costa
Thank you, Rickard. Let’s move on to our telephone line here and Max Yates at Morgan Stanley. Please go ahead.
Max Yates
Thank you very much. Could I just start on the selectivity that you’ve talked about and particularly in the Americas? Actually, do you know what, I’d change that. I’m going to ask something else. Could I just ask about the organic growth kind of cadence in the years? So you’ve obviously talked about minus seven, kind of we’ve just done minus five in down mid-single digit.
What is it that you look at that gives you the confidence that to get to that kind of low single digit, we can be kind of flat or even slightly positive by the end year? Is it sort of conversations with your customers? Is it China wind dropping out? Just if you could give some framing, because obviously that’s going to be quite a significant improvement in the second half and more than what we’re seeing kind of quarter-on-quarter in Q2.
Rickard Gustafson
Right, I think there are two things. Firstly, if we look into the intelligence that we gather and also even though we don’t guide in our order book, but I can’t say that things have changed or the tide has turned, but we do see signs of that things are flattening out. So that’s kind of one answer to it, why we believe that the second half will be better from a demand point of view than the first half.
But then it’s also mathematics. We are reaching the tail as we go into Q3 and Q4 when last year when we start to see the negative volume drops or the softer demand and of course, the comparison will be somewhat easier as we come into Q2, sorry, Q3 and Q4 this year. So I kind of some signs of flattening it out. I don’t dare to predict when it will turn, but clearly some signs that it’s encouraging and then mathematics, I guess, is the answer to your question.
Max Yates
Okay, and then maybe just a sort of longer term follow up. If we look at your sort of sales, they’re around kind of maybe SEK100 billion this year, you’ve got a 14% margin target. So kind of SEK14 billion of EBIT. I guess what I’m curious is, we’ve had a lot of moving parts around kind of cash flow in the last couple of years, kind of supply chains now moving kind of down inventories. Do you have in mind a kind of sustainable free cash flow number kind of on those SEK100 billion sec of sales that you think is achievable for the business in a more normalized environment when we’re doing 14% margins? Thank you.
Sophie Arnius
Niclas, this is a question for you.
Niclas Rosenlew
Thanks. Well, won’t give you an exact number. Of course, this is something where we have a clear view on where we want it to be and need to be and again, it’s a bit back to what we’ve said before, 14% margin, that’s a hard coded target and there we have line of sight, how to get there in not too distant of a future without saying an exact date or year. It’s a long term target.
And then on the networking capital side, we do have a long term target of this 25% of sales and now being at this 30%, 31%, there’s quite a way to go still to 25%, but it will take time, that’s pretty clear, but hopefully that gives you an idea of what the cash flow potential could be of the company long term.
Sophie Arnius
Thank you. We will continue with a question here from the webcast and it is from Mattias Holmberg, DNB Markets. And also a financial touch to this one.
Mattias Holmberg
What drove the inventory increase quarter-on-quarter and have you had a fixed cost over absorption effect boosting the margin in the quarter? Niclas.
Niclas Rosenlew
So inventory, as you saw in the large, bigger scale of things, inventory was quite flat in the quarter, slightly up, that’s correct, Mattias and this was mainly a valuation topic. So what drove that small uptick was valuation driven while the real kind of volume of stuff was pretty much flat. And then on this under over-absorption, we had a negative effect from absorption, roughly SEK400 (ph).
Sophie Arnius
And continuing on that theme when it comes to inventories, but more across the value chain, and this is a question from Daniela Costa at Goldman Sachs. So Niclas, inventories across the value chain, any comments to that?
Niclas Rosenlew
No, I think pretty much the same as we’ve seen before and discussed before. So if we think about our customer go-to-market, we don’t see — we see distribution inventory levels being pretty normal and then on the OEM side, there are pockets of destocking. As we mentioned, in the US it continues and most likely elsewhere as well. And, we see it on ourselves as well as we said, we still think we have to somewhat too high inventory levels, even if we’ve taken down inventories a lot in the last 12 months, we still have some way to go during this year and it’s for sure similar for some of our customers as well.
Sophie Arnius
Thank you, thank you Niclas and let’s move on to the telephone line here and we have a question from Rory Smith at UBS. Rory, please go ahead.
Rory Smith
Good morning, it’s Rory at UBS. Thanks for taking my questions. I’ve got two if I may. Just on the near term price mix, obviously in the quarter, you’ve called out high speed rail, aerospace, very strong wind, very weak. Is that the main — is that mix the main driver? Or obviously that is the main driver of price mix in the quarter, but how would you expect price mix to develop through the year? Just thinking about comps for wind in China coming back in in the second half, should we expect a sort of reasonably steady improvement? Or do you think there are some moving pieces to think about? I suppose it’s more of a qualitative question than a quantitative one, but just thinking about price mix through the balance of the year, that’s the first question, thank you.
Sophie Arnius
Niclas, you want to support Rory here.
Niclas Rosenlew
Sure, Rory. So yeah, we’ve had a good run with price mix over the last few quarters and so it was in Q1. On the pricing side, which I guess isn’t exactly your question, but anyway, on the pricing side of price mix, we continue — essentially continue selectively to increase prices, continue to work with value-based pricing and as Rickard just mentioned, this is a — it’s a big theme of the improvement work as well to do better pricing, more value-based pricing, capture the value we have or provide to our customers and that work will continue.
Then when it comes to mix, it’s more, if price is a bit easier to predict what we are going to do, mix is of course a bit harder to predict exactly as you said. So which industry moves up, which moves down over the next year or so, but another theme that we continue to work on as part of portfolio management.
Rory Smith
That’s very helpful. Thank you and apologies for the badly worded question. That was exactly what I was looking for there and second question from me, please. Second question from me, just a sort of a longer term or a bigger picture question on China; you drew out the localization rate increasing over the last few years. Is there an upper bound to that number? Let’s not assume a 100%, but can it go much higher and if it can’t go very much higher, what are the sort of imported sales in China that you’d have to keep doing there? Is that a market or a product that would drive that? Thank you.
Sophie Arnius
Rickard, please.
Rickard Gustafson
Yeah, let me first try to put this in a broader perspective. Yes, we are on a journey trying to drive regionalization to the extent possible in order to create more resilience and actually safeguard our business for disturbances in global supply chains and China here, as we mentioned, we have come a rather long way. I think there is still a bit more to do. We will never get to your point. You’re absolutely right. It will never be a 100%, but maybe creep up a little bit further, kind of a 75-ish, 80-ish percentage, something like that. It’s not a fixed number as such, but maybe something at least gives you a reference point.
And in terms of how to get there, I think that over the last few years, we have done some rather significant investments in China. I think we have the capacity now in place to start to ramp that up in phase with how demand develops to get to such a level. So I don’t see that we need continue massive investments to get to where we want to be in China. I think the foundation is in place. It’s all about how quickly we will then ramp it up and to support the market demand as it evolves.
In terms of product assortment, I won’t go into those details, but clearly, there are some kind of — some part of our assortment where you have rather low volumes on an annual basis and it makes no economical sense to spread that across the world. You probably need to have a centralized operations for economies and scapes and so forth. But for the majority of our assortment and the high volume products, our aim is to regionalize them to the extent possible.
Sophie Arnius
And the next question, thank you, Rory. We have the next question here from Anders Roslund at Pareto, Anders, please go ahead.
Anders Roslund
Yeah, very short one. What did you say about the mix, the negative effect of under-absorption? I didn’t really understand. Did you say that it was minus SEK400 million or did I misunderstood it?
Sophie Arnius
So Niclas, do you want to clarify here?
Niclas Rosenlew
Yeah. So on the EBIT, the effect of lower volumes in terms of under-absorption, SEK400 negative.
Anders Roslund
Yeah, that’s far bigger level than previously. So yeah, okay.
Niclas Rosenlew
Yeah, but as you know, 7% sales down and fixed costs and we haven’t had negative 7% in the prior quarters.
Anders Roslund
Yeah, but that means that you have taken down production. The under-absorption should come from that you have lower production than sales.
Niclas Rosenlew
We can maybe better to take that offline as it’s a relatively technical discussion.
Anders Roslund
Okay, thanks. That’s all for me.
Sophie Arnius
And it’s sort of say not the effect of inventory change is more about the lower manufacturing levels here. But Anders, if you have further questions, please give us a call here. We will continue with questions here from the phone line. And it’s Max Yates at Morgan Stanley that is next up here. So Max, please go ahead.
Max Yates
Thank you. Could you just give us the year-over-year price impact in the quarter? So you did minus seven organic. What was the contribution of price in the quarter?
Niclas Rosenlew
The price mix in total was positive. As I said, we won’t give an exact number. We’re well aware we gave it previously, but it was a different environment. So now we stick to price mix being positive and price within that price mix, as I mentioned, also being positive.
Max Yates
Okay, maybe just sort of qualitatively, did you still put up prices in Q1 versus sort of Q4? Are you still putting through price rises?
Niclas Rosenlew
Yes, yes. So very much as discussed before, we continue to work with pricing, meaning we continue to increase prices. Of course, there might be an exception somewhere, but the general direction is increasing prices and as I mentioned earlier here, this is a key theme also going forward to work with pricing and also increase prices.
Max Yates
Okay, and maybe just sort of another quick follow up. Just when we think about, I’ve seen in other companies that we look at, there was obviously quite a substantial kind of working day impact this quarter, particularly in March. Could you maybe just talk through just in terms of sort of sequential development when you think about kind of Europe and the Americas? Did you really see kind of when you look in the business, talk to your people, any real fundamental change sequentially, because obviously when we look at these year-over-year growth rates, I know it can be skewed by working days and things like that. How would you sort of characterize a sequential development in Europe and the Americas?
Sophie Arnius
Yeah, do you want to take this?
Rickard Gustafson
Well, on very high level, of course, exactly as you said, there was some impact of Easter in the quarter. Year-over-year, the number of days wasn’t that different. You could see it clearly in the March performance, but we don’t publish the March in itself. So some impact and small part of the reason for negative seven being explained by this year-over-year, but nothing too big.
Max Yates
Okay, could I just squeeze in one more, Rickard, sorry, on your portfolio comments. When you talked about sort of nothing to report, I just want to really understand kind of what is in the scope of your consideration and I guess kind of very bluntly, what I’d like to ask is the automotive division as an entirety, you talked about getting this to sort of 8% margins, you’ve done a very healthy kind of 6% margin. Would you say that within the scope of your kind of thinking, your review, you’re looking at not just pruning, but also the kind of wider, I guess, sense of having those two divisions together?
Rickard Gustafson
Right, I may disappoint you on my answer and the level of depth in my answer, but if I go back to automotive, but in general, as I said, I’m not going to pinpoint any particular area and my message was that, yes, we are looking into different parts of our portfolio to see are there potential strategic moves that we should do to maybe shift something out and replace that with something else. So that is the work that is constantly ongoing. And once we have something exciting to report, you will be the first to know, or the market will be the first to know, of course.
Regarding on automotive, as I said before, we are working hard to create an autonomous automotive business within SKF. Automotive is very entangled and integrated in the way we operate. We share factories, we share R&D, we share AIP, we share to some extent, commercial resources. So that work is ongoing.
We have no decision to split those entities. So automotive is an integrated and vital part of our business, but we are working on how do we create a more autonomous automotive division to create what I said a few years ago, what I call strategic flexibility. You never know what the future will entail and it’s always good to have options to maneuver and maybe we’ll have a different answer tomorrow, but today that’s the answer you’re going to get.
Max Yates
Okay, that’s very helpful. Thank you, Rickard.
Sophie Arnius
Thank you, Max. And we move on to the next question and it comes from the line of Klas Bergelind at Citi. Please go ahead.
Klas Bergelind
Thank you, Sophie. Klas at Citi. So I was late on the call, too much going on. You might have answered some of this, but I just want to come back to the manufacturing impact and sorry to label the point, Niclas. I checked in with IR this morning about the pure impact from manufacturing inventory about the negative SEK400 million. That however, seems to be linked to the lower utilization, the volume effect, not the absorption from production, the cost absorption accounting.
So look at the inventory. It looks like you were building inventory and more than last year. That in itself should boost EBIT. Did the inventory boost EBIT? That was my question, really. I’m sorry if I wasn’t clear before with IR. Apologies. Thank you.
Niclas Rosenlew
No, no. Sorry, I probably…
Sophie Arnius
Please clarify now.
Niclas Rosenlew
Yes, thank you. Sorry, I probably haven’t been clear enough. And if there are further discussions on this topic, please let’s take it offline, but I’ll make an attempt. So we had less sales. We had lower volumes year-over-year in Q1. And of course that led to an under absorption as we had fixed costs and less activity and that’s the SEK400 million I referred to in EBIT impact.
Then when it comes to inventories, this year on Q1, we actually, as you can see in our accounts, it increased slightly, but again, very slightly considering the base number and that slight increase was mostly related to valuation of inventory rather than, increasing the kind of hard stuff on the shelves. So without that valuation impact, pretty much the same level.
Klas Bergelind
Thank you. No, that’s much clearer. Thank you for that. So I have one more. My second one is on the cost element of the SEK550 billion in the bridge. Niclas, can you please confirm that this was largely the components energy improving rather that you are ahead on world-class manufacturing or that, we know that OpEx is already run rating SEK2 billion, right? So that shouldn’t come in higher, but on the world-class manufacturing, was that greater than you thought, or is it tracking broadly in line? Thank you.
Niclas Rosenlew
No, I would say — exactly as you say, tracking — world-class manufacturing, tracking broadly in line with plans and exactly as you said, we had a tailwind from component materials. So that was on a lower level than last year, the cost. Same goes for energy, although it’s a much smaller category. So it doesn’t matter that much and then also on logistics, slightly positive high, low cost compared to last year.
Then on the other hand, personnel costs, which is the second biggest kind of cost bucket. We had a slight negative, so slightly higher cost than last year and within that personnel costs, we had salary inflation pushing costs up, but then the efficiency program that we concluded in December last year, helping things. So taking costs down when it comes to personnel costs.
Klas Bergelind
Thank you. My third and very quick final one is around price mix and I totally get it. You’re not going to give the exact number now. I appreciate that. I’m just going to ask about from a seasonality point of view, when we look at USPPI, bearing state, etcetera, it seems to be improving at the beginning of the year. Yes, basically very high level. Do we have some sort of seasonality impact or that you typically get a little bit better pricing start of the year than end of the year? That’s my only question on that. And apologies, yeah, that’s annoying.
Sophie Arnius
Do you want to continue here?
Niclas Rosenlew
And the short answer class is no. So no particular seasonality in pricing. That’s more of a constant job we do over the year and over years.
Sophie Arnius
Thank you. And if, let me just remind you on how to ask a question. (Operator instructions) We will continue with a question here from the phone line and it comes from Andreas Koski at BNP Paribas. Andreas, please go ahead.
Andreas Koski
Thank you and good morning. I hope you can hear me. I want to ask about the organic growth in the quarter. It was minus 7%, quite significant step down from the minus 2% in the fourth quarter. And I also understand that you won’t give us an exact price mix component, but would you say that the delta from the minus 2% to the minus 7% is mainly explained by a lower price mix component and that the volumes in the quarter was still down only single digit numbers? Thank you.
Sophie Arnius
Let’s, Niclas, do you want to try to sort this out?
Niclas Rosenlew
Yeah. There’s different ways to try to get to price mix, but no, we had, and again, now I refer to year-over-year. So minus 7%, now in Q1, as you said, a smaller minus number in Q4 and we had from a volume perspective, more negative impact in Q1. So meaning that it wasn’t only price mix that skewed the numbers in itself.
Andreas Koski
Okay. So volumes were down, say around five single digit or even low teams in the quarter, it sounds like.
Rickard Gustafson
We won’t, no, we won’t give the exact number, but you get the rough idea. So positive price mix, minus 7% in organic.
Andreas Koski
Understood. And then the second question is on your — that same manufacturing footprint programs, all the restructuring you are doing. We had another restructuring cost of around SEK200 million second this quarter. I think over the past four years, restructuring costs have averaged around or more than SEK200 million a quarter, corresponding to around 10% of your adjusted EBIT. Maybe if you can just — what are you spending all those money on? Is that laying off people or closing down factories or what are all those restructuring costs going to and how long will those restructuring costs continue? Thank you.
Rickard Gustafson
Right. I’m going to give it a try. If we start by looking into this quarter, it’s primarily related to the ongoing transformation that we have embarked upon. Please recall that we have announced that we are about to close down our factories in Luton in the UK. We have announced that we are closing down a factory in South Korea. We have announced that we are restructuring some of our activities in Germany, in Schweinfurt. Clearly that’s the majority of the one offs that you see in this quarter and that relates to costs for, unfortunately reduced headcount and other costs in terms of transforming, moving equipment and so forth.
So that’s the majority. And that has been the case also in the last few years and we have set that we are on a journey for the kind of world-class manufacturing program that was referred to before that we say, believe it’s fairly on track and that is due to be completed sometime during 2025. So through that period, I think you should expect us to continue at this level.
Andreas Koski
Understood. And then lastly, maybe on the America’s organic decline of around 10%, do you see that distributors are still doing a lot of destocking or is that coming to an end, you think? Thank you.
Rickard Gustafson
I’m actually rather pleased to report when it comes to destocking, that has primarily been visible in our OEM part of the business and not so much on distribution and that is also the case in this quarter. So, and that’s a positive for us.
Sophie Arnius
Thank you, Andreas. And we continue with a question from Daniel Kinliff (ph) at Bernstein. Daniel, please go ahead.
UnidentifiedAnalyst
Hello, thanks for the question. Just really a follow up on these one-off charges, which we understand they’re restructuring. Just want to look at the impairment charges. I think it’s just under SEK100 million or so. Could you just give us a colour of where we should think about that going forward, because if I look at the impairment one-off costs for the last 10 years, I think those one-off costs average about SEK250 million a year. So obviously SEK100 million for this quarter would seem at the higher end of that. So just give us a flavour of those, just given the one-off costs as the higher end of the 10-year average, what should we think about that? And any colour would be really helpful for the remainder of the year on the impairment costs.
Sophie Arnius
Niclas, I think this is a CFO question.
Niclas Rosenlew
Sure about that. But anyway, when it comes to, if we talk about one-off or IAC in total, for us, as Ric had mentioned, it mostly relates to the manufacturing transformation. And with some exceptions, and for instance, last year, as you know, we had this, call it white-collar reduction programme, efficiency programme. So then it was more broad than just manufacturing, but looking over time, it’s mostly related to manufacturing. And Ric had mentioned some of these initiatives in South Korea, Busan, in Luton, UK, where we close down production and then ramp it up elsewhere. And within IAC, what you see most often, for instance, in the quarterly numbers, is headcount related, so redundancy costs.
UnidentifiedAnalyst
So should we assume that the run rate for the rest of the year will be at the upper end of the five-year or 10-year average restructuring cost?
Rickard Gustafson
Yes. Just sort of a view on. Yeah, so just to give you some sense and an idea, last year we had unusually high because of the programme. So this year, most likely, or it will be less than that, but then again, it very much depends on the timing of, for instance, bigger restructuring. Does it fall into Q4, Q1? But anyway, just to give you an idea, less than last year.
UnidentifiedAnalyst
Less than last year. Okay, perfect. Thank you very much.
Sophie Arnius
Thank you, Daniel. And we have time for one final question and it is a follow-up then from Andy Wilson at JPMorgan. Please, Andy.
Andrew Wilson
Hi, thanks so much for squeezing me in. I’ve got two, hopefully they’re both very quick. Just on the cost development that you outlined for Q1, would you expect a similar picture in terms of the Q2? I appreciate, obviously, that can change, but in terms of the visibility you have on savings coming through and I guess the visibility on where your cost lines are kind of running, should we expect a similar picture in Q2? And I guess secondly, and apologies if this is either too technical or I’ve misunderstood, but is there any EBIT impact from the revaluation of the inventory in the Q1?
Sophie Arnius
I think, Niclas, it’s your name on these two questions.
Niclas Rosenlew
Okay, thanks. Thanks, Andy. So on the second one, no, and we can look into that offline if needed. On the first one, no, we don’t give margin guidance on Q2 in particular, but more broadly speaking, when we think about our cost categories, cost components, materials has been gradually coming down. Energy is a bit more choppy and then logistics also because everything happening in the world, a bit more unpredictable, but maybe directionally everything else equal, kind of see some continuation of the past patterns.
Then personnel costs is there we have some seasonality where 01 of April new salaries kick in in some European countries, for instance, where we have relatively large number of people. So in that sense, there’s a step up from an inflation perspective. On the other hand, then the efficiency program that we referred to should of course continue to show effect. So it’s a bit of a mixed picture.
Andrew Wilson
Thanks, Niclas, very helpful as always, appreciate it.
Sophie Arnius
Thank you, Andy. And thanks for all of you that have asked question here to us today. Let’s wrap up this call. And Rickard, do you want to say some concluding remarks here?
Rickard Gustafson
Yes, please. And again, thank you for your attention and for your insightful questions. I am pleased that we are building a more competitive and resilient SKF. And I’m encouraged about our ability to maintain and actually even improve margins in a rather soft demand environment, but even more importantly, we are staying firm of our strategic transformation. We are investing in our future. We are creating a more innovation spirit in the company, bringing new exciting products and services into the market and we are gearing up for proper growth once demand bounces back again.
So I really like to take this opportunity also to thank all my colleagues across our global footprint for all their contributions and hard work. It’s truly appreciated and we will continue on this journey that we embarked upon. So with this, I thank you so much for your attention and I wish you all a wonderful day and a great weekend once you get to it. Thank you.
