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

Hello everyone, and welcome to the SKF year-end report for 2023. My name is Seb and I will be the operator for your call today. [Operator Instructions]. I will now hand the floor to Patrik Stenberg to begin the call. Please go ahead when you're ready.

Thank you. Good morning to you all and welcome to this SKF event. Today, we will focus on the Q4 results. We will start with presentations from our CEO, Rickard Gustafson; followed by presentations from our CFO, Niclas Rosenlew. These presentations will take some 25 minutes and after that, we are ready to take on all your questions. And as usual, you can either post your questions live on this call or you can use the chat function as you prefer. With that brief intro, I will leave the word to Rickard. Please go ahead.

Thank you, Patrik, and a warm welcome to all of you and thank you for joining us for this webcast. It is no coincidence that I have chosen a train as the background image on this first slide. On the contrary, railway is a global, high-performing industry where we play an important role for our customers. I will come back to this later in this presentation. But first, let me start by looking back at the full year 2023. This was a year where we diligently executed in our strategy to further strengthen us as a company. The ongoing transformation has made us more resilient and competitive, both in the first half of the year with strong demand, as well as in the weaker demand environment that we faced in the second half of the year. I'm very happy to conclude that this is also reflected in our 2023 full year results. Last year, for the first time ever, we delivered net sales north of SEK 100 billion, bringing our organic growth to around 4%. It is also very satisfying that the adjusted operating profit came in at the record high, SEK 13 billion. The adjusted operating margin was 12.5%, which is a significant improvement compared to 2022. And cash flow from operations, we're just shy of SEK 14 billion, being one of our strongest performances ever. So all in all, it was a very strong performance last year in a turbulent macro environment. But now let's take a look at our performance in the fourth quarter. Let me once again stress that I'm pleased that our strategy and operating model are creating a more resilient and competitive SKF. We delivered a strong performance also in the fourth quarter, despite reduced demand across all regions. As you can see from this slide, we had net sales of SEK 24 billion. We delivered an adjusted operating profit of almost SEK 3 billion with a cash flow just below SEK 4 billion. Our adjusted operating margin improved significantly and came in at 12%, compared to 10% in the same quarter last year. This despite a significant volume drop. Our performance should also be viewed in the light of a somewhat negative mix effect, where automotive growing ahead of our higher margin industrial business. Across our business areas, we have continued our pricing, cost and portfolio management activities, and this has contributed positively to our profitability. It is also encouraging to note that our decentralized operating model has further enhanced our ability to drive productivity and efficiency. We have succeeded in reducing cost and inventories to effectively manage the business cycle. As an example, we have completed the previously announced SEK 2 billion annual run rate saving program including a reduction of more than 1,000 staff positions. When it comes to our geographical regions, we see that demand in Europe continues to be resilient. This partly related to good growth in railway and aerospace as well as in the aftermarket business. In the Americas, we saw continued soft demand where the agriculture and food and beverage segments remained weak. In China and northeast Asia, it is possible to see a more stabilized situation where demand was somewhat less negative than in the third quarter. However, demand in the Wind segment continues to be very weak, but partly offset by strong development in distribution and aftermarket businesses. Finally, growth in India and southeast Asia was as you can see on this slide relatively flat in the quarter. Now, let's take a deeper look at the results for our Industrial and Automotive business areas. I am happy to report that our robust industrial business representing more than 70% of net sales continued to perform well in the quarter. We delivered a strong adjusted operating margin north of 15%. As a result, the adjusted operating profit came in at SEK 2.6 billion, which is a significant uplift compared to the same quarter last year. The growth rate for the Industrial business was negative 3% due to the overall economic slowdown. However, our industrial distribution, railway, and aerospace businesses all demonstrated good growth fueled by our ability to develop innovative solutions together with our customers. I will present some more examples of this in a little while. Turning to Automotive business representing a little bit more than one quarter of our sales. The adjusted operating margin for the fourth quarter came in at 4% with Q4 typically being a lower margin quarter. More long-term, we feel confident that the underlying performance in our Automotive business is on a positive trajectory as we progress our ongoing portfolio repositioning. This is actually also visible in our 2023 full year margin improvement in Automotive surpassing 5%. With this, let's move on and look at our strategic execution. Our strategy makes us more resilient and competitive, and last year, it helped us to navigate in both a strong demand economy as well as in an economic slowdown. This year, we will continue implementing our ongoing strategic initiatives. This includes for example, maintained efforts to optimize our supply chain and footprint, managing and restructure our portfolio as well as strengthening our leadership position within sustainability and low friction products and services. I would like to share more details on these key priorities, what we have done in 2023 and maybe more importantly what we will do going forward. Starting with our competitive and intelligent value chains. Localizing our manufacturing footprint is an important part of our strategy. Being closer to our customers shortens delivery times and reduces the need for transportation. In 2023, we took some major steps in all our regions and this year, we will build on this strong momentum. In Americas, we inaugurated our new green field plant in Monterrey in Mexico. As we now build up the capacity in this factory, we increase our competitiveness. We get close to our North American customers and we reinforce our value chain in the region. The optimization of our European footprint continues and as an example, last year, we announced the closing of our plant in Luton, UK, with the capacity now being moved east to Poznan in Poland. In Schweinfurt, Germany the restructuring continues by gradually moving some assortment volumes to China and to India to further enhance our regional competitiveness. In Asia, we announced the closure of our plant in Busan, Korea, with production volumes being moved to Mexico, China, and India. Speaking about India, we are also ramping up capacity and broadening the assortment to further fuel profitable growth in this important region. In China, we have finalized some of our larger investments in Dalian, Jinan and Xinchang. We have now established an even more competitive China-for-China value chain geared for profitable growth. So let's turn to portfolio management. We have been successful in our efforts related to divesting and exiting lower margin businesses or businesses that are not core to us. Today, I would like to highlight another area that we focus on related to new innovations in our targeted growth segments that would provide significant customer value. For our distributors and together with them, we have developed a new tool, we call it SKF Housing Select, to make it even easier to do business with us. This enables distributors to quickly offer their customers additional accessories like housings, seals, and lubricants in addition to bearing sales. For our railway segment, we have developed a new robust bearings for gearboxes. This gives several benefits to our customers such as longer product life, and fewer unplanned stops under harsh conditions. We have also introduced a new precision bearing for lithium batteries thin copper film production systems. This precision bearing provides good anti-corrosion characteristics and longer service life. And finally, let's turn our efforts to strengthen our intelligent and clean leadership. Decreasing greenhouse gas emissions and decarbonization have become paramount objectives for industries worldwide. Hydrogen plays a crucial role in achieving these goals with hydrogen production and transportation being critical areas of research. Green hydrogen is an industry which is growing rapidly for us and we are active in the full supply chain. We are investing in R&D, we are increasing sales, and we have multiple active customer projects ongoing. Furthermore, we are working with some of the leading machine builders in the world. In the recent collaboration with Atlas Copco and Plug Power our magnetic bearings are used in hydrogen liquefaction. This technology enhances reliability, eliminates the risk of contamination and enables greater production capacity. We are the market leader for bearings in the fluid segment with solutions for industrial compressors, expanders, blowers, pumps and fans. There is an increasing utilization of magnetic bearings within the fluid industry, especially within the high-speed segment. This rapid growth and development of new magnetic bearing applications are very exciting for us being an important or a leading player in this field. Now, I would like to hand over to Niclas, to take you through the numbers in more detail. So please, Niclas, the stage is yours.

Thank you, Rickard and hello everyone. I'll start with commenting on sales. After a strong period of strong growth, we started to see the effect of a macroeconomics lowdown in the last 2 quarters. In Q4, our sales amounted to SEK 24 billion which is down from SEK 25 billion 1 year ago. Year-on-year volumes were down quite substantially, but on the other hand, this was to a large degree offset by continued good pricing momentum. Compared to last year, our net sales declined organically by 1.9%, currency impacted negatively by 1.8% and the total sales therefore declined by 3.6%. In terms of currency, the largest effects came from the dollar, the Chinese yen and the Argentinian peso. In the fourth quarter, we delivered an adjusted operating profit of SEK 2.9 billion. The adjusted operating margin was 12%, very much as Rickard commented, which is a significant step up compared to last year. The improvement is explained by our efforts to adjust our cost base to lower volumes, a continued positive effect from increased prices, and our work to improve or exit low margin businesses. If we take a look at the bridge step by step, we can see that the net effect of currency was a negative SEK 260 million mainly related to our relatively high-cost base in euro countries. The organic growth contributed with a positive SEK 440 million. This was driven by a strong price mix, offset on the other hand by lower sales and manufacturing volumes. Total costs declined by SEK 210 million where energy, logistics, and material contributed positively, while on the other hand, personnel cost inflation impacted negatively. During the quarter we also continued with our efficiency measures. As an example, we've delivered the SEK 2 billion cost reduction program very much according to plan. So all in all, we are pleased with our profitability performance, not least considering the more challenging macro environment. Worth mentioning also is that we had a relatively high level of items affecting comparability in the quarter. This was very much a reflection of our strategy execution as Rickard just commented on. It related to firstly the consolidation of manufacturing in Korea as well as in China; secondly, the right sizing of our operations in Germany and the final quarter of our SEK 2 billion efficiency program; and thirdly the impact of the devaluation of the Argentinian peso. And in terms of Argentina, we are very much taking active steps to reduce our exposure. Moving on to cash flow, we generated a strong operating cash flow of SEK 3.9 billion in the quarter. This is a record for a single quarter in SKF's history. The driver of the improved cash flow was cost, besides the operating profit or the solid operating profit, a strong reduction in working capital. During Q4, we continued our work on reducing inventories with inventories coming down approximately SEK 400 million during the quarter -- SEK 600 actually is the number. For the full year we've reduced inventories by some SEK 2.5 billion, while at the same time having an organic sales growth of 4%. When we take a look at the overall net working capital as a percentage of sales, it decreased to 28% down from peaks of 35% just a few quarters ago. As you can see in the bridge, net working capital had a positive impact of SEK 1.5 billion due to reduced inventories and also accounts payables. We're very pleased with the work done by our teams to reduce net working capital. Saying that, we do see further potential and the work continues across our businesses also going forward. So all in all, a very strong cash flow in the quarter and also for the full year 2023. When it comes to our balance sheet, it continues to be very strong and our liquidity to be solid. Net financial debt amounted to SEK 7.6 billion, which is a continued decrease versus Q3 as well as versus last year driven by our strong cash flow. What comes to return on capital employed, we also saw another quarter of positive development. The 12-month rolling return on capital employed improved by -- or improved further to 15.4% driven by solid profits and a strengthened capital efficiency. So finally, let me turn to our outlook. Looking into the first quarter of 2024, we expect a mid-single digit organic sales decline. For the full year 2024, we expect a low single digit organic sales decline compared to 2023. Furthermore, based on the solid performance in 2023 and our financial strength, the Board has decided to propose a dividend of SEK 7.5 per share subject of course to AGM approval, up from SEK 7 per share a year ago. And with that, I hand back to you Rickard.

Excellent. Thank you, Niclas. As we now have closed 2023, we conclude that it was a year of 2 tails. I am pleased that we performed well both when demand was strong in the first half of the year, and when demand was weaker in the second half. We have effectively dealt with the turmoil in the world and a volatile economic environment. So all in all, we delivered a strong performance both in the fourth quarter and for the full year 2023. Looking into 2024, we expect to see continued market volatility and geopolitical uncertainty, and the business is prepared to tackle different scenarios. Our focus in 2024 is on implementing our ongoing strategic initiatives. This includes, firstly, continued activities related to optimizing our supply chain including speeding up the regionalization of our manufacturing footprint. We will for example, as previously mentioned, scale up regional production volumes, especially in Mexico and India. Secondly, managing and restructuring our portfolio. Here, we are for example actively pursuing our aerospace strategy, but we are also refocusing product development to capture growth in targeted industries. And thirdly, strengthen our leadership position within sustainability and low friction solutions, and thereby contributing to the needed sustainability transformation. For our own operations, we plan to invest about SEK 0.5 billion this year to further reduce energy consumption and drive decarbonization. We will also continue our focus to grow within cleantech industries, already today representing some 10% of our annual sales. These areas and plenty of other exciting things will further strengthen us as a company. Finally, I would like to sincerely thank our employees for their excellent work and commitment, and also thank our partners for their support in 2023. Thank you. Together, we have delivered a very strong performance with net sales over SEK 100 billion, a good profitability and a very strong cash flow. This is not a coincidence, but the results of everything that we have achieved together last year. With this, I'd like to thank you for your attention this morning and we're now ready to enter into the Q&A session, and I will invite back Niclas and Patrik, and also Seb, the facilitator, to help us manage this session. So thank you.

[Operator Instructions] Our first question is from Daniela Costa from Goldman Sachs.

If I could just sort of ask 2 things, please. I just wanted to confirm on the gross margin. Obviously, when we look at the income statement, it looks like it fell down, but you have all of these one-off items. So I guess, that's not a picture of underlying. Can you clarify what the underlying has done in this quarter? And also, in the sequence of that, given your commentary on the high single digit volume decline, that means that pricing was probably quite strong. What's your outlook for pricing next year?

Thank you for joining us early morning. Yes, as Niclas described the details, yes, we do have a rather significant amount of items affecting comparability in this quarter, but I truly believe that the -- all of them are really a proof point of evidence that we are doing what we said that we're going to do. We are delivering on our strategic transformation. We are making the efforts to reduce our assortment in Schweinfurt to move that close to our customers in China or in India. We are making the hard steps in also closing our production capacity in Korea and replacing that -- moving that to Mexico and other areas getting close to our customers. And we are proud that we have been able to also fulfill our target of reducing the staff -- number of staff by some 1,000 employees. So all of this, of course, will strengthen us going forward and helped our, what we call the adjusted operating profit and also the margin. When it comes to your question regarding pricing, it is true that we have had a rather significant negative volume decline in the quarter, to some extent offset by strong price mix that we have continued to drive, as we said that we're going to do. We don't really guide for how we see that going forward, but I will reinforce what we said also in Q3 and what's also relevant as we move forward. We intend to fight for our margins. We intend to continue to be in an active dialogue with our customers, and make sure that we clearly can articulate the value that we bring and charge for that. And if the world becomes even more volatile and we do see now signs of this disruption in the supply chain due to the development in Red Sea, of course, that is something that we also need to think through, how we're going to manage to ensure that we don't have to sit with the entire cost for that problem. So it will be a continuation of you what already had seen in 2023 is what you should expect in 2024.

Sorry, just to make sure and understand on the first one. So underlying gross margin has sequentially gone up in your view once you take the one-off?

Yes, Daniela. That's the short answer.

Our next question is from Klas Bergelind from Citi.

So first on the on the inventory impact. So Niclas, just to confirm the inventory reduction this quarter, was that largely volume led and not linked to finished goods. So there was no sort of impact from the inventory reduction in the bridge. I just want to start there.

Yes, you are right. I mean this quarter or in Q4, it was relatively small. I mean there was some impact, but relatively small.

All right. My second one maybe for you Rickard on the Red Sea. You're obviously working towards improving the manufacturing balance, the localization as you say, but you're still quite heavy on production in Europe and that is why we saw this, obviously, this currency effect. So how will this impact you now when you look at sort of the Red Sea and the flows of both finished goods, but also supply? What you can comment if you've seen anything and what you see ahead?

Thank you, Klas. It's an important question that you raise. If I start with the more longer-term strategic dimension to your question, yes, you're right, we are actively driving towards what we call more a regionized setup or a region-for-region setup in our value chain. We have come a fairly long way on that journey, but we do admit that we still have a lot of work ahead of us to get to a point where we want to be and make sure that we have resilient supply chains and value chains in all of our regions that are more self-sufficient. So that journey is ongoing and will continue. Clearly, we will also need to do some tactical maneuvers to ensure that we manage through the situation that has been developed in the Red Sea. We all know that the Red Sea is one of the largest passages for the world trade, and we are not immune to that. So what we are doing is of course we work together with our customers, we look into alternative transportation routes, and we also have to look into, do we need some safety buffers in terms of inventories to ensure that we keep our customers unharmed from this development. So strategically, we continue to drive our agenda forward. Tactically, we'll be a lot of maneuvering as things develop in that region.

Okay. My third and final very quick one is on China ex-wind. And looks like, growth can be better than at least what I thought when I back out the China drag. Where did we see that sort of improvement if it is improving, and is it largely sort of end of destocking? Do you see any sort of final demand improvement in China sequentially as you went through the quarter and in the beginning of the first?

No, thank you. And I do echo what you said there. I think that we were also pleased to see that we saw a bounce back in China. Wind is still dragging us down but was to better, large extent, compensated by positive development in some other industries. And there are 2 that I like to primarily bring to your attention here was our industrial distribution and the aftermarket businesses in China. They came in rather strong in the fourth quarter and was able to offset to some extent, not fully, the negative development in wind.

Our next question is from Sebastian Kuenne from Royal Bank of Canada.

I have a question regarding the one-offs, especially regarding restructuring. You mentioned that in 2024, you want to drive more regionalization, scale up regional production, and management portfolio. Historically, SKF always closed 3 to 4 plants every year. So we really -- should we really see these closure costs, these restructuring costs as one-offs? Or is this now becoming part of SKF where you have these higher restructuring charges annually, especially now in 2024, which you just mentioned? I just want to get a feeling of how much one-off this was in Schweinfurt and Busan and Luton?

Niclas, would you like to take that question?

Yes, Seb. Super good question. In 2023, if we just start with that before we move on to the future, we had a SEK 2 billion program, and when we launched that a bit more than 1 year ago, we did say a 1,000 persons, and we did say approximately SEK 1 billion in restructuring costs or one-off costs or IAC. So you can see that roughly half of what of the IAC in 2023 was related to this one specific program. And then the other half is broadly speaking related then to what you talk about the restructuring plants and so on. So I would say that in that sense, 2023 was exceptionally high when it comes to IAC. Very much as Rickard commented earlier, yes, we do have an ambition and a plan and we will continue with our footprint activities, regionalization. I wouldn't say that one should assume or we don't see that one should assume that we continue from here to eternity. We now have -- we had a very good level of activity, exceptionally good level of activity in 2023. Let's see what it turns out to be in 2024, but therefore we very much view these as in that sense, restructuring activities not something that goes on for the rest of the future.

Understood. Then my second question is on the Argentinian peso. I assume the products that you did have in or do have in Argentina, you sell them in Argentinian pesos. So you book that loss in the normal course of business. So revenue, operating loss. And the charges you put underneath the adjusted operating profit line, this is probably then for expected losses or is it for asset write downs, how do I understand it? And what should be planned for the first quarter and second quarter 2024? Is this now all done? Is Argentina put aside all the potential losses booked? Or is there more to come?

No, it's -- so 2023, Argentina being a high inflation country, not to bore you with all the details, but you do high inflation accounting, IFRS, and we had a devaluation of more than 50% in Argentina in December and that's what we booked. So that's up until then. What I did say earlier is of course a focus area goes for Argentina, is that we reduced our exposure, we already have taken action, we started some while ago already, and we have some actions left still to reduce our exposure.

But the products you now sell in Argentina, are they now quoted in U.S. dollar, in Swedish krona or local currency, but then double the price? What's the situation?

So we do…

The contracts where you still have -- the long running contracts and you still have to book losses against that?

No, no, no. So we have a normal ongoing business in Argentina like we have in many other Latin American countries. There's no pending losses or anything like that, it's just business as usual. And as I said on the operational side given the volatility in Argentina, we of course taking action to minimize the exposure there.

The next question is from Max Yates at Morgan Stanley.

Just my first question was on the cost savings, the SEK 2 billion program, and just to understand, how much of that has actually been recognized in the P&L so far -- well, in 2023? And how much is still to come in '24? That's my first question.

Right, maybe I can start Niclas, and you can correct me or add on to my answer, but just to remind you Max, the SEK 2 billion we said was as run rate savings coming out of 2023. So some of it has been reflected already, but they are run rate savings as we move in now into 2024, that's how you should read it. As always, it's very hard to find the number in the profit and loss statement because things are moving. That's why we also reinforce the 1,000 staff headcount reduction because that you can also see in our numbers and that is actually visible in our report. So as a proof point that we have delivered on what we actually said we're going to do.

Exactly, as you say Rickard, so it's a kind of an entry into 2024 run rate.

Okay. Understood. And then just my second question is just around your component costs because I guess if I think back to kind of cost lines that sort of took us by surprise maybe towards the end of 2022 and early '23, it was really your component costs that still seem to be rising kind of quite significantly. And I can kind of see in the industrial division, you call out sort of lower cost of material. And I guess, my question is, when you say that, are you talking about kind of raw material purchasing? Or are you actually now sort of having seen steel costs start to come down versus the peak so we now starting to see that actually come through in your component costs as well?

I guess a short answer, Max, is the latter. So when we talk about materials, we lump components as well as raw mats into one. And raw mats is actually a very small portion of the overall materials. So it's both components and materials with components being by far the largest cost item there. And that kind of bubble that we've seen started to come down in cost versus the previous year. And as we've had many of these discussions during the last 6 months or so, what do we see? What do we see? We've always expected this cost to start to come down and that's what we see now.

Okay. And maybe just very, very quick final one. I mean, I think -- versus some other companies I think, your kind of regional growth is sort of slightly unusual in that kind of Europe is holding up better than the U.S. Most other -- or Americas, most other companies we kind of see the reverse. And so I guess, my question is you've talked about seeing sort of destocking at some of the OEMs in the U.S. I guess, I just wanted to understand: a, are we sort of nearing the end of that process? Or do you have any visibility on when we start to sort of see that come to an end? And I guess additionally, any comment around your industrial distribution in the U.S. where some of your competitors I guess, have been more vocal about destocking, what are you seeing there?

You're right. We are happy to see a resilient EMEA in that regard. I think, it's a reflection also, our ability to effectively drive price mix in this region, and we have also seen a strong development in some of our focus industries, distribution is being one. Clearly, there is some destocking going on in Europe as well, but maybe as not as paramount as has been in the in North America. Moving over to North America, I think we still see some destocking especially in certain industries like agriculture, like food and beverage still ongoing, but we should reach the tail of that fairly shortly. It's hard to predict exactly when and how, but it should. We should enter into territory where we should reach the tail and have a different comparison. And finally, then on industrial distribution in the in North America. So far, we are pleased to see that it's holding up pretty well.

Maybe to add Rickard, what you said, I mean we've also been quite active when it comes to portfolio management in North America. So it's both I guess -- or not I guess, but it's both the destocking, as well as then taking active measures on pruning exiting low performing businesses. And exactly as you say Rickard, distribution in North America has been holding up quite well. And also price mix in North America has been good.

No, but the pruning is important. So thank you for that important clarification.

The next question comes from Erik Golrang from SEB.

I have 3 questions. The first one on your export/import flows from the U.S. or North America. You had a slide on transformation activities and the 66% in Americas. Is that where sort of the level of localized supply is in North America at the moment? And you could say something about what's imported to North America and from where? And then the second question going into Q1 and your guidance, realize you don't give regional guidance, but is it fair to assume that it's in EMEA that you see sort of a deterioration in year-on-year demand from organic perspective? And then thirdly on working capital, a big reduction now compared to quite elevated levels, where do you see this in '24? Is there room to improve a bit further here? Also, near term on working capital to sales?

Well, thank you, Erik. 3 important questions, and I'll try to give you some color to the first one and then I will be in warm hand, hand over to Niclas to you the second 2. When it comes to North America, a big emphasis for us is really to now build on the plant that we have established in Monterrey, Mexico. Clearly, it's a building that is now up and running. We do have equipment installed and production is ongoing, but we're far from 100% utilization and capacity there. So it will come. So that will really help to further enhance our localization in Americas to go up north of the 65% that you referred to. And where does things come from? Well, it varies by assortment, but we today have some significant volumes for the automotive industry being imported from China that would then -- as we ramp up in Monterey, that will then stop, and we rather -- we're going to serve our North American automotive customers more out of the Monterey facility. But Monterey is not just for automotive, it also has a number of industrial companies or customers. But clearly, North American automotive is a key part of the strategic intent with Monterey.

And then Erik on the 2 others, so 2024 demand. Rather than commenting exactly on countries, regions, and so on just to share our thinking, we do see from a year-on-year perspective a slightly weaker start of the year and then an improvement towards the second half of the year. So you can see kind of a say, that it's a bit of a mirror picture compared to 2023. And then of course, we have the different regions moving in, not in sync all of them, but that's just to share our thinking. When it comes to working capital to sales, very much as said, we see further upside potential there. Remember, we do have the seasonality where we second half take down inventories a bit more and then during first half usually build up inventories, but disregarding that effect, we do see potential to continue to improve net working capital to sales, and that will continue throughout 2024.

And then a quick follow-up, coming back to the currency discussion previously on Argentina. I didn't fully understand that the SEK 338 million from currency devaluation in Argentina, what specifically was that? Was that balance sheet items hedges, or what was it?

No, no. That's the -- what you do in IFRS high inflation accounting. You take the full year impact. So you adjust the profit from January onwards and as the devaluation happened in December, you take the full year impact and you record that profit based on the lower currency rate.

Our next question is from Ben Heelan at Bank of America.

Yes, I just wanted to talk or ask about the China wind situation, and how far through that cycle you are? And how you're feeling about that into 2024, and whether that's going to continue to be a material drag particularly in the first half? And then secondly, in terms of the breakdown between industrial and auto into 2024 on the volume side, is there any color that you can give in terms of how you're feeling about those 2 different businesses?

Yes. When it comes to wind, it's hard predicted. There is also, of course, some political dimension to this how that particular industry will evolve. It's not the only answer to the question, but it has some significant impact. We have seen as we mentioned a rather steep volume decline in Q3 that was also maintained in Q4. Even though in Q4 as I mentioned, was somewhat offset by good development in some other industrial segments. Moving into 2024, at least for the first half of 2024, I see no reason why I dare to change the outlook or believe that wind will dramatically turn positive in the shorter time period. For the full year, it's a bit hard to speculate, but in our plans, we maintain a bit conservative in our expectations for wind for the first half of 2024. Maybe Niclas, do you want to touch on the automotive split?

Yes, on the industry automotive, I mean we look back at 2023, of course, auto had a stronger growth than industrial and then it kind of tapered off commenting on auto towards the end of the year. What comes to our intention going forward, auto is very much a focus on margins essentially. So margins over growth, saying that we do have a very good momentum when it comes to driving electric vehicle solutions and a very good position with our customers in that segment. So I won't give you an exact answer or forecast on how the split will evolve, but you can maybe look at it, taking a look at the rear-view mirror of what -- how the 2 segments developed throughout 2023.

Okay. Very clear. And just a quick follow-up, you mentioned I think to one of the questions earlier that underproduction wasn't a big hit to margin in Q4. Given the -- where the balance sheet and net working capital is today, is underproduction something that we need to be thinking about the margins in the first half of '24 being a material drag? Or how should we think about that?

I don't think maybe necessarily the underproduction as such. Yes, it will be as we reduce, if we reduce -- as we reduce, it will have an impact. Of course, the bigger impact comes from lower volumes and then us taking action to adjust the cost base. That's where you have the big margin impact.

The next question comes from Andrew Wilson at JPMorgan.

I have, I guess, probably 3 short ones. And I'm sorry if I missed it, but did you quantify the price mix versus volume split in the Q4?

No, we didn't miss it. We did not particularly be inexplicit to that. We do admit that we have had a significant volume decline partly offset by price mix, but we don't share any details on how much contributes from what.

Understood. And just on wage inflation, which obviously flagged as a headwind, which I don't suppose is a surprise to anybody. But can you give us an indication of kind of how you see that developing in '24? I'm assuming, it's going to be a headwind again, but whether you sort of feel you've taken the worst of the inflation pressures and therefore, it's going to be a lower number in the bridge or would you expect that to be higher?

Niclas, do you want to give a shot?

Yes. So when you look at our costs and put it in different buckets, we discussed materials here, earlier that's the biggest chunk. And then of course, wages very much, and as you are saying that's the kind of second biggest bucket. I think we are no exception there. We've had a significant pressure on wage inflation in the last year or so. A lot of increases have been made during 2023. If anything, one should expect maybe less pressure in 2024 when it comes to wage inflation, but of course there's the tail coming from 2023 going into 2024. So therefore, yes, there's going to be that wage inflation pressure quite far into 2024.

That's very helpful. And finally, just I guess, broader and more strategic, you've obviously -- you've talked a lot about that very helpfully this morning. And in terms of the strategic review in aerospace, have you got plans for more of that type of project as we go through 2024? It feels that you're very much on the front foot from a strategic perspective. So kind of interested as to whether that's going to be something that we hear about I guess, through forums like this, or is that going to be some background? Just, some thinking around that and maybe any projects that you could flag even if I appreciate, you're not going to give details at this stage?

Well, thank you Andrew it's important and it's very close to our strategic intent and our efforts here is what we do with our portfolio. And as I -- as we try to explain in a number of occasions, I see this in different dimensions. We have a tactical dimension to when we talk about portfolio, and that is really what we're doing in day-to-day activities in our business areas to work hard on improving the mix in our portfolio. Dare to walk away from unprofitable business and dare to focus on those accounts or those segments that are really contributing strongly. So that's kind of the tactical activities. I think we have proven that we have been successful in that space during 2023, and it's one, not the only, but one of the reasons why I also see an improved margin in 2023. But we also work to your question strategically on our portfolio. The one that we have highlighted and been very transparent about is the strategic review on aerospace, and our conclusion of that strategic review and that we now are embarking actually delivering on finding a home for some of those assets that was not deemed as core to us. So that work is ongoing. And then do we have others? The answer is, yes, we do work. We do constantly look into our portfolio. We do think about how can we further enhance or reposition it also, strategically. As of today, I have no information to share in that regard, but you can rest assure that it's something that we work on. And potentially maybe at some point in the future, we have concluded something and then we'd be delighted to share it broadly with you.

The next question is from James Moore at Redburn Atlantic.

And I've got 3 as well if I could. Maybe we could start with the automotive margin. A softer number. I just wondered if you could help us unpack that a bit. I mean is it ICE versus EV weakness? Or is it BSM or truck? Or is it a function of underutilization in Monterey? And what's the trajectory from here? If you could just help us, think about that a bit.

Yes, I think and the -- first of all, the way we look at it is that 2023 was a good progress -- progression when it comes to putting in place the new automotive, implementing the strategy. So we saw significant margin uplift. Q4, you're right, wasn't as exciting when it comes to margins. A bit on the low side compared to our ambition, but as Rickard said earlier, we see it more as a seasonality impact rather than anything about how the future will look like. We're quite confident that auto will continue to progress well when it comes to improving margins. So Q4, usually weak, turned out to be weak this year as well for auto, but we are very confident about the margin progression going forward.

And if I may add just one thing, as I also tried to say in my earlier remarks, when it comes to automotive, please also take a look at the full year development because that clearly sends the signal that this positive trajectory that we're talking about is also visible in the full year improvement of the margin. So more work to be done there, but we're not walking away from our ambition to reach an 8% operating margin -- adjusted operating margin by 2025 as we said before.

That's very helpful. And maybe one technical question. On the cost development line that the SEK 213 million. I mean, it's made up of 3 buckets as far as I can see. You've got the savings where I would have thought you could have had quite a big number as you hit your peak quarter for the SEK 2 billion plan, and you've still got some of the SEK 5 billion COGS. I could imagine a high triple digit number for that. And if wages are still minus SEK 400 million, and we're getting positives from raw material and energy and logistics. I could have seen a scenario in which that number was materially higher. I wondered if you could just help us think a little bit about whether there's anything dragging that down and how it moves going forward?

I don't think James, there's anything particular -- nothing particular comes to mind dragging it down. I think, it's a progression. I mean, 3 buckets out of 4 came down, and the fourth one being salary inflation pushed it back up again. And we of course, depending on what happens with logistics and so on, but we see it continuing, but nothing particular that comes to mind.

And just in terms of profitability, a 14% margin. When do you think we can reach that given what you see today?

It's a target that we set out there and yes, we are determined to deliver on that target. I know that we still have to prove ourselves to get there, but I'm confident that the ongoing transformation that is happening within SKF and our operating model with clear accountability, and drive in our organization will enable us to get there. Again, I'm not going to share or provide any idea on when we're going to get there, but definitely, we truly believe that it is an achievable target and something that we definitely should aim to deliver as soon as possible.

Our next question is from Magnus Kruber from Nordea.

I have 2, and I wanted to push you a little bit more on the pricing question you had earlier. Is it fair to say that the year-over-year contribution you had on pricing was on par what you saw in the third quarter?

So Magnus, you are essentially asking about the price mix in Q4. Is that right?

Yes, exactly. So how does it compare to the contribution we saw in Q3? I think, contribution to Q3 was around 5%-ish or so. Was it similar in?

So -- similar, yes. Maybe a notch lower, but similar and good development, good momentum when it comes to pricing. And as we commented earlier, we also, as Rickard said, will continue to work on pricing. Also price up going into 2024.

Yes, so expectations of 5%.

Yes, so just to be a bit more precise 5%-ish in Q3, 5%-ish in Q4 when it comes to price mix.

Perfect, that's super helpful. And then finally, could you quantify a little bit the volume impact you had on the portfolio pruning initiatives and if that fell more in the automotive or in the industrial side of the business? That would be very helpful.

Right, I am afraid Magnus, that I'm going to disappoint you. We will not disclose any significant numbers. We have disclosed what we said that we're going to do in automotive, but we had the SEK 1.2 billion of unprofitable business that we walked away from. We have concluded on that one, but that's not the whole story. There have been more activities within automotive and within our industrial business areas. They have also constantly and continuously worked on this. But as I mentioned before, you see the result of that both in a little bit maybe more negative volumes, but an improved adjusted operating margin. So we leave it as such and don't actually share any more light to this than what I just said.

No, I understand that. It will be helpful to see it though, given -- following on James' question about the margin progression to 14%. I guess this would be a big stepping stone towards those. So granularity on that would be very helpful for us.

Thank you all for listening in. We are now 2 minutes over the hour. So I think we've come to the end of all the questions as well. And please one or 2 finishing words, perhaps from Rickard.

Thank you, Patrik. And again, thank you all for taking your time and joining us for this early morning call. Again, just to reinforce some of the key messages, I think, and I hope that Q4 is another proof point that we are creating a more profitable and competitive SKF. Despite a volume drop in the quarter, we do see an improved adjusted operating profit of SEK 2.9 billion. We improved the operating margin to 12% and we delivered a very, very strong cash flow of SEK 3.9 billion in the quarter. This comes from a rigorous execution on our strategic transformation. We have had a lot of emphasis on the portfolio mix. We have driven cost effective efficiently and very rigorously. We are making real steps into the green transition. We are driving customer innovation at a higher pace, and we've been able also to reduce inventories. All of this contributes positively to our numbers in the quarter. And for the full year, again, I think I like to reinforce that we have been able to demonstrate that our business model and way of working works both in an environment of significant growth and high volumes as was the case in the first half of the year as well as it continues to enhance, and improve our margins and profitability also when the tide is turned in the second half. And we do have some historical milestones that we can report for the full year with the net sales reaching SEK 100 billion for the first time in our history. So a number of good things that we take with us as we now tackle things that will evolve in 2024. So I stop there and again, I thank you so much for joining us and I wish you a wonderful day. Thank you very much.

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.