AB SKF (publ)

Good morning and welcome to this conference call on the second quarter results. As usual, we'll use the chat function for the Q&A session that will follow after the presentation. You can start posting your questions already now and we'll answer them in due course. Today is also the first time I will welcome our new CEO, Rikard Gustavsson, to the quarterly presentation. Rikard will start the presentation and after that Niklas Rosenlev, our CFO, will continue. So with that brief introduction, welcome again, and I'll leave the word to Rickard, please.

Thank you very much, Patrick. I'm very pleased to report that SKF has performed well in the second quarter. We have delivered a record-strong operating profit, and we're making solid progress on our efforts to consolidate, automate, and regionalize our manufacturing footprint. Demand is currently very strong, and organic sales grew by 33% in the quarter. taking us back to pre-COVID levels. Net sales in the quarter reached 20.7 billion Swedish krona, up from 16.5 billion last year. Industrial sales grew organically by 22%, and automotive sales grew by a full 76%. The second quarter saw a record adjusted operating profit of 3.1 billion Swedish krona, and a strong adjusted operating margin of 15%. The result was especially impressive given continued headwinds in the form of negative currency impact and rising input costs. Through effective mitigating actions, we have been able to compensate for approximately 50% of this cost inflation. We have done well to serve our customers under these circumstances. and we are doing our outmost to capture additional growth opportunities. Cash flow generation in the quarter was just north of 500 million Swedish krona, a significant improvement compared to last year as well as the last quarter. All in all, a really strong set of results which we are pleased with. When looking at the development across our main markets, you can see that EMEA is still our largest market, representing some 44% of sales, followed by Asia Pacific at about 30% and North America at about 20% of sales. During the second quarter, we have seen a very strong rebound of demand and we are all working diligently to meet our customers' expectations. All regions saw double-digit organic growth, although from an extraordinarily low comparison in Q2 last year. With that said, organic sales in Asia and Latin America are now at level above what we saw before the pandemic hit. As mentioned, we are constrained by tight supply chains and a lot of efforts and hard work have been done throughout the entire organization to serve our customers. What all our regions have in common is the shared belief and focus on our ability to capture even more growth. Taking a deeper look at our two segments, starting with industrial, which you are aware represent about 75% of our sales and 85% of our profits. Industrial demand is currently very strong. Organic sales grew by 22% in the second quarter and net sales reached almost 15 billion Swedish kronor. Demand in Asia-Pacific was especially strong within off-highway distribution and industrial drives. In EMEA, we note the strongest momentum in the off-highway, energy and industrial distribution businesses. In North America, heavy industries, off-highway and distribution have been significant growth drivers for the accelerated demand. And finally, in Latin America, Demand has been very strong in energy, industrial drives, off-highway and distribution. From a results point of view, the industrial business delivered another strong quarter with a record high operating margin of 18% compared to 40% last year. Turning to the automotive business, the second quarter has seen exceptional growth compared to Q2 last year. Organic sales grew by 76% in the second quarter, and net sales reached almost 6 billion Swedish krona. However, we are still a few percentage points below the 2019 levels. Some of our automotive customers have been affected by component shortages and have been forced to make production adjustments. These have also had an impact on our inventory levels, which Niklas will tell you more about shortly. We have continued to support our customers to the best of our ability and we show continued good performance with an operating margin of 7.6%, a significant improvement compared to the negative 7.6% of last year. In the second quarter, we have seen strong growth in demand for both cars, commercial vehicles and spare parts across all regions. As you know, We are well positioned within the electrical vehicles and work with many of the leading OEMs in most regions. We have secured another couple of really interesting contracts in the last weeks, both in North America. One for full electric passenger SUV and another for a commercial truck that is being developed. While maintaining our high pace of investments and investments, consolidation of our manufacturing footprint. Since 2019, we have permanently closed six manufacturing units and are currently in the process of closing an additional 11. Some of these initiatives regretfully have a negative impact on some of our employees, but are absolutely necessary to align our manufacturing footprint with customer demand to increase automation and secure growth opportunities. Investments in our factories are expected to reach 3.8 billion Swedish krona for the full year, some 200 million higher than our previous guidance. These investments make us more flexible and efficient, as well as being an important foundation for winning more business from customers in fast-growing segments and regions. So far, These investments and consolidation efforts have realized 1.1 billion Swedish krona of the 5 billion in annual savings we expect to generate by the end of 2025. We are moving towards a more sustainable future, and we already have an ambitious net zero CO2 emission target for our own operations by 2030. By also committing to the science-based target initiative, we are now taking steps to further increase our ambition and transparency levels throughout our supply chain. This will ensure that our efforts are fully aligned with the ambitions of the Paris Agreement. Sustainability isn't just doing the right thing. It's also a great business opportunity for us and which we will continue to invest in both from a product and industry segment point of view. As you can see on this chart, we have seen strong increase in our cleantech revenues during the last couple of years. It now represents sales of more than 7 billion Swedish kronor annually, an increase of 78% since 2018. This includes revenues from the renewable energy, electric vehicles and bearing remanufacturing, one of the many services that we offer to help to reduce CO2 emissions. This is a real excellent growth driver going forward and one which we'll continue to invest in. With this, I'd like to hand back to Niklas for a deep dive in our numbers, and then I will come back with some further comments at the end of this presentation. So, Niklas, over to you.

Thank you, Richard. If we turn to the next page, I'll take you through the details of our financials. So as Rickard mentioned, we had a strong demand for our products and our services in Q2. If you look at this sequentially, our organic sales continue to improve with consistent and good progress in recent quarters. Compared to last year, our net sales increased by 24.9% in the quarter. Our organic sales increased by 33.2% compared to last year. So as you can see, the currency effect on sales continued to be substantial at negative 8.3% in the quarter, with the largest effect coming from the dollar, the euro, the renminbi, the Indian rupee, and the Russian ruble. In Q2, we continued to experience cost inflation on both components and on transports. We also had a significant currency headwind. Despite that, our adjusted operating profit was record high at 3,118 million, corresponding to a margin of 15%. We are investing in innovation, improving our competitiveness, continue our push within sustainability, and we are adapting our operations and our ways of working. This has continued to deliver good results. So in sum, The second quarter was strong and we continued to transform our business. So in Q2, we had record high profits despite a challenging supply chain situation. And let's go through this step by step in the form of the profit bridge. Firstly, the currency impact was strongly negative at 586 million compared to last year. We also saw continued headwinds from increased prices on materials, components, and logistics, and this amounted to 718 million compared to Q2 last year. Of the total 718 million, a bit less than half was mixed-driven, while then the rest was inflation. On the other hand, our organic sales and manufacturing volumes contributed with a positive 2,824 million. Within organic sales and volumes, both price and mix were positive. In the quarter, price mix did offset roughly half of the higher material and logistics costs. Cost development continued to be good. and costs were 33 million lower than last year. To sum up, despite headwinds from currency and increased material and logistics costs, our operating profit improved to a record high 3,118 million with a 15% margin. We generated a cash flow of 509 million SEC in the quarter compared to negative 854 million last year, excluding acquisitions and divestments. The cash flow for the last 12 months is 4.5 billion. A key driver to the stronger cash flow is the improved operating profit. partly offset by continued build-up of working capital in the quarter, primarily coming from higher inventories. The reason for the higher inventories is due to the strong demand and expected growth also going forward. The other reason for the higher inventories is the volatile supply chain environment. So for instance, in automotive, some of our customers did not take deliveries because of shutdowns or lack of other components. Networking capital in percent of annual sales was 30.7 in the second quarter compared to 30.0 last year. The ratio was negatively affected by exchange rate fluctuations, In fixed currencies, on the other hand, networking capital to sales improved by about one percentage point compared to last year. Return on capital employed continues to improve and was 15.4% for the last 12 months, this being good progress towards our target of 16%. We continue to have a strong balance sheet and solid liquidity. Net financial net debt amounted to 4 billion, and the net debt to equity ratio excluding pensions was 16.8 at the end of the quarter. The sequential tick-up is seasonal, and this is due to the dividend payment in the second quarter. And with that, I hand back to you, Rikard.

Thank you, Niklas. To me, Being the newcomer to this organization, the record high operating results for the quarter is a clear proof point on SKF's ability to drive efficiency and effectiveness in a volatile and demanding market environment. As I mentioned, I've been here now for roughly one month, and it's clear to me that SKF has some significant strengths and competitive advantages. What I've seen so far is a group of very, very dedicated and skilled people We have unparalleled engineering skills and capabilities. Throughout the organization, there is a true innovative spirit. We have a very strong market position and earned a lot of trust among our customers, suppliers, and partners. And also, in this rather challenging market environment, I've seen a true desire to always deliver on our customer promises. Going forward, we need to build on these capabilities to drive additional profitable growth. I think there are a number of levers that we can leverage. We need to further engage with our customers across the entire value chain. There are numerous examples that when we do that, we do win. We will continue with selective investments in additional capacity and further drive automation in our production units. We should leverage our natural fit in supporting the growing cleantech industries. We need to continue to industrialize and scale our ongoing innovation and services initiatives that has an enormous potential if we get it right. And we can further enhance our overall leadership capabilities to truly realize the full potential of the greater SKF. To me, SKF rests on a fantastic platform that can fuel future growth. I'm thrilled and eager to embark on this exciting journey that lies ahead of us. In the near term, though, demand is expected to remain strong, but I need to point out that we still have some uncertainties related to the ongoing pandemic and, of course, a continued constrained supply chain situation. For the third quarter, We expect an organic growth rate of around 10% compared to the same quarter last year. Before I wrap up and hand over to Patrick for the Q&A, I just want to reflect on one other thing that relates to the ongoing pandemic. It is the Goja Cup. Normally, you know that we host the world's largest football tournament every summer. But again, this summer, it's been canceled. as it was last year due, of course, to the ongoing pandemic. And, of course, that is extremely regretful, as it's such a joy to be part of something that makes young people come together, engage through sports, and further grow and develop as individuals. And I hope that we can get back to this as quickly as possible. Hopefully, already next year, we can welcome teams from across the globe to the football fields here in Gothenburg. But we will not leave you without some additional sports comments. Referring to the illustration on this slide, SKF will present also on these big sports arenas this summer. The guy on this slide, his name is Oskie. He's a two-time skateboard world champion, and he's representing Sweden in the Tokyo Olympic Games. And he is, of course, an SGF user. As you know, bearings, they come in different sizes. And seeing some of the smallest ones in action in Tokyo is something I truly look forward to. So with that said, over to you, Patrick, and the Q&A session.

Thank you, Richard and Niklas, for the initial presentation. Now we'll move over to the Q&A session. And the first question from several of you relates to the demand. So, Rikard, how did demand develop during the quarter?

Well, as we described, it's been very strong throughout the quarter in all parts of our business. In totality, net sales grow by 33% to 20.7 billion Swedish krona. within our industrial segment, it grew by 22%. Our automotive segment grew by 76%. And if we then break it down by the regions, Asia Pacific, 19% up. EMEA, 40% up. Latin America, 91% up. And North America, 27% up. So all in all, a significant increase in demand throughout the quarter.

Thank you. Moving over to the second question comes from RiskMighty at Jefferies. It's actually two questions. First one, I would point to Rikard. Can you talk about your early impressions on SKF and what your priorities will be?

Of course, I'd be happy to. And as I tried to also say in my initial remarks, What I've experienced since I walked into this office and to this organization is I met an organization with two skills, significant engineering capabilities, a company that really had a strong foundation in the market, built a lot of trust among customers, suppliers, and others, especially also during this quarter where we have seen some constraints in terms of logistics and supply. So all of that is really, really good and a great foundation to continue to build upon. I believe that there is more that can be done to fuel further profitable growth. And also, as I tried to describe in my remarks, there are a few levers that I believe are relevant to emphasis and focus even further on. One being our natural fit for the fast-growing clean tech industries. By definition, we were originated or we were founded on an idea to actually eliminate and create efficiency, energy efficiency. And that's what we need to continue to embark upon and support our customers in that journey. I think there are significant growth opportunities there. We have a lot of innovation ongoing in this organization. It's up to us. to really capitalize on those and make them scalable. I think that's another area that we're going to focus quite a lot over the next few months and years. And then to me, we will define and develop our strategies, but strategies are not worth much if you don't have an organization that is fully behind it and that you can unlock the full potential of your organization. So I'm going to also spend a lot of emphasis and time on really understanding the leadership culture of this company, seeing how we can further strengthen and develop our leaders to really make sure that we get the full potential of this business. So I'm excited to be part of this, and I believe that there are, you know, a good foundation that has been built over the years in SKF that we can build upon to further fuel profitable growth.

Thank you. A second question from RISC I would direct to you, Niklas. It relates to China. Can you talk or elaborate a little bit on what you're seeing currently in China? Any indication of demand slowing down in the country?

Sure. So, as Rico just mentioned, in Asia overall we had a 19% year-on-year growth. And, of course, China is a significant part of Asia. specifically when it comes to our Asia business, specifically what comes to China. Of course, the comparison point is stronger in China. So China came out of the downturn earlier, so already in Q2 last year. Of course, we do see lower growth rates, year-on-year growth rates when it comes to China. But overall, I mean, we see a strong business in China and also expect China to be good going forward despite year-on-year growth rates being lower.

Thank you. Moving on to Bank of America and Maddy. A question on automotive. Why were adjusted auto margins lower quarter on quarter despite such strong organic growth? What kind of impact did raw material pricing have on margins, especially in auto segment? What other challenges are you seeing in the supply chain?

Maybe if I comment on automotive and comments on supply chain in general, So, I mean, we had a 7.6% margin in Q2 in automotive, which is a clear uptick compared to kind of the historic automotive margins. And automotive clearly was affected by the price or cost increases. And I think in general, there is a slowness in price increases, or let's say relative slowness in price increases in in automotive, so it takes longer to get to some sort of parity there. But clearly automotive was impacted by the supply chain challenges and also higher input material costs.

Yeah, and if I, in general, on the supply chain and also related to some extent to automotive, As you also heard in our initial remarks, a number of our automotive customers, they struggle with the components and therefore, on a very short notice, maybe do not take their orders or even cancel orders, which of course is impacting our profitability in our automotive segment. The supply chain challenge is for real. I must say that the team here has worked extremely hard during this quarter to manage this with the true desire to constantly serve our customers to the best of our ability. And I think that's going to be a key theme also as we move into Q3, to navigate in this environment where supply chain and logistic chains will be difficult or constrained.

Another question on demand, a little bit more detail. How did the demand differ between different industries or customers in the second quarter?

Well, as I've described, we saw a strong increase and rebounds in demand across our geographies and also in our two segments, both in industrial and automotive sectors. We also tried to highlight some of the key growth drivers. Of course, automotive comes from a very weak comparison point in Q2 last year, where especially European automotive customers to ours were made based on the standstill. Of course, that's a significant rebound. In other parts, we see significant growth in renewable energy. We see growth in off-highway. We see growth in agriculture. We see also growth in distributors among our industrial distributors. So it's a broad theme and a general good demand growth across industries and across geographies.

The follow-up to that is how do you expect demand to develop in the second half of this year?

Well, first, I need to also state the obvious that there are some headwinds still out there that we need to manage through. that can impact the overall situation. The pandemic, as we all know, is far from over. We are still wrestling with this, and it's actually getting worse in some parts of the world at the moment. And as we already talked about a couple of times already with the supply situation, will also be a challenge as we move forward. But within that context, though, we do believe that the demand growth will continue. We foresee that it's going to be a strong development, again, in our main regions and also both in automotive and in our industrial segment. And altogether, our best estimate or our best outlook that we can provide at this stage is a net sales growth of around 10% for the third quarter compared to the same quarter last year.

Thank you. If we move over to a question from Societe Generale, again, addressing the supply chain. What was the impact from shortages in the quarter, and how do you see that impact in the coming quarters?

I think a bit referring to what Rickard just said, I mean, we have seen a significantly constrained supply chain in general, and This is everything from logistics, transport to a lot of input goods. On supply or chip shortages specifically, we have not seen that being a big issue for us as such. Of course, we are fully aware that some of our customers have been impacted, so there's been an indirect impact on us as well. But I would kind of refer back to kind of the overall situation or challenge that we see in the supply chain all around the world rather than zooming in on chips in particular.

Thank you. Moving over to Goldman Sachs and Daniela Costa. A question on the recon oil. Can you update us on the recon oil progress since the launch externally in mid-March? How large do you think this business can be over the next five years? And secondly, do you think current industrial margins are sustainable? How much reversal will permanent savings from the 11 plant cuts more than offset that? We'll start there and there are a couple of more questions.

All right, I can take the first one, and maybe Niklas, you can take the second one then. On Rekond Oil, there's been an intensive work over the last three months, and there's been to really test out the technology to make sure that we have built capacity to scale our business going forward, and we have also installed the technology in some of our own operations with very, very positive indications of the benefits that we will derive from that. So it's a lot of hard work at the moment to really position Raycon Oil for a scalable business over the next few years. At this stage, we do not give the guidance of how large we think this business can be, but it's definitely still high on our agenda and we work intensively to secure the technology and scale our offering. and bring it to the market as soon as possible.

And then, hi, Daniela, on the margin sustainability. I think in general, as you've seen over the last couple of years, the teams have worked quite hard on making the business more efficient and essentially increasing the margin levels sustainably. And that's what you've, or we've all seen, we've seen not just in Q2, but over a number of quarters now. Of course, we don't predict margins going forward as such, but it's been a key theme to actually bring up our margin levels, and that's what we've seen now recently. Specifically on industrial business margins, Again, I don't want to comment on those, but there is the generic theme of a lot of work having gone into this, a lot of efficiencies that we start to see in our margins, both industrial and in automotive. And we do expect that to continue, that theme. And there's still a lot more we are working on. And then on the reversal of temporary savings, I think the, I mean, if you look back at last year, we had roughly one billion of savings into two last year, and we said that half of that was temporary, half was permanent. As you can see now, I mean, the permanent savings are coming through, and they are real, and they are permanent. What comes to the temporary ones, a big chunk of those have actually come back. such as, you know, bonus accruals to some degree, salary increases. But, of course, we are yet not traveling very much or hardly at all, so that we expect to come back at some stage, maybe during second half. And then also kind of the timing of salary increases is such that we don't yet see the full effect of salary increases. So some of the so-called temporary ones are still to come through or be seen going forward.

Thank you. Moving over to Derenberg and Joel Spangen, a question that comes from several of you out there as well. Can you quantify if there was any margin impact from the inventory build in the quarter? Okay. Yes, I would say we have built some finished goods inventory in this quarter as opposed to the second quarter of last year when we actually reduced the inventories. So we do have some tailwind when it comes to margins this year. In the year-over-year bridge, I would say the effect is around 170 million on operating profit. Then moving over to J.P. Morgan and Andrew Wilson. Good morning. Can I please ask, is the step up on the investments or CapEx this year indicative of higher spend levels in the future years, or is this a timing difference pulling forward some spend?

Maybe I can start, and then, Niklas, you can second me on this one. I think you should see this as an indication that we are – ready to go after growth opportunities where we see them to really align our investments and build our footprint according to where our customers are and to really support them and that we are determined to continue the automation effort of this business to drive efficiency and cost effectiveness going forward So the step up here is actually part of the plan, and we have also seen additional growth opportunities that we're eager to go after. That's why we also have increased the pace somewhat this quarter versus what we had in the first quarter of this year.

Thank you. Moving over to the second question from Andy. It relates to the bridge and the cost items. So could you please outline some of the bridge considerations for the third quarter, such as the cost development, savings versus inflation, price mix, and raw materials over logistics, please? Any detail is appreciated.

Yeah. Hi, Andy. So we do expect cost inflation to continue to have a negative effect also in Q3 and going forward. As you know, we are working quite hard on mitigating actions. We saw some of those mitigating actions coming through in Q2, and we actually expect that to continue and actually more mitigating actions to come through in Q3. So it's a combination of both continuous cost inflation, higher cost levels, but then mitigating actions. The reason why we think that the mitigating actions will have a somewhat bigger impact in Q3 is natural because when what comes to pricing towards our customers, there's always a delay, it takes some time to get through. And that's partially the reason why in Q2 we didn't see a full effect from the mitigating actions.

Thank you. Staying on the topic of pricing, but moving over to Olof at RBG. I apologize, I missed the first 10 minutes of the call, but could I ask how price increases are going? If you expect to be able to fully offset the raw material cost inflation through price increases during the second half of this year?

Well, I think we partially answered that on the previous question, but Olof, welcome to this conference or this call. What we said when you were not joining us is that we have experienced some rather significant headwinds in the quarter related to cost inflation. Cost is up around 700 million in the quarter. But through our mitigating actions, which is a mix of price initiatives and cost takeout, we've been able to mitigate approximately 50% of this cost increase in the quarter. And as you heard, Niklas mentioned just as we look into the second quarter, we will continue to work hard on these measures to ensure that we do whatever we can to offset the ongoing cost inflation. And the activities related to pricing, we believe, will have a somewhat more larger impact as we move into the second half of the year.

Okay. Thank you. A question from Andre at Credit Suisse. Two questions, really. One is related to the production level. So could you please tell us how your production level compared to sales in the second quarter, the first one?

Yeah. Hi, Andre. So we did build finished goods to some extent. So the production level was slightly higher than sales. Okay.

Second question relates to cash flow. So can you please talk through the key drivers of the cash flow development in the second quarter and provide some outlook for the second half of this year?

Sure. So on cash flow, of course, we had a strong positive impact from the profit, essentially. And then what pulled the cash flow down was the buildup of working capital and then If you tune in on working capital specifically, it's really about increasing inventories. And, you know, two main things worth mentioning there when it comes to build up or increasing inventories. One is that, of course, we do see significant demand. We've seen significant demand throughout the whole quarter. Given our guidance, you can also see that we expect demand continuing to be stronger and forward. So partially it was about securing future output, future deliveries to our customers. Then the second thing that increased our inventory levels now in Q2 was customer delivery. So essentially the constrained supply chains, especially in automotive, where customers, as Rickard mentioned earlier, essentially did not take deliveries, postpone deliveries in the last minute because of other reasons, production being run down or other components missing. So that meant that we were left with more inventory, you can say, than normally when it comes to automotive. So those are the two reasons. big kind of blocks driving up the inventories.

Thank you, Niklas. Moving back to sales, a question from Ben at Morgan Stanley. Hi, Patrick. On China, please could you clarify, are you seeing lower growth rates year over year, or are you seeing negative year over year growth in China?

For Q2, lower growth rates.

Thank you. And another question from Ben for Rickard. As a manager, how do you think about free cash flow? Is this an important performance metric in your view or not really?

Well, hi, Ben. The simple answer is yes, it is an important metric that we will continue to monitor and follow very, very closely.

Thank you. Moving over to Claes at Citi. So on the price mix, you say that around 50% of the cost increases were compensated for. What price mix roughly would that imply? Around 2%?

Hi, Klaus. So, yeah, I mean, roughly half of the 700 million in the bridge were compensated. Yeah, roughly around those numbers.

More medium to long-term question relate to, again, from Klaas. You say, like, lower growth and ROCI have been the key issues versus sector peers historically. Your M&A pipeline is stronger than what we've seen for years. Without saying too much, of course, where do you see the gaps for M&A going forward?

Well, I'll try to answer that one, Claes. And you're right. I'm not going to say too much on this one. But here I think you need to have some patience. For me coming in new into this business, I want to build a strong strategic platform and a holistic view on where should we, you know, invest. Where do we have the gaps either in terms of technology, in terms of market presence, or in terms of segments where I want to play? And I want to, you know, develop that roadmap before we articulate a more specific agenda for our M&A activities going forward. So, again, that's what I'm focusing on at the moment, trying to build a holistic view for our future M&A activities.

And swimming back into more details, again, from Claus, targeting pricing. After the pricing achieved this quarter, how much spot pricing versus OEM? And you said you are early in the price increases. When do you expect to compensate fully for the cost increases, assuming they stay at current levels?

Yeah. So, again, if we look at Q2 as a whole, we had a 15% margin. Of course, a lot of activities went in there to achieve that sort of a margin. Pricing is of course one component which we are working on diligently and hard, but it's only one of many components there. Specifically on pricing, what we've done, of course, you can say in general terms that distribution pricing is somewhat quicker to get an impact from essentially increase distribution pricing while OEM pricing takes longer. But we are absolutely working on all fronts and on both OEM pricing and distribution pricing.

Thank you, Niklas. Now leaving London for Stockholm, SEB and Eric Goldrang. Question about our guidance for CapEx. You raised guidance for 2020 and CapEx to 3.8 billion. How should we think about that for 2022 and 2023? That's the first question.

Well, we don't really guide on future CapEx levels. But as I said in the previous question, we do believe that we have the financial strength. to further invest when we see opportunities either to drive further automation or to really, you know, support sustainable and profitable growth. And we're going to do that when we see those opportunities.

Thank you. Second question relate to headcount. Headcount is creeping up a bit again. Of course, it's demand related, but when would you expect factory closures to start reducing that number again?

Yeah, if I comment on Q2 headcount specifically, it did, as you say, creep up a bit. It's primarily coming from manufacturing. So in that sense, you can say that it's volume related and related to the extremely strong demand that we have seen. And what comes to factory closures, Of course, we don't want to comment specifically on how it's going to go through, and that's something that we do in good cooperation with our employees and employee representatives. But as we commented on earlier, we are working diligently on this program. We have with around five closures announced every year. And then, of course, we do want to see them close as well. So that's a program that we are working through. And depending on whether it's a large production unit or a small production unit, then, of course, you do eventually see a downtick in numbers as they happen.

Okay. Thank you. Moving back to Bank of America and Maddy again. More long-term question or strategy question for Rickard. What is your initial view on the rotation as a service business model? Do you think it can be a long-term risk in terms of higher competition? Is there any changes needed in the general strategic priorities for the SKF group?

All right. I'm going to try to divide it into two sections here, starting with your question related to rotation as a service. I believe that this is an area that will continue to grow. It's a good way for us to really, you know, get close to our customers. When we create some of these contracts, it creates stickiness and loyalty to our customers. We are very close to our customers, and we are then an integrated part in their application development, which is, you know, a key benefit when we get there. And also, we get access to important data that we can use to learn and further, you know, fuel our own innovation as we move forward. So, all in all, I think, you know, the rotation as a service is an important element part of our offering going forward. However, though, we still have work to do to truly scale it. And I believe that some of the answers to do that lies in that we need to simplify it. We cannot sell too complicated and complex solutions. I think very few customers are comfortable in buying that. So some of it is really simplifying the model. I think we have seen some good success stories, especially in North America, when we've been able to do that. And another thing is, of course, that we need to continue to build our software capabilities or analytics capabilities to make this scalable. We got to make sure that we have algorithms and AI to really, you know, support a large-scale rollout of these services. So more work to be done, but I still think and I do believe there's some significant potential here if we get that, you know, business model right. Your second part of the question regarding general changes to the strategic direction of the company. Actually, I can't really answer that as of now. Yes, as I said on the M&A, I'm going to do a lot of work together with my team here to really digest and assess the group strategic direction and provide a holistic view on where we want to take this company and how to ensure that we get the full potential of the business model that we run. That work will take some time during fall and maybe into early winter. And once we have concluded that, I will be more than happy to share the outcome of that work. But you need to be a little bit more patient and give me some more time to really narrow this down into a comprehensive and robust strategic plan for the company going forward.

Thank you. Now, leaving the big picture, swimming into the very details, we've got a question from Max at Ecofin, relating to the timing of commodity prices. So, essentially, what is the timing lag of commodity prices to COGS in industrials? When would we see current spot levels reflected?

Yeah, hi, Max. Of course, it depends on what we talk about, but... Maybe as a very generic comment, you could say that two to three months is the kind of lag that can say that applies to our business.

Thank you. And that actually concludes the questions that we have received from you during the chat. So with that, we close the question and answer session.

I leave the world back to Rickard for some closing remarks perhaps and then we all wish you a good nice summer thank you very much and first and foremost thank you for joining us this morning and thank you for your also energizing questions that you have provided as we said as we in the other remarks we do present what we believe is a strong set of numbers today with a significant growth and a strong operating profit actually a record high operating profit we are you know pleased with that and we will work diligently to continue that journey as we move forward and trying to navigate also through those headwinds that are still out there related to forex exchange related to supply chain and of course the ongoing pandemic but thank you so much and i wish you all a fantastic summer