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Tom Johnstone President and CEO SKF Capital Markets Day ● 10 September 2014 SKF Capital Markets Day 2014 – Main topics • Business update - Group and Business Areas • Activities/actions to support strategic priorities and financial targets - growth, operating margin, net working capital, ROCE • Development in Asia and particularly China • Specific industry/area focus - renewable energy, marine and lubrication • Asset life cycle and mobility • Customer view on SKF © SKF Group Agenda 10.00 Group overview Tom Johnstone Finance Henrik Lange 11.00 Strategic Industries incl. Q&A Rakesh Makhija Bernd Stephan Robert Law 12.15 Coffee break 12.35 Regional Sales and Service incl. Q&A Vartan Vartanian Thomas Fröst Christian Gill 13.50 Guest speaker Bruno van den Heuvel, RWE Power AG 14.20 Lunch 16.00 Automotive incl. Q&A 17.15 Coffee break 17.35 Summary and Q&A 18.30 Cocktail reception © SKF Group CMD 2014 Tryggve Sthen Luc Graux Ulrich Selig Tom Johnstone Henrik Lange Alrik Danielson, Designated CEO New President and CEO as of 1 January 2015 Born: 1962 B.Sc in Business Administration and International Economics from the University of Gothenburg 1987-2005 Previous positions within SKF: • Financial controller in Gothenburg • President, Industrial Division in Spain and Portugal • President, SKF do Brazil • President, Industrial Division and several other managerial positions. 2005-2014 Höganäs AB, President and CEO © SKF Group CMD 2014 Key topics • Half year performance and outlook for Q3 • SKF Group financial targets and priorities • Specific focus - purchasing - inventory reduction - UNITE - Kaydon © SKF Group CMD 2014 Key topics • Half year performance and outlook for Q3 • SKF Group financial targets and priorities • Specific focus - purchasing - inventory reduction - UNITE - Kaydon © SKF Group CMD 2014 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 Organic sales growth in local currency: SKF Group 5.2% Strategic Industries 9.0% Regional Sales and Service 2.2% Automotive 4.5% Key points Sales volumes up by 5.0% y-o-y. Manufacturing was higher compared to last year. © SKF Group CMD 2014 2014 2013 34,689 4,120 11.9 11.9 3,548 5.26 1,164 -1,661 31,544 3,317 10.5 11.9 2,864 4.10 255 255 Europe North America Asia Latin America Middle East and Africa 3% 3% 13% 1% 18% Sales development by geography Organic growth in local currency YTD 2014 vs YTD 2013 Europe 3% North America 3% Asia/Pacific 13% Latin America 1% © SKF Group CMD 2014 Middle East & Africa 18% Components in net sales 2012 Percent y-o-y 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Volume -0.8 -2.8 -5.0 -5.9 -8.7 -1.6 2.2 7.1 6.2 3.6 Structure -0.1 0.0 0.8 1.0 1.5 2.6 1.1 4.8 4.7 3.8 Price/mix 1.9 2.0 0.5 0.7 0.7 -0.6 -0.2 -0.2 -0.4 1.0 Sales in local currency 1.0 -0.8 -3.7 -4.2 -6.5 0.4 3.1 11.7 10.5 8.4 Currency 0.4 3.6 -2.7 -3.6 -4.0 -5.0 -2.2 -2.1 -0.1 1.1 Net sales 1.4 2.8 -6.4 -7.8 -10.5 -4.6 0.9 9.6 10.4 9.5 © SKF Group CMD 2014 SKF demand outlook Q3 2014, main regions Share of net sales 2013 Sequential trend for Q3 2014 Q3 2014 vs Q3 2013 Europe 42% +/- Asia Pacific 24% ++ North America 24% + Latin America 7% - Total © SKF Group CMD 2014 + SKF demand outlook Q3 2014, main business areas Share of net sales 2013 Q3 2014 vs Q3 2013 Strategic Industries 29% ++ Regional Sales and Service 39% +/- Automotive 27% +/- Total © SKF Group Sequential trend for Q3 2014 CMD 2014 + Key topics • Half year performance and outlook for Q3 • SKF Group financial targets and priorities • Specific focus - purchasing - inventory reduction - UNITE - Kaydon © SKF Group CMD 2014 Financial targets 15% 20% 8% Operating margin Return on capital employed Changes in sales in local currency incl. structure 15 -20 One-time item © SKF Group CMD 2014 One-time item for the individual year H1 14 13 13 12 11 H1 14 -15 10 -10 09 11 4 13 H 12 11 10 09 08 08 0 -5 0 12 5 11 10 5 10 15 09 10 08 30 25 20 15 10 5 0 20 SKF’s priorities Sustainable profitable growth • Expand the platform concept • Exploit the asset life cycle approach • Develop new products and grow SKF BeyondZero portfolio • Extend and grow second brands • Acquisitions Capital efficiency • Fixed capital • Net working capital Investments & Innovation • New and existing facilities • Research and development • IT systems • Mobility Cost reduction • Business Excellence • Consolidation of manufacturing • Optimization and productivity improvements • Reduction in purchasing costs © SKF Group CMD 2014 SKF’s priorities Sustainable profitable growth • Expand the platform concept • Exploit the asset life cycle approach • Develop new products and grow SKF BeyondZero portfolio • Extend and grow second brands • Acquisitions Capital efficiency • Fixed capital • Net working capital Investments & Innovation • New and existing facilities • Research and development • IT systems • Mobility Cost reduction • Business Excellence • Consolidation of manufacturing • Optimization and productivity improvements • Reduction in purchasing costs © SKF Group CMD 2014 Key topics • Half year performance and outlook for Q3 • SKF Group financial targets and priorities • Specific focus - purchasing - inventory reduction - UNITE - Kaydon © SKF Group CMD 2014 Purchasing in SKF © SKF Group SKF Global Spend Total SKF spend 2013 Direct Material 18% Total SKF spend is SEK 36 billion – direct and indirect representing ~ 50% respectively 44% Rings & Subcontracting 40 000 36 153 38% 35 000 30 000 20 000 Components SEK 17.7 billion 19 119 25 000 Steel Raw Material & Rolling Elements 17 034 Indirect Material & CAPEX 15 000 8% 10 000 12% 27% 5 000 Logistics 0 Total Direct Material Indirect Material 18% 21% SEK 15.6 billion CMD 2014 Facility Management Professional Services 13% © SKF Group MRO IT CAPEX The foundation is in place Current state & opportunity assessment New process framework Vision, strategy & future state New competence framework The new purchasing process framework - 2013 Management Processes Strategic Processes Operational Processes The New Purchasing Competence Framework 2013 Transactional Processes Manage Vision & strategy, Operating model & governance model Conduct Regular Spend & opportunity Analysis Provide sourcing support incl purchasing analytics Execute & place purchase orders Target Setting & Performance mgmt Develop Annual plan for strategic sourcing projects Manage performance reporting & budget integration Perform invoice processing Manage People & Competencies Execute Strategic Sourcing Projects Drive purchasing part of product development projects Manage Communication Manage commercial relationship with suppliers Perform & evaluate SQA audits Operational reporting Manage supplier development program Master data maintenance Supplier information management Manage Purchasing Processes & IT Technology Systems Manage QCDIM strategy Manage Stakeholder interaction Manage purchasing risk strategy Manage spot buys Demand management strategy (indirect) Manage supplier onboarding & execute local contract implement. Manage supply market analytics incl supplier innovation scouting Optimize contracts Manage Supplier Relationship Management Strategy © SKF Group Contract administration Goods receiving Purchasing Strategy Purchasing Strategy Opera ng model (solu on architecture) Governance Model Target se ng & performance management Project Management Project management Change management Category Management Strategic Sourcing Supply Market analysis Spend Analysis Demand Management/Consump on Policies Supplier selec on criteria Bid strategy RFx Management Nego a on strategy planning Fact Based Nego a on Contract design Cost management Total cost of ownership modeling Should cost modeling/clean sheet cos ng Value Analysis/Value Engineering Working Capital efficiency improvement Business case design Category strategy & target se ng Compliance management Supplier Rela onship Management Supplier development Supplier joint cost workshops Supplier performance management CSR - Corporate Social Responsibility Code of conduct Sustainability Sustainable sourcing Risk Management Currency Risk management Supplier Financial health Supply Chain disrup on Geopoli cal risk Commodity price development and vola lity Supply chain visibility Supplier Quality ISO 9000/ISO 14000 ISO 14001/ISO 50001 Supplier QA Audit/Supplier Quality Performance APQP/PPAP Six sigma methodology Purchase-to-pay process P2P process design Transac on management Purchasing IT system support Purchasing applica ons © SKF Group Purchasing report EMT 12w42.2 Security Class: Confidential How are we performing today? What should purchasing be doing? New job roles New organizational design Operational set-up What titles and job roles do we need to perform the processes? What organizational design best ensure we match processes, competencies and roles? What is the most efficient way of delivering the processes with minimum cost? © SKF Group Which processes are necessary to execute the role? Which competencies are required to execute the processes? New governance model Who is responsible for what decision in the processes? Our global presence Sourcing centres in • Chicago • Gothenburg • Pune • Shanghai International purchasing offices in • Japan • Korea • Turkey • Russia • Ukraine • Slovakia • Mexico © SKF Group CMD 2014 Responsible sourcing SKF Care in action – integrated part of purchasing strategy © SKF Group CMD 2014 Purchasing Strategic Direction AGILE – ADAPTIVE & ALIGNED Regional supplier base Supplier Rationalization Strategic supplier relationships Supply Chain Agility People development UNITE TCO – Q C D I M – Cash © SKF Group CMD 2014 Supplier relationship Management - Consolidation Supplier Consolidation DM 8,000 6,000 4,000 2,000 0 2012 Actual 2013 Actual 2014 DIRECT MATERIAL 2015 2016 Strategic Suppliers Preferred Suppliers Target 14 -1,000 suppliers Developing Suppliers INDIRECT & SERVICES Target 14 -5,000 suppliers © SKF Group CMD 2014 Transactional Suppliers Supplier relationship management – Localization 77% 80% 90% 85% 85% 80% 85% 90% 75% 80% 13% 15% 90% 25% 70% 75% 75% Sourcing localization 2012 2013 Target 2014 © SKF Group CMD 2014 90% 10% 10% Strategic Sourcing projects – Components Potential savings 140000 120000 • Strategic sourcing projects are addressing a purchasing spend of ~ SEK 1,275 million Sheet Metal Parts Started Q3 2014 100000 • Potential annual reduction of TCO (Total Cost of Ownership) of >15% 80000 60000 Castings Started Q2 2014 40000 Electronics Started Q2 2014 20000 Fasteners Started Q1 2014 • Supplier consolidation potential estimated to ~ 250 suppliers 0 0 © SKF Group CMD 2014 1 2 3 4 5 Ease of Implementation Strategic Sourcing projects – Indirect material Potential savings Strategic sourcing projects 2014 addressing a spend of SEK 1.3 billion 115.000 110.000 105.000 Under implementation 100.000 • Packaging / Lubrication / Printing/Car Lease 95.000 90.000 • Addressable spend SEK 550 million with >230 suppliers 85.000 80.000 75.000 RFx ongoing • Office Supply /Tool to drawing/ Metal Cutting tools / Abrasives / Gifts and Sales promotion 70.000 65.000 • Addressable spend SEK 703 million with >900 suppliers 60.000 55.000 50.000 45.000 40.000 Lubricants 35.000 30.000 25.000 Packaging Plastics Packaging Corrugated 20.000 15.000 10.000 M&S Printing project 5.000 Company cars Sweden 0 0 © SKF Group 1 CMD 2014 2 3 4 5 6 7 8 9 10 Ease of Implementation Strategic sourcing projects bringing down TCO TCO down 15 % on total spend for lubricants no of suppliers from 215 to 16 TCO down 10% on total spend for plastic & corrugated packaging no of suppliers from 160 to 30 © SKF Group CMD 2014 Purchasing ramp up and saving plan (vs 2012) 2013 2014 Fcst 2015 SEK 800 m SEK 400 m • New GPU org. in operation • New process framework • New competence framework, role descriptions and career path model • Sourcing waves 1 / Speed sourcing started to leverage spend across all BUs • Integration of BU Purchasing • Localization of the strategic supplier base © SKF Group • Separation of strategic tasks from transactional tasks • Sourcing waves and continued Speed Sourcing activities High Performance Purchasing organization • One SKF in Purchasing for full leverage of all spend in SKF • Category and business driven organization fully leveraging SKF’s purchasing power • Global job roles and decision matrix (RAPID) clarifying responsibilities and decision making • Supplier Innovation Forums with strategic suppliers • GPU supporting the full internal value chain (R&D/PD, After market) • Strategic Partnership Agreements • Focus on Total Cost of Ownership (TCO) • Common purchasing processes • Competence mapping and competence development program • Supplier consolidation through increased sourcing leverage • Strong alignment with the business through a clear target setting process • Highly competent purchasing professionals • Reduced supply chain risk and costs through top performing suppliers in Q C D I M Inventory reduction activities © SKF Group Focus areas to reduce inventory Suppliers Manufacturing Distribution Customers Forecasting and planning Supply structure and flexibility Inventory Product range and service policies © SKF Group CMD 2014 Business mix and demand variations Program cornerstones and objectives Increase supply flexibility © SKF Group • Reduce lead times from supplier to customer • Reduce manufacturing set up times and increase frequency • Balance regional manufacturing/ supply/ regional demand Optimize product range and service policies • Review/reduce product assortment • Review number of stocking points and stocking policies • Eliminate duplication of inventory across stocking points Improve forecasting and end-to-end planning • Improve forecasting and planning process to drive entire demand chain end-to-end CMD 2014 Program timeplan 2014 2015 2016 2017 Increase supply flexibility Optimize product range and service policies Improve forecasting and end-to-end planning © SKF Group CMD 2014 Pilots in selected product lines and regions Rollout to all product lines and regions Implement improved process (global roll out) UNITE UNITE © SKF Group Background • Current systems landscape is fragmented and partly based on old mainframe solutions that need to be replaced • Strategy to become the Knowledge Engineering Company puts new requirements on our processes and systems support © SKF Group CMD 2014 What we want to achieve Suppliers Purchasing Leverage SKF full global scale in sourcing Manufacturing Distribution Sales Improve forecasting and end-to-end planning Streamline processes to reduce waste Easy for customers to do business with SKF – One coherent interface across all platforms Standardize processes and master data globally One modern, integrated systems landscape © SKF Group CMD 2014 Customers UNITE – our approach • A business led program • Dedicated development and roll out organization • SAP as main software partner • Scope is sales, supply chain, purchasing and finance processes/systems • Gradual design and testing of new processes/systems in a series of pilots before fullscale rollout © SKF Group CMD 2014 UNITE rollout plan 2013 2014 2015 2016 2017 2018 2019 Rollout phase AMERICAS Italy ASIA-PACIFIC Design phase Country pilot 3 Germany Country pilot 2 Finland pilot Purchasing pilot © SKF Group CMD 2014 Template , France EMEA 2020 Kaydon update © SKF Group Kaydon Corporation Net sales: around USD 475 million Employees: around 2,180 Headquarter: USA Manufacturing: Friction control products (primarily bearings), velocity control products and specialty products, including environmental services. © SKF Group CMD 2014 Kaydon brands in the SKF Family © SKF Group CMD 2014 Kaydon integration - Synergies Cost synergies • Finance and legal • Purchasing • Logistics Target – USD 30 million by end 2016 Status – USD 12 million fcst for 2014 Sales synergies: • Renewable energy • Medical • Aerospace • Industrial aftermarket Target – additional sales of USD 50 million by 2018 Status – new business agreed, new wind order for USD 200 million (50% synergy?) © SKF Group CMD 2014 Kaydon integration – Financial performance • Sales development - growth is 7% in local currencies - good growth in both velocity control and friction control • Operating margin - Excluding PPA it has improved by approx. 300 basis points - PPA impact is some 500 basis points • Outlook Q3 - Continued good growth - Integration work continues - increased focus on sales synergies - continue activities on cost synergies © SKF Group CMD 2014 SKF’s priorities © SKF Group CMD 2014