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

Ladies and gentlemen, welcome to today's SKF Fourth Quarter Year-End Report 2020. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] If you'd like to ask a question, you may do so by submitting via the webcast or you can e-mail your questions to [email protected], that's T-H-E-O dot [email protected]. I'm now going to hand over to Patrik Stenberg to begin. Patrik, please go ahead.

Good afternoon, and welcome to this presentation of the fourth quarter results. Today's presenters are Alrik Danielson, our CEO; and Niclas Rosenlew, our CFO. After the presentation that will last for 20, 25 minutes, we will, as usual, have a Q&A session. For that, we will use the chat function in this portal. So please make use of that and post your questions, and we're happy to answer them afterwards. With this brief introduction, I'll leave the word to Alrik. Please.

Thank you very much, Patrik, and as -- very welcome, and I'm so pleased that so many have chosen to tap into today's presentation. I am so happy to see that SKF has delivered a very strong end to this very difficult and volatile year. And to me, it is yet another quarter where we prove that the strategy that we set for ourselves some years ago is actually delivering the expected results. The transformation of SKF continues, but that we are now on a different level than we were a few years ago, I think it's obvious to see look only how we have managed this very volatile situation. And on a quarter where we had unchanged sales, we delivered margins over 13%, up from 10% last year. Cash flow also, that's always is our forte as you've heard me say many times, but this time, almost SEK 2 billion, SEK 1.9 billion compared to SEK 700 million last year, where we've really been able to keep good track of both accounts receivables, accounts payables and also the working capital. I think it's a good month where we have shown that cash flow is our forte and will continue to be so. And what has it resulted in? What we have done? As you know, you remember many years ago, when I said that we need to strengthen our balance sheet, well, we are now practically debt-free if you exclude the pensions. And I just need to take the opportunity now and to thank all the colleagues for making this possible because it is, of course, everybody's hard efforts and everybody taking real charge that has made this possible. So if we go to Slide 3, industrial market, then we can see that we had strong results. Despite a 4.4% lower sales than last year, we delivered an operating margin of 14.5%. And higher, very much higher volumes in Asia, significantly higher volumes in Latin America, but then to arrive to a total that was lower than last year, lower volumes in Europe and North America. We've been very good, I think, in adapting to the volatility in the marketplace. And there's -- the hard work that we have done is continuing now to pay off in the industrial business. So now if we go to Slide #4, we talk about the Automotive business that we can say that for the first time in modern history, I think, that we have a double-digit margin in the automotive. And I mean it's -- I'm really, really pleased. We started during my tenure with the automotive turnaround plan. We have improved last year, which started with a last sort of notch on it, and we are now seeing the results coming through. Having said that, of course, 10% is an extremely strong result. And there is a little bit of a sweet spot there. We've had tailwinds coming from the 11% volume increase, of course. And there are a few percentage points there that could be attributed to this. But I am confident that you will see now that we will have better profitability in our automotive business going forward. And I'm so impressed with the team, how they have been able to sort of follow this market, especially in the OEM business for both trucks and cars that has been growing so strongly. With these comments, we will now go through the results more in detail, and I will leave that to you, Niclas.

Thank you, Alrik. Thank you very much. So if we turn to the next page, and we'll start off with sales. So sequentially, our organic sales continued to improve albeit from the very low levels seen in Q2 through a moderate decline of 5% negative in Q3 to now an almost flat sales year-on-year in Q4. Compared to last year, our net sales decreased by 7.7% in the fourth quarter, while organic sales were 0.1% lower than last year. As you can see, the currency effect on sales was substantial at negative 7.6% in the quarter, with the largest effect, as usual, coming from the dollar, the euro and the renminbi. 2020 was, as Alrik said, a very challenging year with massive swings in demand, and we have responded to this in a great way. Despite the tough external circumstances, it's very pleasing to see that we managed to see or serve our customers really well throughout this volatile period. The improved flexibility and lower cost base has also materialized in excellent profits and in strong margin resilience. And with this, I also want to extend a big thanks to our colleagues who everyone have contributed to this throughout the year and throughout the fourth quarter. In the fourth quarter, our adjusted operating profit was SEK 2.6 billion corresponding to a margin of 13.2%, which is an improvement of almost 3 percentage points compared to Q4 last year. So our efforts to transform how we work delivered good results in Q4. And these efforts do continue, as Alrik said. We are investing in innovation. We are improving our competitiveness and continue our push within sustainability. And we are also adapting our operations our ways of working. So in sum, Q4 was strong, and we continue to transform our business. If we then take a look at the profit margin, our profit -- our profit improved on flat sales despite strong currency headwind. And this is, again, back to our continuous investments in innovation, in competitiveness and deliver structural cost savings. So if we go through the bridge a bit more in detail, firstly, our currency impact was negative by SEK 645 million compared to last year. On the other hand, then, our operational performance was more than SEK 1 billion positive year-over-year. And commenting specifically on the operational performance, our organic sales and manufacturing volumes were lower by SEK 14 million. We had a negative effect from lower sales and production volumes. But on the other hand, we had both price and mix contributing positively in the quarter. What comes to the cost development, it continued to be good. We saw a net cost reduction amounting to SEK 1.1 billion compared to last year. And if I comment on the SEK 1.1 billion cost reduction, it included a very small SEK 30 million of government contributions. And you could say that a bit more than half of the cost reduction is permanent. During the quarter, we had a net reduction of approximately 200 permanent employees, and this is part of the competence shift that we have been going through and continue to go through. So for the year, the net reduction in permanent employees was 2,400. And we've continued, at the same time, hiring more than 1,000 people. If you turn to the next page, looking at our performance within Industrial. As Alrik said, the organic net sales decreased by 4.4%. Sales were higher in Asia, significantly higher in Latin America. While then on the other hand, we continue to have lower sales, actually significantly lower sales, both in Europe and in North America. The adjusted operating margin was 14.5% in Industrial compared to 13.3% last year. And if we think about what contributed to this, cost reductions contributed positively, while on the other hand, the lower sales and production volumes contributed negatively. For Automotive, the organic sales increased quite strongly by 11% in the fourth quarter. So sales were significantly higher in Asia and in Latin America, and also higher in both North America and in Europe. Within Automotive, we have been successful in delivering on the higher demand to our OEM customers for both trucks and within the car segment. Combined with our work to structurally lower our costs, we managed to leverage on strong sales growth. And the adjusted operating margin in Q4 for Automotive reached 10.1%. What comes to our net working capital, it was 26.1% of sales at the end of the fourth quarter, which was 1.6 percentage points better than at the end of fourth quarter last year. We reduced our inventories during the quarter, and inventories as a percentage of sales improved compared to both last year and to the previous quarter. And what comes to receivables and payables, both increased in Q4 compared to last year. Our cash flow in Q4, as Alrik said, was good. Excluding acquisitions and divestments, it was SEK 1.9 billion compared to SEK 0.7 billion last year. Here, the net working capital contributed positively. And we had lower investments than last year. Saying that, the slightly lower investments in Q4, if you look at it over the whole year, 2020, we continued to invest at a similar pace and level as in 2019 despite the economic downturn. The cash flow for the last 12 months was SEK 5.2 billion. What comes to our balance sheet, it continued to strengthen during the quarter. So we have a strong balance sheet, and it strengthened further, and we also have a solid liquidity. Our net financial debt went down in the quarter. And at year-end, we had SEK 0.7 billion in financial net debt. And just to put this into perspective, it was SEK 20 billion back in 2014. The net debt-to-equity ratio, excluding pensions, was 9.3%, further down in Q4. So to sum up our Q4, we continued implementing our transformation journey. We had flat sales. We had improved profits. We had higher margins, and we had a strong cash flow. Operationally, we continue to regionalize and consolidate our manufacturing as well as investing in automation across the board. We also continue to invest in new technology and in customer offerings and will continue to do so going forward. Finally, what comes to sales guidance for Q1, we've seen a gradual improvement in demand during the second half of 2020, and we do expect to see a mid-single-digit growth in the first quarter of 2021. And with that, I'll hand back to you, Alrik.

Thank you very much, Niclas. Excellent presentation. And what a journey it has been. I tell you, you know -- you all know that I am -- this may not be my last quarter, but it's, of course, one of my last, and it's been a fantastic 6.5, almost -- I mean, I started 2014. And I must say, it's been an incredible journey. We have reformed our leadership around the rotating chat with all the relevant technologies. We have increased our way of working with our customers and focus on their needs and having customer-focused and application-focused solutions. Our green offerings when we talk about how not only we reduce our own CO2 footprint and our own waste, how we are now so well positioned not only to now but also in the future help our customers to reach their environmental goals. I mean this is one of the things that just blows my mind and how this is happening. And we have created a more flexible organization, full of real competent and self-governing people who really know what to do and takes charge and they take accountability what needs to be done. We have really ramped up our investments in our factories in automation and state-of-the-art manufacturing. We have strengthened our balance sheet. You heard what the figures that Niclas mentioned. And we have improved our profitability. And most importantly, it's not only for today, this is a sustainable development. I must say we've had quite a lot of fun doing it, too. So I want to thank all the employees, customers and stakeholders all around the world, also you, from the investor community, I want to thank you for helping me and making this fantastic journey possible. Thank you very much. And with those words, I hand back to you, Patrik.

Thank you, Alrik. And with that, we go into the Q&A session.

As a reminder, ladies and gentlemen, if you'd like to submit a question, you can do so via the webcast or you can e-mail your questions in to [email protected].

Welcome back. We have a number of questions being posted on the chat. Good to see that. First question comes from Daniela Costa at Goldman Sachs. So 3 questions actually. First one is, what is your confidence regarding the sustainability of current autos margins through 2021?

Sure, Daniela. So we've we made a number of improvements within the automotive business, and we are quite confident that, over time, we'll continue to improve the performance of Automotive, not saying specifically commenting on the 10% margin we had, but we are very confident that we'll continue to sustainably improve the business performance.

Second question on what are the reasons for the sequentially lower Industrial margins, given still likely low level of discretionary spending and increased automation efforts lately?

Well, Daniela, the fourth quarter is always the lowest margin quarter we have in SKF. And actually, we have improved our margins very much during the fourth quarter compared to last year. If you see sequential, it's always like that in SKF. So this has been a fantastic quarter for industrial margins as well, given exactly what you say, all the efforts we're doing to be more competitive.

And then the third and last question from Daniela. What are your capital allocation priorities going further post the higher-than-expected dividend increase?

Okay. Daniela, innovation, continue to invest innovation and green technology and new solutions and continue to invest in our factories and our transformation. And of course, we're looking at acquiring, and then we will make dividends.

Good. Then we have one question from Gael de-Bray at Deutsche. Could you please give a bit more granularity on the 11% growth in automotive? Was it for trucks, aftermarket, light vehicles? And same question for EV versus ICE-related demand. How do you see this trending in Q1?

Well, if you look at what happened, of course, we had growth both in trucks and aftermarket, strong in Asia, but in all regions, but it was basically -- sorry, cars and trucks OEM business, that was the strong growth. Aftermarket was okay, some growth, but -- and in all regions. So it was a real good all over the board so to speak. And when you look at EV versus ICE, we are strong in EV. So as EV grows, it is important for us, too. And then of course, as electrical powertrains will be sold more and more in the future, we will also do so to this segment. And as you understand, and I've said it before, for us in SKF, the electrical drivetrain -- the mix -- the shift over to electrical drivetrain is actually an opportunity.

Moving over to Rizk at Jefferies. Can you please help us understand the 11% organic revenue growth in automotive in light -- of light vehicle production of 2.5% in Q4. How did inventories move in the quarter?

Well, what we see was a true demand from customers around the world and in China. And I haven't seen actually the -- our customers' automotive inventories. But the way we see it right now is that sales is continuing. And our inventories, we had basically very little effect on inventories in SKF.

Good. Thank you. Then we move over to Citi and Klas Bergelind. A question on savings. On the temporary savings, I get these 200 basis points worth of margin for 2020. I know it's difficult to guide, but how much of this is linked to less travel and other discretionary spend that might not fully come back after the pandemic?

Yes. Good question, Klas. And I mean, out of the -- if we comment on specifically on Q4, where we had a bit more than SEK 1 billion in cost down versus the prior year, more than half, call it, 60% or so of those savings in total were such that we deem them as permanent. So the ratio, if you remember, if you go back to Q3 and Q2 where we said that it was roughly half and half, now we had a bit more in permanent savings. And exactly, as you say, it is, of course, a bit of a gray line. I mean what will travel go back to when it's, so to say, back to the new normal. But anyway, we deem that more than -- a bit more than half is actually permanent of our savings.

And then another question from Klas on raw materials. Can we talk about likely headwind on the scrap side on current spot rates? Is this SEK 300 million to SEK 400 million and with the effect to come with a 2- to 3-quarter lag from the scrap prices started to increase?

Yes. I mean, there will be headwinds. I mean, I don't know exactly -- maybe you have a better estimation what it is. I don't know exactly how much it's going to be. And there's another headwind from transportation right now, as you know. But we are confident. With the kind of market situation we are right now, we are confident that we will be able to offset those headwinds. So we see this not as in the short -- in the coming quarters as a negative.

Good. And I might add to that, Klas, that yes, we did see a very slight negative effect from raw materials in Q4, yes. But normally, we have about 2 to 3 quarters lag from spot prices. That's correct. Moving over to Nordea and Andreas. It would be very helpful if you could give us some thought of guidance for what you expect from cost development line in 2021.

Yes. If I comment on that, so we've been quite successful in 2020 to take down the cost year-on-year. And actually, if you go back to Q1 2020, it came down, what's it, SEK 500 million, SEK 600 million already back then. So of course, one aspect to keep in mind is that the comparable now that we -- in 2021, the comparable will become much tougher. Another point, going back to what we've said earlier throughout 2020 is that roughly half and half permanent temporary. And that maybe gives you some indication. And then, of course, as you've seen, the net reduction in personnel was roughly 2,400 persons during 2020. And that will, of course, then carry over. And not all of those were -- the reduction didn't happen first of January. So it happened throughout 2020. So you'll see a good impact, positive cost impact from that during 2021 or going into 2021. So maybe I'll stop there. We don't provide as such an exact guidance for the cost, but we are quite confident that both -- there will be both a carryover from 2020, which is quite obvious, and then, of course, we continue to work on this. We didn't stop end of December 2020. But it's -- the whole transformation is a continuous journey.

And if I may add, I mean, if you see what we've done during this volatile year, I think we've shown that we have a completely different capability nowadays to adapt ourselves quickly.

A second question from Andreas. Regarding the outlook, could you please share with us what you think in terms of organic growth for your 2 divisions in Q1? Do you expect both divisions to grow by mid-single-digit figures?

Well, the short answer is no. And I guess we do see continuation of Automotive still being strong. We do -- so it won't be the same for both. But going back to Q4, again, I mean, Industrial negative 4% and a bit -- 4% and a change and then quite strongly growth in Automotive. And maybe that gives you some idea of calibration in Q1 as well.

Moving over to the U.K. and James at Redburn. Two questions. When I look at your guidance for organic sales of about 5% year-over-year growth in Q1, I calculate, it implies that daily organic sales would drop by about 2% to 3% versus the fourth quarter. Is it possible this is conservative? That's the first question.

James, not entirely sure about the calculation behind this. Year-on-year, mid-single-digit is our guidance. And if you would compare that to Q1 -- our Q4, sorry, I mean, it should be around similar levels, if you pick a midpoint there from the guidance. Patrik, if there's anything you want to add there?

In terms of daily sales. Yes. Yes, probably. Yes. Moving over to the continuation of James' question here, can you talk a little bit about how December grew year-over-year and how January developed to help us understand what you imply for February and March?

Yes. We do try to move away now that we give an indication of the whole quarter from commenting on weeks. One reason is, of course, that the comparison point, the volatility with COVID starting to hit in 2020, makes it a bit tricky to look at week-by-week or even monthly development. But I think if you take a slightly longer perspective, what we did see throughout kind of second half of 2020 was a gradual, nothing dramatic, but a gradual pickup, gradual recovery. And you could say that we saw a similar development also throughout Q4. So that's maybe an indication of how we see Q1 as well.

Good. Maddy at Bank of America. Industrial growth appears to be softer. Can you please give some color around why this is the case? On the other hand, auto's growth is quite strong. Was it driven by restocking? Or this is part of secular demand growth? Then a continuation of that question, but I'll leave it there for now.

Well, the -- what we have seen in the Automotive side, as we have said, we've seen a strong sort of growth in the fourth quarter, and that goes directly into when we deliver. While in the Industrial side, there's more industrial dynamics, and of course, the kind of general sort of economic -- following the general economy more than a certain sector like the transport sector has been strong during the fourth quarter. So I mean, I think it was expected that we would have softer development in the industrial side. But we've been growing okay in Latin America. We have been growing in in Asia, and it's been softer in Europe and in the United States. Do you want to add something?

No, I think that's quite clear. And the continuation there, I think it relates to pricing to some extent. Can you talk about auto volume growth versus organic growth?

Yes, you take.

Yes. As a whole, we had a positive price/mix in Q4. And that actually goes for both Industrial and auto as well. Maybe that's the short answer to that positive price mix. Not a massive one, small one, but nevertheless positive.

Good. Let's move on. And now we have a question from Swedish Television actually. You received government support in 2020, but finally paid it back. Does that imply that you, in hindsight, never was in the kind of severe problems that justified government support? That's the first part of the question.

The idea with the government support is to prevent companies from having to -- when you have a short dip to sort of get rid of people and keep people employed. And when they changed the rules, and we had done the dividend, it was already decided that we were not going to get any. So it was a clear decision. And as you see, we have created a very good result despite this. But on the other hand, unfortunately, there has been quite a few people who unfortunately had to leave SKF.

A continuation of that question from Swedish Television as well. How do you feel when other companies who did not pay back support give extra dividends this year instead?

Well, I am not the person to have any opinion about that, unfortunately. I'm sorry.

Good. Then let's leave television, and we'll move to JPMorgan, Andy Wilson. Two questions. First one, please, can you discuss your expectations on net working capital as a percentage of sales in '21? And how much of the Q4 gains can be retained?

So we did improve our net working capital in Q4, 26% and a bit more of sales, down from 27%, 28% earlier. And as you know, I mean, our long-term goal target is to take it down to around 25%. We are still quite confident or continue to be confident that that's something that we can reach. Of course, one thing to keep in mind is the volatility in volumes, which affects this quite significantly. We are quite pleased with how we handled it during 2020. So despite the extreme volatility, we managed to kind of keep it at a decent level and actually managed to improve it also throughout the year. So over time, of course, the direction should be down as a percentage, but it won't happen every quarter, depends a bit on the volatility in volumes.

Good. Second question on investments. Does the CapEx guide of SEK 3.6 billion include lease payments?

No, no, no. It's excluding lease payments. So this is comparable to SEK 3.3 billion we had actually in 2020 as well as in 2019, and now we step up a notch. And as we talked about before, I mean, these investments are quite important to kind of not only maintain but significantly improve our competitiveness and obviously has an impact on the ability to manage cost and so on and so on. So we're actually quite happy with increasing the level here.

All the investments we're doing are good investments with good returns.

Good. Then 2 questions or 3 questions actually from Andrew -- Andre, sorry, at Crédit Suisse. First question, it's about the industrial business. The sequential margin development in Q4, it declined by 130 basis points versus Q3 despite an improved sales run rate. Could you comment on the drivers, please?

Well, again, I mean as Alrik said earlier, we have a seasonality in the Industrials business. And we think the 14.5% achieved in Q4 was actually very strong. It was up roughly 1 percentage points year-on-year point -- year-on-year despite sales going down a bit more than 4%. So in that sense, I would actually say that it was quite a good improvement. And definitely, the direction is pretty clear.

Good. Second question about manufacturing impact in the fourth quarter. Could you please quantify that? Okay. For me. I would say, on a general note, we produced on a slightly lower level than what we sold in the quarter. So in the quarter, we had a very slight headwind as we did last year. So not a material impact, put it that way. Third question then. Market share gains cited during the presentation. Could you please quantify SKF market share now versus 1 or 2 years ago? Are there any notable regional differences?

We don't go into quantifying our market share in this sense. But you can see, you can understand, we're strengthening our position in several segments where you can also see that we're doing well. And this is not for anything that we are growing well in certain segments that you see in our reports. So I think you can see that we are defending our position. In many segments we are growing, and we are more competitive now than we were a few years ago, without going into specific numbers on market shares.

Maybe just to add, so what we do see is that we have continued to and continue to increase our market share overall.

Good. Then we move further down the list, Ben at Morgan Stanley. 2020 is another year where SKF has done a great job on margins going up from 11.8% to 12.3%. But still, we see return -- ROCE coming down from 13% to 10%.

Yes, absolutely, Ben, you are right here. Margin-wise, of course, if you look at absolute numbers, profits, it's not up significantly if we talk about profit. And as we all know, 2020 was quite a challenging year in many aspects, and we also had lower sales. But as you say, despite that, we continue to improve our margin. Of course, when it comes to capital employed, we've added to capital employed. So it's quite natural that we see this development on capital -- or return on capital employed. We are quite confident, and we can see it if you look at the quarterly return on capital employed that it's turning back up now, and we are quite confident that we can continue the upward slope here and improve also return on capital employed.

There's a continuation here from Ben as well, targeting our investments, investment rates. And Ben, you're right. It's just because SKF continues to invest above its growth rate as it has done for several years. How does management think about this equation? Does it really matter? Or am I making a fuss about nothing here? And how can you get your ROCE back to 16%?

I think that Niclas partly, of course, answered it. As we drive profitability and growth, we will due to the fact that all these investments are actually good investment that lower our costs and make us more competitive that they will drive better profitability. And you can understand that any company, any industrial company today, I would argue, with this very fast-changing world, with technology coming in, digitalization, automation, if you don't invest in your core business, no way will you be able to keep your profitability. So from my point of view, this is one of the strengths of SKF now that we are really investing in becoming second to none as far as our value chain.

Yes. I guess, in some, I mean, investments, we are quite -- seeing it quite clearly that it will over time enable a higher profitability. And then when it comes to the overall return on capital employed, we are quite confident also that, that will continue to improve and -- towards 16%.

And of course, part of what you see and this is already coming out of this, of course.

Good. Question from Seb at RBC about working capital. Working capital looks neat. But with Automotive rising fast, what is your view on working capital sales ratio in the coming quarters? Should we expect a rise into the recovery? Question for Niclas?

Yes. Again, I mean, longer term, we see that SKF overall will go towards that 25% ratio of sales. But of course, there will be fluctuation quarterly and also depending on volume. But longer term, that's the direction. Of course, as always, when going into a kind of not only a recovery, but eventually also a growth in the economy that will tie up a bit more capital. There's no question about that. That's just natural. But over time, we have a clear direction to drive it down towards that 25% level.

Good. And another question from Klas at Citi targeting pricing versus raw materials? Probably a question for Alrik or Niclas here. On pricing to offset raw material headwinds, have you already discussed price increases which will fully offer increased cost inflation? How should we think about price versus cost through the year?

And through the year, I don't know. But for the coming -- forthcoming with what we have today, well, you can see today the answer is yes, on both accounts. I mean, we have already started, and we are thinking that we should be able to offset cost inflation in the next quarter.

A question from Lars at Barclays. APAC growth was 7.5 -- 7.7% in Q4, largely in line with Q3. What held back growth in APAC in Q4? Was it mostly the marine segment?

Well, what we saw a little bit softening, you want an answer, is railway during the quarter, but of course, aerospace and also a little bit marine.

And a specific question on China. And can you comment on China growth in Q4 versus Q3? And potentially also if I might ask, of course, an expectation for Q1?

I think overall, of course, what we've seen in China is a strong recovery. We continue to remain quite positive about the business in China. Of course, now when going into 2021, there's always a question of the comp rates when timing of COVID hitting China. But anyway, we remain quite positive about China. What it is. Alrik, Patrik, anything to add?

No. I think we're good there. Another question from James at Redburn directly to Alrik. Alrik, congratulations on your time at SKF with some genuine structural improvements of the time, especially on the cost base. What do you think the key challenges are for Rickard Gustafson, your successor?

Well, first, I want to say I'm really happy. As I said, Rickard is a really good person and a good leader and will be an excellent team leader for SKF. I'm so happy both for SKF and hopefully for him. And right now, I think we have a good strategy. So it's about implementing the things that we have been talking about. And one of the great opportunities that I think is lying ahead of SKF is the green clean tech agenda, where you see now how coming out of the COVID crisis is actually coming reinforced all governments are going for reducing waste and reducing CO2. And we have such a fantastic portfolio of things that we have been talking about. Our recon bearings, our RecondOil are possibilities to help our customers to reduce waste. And I think this is one of these fantastic growth areas. Then, of course, also, like always, innovation. There are so many cool things cooking in SKF. We have become so innovative. And I am really, really -- I'm going to look at this, and I'm sure that there will be coming so many things -- new things out of SKF coming going forward that will further strengthen our possibility to both take market share and make money. But I don't have to teach Rickard anything. He's a seasoned and very good leader.

Question from Hampus at Handelsbanken, getting back on the automotive segment. Light vehicle production is expected to grow by 14.6% in Q1. How should we think about Automotive organic growth in Q1, given the outperformance in Q4 2020? Have you seen any changes in autos due to shortage on semiconductors?

Well, the answer is not yet. But of course, this is how it works. If there is a true longer stoppage due to this with some customers, of course, those customers will not produce. And during that time, they will not demand our products. On the other hand, I believe their order books are quite okay. So of course, then they will hopefully try to catch up.

I think maybe still back to one of the earlier questions also. But because if you think about different segments, we do expect automotive to relatively to some other be strong also in Q1. Then on the other hand, aerospace is more in the weaker category. So definitely, we do remain at least short term positive about Automotive relative growth.

Two questions from Anders Roslund at Pareto. One question on Automotive, which I believe were already answered, so I'll pass that one, but you're also asking about how much long-term savings do you expect for 2021.

So we are continuing the transformation. We've talked about transformation, which is a pretty broad concept, but we are continuing the transformation of SKF. And of course, one part of that is cost efficiency and cost down to be very specific. So we do expect to see more of those actions also throughout 2021. Of course, if you, from a modeling perspective, compare year-on-year, the comps will become much tougher now, but it's a continuous thing that we are working on transforming SKF.

And I think just to add, I think you've seen that we are we are much in a much better control of this now than we used to be some years ago. So rest assured, we will stay on the ball.

Two questions from Olof Cederholm at ABG. First question on the outlook for Q1. Do you expect all regions to grow? If not, maybe possible to give some color on what you see at the per region going into Q1?

Maybe without specifically giving a number on each region, but looking back Q4 and Q3 as well, and Alrik said it here earlier that I mean what we've seen is Asia, very much driven by China, continuing to be relatively seem strong. Same goes for Latin America, well then, Europe and North America being weaker. And yes, I mean, if you look at the economy, of course, obvious reasons in Europe for the slowness. But also in these regions, there's been a gradual, although not yet in positive territory, but gradual improvement. But relatively seen, Asia, Latin America, stronger and then Europe and U.S. weaker.

Second question from Olof on Automotive and profitability. Do you have higher margins on the EV-related products versus the combustion-related products?

Well, yes, traditionally, this has been true. And -- but on the other hand, if you see, we are now improving our profitability on the combustion-related products, too. But on the other hand, what is our most sold product is actually wheel bearings. And these wheel bearings, they go both on combustion engines driven cars or combustion drivetrain cars and on EV cars. So with this latest sort of we're investing in to be competitive in our factories. We are streamlining our organizations. We are becoming more innovative. This is the thing that is partly what you see the results coming in now. This is the good part. It's sort of a new way of addressing the market.

Good. And fairly different question, moving to net working capital on a question from Christian at Liberum. Question from Christian then on working capital which fell by 160 bps to 26.1% in Q4. How much is FX driven? And how much comes from lower inventories?

Christian, I guess, the short answer is a bit of both. There is an FX impact, but we also see and saw throughout 2020 a higher efficiency overall. So a bit of both. And as I said earlier, kind of longer term, we have a pretty clear goal and also see that we should move and will move towards that goal longer term. So 25% of sales working capital.

And a question from India on India from Ravi at [ Securities Management India ], SKF group's view of India as a growth market.

Definitely. Namaskar. We believe that there's a fantastic opportunity in India. And we have invested in several manufacturing and technology in India. And we are determined to continue to grow and invest in India for the future. India is one of those markets that has the full value chain, steel production, everything, and there's a growing market as well and high technology all the way from all segments, from the most advanced aerospace to machinery and wind and marine and, of course, automotive and industrial applications. So it's definitely.

Thank you. A more strategic question from Ben at Morgan Stanley. A follow-up to his initial question. Instead of investing in SKF's core business, would it be possible to move more into different or adjacent businesses? For instance, like Atlas Copco has moved into vacuum mission, vision as Sandvik into verification software. Could this be something that SKF would consider instead of putting SEK 3.6 billion into the core business?

But please understand, this is exactly what we're doing. Look, we have our SKF AI out of Israel with -- it's driven out of Israel. We have an extreme advanced service business where we can help you to detect absolutely everything what's happening inside your machine, of course, with a certain expertise around the motor rotating shaft, but way beyond that. So we are -- this is what we have been doing. If you look on what we are doing, for instance, as far as RecondOil, where we have a new technology where we clean oil, we recycle oil, but with oil, the whole machine works in a completely different way that gives us not only the possibility to go way beyond the bearing but also tap into the -- our customers' absolute needs for a clean tech in a circular economy. When we are looking at many of the different things that we are doing, it's all to take -- to be that high impact for a trouble-free operation of the whole machine. So yes, but we are already doing this. And I apologize. I mean, if you have missed that we must sort of be more clear on what we're doing on that.

Question -- another question from Andre at Crédit Suisse. Two questions actually. First one on personnel. The SKF transformation continues. What level of net personnel reductions would be reasonable to expect in 2021?

I guess, for obvious reasons, we don't want to put a number out there. Again, the transformation absolutely continues. And what we did in 2020 was a net reduction of 2,400 roughly. And that's a net reduction. We had a higher reduction, and then we hired some thousand people. So there's a transformation of the competence base going on. And a bit back to what Alrik said here earlier, I mean, we've grown the AI center from less than less than 10 to more than 50, then goes for the kind of oil rejuvenation and so on and so on. And of course, on the digital side of things, there's a lot of things happening in terms of transforming SKF and transforming the competence base. But as we said earlier, we will continue the transformation. We are absolutely not done with it, without giving an exact number for 2021.

And Andre, your second question is on the temporary cost savings, but I believe Niclas has already answered that. So given that we have 3 minutes left, we will move on to the next question, which is actually our last question as well. That's from Joel at Berenberg, relating back to the Capital Markets Day. And at the Capital Markets Day, you talked about SEK 5 billion in terms of savings by 2025. Do you consider the structural savings achieved in 2020 to be part of that SEK 5 billion? Or is that yet to start coming through?

You'll get the last one.

I get the last one. Okay. That's a surprise. No. I think the SEK 5 billion savings was based on 2019 as a base year. That's the reference point to be clear. Alrik, final 2 minutes to you.

Well, thank you for so many questions for all of you to listen in. And thank you once again. I mean, I'm so pleased. Look what a strong result despite the headwind from currency. And I'm so proud that -- I mean, it's not my last quarter. I still have one to go. But it is really good to feel that when we started out in 2014 and what I said and what I promised, together with the team, what we said that we were going to set out to do, we are on a good way of achieving this, and that makes me so happy. And James, thank you for your kind words.

Thank you, both. And with that, we will close this Q&A session for the fourth quarter results. I believe we have answered all your questions in the chat function. But if there's anything more, you know where to reach us. Thank you.

See you next quarter. Thank you.

Thank you.