AB SKF (publ)

Thank you and good morning everyone and welcome to this SKF conference call on the first quarter results. As usual, we'll start with presentations by our CEO, Richard Gustafsson and our CFO, Niklas Rosenglev. After the presentation, we do look forward to answering all your questions. You could either choose to post your questions live on the phone or you could use the chat function as you prefer. The chat function is open already now if you want to. With that for a brief introduction, I will leave the word to Richard. So please,

there you go. Thank you very much and good morning ladies and gentlemen and welcome to this presentation and thank you for joining us this morning. Looking into the quarter, putting it in a context to start with, it's been a quarter that has been divided. We have seen some significant headwinds in our business. Some of those headwinds are of such a character that we wish we would never experience them. Of course, I'm referring to the awful situation and the war in Ukraine that also caused us to now exit our presence in Russia. We have seen a situation where cost inflation has continued to be on the rise. We have seen a very challenging logistics and supply chain situation. Most recently, we have also seen a complete lockdown of the important industrial region, Shanghai, in China. Of course, impacting our customers and thereby also impacting us. But in that context and to deliver the numbers that we are about to present to you today, I need to express my sincere gratitude and thank you to all of my colleagues in SKF that I think have managed in a fantastic way in really trying to navigate in these very difficult waters and still deliver these results and at the same time safeguard themselves, our customers and our business. But there has been a number of tailwinds in the quarter as well. First and foremost, we have seen a very strong demand across our geographies and across several industries, which of course is shown in the organic growth rate that we'll come back to shortly. We are pleased to see that we have been able to actually maintain and to some extent even further enhance our operating margin, especially within our industrial business, which is good news. And that in itself is also partly driven by our ability to drive price to compensate for the cost inflation that is hitting us. So both headwinds and tailwinds, when it comes to our strategic framework, I'm also pleased to announce that we feel that we have had good progress in the quarter in our Intellent and Clean Growth Framework. A number of those growth segments that we identified that's especially of interest to us, they all show great progress in the quarter and I will come back to that. When it comes to our service offering, we today announced what we think is an exciting new collaboration with Amazon Web Services that I also will come back to. And then in the quarter, we have also operationalized our new way of working, our new operating model, where we have the autonomous business units or business areas that have full accountability and ownership end to end for the entire value chain, creating more agility, being closer to our customers and hopefully also more speed in the way we operate. So overall, good progress. But turning to the quarter and the numbers, I think we are off to a good start for 2022. Net sales came in just below 23 billion Swedish krona, representing an organic growth rate of 6.5%. And again, if you look into what's building up to that, you will see that the industrial business is really spearheading the growth, growing around 11% organically, while we see a small decline in our automotive business of negative 3% growth rate. Our adjusted operating profit came in close to 3.1 billion Swedish krona, which is somewhat ahead of the same period last year, representing a margin of 13.3%. And you break it down and look into the industrial that had a very, very strong quarter, where we have reported a margin of 16.5%, which is actually somewhat stronger than the same quarter last year. While automotive have a more challenging comparison period, given that the first quarter 2021 was exceptionally strong, I still believe given the circumstances that to deliver a .2% margin in automotive is also worth noticing. Maybe the one number that we're less happy with in the quarter is the net cash flow from operations that is negative 270 million, as you can see on this chart. There are good reasons for this. All point to the buildup of inventories. A lot of that is driven by our need to build up buffer stocks to ensure delivery and quality to our customers in this very volatile and challenging environment that I described before. The underlying cost inflation by itself is pushing up the value of our inventories. And of course, the lockdown of Shanghai has also come in as an event that has driven up inventories in our Chinese business. Hopefully of more short-term nature, but for the quarter, they do have an impact on our cash flow. If we stay a bit on the group level before we go down to the industrial and automotive part, turning it back and focus to our Intelligent and Clean Growth Framework that we announced a quarter ago. As you may recall, in that framework, we identified four growth levers for our business. And I'm pleased to say that we have made some good progress in all four of them in the quarter. Starting with the high growth segments, you can see on the right hand side of this chart an example of a number of those segments that were identified as strategically important to us. And I'm really pleased to say that most of them, at least all of them that presented this chart, they all demonstrate solid double-digit growth rates. When it comes to new technologies, which is important, we will continue to invest and be the leading player to provide our customers with the most relevant products and capabilities. I'd like to point out that in the quarter, we have seen good progress in magnetic bearings that is really enabling and opening up a new industry, i.e. hydrogen. And I'll come back to you with a concrete example later on in that regard. When it comes to our ceramic bearings, they are in high demand and they are the foundation for our growth in the EV segment. And we are a clear number one in the market here. And that is really putting us in a very favorable position at the moment. Service and aftermarket, there I want to refer back to the announcement this morning with the collaboration with Amazon Web Services that we believe has the potential to really drive significant revenue opportunities going forward. And I will come back to talk to you a little bit more, give you some more flavor to this shortly. And finally, portfolio management. Here I don't have a massive or significant event to point to, but in our new setup, in our new operating model where we have each of the business areas, they all now look into their portfolios to really assess what do we need to prove? What are the loss-making accounts and how can we further improve our overall profitability within our portfolio? And that has also helped to drive some of the improvement in the underlying margin as we've seen in the quarter. So again, good progress on our strategic framework. But if we then move forward and look into industrial, and to give you the context, industrial as you're probably all aware of is the main industrial segment for us, a segment for us representing just north of 30% of revenues and close to 90% of our earnings. Industrial has, as I mentioned, had a very strong growth. We come in at 16.5 billion Swedish kronor in net sales representing some 11% organic growth. You can see that the two main markets or geographies, such as say, EMEA and Americas, had strong double-digit growth as well as India really growing rapidly across all of our different industrial segments, north of 20%. And then China is the one that stands out with the small negative growth rate for the quarter. And I'd like to draw your attention to two things that is really driving this. It's primarily wind and rail that has a tough comparison versus the same quarter last year, given incentives that really draw growth in wind a year ago. If we would exclude rail and wind from these numbers, we would report a mid-sint single-digit growth rate for the rest of the industrial business in China. Again, I've already talked about the growth rate here, but I'd like to reinforce the margin improvement of 16.5%. Here we really see that we have been able to drive price and other cost-mitigating actions effectively throughout the quarter, which is really boosting up our margins. But with that said though, we are not complacent. We know that we are chasing a moving target, and the team is as on its ass, as it was when we started this quarter, to continue to ensure that we do everything in our power and use all the levers available to continue to drive efforts to mitigate the cost inflation. But we're pleased to see the momentum that we built in the first quarter that we foresee and we're also going to move into the second quarter and onwards into 2022. I'd like to end the industrial part of this presentation by also pointing to a few customer success stories, starting with agriculture, which is one of our key strategic themes or sectors that we focus on. It's always good to get some sort of proof point from customers, and we use here the John Deere Excellence Award that our SKF Brazil team in Brazil has won for the third consecutive year, which is saying, well done and well deserved. But we have also in the quarter signed some new partnerships that we believe have the potential to unlock some new industries. I've already touched upon them, but let me give you some more flavor, and starting with Amazon Web Services. We're excited about this because this can really take our scalability of condition monitoring and data analysis to a new level. This will not replace what we have today. It will complement what we have today by adding affordable, easy to scale, easy to use condition monitoring and software analysis capabilities to our existing customers that then could afford to maybe hook up and connect more of their less critical machinery or applications. It will open up opportunities for mid-sized manufacturers and entry-level users to also get into the game here and start to connect their applications or their machinery. We believe that this has the potential to really drive our recurring revenue going forward within our service business. So we're excited about this announcement today. And this is going to start in North America. We're going to prove the concept in North America and then hopefully scale it and rule it out in other parts of our geographies as well. Another key example as relates to hydrogen, where we have in the quarter is part of a solution for new hydrogen energy to a customer in North America. And in order to liquefy hydrogen, you need turbo expanders. We don't do turbo expanders, but the main component in a turbo expander is the magnetic bearing. And here we have unique capabilities. Our uniqueness and our capabilities in really providing the bearings or the magnetic solutions to unlock this industry is second to none. And we can provide a 100% friction-free high-speed rotation that is really enabling growth in this exciting industry. So it's kind of an emerging industry. We believe it has used potential and we're pleased to take part of it from the beginning. Moving on to automotive. And again, automotive represents less than 30% of our revenues and about 10% of our

earnings.

Automotive had a 6.4 billion net sales in the quarter on the totality that's down by some 3% in the quarter. Here you can see again that EMEA and Americas represents our largest geographies, where EMEA have a small single-digit growth rate and Americas is dropping a little bit down 2% on the organic growth. While India has a kind of mid-digit single growth rate. China again is the region that stands out. And here there are two things I need to draw your attention to to explain that rather significant negative growth rate of 20%. Firstly, it's of course the ongoing lockdown of Shanghai that has made it impossible for many of the OEMs in the region to continue their operation and therefore also have an implication on us. Secondly, it's the comparison on commercial vehicles that are a bit problematic where the first half or the beginning of last year we saw some significant growth before they changed the emission legislation in China. So that's really the comparison that makes it a bit difficult from that point of view. Hopefully at least the lockdown in China and the Shanghai region are of short-term nature. We have no idea how this will evolve and then when they might open up. It might be there so that it will get worse before it gets better. But at the end of the day, I hope that China will also open up within a reasonable timeframe. But time will tell and we have to manage accordingly. Looking into automotive in a broader perspective. As I said here, you know, the negative growth but they are delivering a .2% adjusted operating margin. But given the circumstances, I think it's very solid and well done by the automotive team. Also here we have seen an ability to drive price effectively, not just within the aftermarket but also within the OEM part of our business, which is satisfactory. Also as I mentioned, we have seen some pruning of the portfolio that is also helping to improve the margins in automotive. On the positive side, EVs are growing rapidly and here we are a clear number one in the market. We are taking advantage of this and we see that more and more of the words EV manufacturers are turning to us. Our ceramic bearings or hybrid bearings are in high demand to deal with the straight current issues that those OEMs suffer from as voltages go up in the vehicles. So strong growth and not just from traditional EV manufacturers but also traditional OEMs are now turning to us for their EV solutions. Also the aftermarket has been very strong within automotive globally. Here we are a clear number two globally and we have made some further inroads and progress also in that part of our business. And even in automotive, we have seen some customer wins and they all refer to E and electrification and we are really strong foothold in E axles and E powertrains. And we see some good wins for some major OEMs in Europe that we are very pleased about that provide some promising growth opportunities in the future. So with that, I think it's time for me to hand over to Niklas to give you some more insights to our numbers. Niklas.

Thank you, Rickard and good morning, good afternoon, everyone. Starting off with sales. So we had a 22.9 billion SEC sales in the quarter. That's a growth both sequentially and compared to last year. And it's overall, the overall growth is 15 and a half percent. And if we split that 15 and a half percent into organic and currency, we had a six and a half percent organic growth. And then the currency tailwind was nine percent with the biggest differences coming from our currencies being the dollar, the euro and the renminbi. So all in all, good solid sales performance in the quarter. Commenting on the adjusted operating profit, we had an operating profit in the quarter of 3058 million. And that's a growth year on year. And if I if I just put that into perspective, we had two distinct parts here. We had an organic growth of roughly one point four billion. And then we had a cost tailwind of roughly one point four billion. Going through this step by step, we had a positive currency effect of two hundred and eighty eight million. The organic growth one thousand three hundred and seventy six million up consisting of two parts. Thirty percent of this is volume driven and roughly 70 percent of this is driven by the positive price and mix in the quarter. Cost, on the other hand, one thousand three hundred and ninety five negative. This very much reflects the inflationary environment in the world. We had higher component costs. We had higher logistics costs and we had higher energy costs, which is the vast majority of this one point four billion negative. So all in all, good performance when it comes to operating profit with organic growth and price mix offsetting the negative cost. Commenting on the cash flow and as Rickard said, this is the one thing we are not particularly happy with in the quarter. But there are good reasons, good explanations for it. So we had a negative cash flow operating cash flow of two hundred and seventy one million. And it was very much driven by a negative net working capital or an increasing net working capital. Networking capital was driven by two things, really. One was the increase in receivables very much following our sales growth. Quite normal there. On the other hand, we also saw an increase in inventories and the inventory increase. You can really break it down into a couple of components. One is that we, as Rickard said, we do continue to prioritize customer deliveries. Very important for us to make sure that we are able to deliver to the customers. And that drives some buffer stock, essentially. On the other hand, we also had a or we continue to have a challenging supply chain situation in the world, leading to, for instance, mismatching in components. The logistics chains are long. We have goods in transit, which is on a higher level than normal. And then last but not least, we also had the Shanghai lockdown, which affected us in the end of the quarter. We do see this or many of these items being temporary in nature. But nevertheless, we do take additional action as well to improve our networking capital in the long term. Commenting on the balance sheet, we have a strong balance sheet. We had a net debt in the end of the quarter of 10.4 billion. That's an increase primarily driven by the dividend payout, which took place in March. The return on capital employed also is developing in a positive way. 15% return on capital employed for the last 12 months, very much driven by the good profitability. And with that, back to you, Rickard.

Thank you, Niklas. And to sum this up, as I said in the beginning, I think we are off to a good start for 2022 with the vote we present now for Q1. There have been some significant headwinds that you all are aware of, and I mentioned them. And of course, the Russia-Ukraine one is horrific in itself, but it's really driving some issues for us. And it's also caused to take the decision to exit the Russian market permanently. And the Chinese lockdown, of course, drives a lot of uncertainty and volatility. We don't really know where it's going. We believe that it's of temperate nature, as I mentioned before. But for how long and if it's going to spread to other regions, it's too early to tell. But I guess we should not be surprised if it gets worse before it gets better. We are very pleased with the strong growth and the margin that we have been able to deliver, especially with industrial. To grow the industry organically with around 11% at improved margins, something that we are pleased about and that we will bring with us going forward. The accelerated price realization is something that we feel good about in the quarter. But with that said, we are in no shape or form complacent. We know that there's a lot of hard work ahead of us. We are constantly chasing a moving target here. And the inflationary environment is here to stay for at least Q2 and probably for a large part of 2022. When it comes to the strategic framework, as I mentioned, we are excited about some key developments in that area. The new partnership with AWS is something we worked on quite intensively and we are very pleased to have that now and be able to talk about it and start work with it. And also the progress within a number of the high growth segments, that is the cornerstone of our Intelligent Clean Strategic Framework, is something that we are pleased with. And also the technology development within hydrogen and ceramic, as I mentioned before. But it is a volatile environment. If we look into the outlook, it's hard to predict what's going to happen and especially how things are going to evolve in China. But we believe that from an organic growth point of view in Q2, we expect to be flatish versus the same quarter last year. Of course, it's highly dependent on these uncertainties, but still that's what we anticipate. But for the full year, we remain still optimistic and we now believe that we're going to have an organic growth rate of around 4 to 8% in that range. And that compares with the previous guidelines of 5 to 10%. And the main difference is I like to draw your attention to Russia again. Russia was normally 2% of our net sales revenues. So we have actually compensated for that in our outlook. But again, it's hard to predict and it's rather volatile around that. So with that, we stop the formal part of the presentation and I will now ask Patrick to help us together with a facilitator online to help us facilitate the Q&A session. Thank you.

Thank you, Richard. And with that end of the presentation, we are good to go and start off the Q&A session. So operator, please start with questions on the phone and then after that, we'll start with the questions that have been posted on the chat. Please.

Thank you. As a reminder, if you would like to ask a question on the conference call, you can press start one. Our first question comes from Daniela Costa at Goldman Sachs. Daniela, please go ahead.

Hi, good morning, everyone. Thanks for taking my questions. I have three, but they are quick. So first one I wanted to check. You talked about accelerating pricing and you seem to have done at least like 5 percentage points of pricing in one queue. Within your 4 to 8 percent guidance for the full year, what pricing carryover are you assuming? Just thinking about that. And then second, you talked about 70 percent being priced and mixed within your Ebit bridge where you have the organic bar of one billion three hundred and seventy six. What about the inventory, the impact of the inventory build on that? That's question two. And then the question three is just regarding the cash progression throughout the year. You obviously mentioned you're dissatisfied with that. Do you see a full compensation to what would be a normal cash conversion this year or this year given the nature of all that's happening with supply chains and cost inflation and so on is a bit of a typical year. So those are my three questions. Thank you.

Thank you, Daniela. And I think I'm going to divide your three questions among the three of us. I can take the first one and then Patrick gets the second one and then Niklaus will answer the cash question. When it comes to pricing and how much will be carried over into the growth rates for the full year, actually that is not anything that we disclose. The only thing I can say that we have seen that our actions and activities has resonated well with our customers in the quarter. We have been able to realize more of the price increases that we have seen in the past. We have further added more price to the equation during the quarter that has not yet materialized in our numbers that will come. But I'm going to refer from referring on how much of the 4 to 8 percent that's going to be derived from prices and what's going to come from other means. But we're on the case and we work diligently with the price and other cost mitigating activities.

Okay, thank you. On the inventories, yes, it's correct that we have built some inventories as we usually do in the first quarter. Not that much though. So in the bridge effect, I would say it's a net positive on the EBIT line of about 40 million in the quarter compared to last year.

And then, hi Daniel, to your last question about cash progression. I mean, again, we are quite confident that we'll make a comeback in terms of positive cash flow in the year. Typically, as you might know, typically first half is a weaker cash flow period for SKF, while then the second half is stronger. But nevertheless, it's something that we are working quite diligently on and are quite confident that when things normalize in the market and when our actions start to bite, we are back in the

game.

Thank you for those. The next question comes from Klaas Bergerlind from Citi. Klaas, please go ahead.

Thank you. Hi, I get any class class at Citi. So a couple of questions, please. The first one is on is on pricing and cost inflation. Price mix around five percent in the quarter and the comparatives are getting tougher for the price mix after the second quarter. And I know, Richard, you don't want to comment on the price mix for the year, but you think you can maybe help us a little bit looking at the second quarter, given that you have a tougher compare, you can achieve a similar four to five there for the second. Then on the cost inflation, I think the gross number was 1.5 billion from material logistics and energy and netted off by 100 million from some net savings. How should we think about the cost into the second quarter? I think energy was around 300 million. That could potentially grow. I'm keen to understand the moving parts there into the second. Thank you.

Well, hey, Klaas, and thank you for your questions. I guess I'm going to be disappointed a bit on my answer to your first one. When it comes to, you know, the price mix that we achieved in the quarter, how much do we think we're going to achieve in the second quarter? I don't dare to give you a number for that because it's not a fixed target that we're chasing. The inflationary environment will most likely change during the quarter. And I don't know exactly what it will look like. We're trying to our best of our ability to predict this. And our sales teams are out there actively engaging with customers and trying to make sure that we compensate ourselves for what we know and what we anticipate to come. But if we are right in our estimates and our anticipations, time will tell. So again, I'm going to refer from really give you some provide you with some details for how I think Q2 is going to play out. More than saying that we are on the case, we as I mentioned, we have already negotiated some additional price increases that have not yet materialized in our books so far.

And then class to your to your question about cost inflation, just to give you some some additional flavor, what we saw throughout Q2 was a bit of a normalization or not normalization, but stabilization at the high level when we talk about materials, logistics and energy. It is quite a volatile environment. So even if we saw a stabilization in Q1 or throughout Q1 saying that that will hold for Q2 is just tricky in this environment. But what we can say is that in Q1, at least inflation didn't get much worse.

Okay, no, that's helpful. My second one is on the guidance. And it seems like you are only taking down the guideline to the 2% sales impact from Russia. And I know you don't want to say Rick, and of course, I totally understand what price mix can end up for the second quarter. But let's say that you would manage 4 to 5% again in the second quarter, then flatish organic would mean that the underlying volumes in Russia will be down. So let's say you are taking down 3. I'm trying to understand how much of this minus 3 for example, then is driven by China lockdown, European wire harness issues in automotive, or if you see any weakness at all in the industrial core segment as well.

Well, again, you know, the forecast that we provide is subject to uncertainties. It is always uncertain. So you can argue that's kind of normal. But I think this year, with both the you know, the ongoing war and the situation in China, it creates even more complex, it makes it even more complicated to really provide a forecast. But we stick to what we said with the 4 to 8% and the rationale behind it is that when we're going through our business, we still see a strong demand across our geographies. We still see growth opportunities, primarily within industrial that sounds looks very promising and robust. And no real signs yet of that that should you know, start to shift in any shape or form. Automotive is more complicated. Of course, in order to deliver on the 48%, it will imply that China is not in a lock down for the full year. But it's a that it will open up at some point, point during the first half of this year. And then, you know, we have some sort of bounce back within automotive. So that's also part of how we've made up the forecast. But as always, we try to provide with our best estimate or our best guess. And we stand by the 48%. Even though I know it's a lot of uncertainties and volatility within it. Maybe maybe just to

add

to

what Richard was saying, I mean, the demand is there and the demand is actually strong. So what we see is essentially one of disruptions. I mean, the Shanghai area, we have a quite a lot of business and production in the Shanghai area. So it's very, very kind of binary. When is it opening up? Is the real question there?

My question referred to the second quarter who knows what will happen in the second half. Exactly. When it comes to my very final one is, is on the strategic framework. You talk about magnetic bearings, ceramic bearings, and there is no momentum seen in these technologies. What the market I think is lacking post-strategy view at the full year is a little bit more disclosure on time. So the addressable markets and how to bridge the implied 8% Tager to 2030. Are you planning more disclosure gradually than during the full year? Just want to finish off on that. Thank you.

Yes, and thank you, Klaus, for that question. The answer is yes to your question. We have tried to articulate, you know, more the framework for you where we see the opportunities. We are now trying to also describe that we see some good progress in a number of those. But if everything goes according to plan, we will before the year is over, we will host a in capital markets day where we should be able to provide some more details and more clarity around our path for growth into the future. So that's just yes to your question.

Thank you very much.

The next question comes from Lars Bralsen at Barclays. Lars, please go ahead.

Great. Thank you. Good morning, Richard, Niklas, Patrick. Can I start with price mix, please? The one billion or so in your EBIT bridge that's price mix. Can you give the split between price and mix?

Niklas? Yeah, yeah, yeah. So I said out of the one point four billion, roughly 70 percent is price mix. Both are positive. And I'll actually leave it with that because pricing not to bore you with a lot of details, but there's different forms of pricing. There's surcharges, there's, you know, the normal price increases and so on and so on. And depending a bit on how you look at it, they land in different categories, sometimes in price, sometimes in mix. So that's why that's why it's not that relevant to to look at exactly price and mix, but look at it in total instead. But both are positive.

I understand, Niklas, maybe I could ask differently then, but specifically to the industrial division, can you help me with the impact on margins from mix within that division? Maybe to ask a bit differently, how substantial was the outgrowth in your industrial distribution business versus the 11 percent organic for industrial overall? And was that a meaningful impact on margins in the quarter?

Yeah, you're absolutely right that distribution grew well on the industrial side and also aftermarket grew well on the automotive side. So that affected mix positively and distribution grew actually in industrial grew more than the 11 percent, somewhat more than the 11 percent that overall industrial grew. So distribution. But you're not able to help us with the margin impact from mix. I don't have an exact number as we don't split out the margins for distribution and OEM. But out of memory, I think the distribution growth in industrial was closer to 20 percent, actually.

Helpful, thank you. Can I ask secondly, just regionally for Europe? I wasn't enthused about the reclassification of regions, but that aside, on the re-acceleration in Europe, that stood out to me. And I guess also to Rickard's comments earlier around a robust demand outlook, which I presume includes the distribution business. Are you seeing more broadly and do you expect to continue to see more broad based at channel restocking that continues to support your distribution business this year?

Well, good question. As Niklas mentioned, we have seen very strong development generally within our distribution business, both in Europe or EMEA and in America, for example. And as of now, I have no indications that that is about to change.

Can I squeeze a third and quick one in finally, just on cost absorption for the remainder of the year? I appreciate the 40 million. Thank you for that, Patrick. If you look ahead now, obviously last year, 2021 was a quite meaningful inventory built year and with quite meaningful earnings tailwind through the year. Should we and I appreciate now that your 2022 outlook suggests a more moderate, sub sequential top line recovery in the second half. Should we brace ourselves for perhaps more significant headwind from under absorption as we get into Q2 and second half?

That's a tricky one. I cannot immediately think of a good reason to see why it would be a major issue. But let's see as the year moves

along. Understood. Thank you. Thank you, Lars. The

next question comes from Andre Kucnin at Credit Suisse. Andre, please go ahead.

Good morning. Thanks for taking my questions. Can I just follow up on the inventory build comment you made and the questions before the 40 million BNL benefit versus the two billion cash outflow seems quite modest. And I appreciate that there are many moving parts in there, but I just wanted to check if you could give us how much of goods in transit are up right now as a kind of value within that overall number and whether that's included as the benefit to PNL from the ramp up in that.

Sorry, Andre. Once more. I lost you there.

So I just wanted to kind of get a bit more clarity on the inventory ramp up that we've seen the kind of the cash commitment

that

you've had in this quarter and in the prior four quarters. Absolutely. Whereas the PNL benefit is seems quite quite low. So I just wondered if you include the potential benefit from higher goods in transit in there as well as just your manufacturing and absolutely.

Thank you. No, what I what we were referring to was the build up of finished goods inventory in the quarter sequentially. And during the first quarter this year, we built about 650 million in terms of finished goods inventory compared to year end. Last year, we had a build up of about 400 million. So the Delta is about 250, hence the 40 million EBIT impact in the bridge this quarter.

Okay, great. Thank you. I'll maybe come back from this offline as well. And thank you for splitting out some of the vertical growth rates in one of the front slides, slide four. Could you help quantify the size of the automation segment for you that you split out there?

The entire automotive segment or.

Automation. It's the second. Automation. The one that we gave off the marine.

Yes, right. I need to I need some help to get the numbers. If I recall correctly, can you help me there? Yeah,

it's a single single digit of the total. But but still, you know, material enough and quite an exciting segment where we see long term growth.

But thank you. Yeah, it'd be great to see kind of continuation of kind of disclosure to track the sub verticals and then just final one coming back to the Q2 growth rate versus the full year guide. So in the Q2 guidance, you help us with how much of the kind of maybe temporary China lockdown impact you you baking in into that flat guidance, because when I look at the comps, how they kind of evolve for the second half of the year, we do need quite a ramp up sequentially to get to four percent or above the full year. And I appreciate what you said on automotive sequential ramp up. That's fair enough. But obviously, that's a smaller part of the business. So we need to see that in industrial as well. Yeah, I just want to check. Yeah. Kind of impact for China.

Yeah, I mean, China, China is is roughly 20 percent of our overall revenues and. And, you know, seeing what's what's happening now in China with a pretty, you know, drastic lockdown in the Shanghai area, it means that the business volumes with our customers are significantly down. That's what we see now in April. Then it's really a question of when the opening will happen and how it will happen. But and that's as we can mention earlier, it's a bit about a bit difficult to predict. So we've taken some, you know, taken that into account to some degree. But we do assume that China opens up here during the

quarter.

Got it. Thank you for time.

Thank you.

The next question comes from Matias Holmberg at DNB. Matias, please go ahead.

You please provide us with an update on the progress of the factory closures and where you stand in terms of run rate cost savings, the five billion.

Thanks. Sure, we continue with according to plan. There's nothing really new to report in terms of additional factory closures in the quarter. For those who are resonates in Sweden, you may saw an article this morning that indicates that we were about to shy away from the Mülheim closed down. That is not correct. That is incorrect article. And we are maintaining our pace there according to our plans. When it comes to the savings generated by of the five billion, I think now we are in the average of one point three, one point four billion. It's now been achieved so far. So it's a bit flatish from last quarter, but we are following our internal plan.

Great.

Thank you.

The next question comes from Eric Gorung at SEB. Eric, please go ahead.

Thank you. I have one question. I got a bit lost in all the comments about sequential costs and price mix development. So what's your best take on the net between cost increases and price increases for the second quarter?

Hi

Eric.

Yeah, would love to kind of say the exact figures, but it's hard to predict. No need

for the exact figures.

I appreciate that, Eric. But I mean, we as discussed earlier, we continue to work with with pricing, essentially price up. What we saw in terms of inflation in first quarter, as I mentioned, was some stabilization, you can say. And let's see if that stabilization holds also in Q2 or whether a combination of the war in Ukraine and the challenges in China will drive inflation further up. So, you know, quite a few moving parts, but rest assured, we are on pricing. We have a good momentum there and we'll continue to work with that.

Thank you.

Thank you.

The next question.

Sorry, is this a question or someone is maybe needs to mute themselves?

Okay, the next question comes from Sebastian Kuen at RBC Capital. Sebastian, please go ahead.

Hi, gentlemen. A few questions regarding your electric car exposure. I recall that you had roughly 800 million revenues with the electric car OEMs for the powertrains last year. What's the current run rate? What do you expect for the year ahead? And what percentage of auto OEM would that be? Secondly, you mentioned some new customers in Europe, also, you know, conventional car manufacturers that go into electric vehicles. I'm not asking who that is, but which customers would you still like to have for electric vehicles? Is there a large customer globally? I mean, we know you have six, seven contracts in China even. I think that Ford is not really on your list. Would that be one that you still want? And then finally, also on electric, you mentioned the ceramic bearings gradually rolling out for, let's say, high performance electric cars. And what is the price point for this? I mean, if you have three, four large bearings in the powertrain of a VV, they are very large, a diameter of 15 centimeter. What's the price point compared to a normal steel bearing? Thank you very much.

Right. Again, you ask a lot of good questions and a number of them, it's hard for us to really disclose so many details on it. But you're right. We have seen a very, very solid growth with our EV, as I mentioned. We have seen actually close to doubling the size of our revenues in this space. Year on

year.

OK. Yeah. Which has been, you know, so it's growing rapidly. I think I have to leave it with that. How big portion that is of our total automotive, I refer to give you at this stage. But it's clearly as we said in our strategic framework, we have identified a few areas within automotive where we really want to play, where we believe that we have uniqueness and some strength. And EV is one of them. Large commercial vehicles is another one. And the EV, sorry, the general automotive aftermarket is the third one. So those three are, you know, things where we will focus going forward and continue to invest and drive growth. I'm not going to give you my wish list of customers, but we are pleased to see that we are already engaged with most of the pure EV manufacturers. We do have a very, very strong footprint there and they are growing rapidly, which is, of course, promising. We also started to engage with a number of the traditional OVMs, both in Europe and North America. And if we can demonstrate our worth and our value to others that not yet have experienced how it is to work with us and our solutions, of course, I will welcome that. But I'm going to affirm to provide you with my wish list on the price points for ceramic bearings. You're on to a very important point. We are working aggressively trying to reduce the cost for these, but they are significantly more expensive than a traditional bearing. We talk about, you know, the

factor of

10 could be somewhere factor six to 10.

Yes. And since you say you want to reduce price cost there, is that at the moment at a similar earnings level, like margin level compared to the bearings? Or is this still a development phase where you say, OK, you know, once we roll it out large scale, we make good money, but at the moment it's still loss-making? What's the situation there? It's

not loss-making. It's not loss-making, but I can't give you the margins. But it is still emerging because the key issue for us is actually how to test and inspect each individual ball. That's the main bottleneck at the moment to really scale up production. And we are, you know, there are solutions that have been invented by SKF that we are testing that are very promising. But that's one area. You know, how do we ensure that we have more industrialization of how to inspect balls and rollers, in this case primarily balls? And the second key headache that we have is that there aren't that many producers of good ceramic balls globally and small balls. We make larger balls and rollers. We make them in-house, but small balls we source from outside. And we need to have more robust and high quality suppliers globally to satisfy the need that is building up. So that's another area that we're working hard on.

OK, thank you so much.

The next question comes from Andreas Koski at BNP Paribas. Andreas, please go ahead.

Thank you. Thank you very much. Good morning. Just three quick questions. Firstly, on your Q2 outlook of flat organic growth, did you mention what you expect for your industrial division and automotive division respectively? Or could you please do that?

Maybe I can take that straight on. We believe that we're going to see some growth. We don't quantify it, but we still believe there's going to be growth, organic growth in our industrial segment, while we foresee that automotive will have a negative growth rate also in Q2, as it had in Q1.

And then secondly on the price mix impact, did you get any support from price increases in the automotive division, or is all of that related to the industrial division?

No, it's not. We also see progress in automotive, where we have been able to push price, definitely of course in the aftermarket, but also in the OEM space. We have some successes and we're seeing that we get acceptance to be compensated for the cost inflation that we have incurred. So it actually, it's not just with industrial, it's also impacted or also applies to automotive.

Yeah, and then a question from Niklas, and I understand this is not on top of your mind at the moment, but when I read your annual report, I noticed that your expenses, your other expenses, which is primarily purchased services, declined by more than 4 billion SEC in 2021. I would like to understand what is explaining that significant decline in your other expenses, and if the 2021 level is sustainable. Yeah,

Andreas, if you don't mind, we can take that separately. I'm just conscious of time as we just have a minute or so left, but we'll take it separately. Thank you, Niklas.

Thank you.

Thank you. And Operator, please, we are getting short of time, so we have to round off here at 10 o'clock sharp. We do realize that there are several questions that have been left unanswered, especially those posted on the chat. We will get back to you separately on those issues. And if there are other questions that you need to get answered, please get into contact with either me or Andreas, my colleague on the IR, who will try to help you. Without a couple of closing words, the last couple of seconds here, Rick. The

last seconds. Well, thank you. And again, thank you for your attention and thank you for joining us. Again, as I said, I think, you know, we are seeing viewing this these set of numbers as a good start to the year. We know that we operate in a highly volatile environment and a lot of uncertainties, but underlying, we're still optimistic about our business. We believe there are significant growth opportunities for us to grab. And we are pleased with the fact that we are can also realize some of the price changes are now also showing in our numbers. So we're in for a good start, but it's going to be a lot of hard work for the rest of year. And I think that the SKF team and my colleagues around the globe have demonstrated their worth during this quarter. And I'm sure they're going to do it again as we move into the second quarter. So with that, I thank you so much and wish you all a great day.