Document

Transcript Document

Henrik Lange Executive Vice President and CFO

SKF Capital Markets Day •10 September 2014

Agenda

● Financial development ● Cash flow, working capital ● Financial position ● Acquisitions ● Second brand ● Key business message © SKF Group CMD 2014

Financial development

SKF Group – Half year 2014

Financial performance

(SEKm) Net sales Operating profit Operating margin, % Operating margin excl. one-time items, % Profit before tax Basic earnings per share, SEK Cash flow after investments before financing excl. EU payment Cash flow after investments before financing

2014

34,689 4,120 11.9

11.9

3,548 5.26

1,164 -1,661

Organic sales growth in local currency:

SKF Group 5.2% Strategic Industries Regional Sales and Service Automotive 9.0% 2.2% 4.5%

Key points

Sales volumes up by 5.0% y-o-y.

Manufacturing was higher compared to last year.

2013

31,544 3,317 10.5

11.9

2,864 4.10

255 255 3% 3% 13% 1% 18%

Business segment margins

On sales including Intra-Group sales H1 2014 On external net sales approx. figures H1 2014

Automotive business (~27%) Automotive Automotive excluding one-off Industrial business (~65%) Strategic Industries SI excluding one-off Regional Sales and Service RSS excluding one-off Industrial business Industrial business excluding one-off 4.0% 4.8% 10.4% 10.6% 11.0% 11.3% 4.7% 5.7% 13.4% 13.7% © SKF Group CMD 2014

Long-term financial targets

Operating margin level Annual sales growth in local currencies ROCE

Targets

15% 8% 20% Definitions: ROCE = Operating profit/loss plus interest income, as aprecentage of twelve months rolling average of total assets less the average of non-interest bearing liabiities © SKF Group CMD 2014

Financial targets

15% Operating margin 15 10 5 0

08 09 10 11

One-time item

12 13 H 11 4

• • Amortization: represents as margin around 0.5% in 2013, and 0.7% in H1 2014.

As from 2016 it is estimated to represent around 1.0% margin.

8% Changes in sales in local currency incl. structure 20 15 10 5 0 -5 -10 -15 -20

08 09 10 11 12 13 H 11 4

One-time item for the individual year

SKF Group – operating margin development

16,0% 12,0% 8,0% 4,0% 0,0% -4,0% © SKF Group CMD 2014 Operating margin Operating margin excluding one time items 3% Gap

How we will close the 3% operating margin gap

15 % 12 H1 2014 Restructuring and efficiency program Sales growth Productivity, portfolio Infl., other Target

Actions:

• •

Restructuring and efficiency

Implement the restructuring and efficiency program Implement business excellence fully • •

Sales growth

Continue to drive growth in the business Drive R&D to generate more new products / soultions • •

Productivity and portfolio

Evaluate portfolio Drive productivity in all areas © SKF Group 10 September 2014 SKF Capital Markets Day

Cost split, operating expenses 2013: SEK 57 billion

Depreciation and amortization 3% Other 26% Material 36% Improvement activities: • Purchasing activities in the restructuring program Employees 35% © SKF Group CMD 2014 Improvement activities: • Productivity improvement and manufacturing footprint activities in the restructuring program

Cost reduction – specific programme 2012-2015

• • •

Main activities:

Consolidation of manufacturing - merger between sites - transfer to faster growing markets with more local production Optimization and productivity improvements - in the manufacturing and demand chain processes - in administration and support functions Reduction in purchasing cost - mainly through standardization and rationalization of the supplier base.

Reduction of annual cost by SEK 3 billion by the end of 2015

Total cost for the programme around SEK 1.5 billion 2,500 people impacted, © SKF Group CMD 2014

SKF’s programme to improve efficiency and reduce cost

Restructuring, SEKm : Cost taken People affected

Q4/12 Q1/13 Q2/13 Q3/13 Q4/13

200 530 250 410 190 320 0 0 50 130

2013 Q1/14 Q2/14

490 860 0 0 100 170

Total

790 1,560 Giving future gross savings, SEKm : Full year gross saving 150 100 80 0 40 220 0 100 470 Realized gross savings from total programme, SEKm : vs 2012

Q1/13 Q2/13 Q3/13 Q4/13

Restructuring S&A Purchasing Total 15 50 100 165 35 50 100 185 75 50 100 225 75 50 100 225

2013

vs 2013

Q1/14 Q2/14

200 200 400 800 70 0 60 130 50 0 100 150

2014

120 0 160 280 Note: Run rate Q2 2014 SEK 1,340 million vs 2012.

S&A and R&D cost development

% 15 14,5 14 13,5 13 12,5 12

S&A % Sales

Flat % 3 2,5 2 1,5 1

R&D % Sales

+1.5% © SKF Group CMD 2014

Cash flow, working capital

Cash flow, after investments before financing excluding acquisitions and divestments

Summary: • Good cash flow generation • Going forward - use cash flow to deleverage balance sheet SEKm 4 500 4 000 3 500 3 000 2 500 2 000 1 500 1 000 500 0 2010 2011 2012 2013 © SKF Group CMD 2014

Free cash flow conversion

Strategy: • Profit improvement • Capex and working capital management 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 2010 2011 2012 2013 Comments: FCF = Net cash flow after investments before financing excluding acquisitions / divestments 2013 adjusted for the SEK 3,000 million provision for the EU fine. © SKF Group CMD 2014

Working capital management focus

Step-up activities to improve our net working capital % sales: • Reduce inventory in % of sales Increase supply flexibility Optimize product range and service policies Improve forecasting and end-to-end planning • Improve A/R % sales ratio Focus on reducing overdues Outsource collection in selected countries • Get effects on A/P from new purchasing activities Implement improved payment terms through Group Purchasing Set-up supply chain financing structure © SKF Group CMD 2014

SKF outsourcing of A/R collection

• Collection process will be handled by an external party using appropriate system support for effective handling • Covering the following countries: Sweden, Denmark, Norway, Finland, Belgium, Holland, UK, Italy, France, Austria, Switzerland, Germany, Portugal, Spain, Czech Republic, Hungary, Poland and USA • Collection contacts will be done in local languages.

• All countries within scope are expected to be implemented during 2015.

• Benefits expected in 2015/2016 © SKF Group CMD 2014

Supply chain financing process and set-up Simplified overview of setup 1 Supplier sends goods and invoice Supplier SCF IT plaform 3 Supplier requests early payment 4 Supplier receives payment 2 SKF approves invoice 5 SKF pays invoice at maturity BANK Benefits and cost:

▪

Supplier benefit:

Faster payment and lower capital cost ▪

SKF benefit:

Extended Days Payable Outstanding (DPO) ▪

Cost:

Bank charges suppliers equivalent to: SKF negotiated interest rate + service & IT fee © SKF Group CMD 2014

Summary of supply chain financing

• SKF plans to increase days payable to support working capital • Supply chain finance will create win-win for most suppliers driven by beneficial rates • Supply chain finance is a tool for suppliers in order to receive earlier payment of invoices • Implementation started by selecting a bank and on-boarding of pilot suppliers in Europe planned for Q4 2014 • Focus initially is Europe • Global roll-out in scope after implementation in Europe © SKF Group CMD 2014

Net working capital 2013 and target

SEKbn

Net sales external Inventories Trade A/R Trade A/P Net working capital

2013

63.6

13.7

11.2

4.7

20.2

% of sales

21.5% 17.6% 7.4% 31.7% Improvement to reach target = SEK ~3.0 billion

Target

27.0% • • • •

Activities ongoing:

Flexibility, product range & end-to-end planning – inventory Overdue reduction & outsourcing of collection of A/R Payment terms & supply chain financing

Total SEK ~3.0 billion By 2017

Financial position

Capital structure, H1 2014

Goodwill, intangibles Fixed assets Inventories Other assets Cash, fin. assets 19,775 14,341 14,769 21,132 4,021 74,038 Equity Post-employment benefits Loans Other liabilities 21,360 10,754 23,972 17,952 74,038 Credit rating BBB+,Baa1, stable outlook Debt Net Debt 34,726 30,705 Equity/assets ratio Gearing Net debt/equity Actual 29% 62% 144% Target ~35% ~50% ~80% Financial position, debt structure and liquidity are balanced.

Balance sheet and leverage

Balance sheet H1 2014, SEKm Cash, fin assets Debt Net debt Equity 4,021 34,726 30,705 21,360

Strategy

Current debt structure

EURm 800 700 600 500 400 300 200 100 0 100 100 110 500 500 100 750 200

2015 2016 2017

Credit facilities: EUR 500 million SEK 3,000 million EUR 150 million 2019 2016 2017

2018 2019 2020 2020 2021

History of strong cash flow generation and a shareholder friendly distribution policy

2003 - H1 2014, accumulated rounded figures, SEKm

________________________________________________________________________ EBITDA 93,000 Investments (23%) 21,000 Fin. Net, taxes, wc, others (40%) -37,000 Cash flow from operations (60%) 56,000 Acquisitions (24%) Dividends/redemption (35%) Extra pension funding (3%) 22,000 33,000 3,000 © SKF Group CMD 2014

Acquisitions

Acquisition criteria

• Strategic fit with clear potential synergies and ability to exploit these in a reasonable timeframe.

• Strong commitment and ownership by acquiring business area.

• Profitable high quality companies with strong management and preferably larger deals.

• EPS accretive in the first full year, positive TVA effect in two to three years, including amortization of intangible assets.

Acquisition strategy for profitable growth

• Acquisitions are seen as one important driver for growth and value creation.

• Integration of Kaydon and BVI is going well with synergies in line with plan.

• SKF has the financial means and acquisition project resources in place to continue to pursue relevant acquisitions. • Focus is on SKF platforms and PT products.

Acquisition 2003-2013 Identifying gaps and opportunities in all platforms

Bearings and units Seals Services Lubrication systems Mechatronics Products Technologies Geographies SNFA (2006) GLO (2008) S2M (2007) Kaydon (2013) Economos (2006) Baker (2007) Macrotech (2006) Macrotech (2009) QPM (2008) Scandrive (2003) Safematic (2006) ABBA Jaeger (2007) (2005) Vogel (2004) Lincoln Industrial (2010) PMCI (2007) PB&A (2006) Monitek (2006) ALS (2007) Sommers (2005) Cirval (2008) TCM (2003) Industries Peer (2008) GBC (2012) BVI (2013) © SKF Group CMD 2014

Major acquisitions performance

• The sum of the major acquisitions perform in line with the Group acquisition criteria.

• The sum of the major acquisitions represent 14% of Group sales in H1 2014.

• The sum of the major acquisitions represent 18% of Group operating profit in H1 2014.

• Acquisitions form a part of the SKF profitable growth strategy.

Second brand in SKF

Strategy for second brands

• Capture mid-market growth • Lower cost manufacturing • Global market approach • Segment focus PEER, Industrial segments GBC, Auto, HD segments © SKF Group CMD 2014

Second brand value proposition in normal application

Engineering design vs cost Performance 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 1st Brands PEER © SKF Group CMD 2014 Manufacturing consistency 3rd Brands • • •

Differentiate against 1 st tier

Cost competitive in normal performance application Customization flexibility Speed and responsiveness Normal Application Target • • •

Differentiate against 2 nd , 3 rd tier

Industry leaders’ supplier Consistency, long term sustainable approach Globally local sales and engineering support

How SKF has developed PEER since acquisition

• • • •

Sustainably achieved great financial results

– Achieved 15% sales growth per annum – Solid operating margin and margin development – Strong cash flow generation

A more globalized brand

– from 90% to 75% dependency on USA – Increased share of global customers

Business strength

– Continuously maintain and win customer confidence – Developed and launched enhanced product offering, especially in Agricultural – Strengthened supply base of components and sourced products

Organizational strength

– Accountable leadership, converting funnels into visible and connected value chain – Upgraded engineering, turn from contract manufacturer to development partner – Certified EHS practices ahead of similar competitors, improved worker conditions © SKF Group CMD 2014

PEER market successes

• • • • • Introduced a range of maintenance free tillage solutions Expand a new range of elevator pulley solutions Developped Ag distribution business Improved taper roller bearing performance to access construction industry 10 Years awards in Deere – main supplier in Ag Attachments © SKF Group CMD 2014

Key business message

• Continued good performance • Strong cash flow and financial position implement restructuring program working capital focus use cash flow to deleverage balance sheet • Acquisition opportunities in the SKF platforms “normal performance” companies © SKF Group CMD 2014