AB SKF (publ) (SKFB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SKF Conference Call Fourth Quarter Results. [Operator Instructions] I would like to advise you that your conference is being recorded today, Tuesday, the 4th of February 2020. I would now like to hand the conference over to your first speaker today, Patrik Stenberg. Please go ahead, sir.

Thank you, and welcome, everyone, to this conference call on the Fourth Quarter Results. Speakers today are Alrik Danielson, our CEO and President; also Niclas Rosenlew, our CFO. We will, as usual, start with a presentation. It will take 20 and some minutes. And after that, we will be more than ready to take on your questions. So with that, I will leave the word to Alrik. Please.

Thank you, Patrick, and thank you for listening in on our call today. 2019 has been a solid year for SKF. During the last 6 months, we maintained a strong operating result despite falling demand. The consistent focus on cost reductions has allowed us to continue to deliver solid results whilst continuing to invest in our factories and in R&D. During the fourth quarter, we delivered a strong underlying operating margin of 10.3% and an underlying operating profit of SEK 2.181 billion. We saw a drop in organic sales of 2.9% with net sales of SEK 21.2 billion. Sales were higher in Asia driven by a strong demand in China, slightly lower in Europe, significantly lower in North America and significantly higher in Latin America. We have a strong financial performance, we have reduced our debt and been able to increase investments in manufacturing and R&D, as I mentioned. In recognition of this, the board has proposed to increase the dividend to SEK 6.25 per share. If we go to the next page and talk a little bit about the industrial business, we can see that the industrial business delivered a good operational performance on lower sales with an underlying margin of 13.3%, higher than last year, despite a drop in organic sales of 1.2%. Sales were significantly higher in Asia, relatively unchanged in Europe and Latin America and significantly lower in North America. The picture comes -- that you see here comes from Boliden Aitik copper mine where SKF has installed new online condition monitoring systems. Assets are being monitored from one of our REP centers. If you turn to the next page, and we talk a little bit about the automotive business, we can see that the automotive business saw a drop in organic sales of 7% and delivered an underlying margin of 2.4%. Sales were significantly lower in Europe and North America, lower in Asia and significantly higher in Latin America. Of course, we are not pleased with the Q4 performance of our automotive business. However, we are continuing to work diligently in reducing our costs. We expect lower demand for Automotive in Q1. But however, we have a competitive offering and healthy long-term order book. If we turn to the next page and talk about -- a little bit about the world, and we see -- as expected, we saw a decline in organic sales, as we had guided. 2.9% compared to last year, with net sales of SEK 21 billion. Sales in North America were 15.9% lower driven by a broad-based underlying declines in the industrial activity. This was accentuated by continued destocking at a main distributor and the impact on certain OEMs, which SKF has a significant exposure to. In Europe, organic sales were 3% lower than last year, with relatively unchanged industrial demand, while Automotive volumes were significantly lower compared to last year. The negative development in Europe is mainly due to tough market conditions in Germany. On the other hand, for example, eastern Europe and the Nordic countries have performed well. Organic sales in Asia increased by 4.3%, with significantly higher industrial demand and lower demand for Automotive. We saw strong development in China during the quarter, but as you will see in our outlook for Q1, the coronavirus adds some uncertainty for Q1. In Latin America, sales grew organically by 8.2% compared to last year, and we saw relatively unchanged volume within the Industrial and significantly higher volumes in Automotive. If we take the next page and talk a little bit about some of the interesting new businesses that we have taken, I want to highlight the Gerdau case, which Gerdau is one of the world's largest steel producers, and we have signed a new fee-based agreement aimed at increasing productivity and reducing unplanned downtime in 2 of their main mills in Brazil. These contracts include our full range of products, services and remote monitoring. You have also seen, during the quarter, with similar contracts announced for customers like BillerudKorsnäs and Nordic Paper, which we are also very proud of. This is something that's continuing. If we then turn to the next page, and we talk a little bit about new technologies. Here, you see the sensor roller system that we have developed in our Sven Wingquist test center in Frankfurt that has proven its capabilities. And all of you who were with us in the last -- our Capital Market Day in Frankfurt, you also saw the centers, and we talked about several developments. And this, of course, is one of the most significant one. The sensor roller allows us now to monitoring the remaining useful life of the bearing, and even better, the use of the load measurement we could in the future, even help control the process, thereby increasing production or extend the life of the bearing. One of the main applications of this is within the wind industry where failures can be extremely costly. If we then turn to the next page, and I give the word to you, Niclas.

Thanks. Thank you, Alrik. Thank you. And if we turn to the next page, I'll take you through our financials for the quarter, starting with sales. So the net sales increased by 0.1% in the fourth quarter. Organic sales were, as Alrik mentioned, 2.9% lower than last year. For Industrial, we saw a decline in organic sales by 1.2% and for Automotive, there was a decline of 7.3% in the quarter. The currency effect on sales was positive in the quarter by 4.8%, with largest effect, as usual, coming from the U.S. dollar, the euro and the renminbi. The structure component was a negative 1.8%, and this related to the divestment of L&AT last year, the L&AT business. We turn to the next page. We have seen a significant slowdown in growth, and this is something you're all aware of. Growth since the peak in Q2 2018. Since then, we've been working quite hard on adapting our operations and our business to a lower growth scenario and reducing our cost base. Looking at the operating profit development, we have been reasonably successful in this process, quite successful actually. In the fourth quarter, we managed to deliver an underlying operating profit of SEK 2.2 billion, which is actually on par with last year despite the lower sales. We move to the next page, talking about the operating profit bridge for the quarter. Firstly, we had a negative effect from divested companies of SEK 1,274 million. And that's, again, related to the L&AT divestment this -- divestment that we did in December last year. So in December 2018, to be specific. Furthermore, the currency impact was positive SEK 101 million compared to last year. And just to note, that's actually lower than what we guided for, which was SEK 250 million. And then in terms of operational performance, we saw an improvement by SEK 181 million year-over-year. Organic sales and manufacturing volumes was SEK 357 million lower. We had a negative effect from lower sales and production volume. Pricing, on the other hand, continued to be positive, but was offset by negative mix and cost development was good. And we had higher realized cost savings than cost increases, which we are very pleased with, resulting in a positive net contribution to operating profit in the quarter of SEK 252 million compared to last year. We also had SEK 286 million lower costs for restructuring, impairment and customer settlements compared to last year. If I comment on the -- just take the opportunity when we have the bridge here ahead of us or in front of us to provide some perspective on the bridge for Q1 2020. In terms of M&A, we expect no effect. In terms of price mix, we expect to see continued negative price mix, with price slightly positive then more than offset by a negative mix. What comes to cost development in Q1, we expect to see -- expect to continue to offset the cost inflation with cost savings. If we move to the next page and the performance by customer group in the quarter. In terms of Industrial, as mentioned, the organic net sales in Industrial decreased by 1.2%, with sales in Asia significantly higher; sales in Europe and Latin America, relatively unchanged; and sales in North America significantly lower. The underlying operating margin for Industrial was 13.3% compared to 12.9% last year. Cost savings contributed positively to the result while lower sales and production volumes as well as material costs had a negative effect in the quarter. For Automotive, the organic sales declined by 7.3% in the quarter with significantly lower sales in volumes or lower sales volumes in North America and Europe, sales in Asia were lower, while sales in Latin America were significantly higher. The automotive business had an underlying operating margin of 2.4% compared to 3.8% last year. The result was negatively impacted by lower sales and production volumes. Moving on to cash flow. We had a strong cash flow during the year, despite having increased our investments in manufacturing significantly over the last couple of years. As Alrik mentioned earlier, we invested significantly. We invested SEK 3.4 billion last year, up from SEK 2.6 billion in 2018. Cash flow in Q4, excluding acquisitions and divestments, was SEK 947 million compared to SEK 1,937 million the year before. The decrease is mainly due to higher investments. As you can see here, some SEK 800 million more in investments. So higher investments in 2019. The cash flow, excluding acquisitions and divestments for the last 12 months, was SEK 5.7 billion. Move to next page on net working capital. The net working capital was 27.7% of sales at the end of the fourth quarter, which was 0.1 percentage points lower than in the fourth quarter last year and 2.2 percentage points lower than in Q3. A few comments on our capital structure. Net debt-to-equity ratio, our net debt-to-equity ratio was 59% at the end of the quarter. The net debt/equity, excluding leasing and pensions, was 10%. We saw a reduction in provision of SEK 1.7 billion for post-employment benefits due to higher discount rates in Germany and in the U.S. And as has been discussed in the past, we are not adding to the post-employment benefit plans, but they do move with the market rates. Moving on, sustainability is very much at the core of our business model. And in October, we launched SKF's new Green Finance Framework. This is connecting our funding strategy to the climate objectives. We also issued our first green bond. We were among the very first green bond issuers as an industrial company in the world. So quite pleased with. The bond was very well received in the market. It has a 10-year maturity, EUR 300 million at record-low interest rate. And then we take the opportunity here as a theme, obviously, it's our margin stability. We take the opportunity to share a bit of kind of light, additional light on some of the activities that we are doing. As you know, we've been working on reducing costs and improving productivity, and we will very much continue to do so. We have 2 updates to provide or 2 examples of what we are working on. First of all, on the ERP system, we made good progress recently with our ERP rollout, and we are now taking steps to make sure that the rollout can be done in a more efficient way. We will use info purpose systems, for instance, sales, finance and manufacturing, which should make the rollout faster. We -- in this area, we expect that the cost is at about SEK 400 million to SEK 500 million per year, which is about half of what we have discussed some years ago or guided for earlier when it comes to the ERP rollout. And time frame here is until 2025 in different stages. We are also implementing a new structure for our support functions, regional centers of excellence are being created, and we are very much kind of adopting a more digitalized way of working. We expect this to be implemented during 2020 and 2021 and savings to be fully realized on an annual basis by 2022. And just to give you some perspective on the support function financial impact, we expect the savings -- run rate savings, again, from 2022 to be in the region of SEK 400 million annualized or run rate. And we expect some SEK 400 million in one-off costs in the next 2 years, so 2020 and 2021. And actually, related to this or taking the opportunity, just to comment on another thing here. We are considering to introduce adjusted profitability and also reporting on our items affecting comparability from Q1 onwards. That's just a head up -- heads up, and we'll obviously come back to that then in Q1. Moving to the next page, please. In terms of the demand guidance, demand in the first quarter of 2020 is expected to be lower for the group. As Alrik mentioned, the current coronavirus outbreak in China, of course, contributes to the general uncertainty in the market. And as of today, we expect to open our factories on 10th of February, which is 1 week later than originally planned and very much in line with the directives from the local governments in China. I'm happy to say, which is, of course, most important, happy to say that so far, none of our staff have been infected. Next page, please. Finally, some additional guidance for the fourth quarter. We expect the finance net to be about SEK 225 million negative, including IFRS 16 effects. Based on the exchange rates at December 31, the currency impact on the operating profit is expected to be positive by about SEK 60 million compared to the first quarter last year. And for the full year, we expect a tax rate of about 28%. And as discussed, over the last couple of years, we have consistently increased our investments, and we are actually continuing on that path. We are accelerating our investments in property, plant and equipment. And in 2020, we expect to see additions to plant and property of SEK 3.3 billion. With that, I give the word back to you, Alrik.

Thanks, Niclas. And then if we turn to the next page. To summarize, I'm proud and happy to be able to say that the team has delivered a continued strong performance in the fourth quarter despite lower sales. This is, of course, not something that just happens, but it's a result of the activities that we've talked about several quarters on how we have sort of have prepared for this. We just delivered a stable underlying operating margin, and as we stated previously, we have been able to offset cost inflation by cost savings. With our strong financial position, we have been able to increase investments in our manufacturing to record levels, which will, of course give very good effects in the future. Whilst at the same time, investing in reducing both our own and our customers' CO2 emissions through technologies and services that help improve the performance of the rotating equipment and activities beyond that, that you will see in SKF. You will hear more about that in the future. We're also continuing to invest in technologies that enable us for our fee-based offering, machine learning, data analytics and of course, condition monitoring, using cloud and edge-computing technologies. With those last comments, I hand over to you, Patrik.

Thank you, Alrik and Niclas. With that, we are ready to take on your questions. So I leave the word back to the operator. Please, go ahead.

[Operator Instructions] And the first question comes from the line of Olof Cederholm from ABG.

It's Olof with ABG. I have a question regarding the -- if we start there with pricing, very impressive strength in pricing here. Are you seeing any short-term pressures at all going into Q1? Or are you still defending price well?

I think we're defending the position well. Of course, like we've always said, in a weaker market, there is always a different possibility. But as you see, with technology, and working well, the value chain is still possible to defend our margins in a good way. And I'm specifically pleased with -- when I look into the long-term order book, for instance, in Automotive, how it's solid and with good profitability.

Great. And then a question on the cost savings, which are also an equally impressive. The -- we got some information, of course, on the longer-term cost initiatives that you have. Is it possible to also give some indications on things that you've done that will affect 2020 and 2021 in a material way?

Well, so I mean, we're also quite pleased with where we've come so far. And the couple of examples that we went through are just, again, examples. I mean there is a number of different things we are doing. And as you might have noted, we are not having a program, per se, but it's part of our normal operations. So it's continuous improvement, and it's -- cost down is one thing, but it's also very much investing in productivity. The investment levels, hopefully, should mean early to find out higher productivity, lower costs going forward. So a number of things around them. So there is no magic to it. It's something that we'll continue to work on.

All right. And then lastly for me. In the bridge on the cost savings and cost inflation bit of the bridge, is it possible to split out sort of the -- so we get a sense for how big the cost savings actually are year-over-year and versus the cost inflation and so forth?

Olof, It's Patrik here. Of course, if you look at the bridge, obviously, if we strip out the operational things, we had a net saving of SEK 252 million in the quarter, which we are very proud of, obviously. In there we had a continued headwind from raw material, actually slightly worse than we guided for to an extent of about negative SEK 90 million or so. We still have the underlying cost inflation that is relatively on par with what we've had before, but [ SEK 225 million ] negative, and obviously, offsetting that quite a significant contribution from savings, yes.

And the next question comes from the line of Erik Golrang from SEB.

I have 3 questions. Starting in Q4 and the demand outcome there, was that -- I get the sense that it was a bit better than expected. Is that correct? And if so, in what areas? And then the second quarter, on your first quarter or second question, on your first quarter guidance, would that have been any different if you would have done this a couple of weeks ago, say, prior to the corona concerns? And then on the third question, regarding the ERP implementation and the cost for that, should we interpret your comments there on the numbers that costs come down by around SEK 100 million per quarter, already in the first quarter of 2020? Or is this more of a gradual phase in to that lower cost level?

So if you start -- if I take -- Alrik here, take the first 2 questions. I can tell you that, of course, yes, as you know, we have come in better, and we're specifically happy with what we see in Asia with a very, very solid growth, not only the traditional segments, but also general sort of distribution and general industry doing well in the fourth quarter. Europe, outside of Germany is actually also better maybe than what we had expected before. When we look at Q1, definitely so that we have taken consideration with the effects of what's happening with the buyers in China on the supply chain in our assessments for Q1. So we have downgraded our view a little bit there. We don't believe that over the year, it's going to be such a large -- I mean, if it's solved now in relatively quickly, we don't believe that there's going to be a long sort of effect of this. But of course, during the Q1, we're just stopping 1 more week, and then when it starts, again, we will certainly have some kind of logistics hiccups, and we're sort of taking that into account.

Yes.

So without the -- would that have been the guidance of slightly lower demand than without the corona consideration?

I don't think we want to speculate exactly that what is the effect. But as Alrik said, I mean, yes, we have kind of downgraded our thinking a bit, and now talk about minus 4% to minus 8%. But exactly, would it had been minus 2% to minus 4% or whatever, without the corona, kind of it's better not to comment on that, but it has a negative effect.

And on the ERP, so the main driver really for the changes we are making and the improvements we are making is speed. So of course, cost is an additional bonus. I mean, now we have a combination of speed and costs down or high -- more speed and lower costs. I don't think it's as straightforward as you said, SEK 100 million per quarter. I mean, we have had -- we've taken down the ERP costs over the years already a bit. So SEK 500 million and change closer or SEK 550 million or so was the number, I believe, for 2019. And now we say that we're aiming more for numbers between SEK 400 million and SEK 500 million. So in that sense, it's not a major, major cost improvement. But again, a combination of slightly lower cost and kind of better speed is what we are aiming for here.

And the next question comes from the line of Klas Bergelind from Citi.

Klas from Citi or C-I-T-I. And first, on the cost savings, sorry, to come back to this, a big number, well done. But Niclas, savings around SEK 300 million ahead of expectations this quarter. How much -- could you help us a little bit, should we carry forward, as you're talking also about SEK 400 million from support functions. I'm trying to understand if the SEK 400 million is coming on top of continued savings like we saw this quarter? Or is that is just the new savings we should carry? And if you could also say something about the raw materials impact likely and the impact from restructuring in the first quarter? I will start there.

Yes. If I comment on the overall cost picture here. So as we said, I mean, the guidance is that we will offset the inflation, which is an estimated SEK 225 million. So that's what we, at a minimum, want to do. Then we've been a bit more successful here in Q4 and actually in Q3 as well. And of course, if that happens, only better or even better, but I don't think we should just assume that this SEK 500 million and change of savings that we saw now in Q4 will be the case in every quarter. So you can call it cautious, but the guidance is -- will offset inflation. And then on the longer term, yes, the -- if we talk about the support functions, for instance, and combine that with some savings from ERP. Over time, this would be in addition to what we are talking about here. But do kind of remember that it will take time to get there. So we deliberately -- I've said that we have a 2022 run rate there.

And road map?

It's Patrik here. Road map, we expect almost no effect in Q1, actually. So it's a less of an issue going forward than it has been in terms of headwind during 2019.

Okay. And then my second one is on price mix. I understand that it was negative now, but with pure pricing flat. But I struggle a little bit to see why the mix turned so negative in the quarter when I look at how Industrial traded versus Automotive. Industrial was pretty solid. Or was the impact from wind, et cetera, that big in the quarter? So I'm trying to understand how should -- how we should think about the mix component going forward?

Yes. And I mean pricing was actually slightly positive, not only flat, then offset by mix. And I mean mix is -- you see it in the page where we have all the customer industries, the pluses and minuses. I mean, essentially, we have a larger proportion of, for instance, wind bearings as a proportion of total sales. And the margins there are somewhat lower, and that then leads to the kind of negative mix.

Okay. My final one is on China, for you, Alrik, and coming back to the strength here, you're guiding total Asia Pac slightly higher now. And I appreciate that the comp is 8% easier, but you also highlighted some caution from corona in your guidance. So what are we seeing on China right now? Interested to hear more Industrial versus Automotive towards the end of the quarter, but also into the first year.

Well, as we said in the quarter, what we saw a good, broad sort of a performance, not only in the traditional wind and railway and so forth, but in the industrial space, really broad-based. As you can see from our reports, a really good development. And of course, Automotive is still negative. So what's happening now? Well, it will also, of course, depend on how quickly this situation with the corona is solved. And we started very, very quickly with the network inside SKF. We contacted everybody. We know we have 6,200 employees in China, and we have no cases of anybody being infected, and we have even helped some of our suppliers who have less prepared in this to do this. And we see a completely different way this time around how the government is also really taking very fast and good measures to contain this. So at the same times, of course, we're stopping 1 more week because of the regulations. Our logistic center has already been approved to start-up. So that we are starting, but we have to wait until the 10th of February to start our factory. And what we believe then is, yes, you have 1 week there. And then you have, of course, as we start, there is going to be some logistics hiccups in -- that will effect the Q1. But if this now sort of culminates rather quickly as time goes by, well, we will -- we think that part of this will be recovered during the year. And maybe there will even be stimulus from the government, who knows, there to try to offset this. So if we look a little bit positive on it and that the government will actually release activities, and we have now seen the culmination, well, then it will affect our Q1, but it will not really be a major issue for the full year.

And the next question comes from the line of Andre Kukhnin from Credit Suisse.

It's Andre from Credit Suisse. I'll go one at a time. Could I ask about the manufacturing impact in Q4 in the P&L and the bridge? And what you expect for Q1, please?

Andre, it's Patrik here. On the manufacturing side, it was almost no impact. We actually managed to reduce our inventories of finished goods slightly more than we did during the fourth quarter last year. So in fact, we had a very slim negative effect on EBIT in the quarter.

Got it. And for Q1, how are you thinking about your manufacturing plans?

Usually, we have a seasonal buildup of inventories in the beginning of the year as we always have. Added to that, I would say, we still have an ambition over time to reduce our inventories also to get closer to our net working capital to sales target of 25%. We have started to move towards the 25% target now. We were at 27.7%. So that is still the overarching ambition, but there will be some seasonal build up as usual in Q1.

But year-on-year, is there -- do you expect inventory to be down? Or about the same in Q1?

We probably do not expect any major changes there, no.

Right. Got it, got it. And on savings, just to understand the kind of the drivers of it a bit better. So you've generated kind of well over SEK 1 billion of savings in 2019. And I guess, SEK 400 million or so is from low ERP costs. But even the remainder of it is very impressive, given that I think the charges for restructuring were barely SEK 0.5 billion, and the headcount reduction is about 1,000 or 1,500 if you compare averages. So is this kind of the wrong tracker for us? Tracking your kind of charges and headcounts to gauge future savings? Is there something else there that you're doing that we should be aware of for 2020?

Well, first, just a small correction. The impact from ERP 2019 compared to 2018 wasn't that material. I think we have it in the report, but it's -- it was less than what you said. I mean, I think, the reference to the higher amount is many years back when we had around SEK 1 billion per year. But now, again, it's been in the region of maybe SEK 600 million, SEK 500 million, SEK 600 million. So -- and it will come, as I said, slightly down from there depending on the speed of the rollout. I would go back to kind of the earlier comment on the costs. This is -- I mean, we are taking action, and we are working on productivity and cost, of course, across the board, you can say. So yes, as you've seen, the headcount has also continued to come down, and that is one indicator. And of course, a direct figure for cost down. And then there is other efficiency measures. So would love to give you a very specific kind of reason, which you could then track or action, but it's actually a broad-based set of actions, which we'll continue working on.

Got it. And on support function costs, you've laid out clearly the run rate and the one-off costs. But do you expect savings already in 2020 or 2021 of any magnitude from this program?

Yes, yes. So we will do it gradually. I mean there is almost monthly activities happening in the next 24 months, so this year and next year. So there will be a gradual impact coming from it. And then the SEK 400 million that I mentioned should be then the run rate in 2 years' time. So gradually moving towards that over 2 years. And then you have the one-off costs.

Right. So we get to SEK 400 million run rate at the start of 2022?

Yes. Exactly.

Okay. Okay, that's clear. And then just final one on raw materials, very clear in terms of near-term indications, but kind of fundamentally for 2020 at current spot rates, do you expect a tailwind towards the end of the year? Or it's kind of more of a neutral evolution across the year?

That's correct, Andre. If you look at the spot prices on raw materials, they have been coming down over the last 6, 9 months. And obviously, as you know, we have a time lag before it affects our costs. Obviously, 2 to 3 quarters. So we have had a headwind throughout 2019. We expect it to be awash for Q1 and then we'll think going forward.

And the next question comes from the line of Gael de-Bray from Deutsche Bank.

I have 2 questions, please. Firstly, I'm trying to gauge the risks on global supply chains from the coronavirus. So I mean when you get Chinese components being imported, say, into the U.S., how many weeks of inventory do you usually keep on hand? And have you been generally working on any mitigation strategies for the kind of risks related to the corona? So that's question number one. The second question I have was on the cash flow side. I was surprised not to see a greater reduction in working capital this quarter as usually happened in the fourth quarters. So can you talk a bit more about this? And whether you really consider the current level of inventories to be appropriate right now, given demand is -- where demand is expected to be and given the uncertainties, obviously, related to China?

So if you take -- this is Alrik here. If you take the imports that we are doing to the American market from Asia, there is quite a significant inventory in this. We are living on the fact that we have very good delivery performance in the U.S., and there are some possibilities to mitigate this through actually -- I mean, if the supplies is now starting, our factory start as decided by the government now on the 10th, and we get it going, I don't think it's going to be an issue for us. What we see is, of course, in general, for China -- China is for us today mostly an import market where we are shipping bearings mostly from Europe to China. And again, there, if it's now starting up again here in a week, and so we hope that we're going to be quite stable on this. And as I said, our warehouse has already been allowed to start working.

And on the cash flow, I mean, I think it's a good observation that the -- let's say, the positive impact coming from changes in working capital wasn't that high compared to the year before. The year before, on the other hand, i.e. Q4 2018, we had a very high reduction. Maybe you can say, abnormally high, but very high, and we had less so this year in Q4 2019. I think the -- I mean, as you know, and this is kind of a recurring theme, and it's very much something that we are working on internally. I mean we have -- if we think about our working capital as a percentage of sales, it's higher than what our target is, and we absolutely want to get to the target. At the same time, we need to be realistic here, and it's going to take time because it's very much related. It's not just about reducing inventories, but it's very much related to our footprint activities. So where do we manufacture and as you know, we are making gradual changes there. And then also the so-called world-class investments, which is both kind of digitalization and then automation of our manufacturing. And over time, this should really lead to us being able to have a lower level of inventories and getting more towards that 25%. That's a -- I know that's a bit of vague answer, but hopefully that helps somewhat.

And the next question comes from Guillermo Peigneux from UBS.

Guillermo Peigneux from UBS. I just wanted to ask actually a couple of questions, really. One is related to Industrial and in particular to the wind market outlook. I guess, in China, we're moving away from the feed-in tariff framework to the auction framework. And I wonder whether you're seeing double ordering or double booking of orders or a little bit of unsustainable activity there, especially when you think towards the need -- to the end part of 2020 going into 2021? A very similar question with regards to the U.S.A. At the moment, we're seeing record volumes on wind. But then you're seeing significantly lower volumes. So I was trying -- I wanted to make sense to some of these numbers. If you could shed some light, it will be great? I have a second question, but I'll keep it for the -- after your answer.

So if you take China and what's happening in China, and of course, we all know that there is this uncertainty going into 2021 as far as wind, but we're not so -- when we look -- try to understand what's going to happen, it's not clear yet if the government will not take the opportunity to maybe continue to see maybe the stimuli in the wind sector also into 2021. For us, it's not 100% clear if that's not going to continue. As far as -- in the U.S., you're absolutely right. It's a particular business that we have exited in the U.S. That's giving us this negative comparison in U.S.

Very clear. And I want to follow up with a question on the SEK 400 million to SEK 500 million. And I guess, implementation of ERP, would you be spending most or capitalizing some of these costs as we go forward?

Well, I mean, at least so far, I mean, we've capitalized, say, a relatively small portion of it. And there is not a plan to change that. So maybe the best assumption for the time being is that, that majority will be expensed and then a slice of it will be capitalized.

And the next question comes from the line of Lars Brorson from Barclays.

Maybe just first to you, Niclas. I mean, I think, it sounds like it would be helpful if you could remind us what the P&L impact was from ERP in 2018, 2019 and expected in 2020?

Yes. I mean if you take this with a kind of a grain of salt now out of memory, happy to come back to this if these are completely wrong. But we had closed, well, 6 -- call it, SEK 650 million. SEK 600 million to SEK 650 million has been the impact state -- or income statement impact in the last couple of years or 2 years. And then this is a combination of project costs and then some license spend. So in Q2 2019, we had a specific kind of license, the S/4HANA license.

So there wasn't a step down in 2019, just to be clear?

No. There wasn't a step down in 2019. That's correct.

And your expectation for 2020?

Again, as said, we are -- we've spent some time on kind of ERP and system landscape and digitalization, as I guess everyone else is doing as well, but concluded that there is a faster way to roll out. And it's very much driven by speed now. So we also looked into the costs, as described here earlier, and estimate that the run rate costs or the annual cost should be around SEK 400 million to SEK 500 million, which is a step down from 2019 and 2018 as well. But I would add some caution there that speed is the most important thing. And if we figure out a way to roll out the systems much faster and take a slightly higher cost, then we'll definitely do that. So this is an approximation, this SEK 400 million to SEK 500 million a year.

Can I ask secondly, Alrik, to your Aerospace business. I've got that to be about a sort of SEK 5 billion or so revenue business, maybe SEK 6 billion, SEK 6.5 billion, if I include part of your industrial distribution business. Can you talk a little bit about the impact associated with the production cuts from Boeing's 737? So not just your direct exposure there, but more broadly across the supply chain, how much of that have you already seen, if you like? How much is embedded in your Q1 outlook? How should we think about that part of your business through the quarter 2020?

Well, yes, of course, we have seen some in this case, but there is also -- we are a broad supplier to all the engine programs and aircraft programs, both in the U.S. and in Europe. So a little bit what we -- what is reduced in one end, hopefully, it's coming back in the other.

So you think your Aerospace business will be a stable business in 2020?

It will continue to deliver good growth also in 2020. That's what we foresee.

And the next question comes from the line of Andreas Koski from Nordea.

I have a couple of questions. And the first one is on your customer settlements and impairments that you have been taking for several quarters now. Are they related to any specific customers? And how long do you expect them to go on?

Well, it's a number of different cases. So it's not related to one specific customer over the years. And...

Are they related to any specific product groups because as far as I can remember, that they haven't been as regular in the past?

Yes. Automotive is the short answer.

Okay. And should we expect them to continue from here? Or...

Well, that is -- I mean, this relates to old cases, 5 -- goes 5 years back or so. So it's a continuation of that. It's a very little kind of mew that has popped up. And we obviously hope -- very much hope to close on all of this ASAP. But there, it's quite hard to give a definite time line or a promise.

Okay. And then coming back to your cost savings of around SEK 500 million, SEK 550 million in the quarter. How much of that was realized already in Q1 '19? And I am looking at my bridge. It looks like you had cost savings of SEK 200 million or so back then. But do you have a better answer?

Andreas, it's Patrik here. The simple answer is, obviously, if you look at the numbers we published for -- regarding the staff levels, we have had quite significant reductions in personnel throughout the 4 quarters of 2019 compared to end of last year, we're about 30 -- more than 1,000 people less in the group today. And that has been a gradual reduction throughout Q1, Q2 and now more significantly also in Q4.

Okay. About that -- yes, you don't have a number to give what your savings were in -- just to try to get an understanding what the rollover savings will be for Q1 '20?

I would say the savings, we've been having good contributions throughout the last 6 months mainly. We were about flat on the cost line in Q2, but more significant contributions in Q3 and Q4.

Yes, yes, yes. Okay. And then lastly, just maybe for Alrik. I'm looking at your gross profit margin. It's been between 24% and 25% for the past 5 years now. That's the same time, as you have been working a lot with productivity improvements. What's your view on the gross profit margin? Do you see a lot of upside, or is this the level we should expect SKF to be at, around 25% or so?

Well, it's always -- it's interesting, right? You have in bearings and our products, they are the most common industrial products you can find in the world. And of course, there are businesses with very, very differentiated with very, very high margins. And then there are some other businesses that are more competitive and that you can choose to be in or not choose to be in. And of course, as we work forward, at the same time, I think there is a possibility for us to both take market share as we become more competitive and work with efficiency, but of course, also to strengthen our margins. So my long-term ambition is, of course, to improve our margins, as well as maintain and -- our place in the marketplace and expand it.

This does conclude our question-and-answer session. Patrik Stenberg, please continue.

Okay. Thank you very much for listening in to this conference call on fourth quarter. I know we're out of time. I also do know that we have a couple of listeners that did not get their questions through. We would be happy to take your questions directly on the phone after this call, if possible. With that, thank you all for listening in.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.

Thank you.