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

Welcome to the presentation of our third quarter results. As of this quarter, we'll use videos on Teams instead of the traditional telephone conference. This also means that we will use the chat function for the Q&A session. So please post your questions there, and we will answer them after the presentation. Today's speakers are our President and CEO, Alrik Danielson; and our CFO, Niclas Rosenlew. With that, I leave the word to Alrik.

Thank you, Patrik, and welcome. Welcome to the SKF Q3 call. And I tell you, I'm so pleased to stand here in front of you also this quarter to present yet another solid set of numbers. As you know, we have been working many years and hard now for -- to implement our strategy, and it's starting to drive the rumble for real. Despite a 5% lower sales than last year, we managed to create a 13-plus percent operating margin. I think this must be some kind of record in SKF history. I have to look back and see how far back we have to go for to see these kind of numbers. And of course, it's based on this that we're actually doing what we set out to do, and it's starting to have these kind of results. Cash flow, if you remember, in the second quarter, due to the low sales, we were suffering. Now we've come back strong, and we've shown again that cash flow is a forte from SKF, and we have delivered more than SEK 2.2 billion -- almost SEK 2.3 billion in positive cash flow during the quarter. If we look at the next picture, we saw the Industrial business having also very good performance. You can imagine, with a drop in organic sales of almost 7%, we managed to kick in with an almost 16% operating margin. And we saw higher volumes in Asia and Latin America. We saw significantly lower volumes in Europe and North America. But nevertheless, we managed this excellent result. And again, thank you to everybody. I mean it seems like this is going to be my theme. Thank you because it's, of course, a lot of hard work behind it. The picture you see here is a unit that we are doing for tidal wave energy where we will help to harness the energy in the tidal streams of the coast. And this is yet another example, I think, where we're putting our knowledge to use to develop solutions for energy and environmentally-friendly technology. To take the next step, we're talking about the different areas. We can see that what we have done -- and we've been talking Europe for Europe, Americas for Americas and Asia for Asia. This quarter, the highlight is on North America, where we have invested 300 -- we announced investments of SEK 350 million in expanding our manufacturing in Sumter for slewing bearing in South Carolina. We are putting SEK 200 million investment in localizing manufacturing of taper roller bearings in Mexico coming from China. It's not only going from Europe or to China, but it's also going the other way around. And this is what's possible with Industry 4.0 automation and digitalization. You can basically be competitive with the right technology, competitive everywhere. And this means that we are actually consolidating the North America completely according to the strategy that we have set out. If we turn to the next page, talk about Automotive. I'm so pleased to see that at the high pace of transformation that we have been driving now for a while is really starting to give results. And despite a slightly lower organic sales in the quarter compared to last year, we managed to create an operating margin of 7.4%. We continue, as you can see in this picture, this is what I want to show with this, to grow in the electrical vehicle side with excellent new offers and a good traction in the electrical powertrain all over the world. And I'm really pleased because we know that this is -- of course, this is the future. And as of this month, Norbert Neumann is helping me as the new responsible for Automotive -- our Automotive business in SKF. And I'm really pleased with that, and that will give us increased traction in this area. Next page, I just have to talk about cleantech and what we're doing. Now about -- in June 2019, we acquired a new technology. Now we have developed it. It's our technology. We have a possibility of cleaning oil down to nanoparticles. And you can imagine, it's not only about reusing oil for better environmental -- very big environmental effects, but also lower cost, but also with absolutely clean oil machines work better. So it's right into our strategic goal of providing fee-based businesses based on longer and longer mean time, to say. I'm really excited. We have our first external customers. We are deploying this in Italy, in Germany, in China, in Latin America, and we're quickly now sort of making this technology available. We will talk more about this on the 4th of November during our Capital Markets Day, but I am so excited about this and how this fits perfectly into our deliverables around the rotating shaft. And with those words, I think I stop here, and I leave the word to you now, Niclas.

Thank you, Alrik. Sequentially, our sales improved significantly, albeit, from a very low level seen in Q2. Compared to last year, our net sales decreased by 11.6% in the third quarter. Organic sales were 5.1% lower than last year. The currency effect on sales was negative in the quarter by 6.5%, with the largest effects, as usual, coming from the dollar, the euro and the renminbi. Starting off with our sales performance. So despite the lower sales, we had a strong operating profit. And as you know, we've been working hard on improving our flexibility and our ability to proactively adjust to market fluctuations. This flexibility has truly been put to a test in the last couple of quarters and during this year. And we can now clearly see that we are delivering on the efforts. I want to extend a big, big thanks to our colleagues, who have all contributed to this. In the third quarter, our adjusted operating profit was SEK 2.5 billion, corresponding to a margin of 13.3%. And our efforts to transform how we work actually continues, very much continues. We are investing in innovation. We are improving our competitiveness, and we are adapting our operations and our ways of working and will continue to do so. So our profits improved despite the lower sales and currency headwinds, as we continue to invest in innovation and invest in competitiveness and also deliver structural cost savings. And let's go through the profit bridge one by one here. Firstly, we had a currency impact, which was negative by SEK 376 million compared to last year. On the other hand, our operational performance was SEK 471 million positive year-over-year. Specifically commenting on our operational performance, the organic sales and manufacturing volumes were lower by SEK 624 million. We had a negative effect from lower sales and production volumes. But then on the other hand, both price and mix were positive in the quarter. Cost development continued to be very good. And we saw net cost reductions amounting to SEK 1.1 billion compared to last year. And as Alrik mentioned, the SEK 1.1 billion included about SEK 100 million of government contributions. During the quarter, we continued to kind of form the company and form the operations. And we had a net reduction of about 650 permanent employees. And this in addition to the reduction we've had in the first half of the year. These efforts will very much continue. And as a result, we expect to see a continued elevated level of restructuring costs also during the remaining part of the year. Commenting on Industrial and Automotive. So on -- in terms of Industrial, the net sales decreased by 6.9%. The sales were higher in Asia and Latin America, while sales was significantly lower in Europe and North America. The adjusted operating margin, as Alrik commented, was 15.8%. We're very pleased with that compared to 13.9% last year. Cost savings contributed positively to the result, while the lower sales and production volumes had a negative effect. On the other hand, for Automotive, the organic sales were about flat, so declined 0.7% in the third quarter, with sales volumes being significantly higher in Asia, higher in Latin America, lower in North America and significantly lower in Europe. The Automotive business had an adjusted operating margin of 7.4%, also quite pleased with that compared to 4.6% last year, and cost reductions contributed positively. When it comes to our working capital, it was 28.7% of sales at the end of the quarter, which was 1.2 percentage points better than at the end of the third quarter last year. We reduced our inventories during the quarter and inventories as a percentage of sales improved compared to both last year and the previous quarter sequentially. And then on the other hand, we increased our receivables and payables. In terms of cash flow, which is -- has been -- is and has been and will be a focus area for us. Our cash flow in Q3, excluding acquisitions and divestments, was SEK 2.3 billion compared to SEK 2.1 billion last year, also something we are quite pleased with. Our net working capital contributed positively, and we had slightly lower investments than last year. Saying that, we continue to invest at similar levels as last year, despite the economic downturn. The cash flow for the last 12 months is SEK 4.3 billion. So we continue to generate positive cash flows also throughout this economic cycle. In terms of our net debt/equity ratio, we continue to have a very strong balance sheet, including liquidity. The net debt/equity ratio was 59.8% at the end of the quarter. And excluding leasing and pensions, it was 8.5%. The provisions for pensions net increased by SEK 636 million in the third quarter, and this was mainly due to changes in discount rates. And with that, I'll hand back to you, Alrik.

Thank you, Niclas. Well, summarizing, our strategy implementation is giving the results that we were expecting, despite lower sales and extremely good operating margin with very strong cash flows. We continue to invest for the future in our business. We have that capability, and we are pushing new technologies like never before. With those words, I hope we will see you back on the Capital Market Day on 4th of November to discuss more about this fantastic journey that we're on. Thank you very much. And with those words, over to you, Patrik.

Thank you, Alrik. The first 2 questions are on margins. Congratulations to a good quarter. Can you give some more information on how you achieved the 13.3% margin?

Sure. If I take that one. So as discussed, we had a lower sales. And despite this, we actually had a pretty strong operating profit. And this is something that we've been working on for quite some time. It's very much about the transformation of SKF and the kind of flexibility and our ability to adjust or proactively adjust to market fluctuations is one of the key things that we've been working on. And of course, as we all know, I mean, the last couple of quarters have been just extremely volatile, so both downs as we saw extreme downs in Q2 and then some stabilization in Q3. So the flexibility that we have been building and continue to build has really been put to a test. And we are quite happy with delivering on that. Specifically, in the quarter, we had negative -- obviously negative effect from sales, from volumes, production volumes. Price and mix were both positive. And then cost development continue to be actually very good, SEK 1.1 billion. And out of that SEK 1.1 billion, we had SEK 100 million in government contributions. So all in all, I mean, we are quite pleased with it. So why the strong result? It's more -- it's a combination of many things and we continue to deliver and are determined to continue to deliver in the future as well.

Then we got one question on Automotive. How was the 7.4% Automotive margin possible?

Well, there is -- of course, one of the main reasons is that we had a very, very strong recovery. And if you see, we were almost back on last year's volumes as far as deliveries. And since we have already been working on sort of a program, as I think I have mentioned also last quarter on a push for a new profitability level in Automotive, we have actually been taking down our costs very, very strongly and simplifying the organization, integrating manufacturing, increasing focus on regionalization and things like that. Of course, all that has not come to fruition yet. But during this uptime, then it was possible for us to deliver this result. I don't promise we will now every quarter have a similar kind of margin level, but I'm quite confident that we will, long term, improve the Automotive business profitability for SKF.

A lot of questions coming in here. We have received a couple of questions on demand. First one, how did demand develop during the quarter?

Yes. The -- I mean if we look at this over a slightly longer period, I mean, we -- as you know, I mean, we had a pretty drastic decline in Q2. And gradually during Q2, it leveled off a bit. And that kind of continued throughout Q3 as well. So overall, minus 5% organic and gradual improvement over the quarter.

Okay. Second question on demand. How has Q4 started? What is the current rate in October?

Sure. If I take that one as well. So of course, I mean, we need to remember, we -- at least we keep in mind that it's a very, very fragile economy and market out there. And the best we can do is just to make sure that we have the flexibility and continue to deliver on our long-term plan. But specifically, the quarter 4 started roughly in line with Q3. So that's round about minus 5% year-on-year.

Okay. Can you give some more color on which particular customer segments that did well or did less well during the third quarter?

Well, you can understand, as I already mentioned, a little bit with Automotive, of course, coming back very strongly trucks of highway, vehicle aftermarket as well, where we saw also wind, for instance, and all these businesses that are a little bit dependent on stimulus from government has been doing very well. Wind in China has been very strong. On the downside, well, industrial drives, railway, heavy industry, not so well so far. And of course, aerospace, you can understand that aerospace has been very much dampened. Why we were doing relatively well? I think we -- I'm not -- I think we actually did quite well, and it's helicopters, it's noncommercial airlines -- sorry, aircraft that has sort of sustained the business we have. And as much as we now see a quick recovery, it's hard to see how the commercial aircraft business will come back in the short term. So I think we will have to live with a lower sales in that part, whilst as I said, helicopters and noncommercial has been going relatively well. So in short, anything to add.

Another question relating to demand in a way. It's on pricing. How did pricing develop in the quarter?

So as mentioned, both mix and pricing was positive in the quarter, as we've had now for some time, in particular, on pricing. So positive is the short answer.

And I can say that we have still not felt any big difference, changes in the pricing in the marketplace yet. So it's still sort of stable.

Good. A specific question on the short volatility here. There's a question on have you lost out on any business due to not being able to deliver given the sharp sequential rebound that we've seen?

I would say I'm -- that's one of the things that I'm extremely pleased with, if I look at how we've handled this. We saw the downturn in Q2. We managed to go down without really building any inventory and then we have managed to sort of accompany the business up. And especially in the Automotive field, how short, close to what the customers are truly needed. And here, I think the learning from before, from what we have done before that you're so close to the customer that you actually can react. And of course, if you look at also on the component side, which is sometimes what holds us back, since basically in Europe, where we have a lot of our manufacturing, we're still below last year. Of course, we have been able to sort of get in the components and so forth. So I would argue that we have probably -- we think we've done a little bit better than market as far as availability so far in the quarter.

Another question on inventories, actually. How are the inventory levels in the market -- in pipeline inventories as well, as I understand it?

Well, I -- my assessment is right now, if you look at it, I think that inventory levels are low at this point. I don't think there's anything as, let's say, low in the sense. There's no big inventory levels. In the U.S., with some distributors, we saw during the beginning of the COVID, they had already destocking trend in the marketplace. Some of them have a lot of inventory. I thought it was going to end basically by beginning of last -- this year. And now with COVID, we have seen it continue a little bit, but now it's actually coming to an end. So my assessment is that our inventory levels are not high in the value chain at this point.

Question on market shares. I would like to ask whether SKF won market share in China, both in the Automotive or Industrial segments.

Well, many times, it doesn't really work like that in the sense that market shares or trends that work over a longer period. So if there are changes, they are relatively small. What I do think, though, is that we've been good at delivering. So compared to what we -- what I've seen, what I've heard from others, we have been many times being able to deliver. So in that sense, I think we have done well during the quarter. And there's a lot of new business coming, of course. I mean there's a lot of new activities going on with customers around the world. So from that point of view, it's positive. But of course, that's not this quarter.

Another follow-up question on China. It's a question about what is your growth outlook for China and in particular bearings to the energy and construction equipment end market?

I understand the question. We see, as we have talked about now for several quarters, that the wind and the energy sector in China is very, very strong. And maybe we thought -- maybe half a year ago, we thought that maybe these subsidies and this push from the government was going to subside by the end of this year. But I'm not so sure anymore how that is going to play out. So maybe we still have quite a strong market here. And of course, that's -- we are investing. We are -- we have announced investments in China. We're investing in this. We're preparing ourselves. From my point of view, we are more and more competitive. So it's something that we believe is going to be positive. It will go up and down like all businesses that are dependent on government, but it's good. As far as construction, it's the same. What do you do when you have a situation where you need to give stimulus to the economy? One of the areas where you can actually give stimulus that creates jobs and creates business is within the construction sector. So I think that we will see that not only in China, but also in the rest of the world as a result of the stimulus that we see, but that's from a general point of view. That's not related specifically to SKF.

Thank you. Moving over to questions on cost. Can you give some more details on the SEK 1 billion cost reduction that we saw in Q3?

Yes. So SEK 1.1 billion was the total and SEK 100 million roughly in government contributions, so SEK 1 billion. As you saw, we reduced net reduction of permanent employees of 650 during the quarter, and this was on top of what we had done already during first half. And then there were a number of other things. Some of them short term. Some of them permanent. So very much a continuation. I mean especially we do mean now focus on the permanent actions, and we are quite determined to take our cost base down to keep it at a lower level. But it's continuous work and many small streams.

Another question. Can I ask about your excellent savings of around SEK 1 billion? What proportion are temporary and will reverse in 2021? And what proportion are sustainable, please?

Yes. As you understand, I mean, it's a bit of a tricky one because how do you categorize what's permanent and what's temporary. I mean as an example, of course, like everyone else, we've seen a radical reduction in travel. And how much will that come back to eventually is a bit hard to say. But I mean, a very rough view is half and half of that SEK 1 billion kind of more temporary in nature or more permanent in nature.

And I agree. I agree. Having said that, though, of course, we -- as we continue to simplify and develop our footprints, et cetera, et cetera, some of these new activities will come in also to compensate what is today maybe more of a temporary nature. So even though we have now a very strong quarter behind us, we're not going to stop. We're going to continue to -- on our journey to make SKF more competitive, more agile, more innovative going forward.

Yet another question on costs. How sustainable is this cost reduction?

I think this is similar to the previous question. But again, let me very much echo what Alrik just said. I mean this is something we constantly, continuously work on. It's not just a reaction on the economy per se. I mean we are truly kind of going through a transformation of SKF. So -- and what we push, what we work on is, of course, the more sustainable ones, sustainable cost savings. So again, rough estimate, but out of the ones we delivered in Q3, roughly half and half permanent versus short term.

But we also have a lot of interesting technologies and new things coming in to help our top line going forward in the midterm. And that's also something that is going to be very interesting to follow. We will talk more about that on the 4th of November. Yes.

Yes. And maybe just to add, I mean, for those who kind of consider kind of modeling. Of course, going forward, the comparable becomes more challenging. So don't assume SEK 1 billion every quarter, even though we've delivered now 2 quarters in a row, around about SEK 1 billion in savings.

Question on items affecting comparability. What did the SEK 550 million in the third quarter relate to?

Yes. So roughly SEK 460 million out of the SEK 550 million related to restructuring. So essentially, that's kind of employee related, redundancy related. And again, SEK 650 million net reduction in terms of workforce is what we delivered in Q3. And then the remaining part, roughly SEK 90 million or so, related to customer settlements.

Thank you. Staying on the topic of items affecting comparability, what level can we expect going forward?

%Yes. That's a good one. And good to keep in mind. I mean as we've said, I mean, we are on a transformation journey. And we are, by no means, done with that. So you should expect to see a higher than normal and elevated IAC level also going forward in the near future.

Then we have a question on cash flow specifically and targeting why was cash flow so negative in the second quarter and now suddenly quite positive?

Yes. Maybe just a reminder, first, on second quarter, where we saw a really sharp reduction on minus 25% in sales year-on-year. And then by the end of the quarter, it started to level off and come back, and we were actually building some receivables in the end of the quarter. So that was a reason for the negative cash flow in Q2. But as we said back then, should look at this over a slightly longer period of time. And now we did indeed have a strong cash flow in Q3, more normal level, I would say. And of course, results helped inventories came down a bit. Payables were good. Receivables, on the other hand, were a bit negative. So many streams, but maybe in a nutshell, results, of course, driven inventories down. And then we had a slightly lower investment level compared to last year.

And from my point of view, I mean, it's interesting to remember that as long as there's any -- not any sort of default that a customer, big customers defaulting and there are some money sort of disappearing, it will always come back. So one of the fortes of SKF is cash flow. And it's always been, and we will try to see to it that it always is. So when you see these fluctuations, they are completely normal. And when you have this kind of enormous volatility, as long as there is no big things happening, extraordinary things happening, it will eventually come back to a strong cash flow. That's SKF.

Cash flow related question, I would say, about inventories. How do you see your inventories developing, given both demand fluctuations and also in relation to your 25% net working capital targets?

Yes, I mean, we reduced inventory slightly around SEK 500 million, SEK 600 million in quarter 3. And the net working capital as a percentage of sales, we also improved it slightly both year-on-year and sequentially. And of course, I mean, long term -- and this relates to Alrik's comment about cash flow being a stronghold, that is something that we continue to work on to improve net working capital efficiency over time, but I don't expect any major swings.

No -- and I know this is one of those things where -- see, in 2015, I even sharpened a little bit the pressure on ourselves by increasing the target. And of course, intuitively, you understand, as we deliver on our region for region supply chain, this is going to be one of these real contributors. So of course, as we now accelerate our footprint activities, et cetera, we will start seeing more the fruits of this coming into these kind of numbers in the mid-term, long-term future, in the next few years of the SKF. So it will come.

In terms of investments done to consolidate the footprint and increase automation, are you considering accelerating this further, given the results so far? Is that possible? Or are you going as fast as you can already?

Well, it's interesting. It's very interesting, Erik, very good question. What I see here is that when we started this journey, of course, it's -- you have to learn. You -- it's relatively new what you're doing. You're sort of accelerating. And you see now how we have quite a high speed. And we'll talk about more about this on the 4th of November exactly what more in detail what we're doing. And then you come to the situation where you have now -- right now very high swings. And of course, when you have high swings, there are some things also that you may not be able to do that you can do more easy when you have a sort of a normal stable situation. So I argue. We are on a very high speed right now. There could be maybe something we could do to speed up. But first, we need a little bit more stability in the demand so we can sort of do the things. When things are going -- this, like it's been doing this year, it's more difficult, even though we're actually doing all the things we're doing. Look, just what we have announced for this quarter with consolidating and investing in the U.S. Last quarter, we announced everything we're doing also in Asia and so forth. I think this is a good speed, maybe a little bit faster we could go, but it's already a good speed.

Okay. Please, could you give us an estimate of how much you think the quarter benefited from restocking in the value chain? And a second add on to that. In addition, can you please elaborate on the trends you have seen in October so far?

I'll take that.

Yes.

My assessment, all in a general term, I don't think there's been a restocking. I mean there's been an increase of demand, yes. But I don't think there's been really a restocking in the value chain. That's not my sentiment. It's actually so we had a very sharp drop. Then, in the recovery, there's been sort of things you need to do that you should have done during the lockdowns that you are now doing, et cetera. So -- and in distribution, I don't really feel that there's a lot of stocking in the value chain. Maybe on the contrary, I think there maybe even some needs going forward to replenish. And for -- as we said in the beginning here, just to reiterate that, so far, we've seen quarter -- this quarter could -- starting off more or less like the quarter 3 ended.

Two more questions. On aerospace. Firstly, can you elaborate on your aerospace exposure? And what you are facing in terms of demand development year-over-year in Q3? And what you expect for the fourth quarter and for next year?

I mean of course, you can understand that demands are down significantly. And the good thing is that when -- in the factories that are predominantly affected by the civil aviation, we've already done the restructuring. We've come very far in that. So honestly, the team has done a very, very big -- good job in bearing very fast and very active on getting those costs out of the equation quickly. And why could we do it because we realized very early on that the rebound on the commercial side was going to take time. So it means restructure, we take our costs down, and then we can follow -- when we see it coming up, we can follow it. So from that point of view, I think we have done better than I expected. And then when it comes to the non -- I think it's going on along quite well. And I don't see any reason why in the next forthcoming future, there will be big changes. But for us, of course, it's considerably lower total volume in aerospace. And aerospace is not that much of our business. And on a profitability -- from a profitability standpoint, we've been doing well in the quarter.

Second question regards pricing. And from this particular analyst, he says, we have heard from industry context that both you, SKF and Timken, recently have announced price increases in industrial distribution in Europe, with effect from Q4. Is this something you can comment on?

Yes. Well, I mean, I think we have gone out with a price increase for distribution. And it's -- I expect it to do well. So it's a normal price increase.

Question on manufacturing. Did you have problems in your manufacturing operations due to the COVID-19 infection?

Yes. We have. And if you take Q2, I mean, it's already behind us. We -- of course, you remember, we were stopped. But also now, we've had some issues, for instance, in the U.K., around the area where we have our Luton factory. There was an outbreak and the authorities went down and cooled down our possibility, so to speak, or impeded our possibility to produce. And all in all, I think we've handled this extremely good. And we've had a few cases, but they have been handled in a good way, and we have not had any major disruption apart from this.

A question on China. Have you had any discussions with the Chinese government after Sweden's decision to ban Huawei and ZTE? Could this impact business at all?

It's so fresh that I can't -- I mean it's too fresh this incident. So it hasn't affected -- as far as I know, the -- we haven't had any questions from the government so far. What I hope for is that like we heard from President Xi just, I think, during the weekend, where he said, let's try to find our differences and let's see to it. I really hope that we understand that a good way forward for the world is to understand each other and trade with each other. So I hope that this will be resolved. And so far, I can't say that we have it. It's too fresh. And if you ask me if it could, of course, potentially it could. But I think that if you look at SKF, I think all -- we have been so many years in China. And I think that just as we are, I hope, perceived a local producer wherever we are, I hope that it's seen that we are a good citizen, both in the U.S. and China and Europe and wherever we are. And that's going to be the prevailing understanding of SKF wherever we go.

Question on targets, actually. SKF has been very close to its long run margin target over the last 3 years. And this year, despite the end market disruptions, it is returning with very strong margins. Is the long-term target still ambitious enough? Or should we think there's upside to it?

Well, I mean, the long-term targets are what we have. That's what we have, and we'll cover that more in detail in our Capital Markets Day on 4th of November. So I hope you'll join that discussion. Of course, I mean, this is why we are here. I mean we are here to deliver a good business and constantly improve the business. So we don't stop, even though we have a certain figure somewhere, we don't stop there, but we constantly kind of challenge ourselves and want to go for something better, just part of daily life.

And if you recall, I set these targets when I came in 2015. We set these targets we have today because at that time, it was not in my mind that we could reach, let's say, higher than 12% at that time in the near few years where we set those targets. And as we work with SKF, making SKF more and more profitable, and more and more agile and what we have presented and what we are showing, of course, we will reach the target, and we will set eventually new targets for ourselves. So don't -- rest assured, we're doing the best we can. And I'm always trying to see to it. We're all trying to see it that whoever is short in SKF should lose money.

A question on the actual -- on dividends, actually. And a question from Daniela. Should we read anything into your fourth quarter cash flow projections or your capital allocation priorities on the back of your decision to cancel the second dividend?

No, no, no. I mean of course, as we all know, I mean, it is a fragile world, fragile economy. And the decision to not call an EGM and go for the kind of other part of the dividend for 2019 was based on that. But I would say there's nothing else that you should read into this as a signal.

And you know that we have a policy where our idea is to have 50% of our net profit as dividend. And if you look at the past, we've always been some years above, some below. This year is a very special year. I'm sure stay with us. You'll get your money.

A couple of more questions on sales, actually. Could you talk about how organic sales developed during the quarter? Actually, what was the end rate at the end of the quarter compared to the beginning?

Yes. That was what we mentioned earlier here today that, I mean, it's almost like you should look back into the kind of worst months going back into March, April. And then there's been a gradual kind of leveling off for improvement or less negative since then. And that's also what we saw during Q3. But again, I would not read too much into kind of the weekly or daily or monthly sales because it is just very volatile. And I mean, what we do is that we make sure that we manage that volatility in the best possible way and then, obviously, grab opportunities on the customer side.

Just another question on sales, actually. Was there any particular difference between Industrial and Automotive throughout the quarter in terms of performance?

Yes, I mean, Automotive was relatively seen actually strong. It was 0.7% down year-on-year. While Industrial was roughly 7% down year-on-year. So in that sense, I mean, Automotive actually had quite a strong -- we had quite a strong quarter in Automotive compared to Industrial.

And it goes into the way it works. Automotive factories, if you understand during the lockdown, they were completely closed. And then when they start again, there's sort of a little bit of a backlog and then the recovery was much faster, while Industrial dynamics made it smoother, so to speak, the effect in Industrial. So it goes with the kind of business.

A question targeting customer discussions on COVID. Has the recent COVID development changed the conversations you have with customers? Is there more uncertainty now compared to a month or 2 ago?

In the conversation, I can't say that changes have come yet. Because, of course, what you see now as compared to the spring -- was in the spring, it was a lockdown of the value chain. That is not happening this time. Now it's more curfew. At least in Europe, it's sort of a curfew where people are not allowed to go out at night, et cetera. But during the day, things are going about as they were before. So this one is a little bit different from my perspective. So it's more long term. What will this -- how long will these curfews be and what are the effects on the long-term demand of certain products more than actually right now in this moment.

A question for you Niclas from Erik. The leverage on the organic sales was relatively high at close to 60% -- 58% to be specific. What drives that?

Sorry, the?

The leverage on the organic sales, the drop through.

Yes. I mean again, I mean, it's a combination of many things, but we've had -- we've delivered quite well on our cost savings, as discussed, and not only cost savings. It's more of a structural change that we are working on. And then on the other hand, it's the competitiveness, the gross margin element of it. I don't know, Patrik, do you want to add anything there?

I think you covered it well. I think nothing to add there. So we are coming towards the end of the hour here. We've got 10 more minutes and a couple of more questions. You said that you take further restructuring costs. What will these enable in terms of savings or layoffs? Headcount was 41,174 people in the quarter. Based on actions taken, where is that figure at year-end this year?

Yes. And I don't want to give an exact figure on headcount for the year-end. But as you know, I mean, we are -- this is more of a structural change that we are working on a transformation of SKF, a building of a stronger, more resilient, more competitive SKF that we are working on. And the headcount figures, the 41,000 that you mentioned, the changes, the reductions that you've seen are net reductions. So on the one hand, there are areas where we've actually added -- we've recruited really good excellent talent. And then on the other hand, there's areas where we see that going forward, there will be less of a need for talent. So it's a structural change that we are working on. And as I said earlier, we are not done with it. We'll continue to work on it. So it's both reduction, but it's also strengthening certain areas where we see a high potential.

And I think that's the way how you should see it, not so much 1 quarter or another. Of course, you can understand during the COVID, we have been very, very -- acting very strongly. But honestly, if you remember, going back, we already started this development, preparing for it years ago. And when we saw a little bit of a softer market in 2019, we already started with this kind of activities. And there will be -- I hope SKF will be a fantastic employer for many, many people, and I hope that we will have a growth story in the future where we can grow people again. But of course, digitalization, new ways of working will enable a different kind of efficiency in SKF over the long term. And we are determined to do that, but at the same time, being a good employer and taking care of good care of our people.

Questions from Rizk. First one is on exit rates, I think we covered that one. The second one is more specifically on the impact from manufacturing to EBIT in the quarter. And I think he's looking for the effect from us under-producing reducing inventories on EBIT?

Yes. And specifically, the inventory result on EBIT was negative roughly SEK 100 million or SEK 110 million. Do you want to add something?

No. We expect that we had a reduction of almost SEK 600 million in finished goods inventory. So yes. Good. Makes good sense. Second question, was there an impact from customer distributed stocking decisions on your sales in either Industrial or Automotive in the third quarter?

As I say, my assessment today is that, that -- the underlying change in Automotive was actually sort of demand. Our customers were running at high rates and you see some -- we talked about it before. You see some areas where the demand is not stocking. It's real. So my assessment is that there's not been so much of this in this quarter of restocking and that some people are probably quite tight on stock. So that's how I see.

We got a question on ROCE. Can you comment on ROCE, which have fallen from 15% to 9%? Are there one-off effects that we should expect to unwind as we go forward? It seems counterintuitive that margins have improved, but returns have not, perhaps FX on the balance sheet.

Yes. I mean of course, one factor to consider here is that IAC or one-offs -- one-off costs have been, as we all know, quite high, as we've taken action on the restructuring and building of a new stronger SKF. So that's one element. And then, of course, the other element is that with the actions -- with many of the actions we've done, we've actually strengthened -- our capital employed has increased. So it's a net effect of that. I would say, in the long run, again, no change. I mean we still very much care about return on capital employed and continue to work on that and pretty confident it will -- the kind of development will eventually turn. And by the way, I mean, the -- it's a 12-month rolling figure. So what you see there is, of course, the effect for the past 12 months, including Q2.

Thank you. Getting towards the last couple of questions here. About the new factory in Sumter. The new factory in Sumter sounds highly automated and really technologically advanced. Could you share more about its capability in improving flexibility and efficiency?

Yes, I mean, all the investments we are doing now are in this range. We're trying to push all the best learnings from what we're doing in the rest of the world and look on always improving. So what we are doing in Sumter is based on what we have learned before. What we do in Schweinfurt was -- is learning from what we have done in Sweden and continuously. So this will be an excellent factory. And with the way we look at the demand situation also with less possibilities maybe of products coming from Asia into America in the future, with the kind of automation and flexibility we have, we are absolutely sure we have an excellent base for the future out of Sumter that where we will be absolutely competitive and flexible to demand. So it's going to be a good one.

We have the very last question before we need to close this conference call. It's about China. Can you talk about how China or your Chinese business has developed throughout the quarter? How Q4 has started in China?

Yes. Well, we had -- we saw a very strong -- as I think if you follow the general media, you see that if you look at what the GDP developments in China, you can realize that it's been very strong. And also for us, in many of the areas where we are wind and in the businesses where the government has been going strong, it's been a strong quarter for us, automotive and so forth. And before I was a little bit thinking that maybe it was going to level off, especially some of the wind business was going to be a little bit weaker in Q4 because of the national seasonality of the way the government was going to give support and so forth. I'm not so sure anymore. So maybe it started strong in the same way in Q4. And I have good hopes for the inclusion of the business for us this quarter also in China.

We also got one very final question here. It relates to the overall transformation program at SKF. Can you please give a scope of the overall transformation for SKF? What are the total savings expected? And over what time line? And with that, before leaving the final words to Alrik and Niclas, I would like to welcome you all to the Capital Markets Day that will be held next week on the 4th of November, and we will cover these in -- this in detail.

And that's maybe the best way to answer this. We will -- during our Capital Markets Day. So this is a good teaser. And doing -- in just a little bit more -- actually -- exactly basically a week from now, we will be going to the more details in exactly how this will play out with much more detail. So instead of me preempting that, why don't you come back and listen to us on the 4th of November, and we'll give you more details around exactly what's going to happen in SKF in the forthcoming years on this topic.

Thank you, Alrik. Thank you, Niclas, and thank you all for listening in. This was a first in this new format. I hope you enjoyed it. If not, please let us know and we'll try to adapt. Thank you.

Thank you very much.

Thank you.

See you next quarter. See you on the 4th of November, sorry.