Henrik LangeExecutive Vice President and CFO
SKF Capital Markets Day � 10 September 2014
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Agenda
● Financial development
● Cash flow, working capital
● Financial position
● Acquisitions
● Second brand
● Key business message
CMD 2014
1Financial development
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SKF Group – Half year 2014
Financial performance (SEKm) 2014 2013
Net sales 34,689 31,544Operating profit 4,120 3,317Operating margin, % 11.9 10.5Operating margin excl. one-time items, % 11.9 11.9Profit before tax 3,548 2,864Basic earnings per share, SEK 5.26 4.10Cash flow after investments before financing excl. EU payment 1,164 255Cash flow after investments before financing -1,661 255
Organic sales growth in local currency:
SKF Group 5.2% Europe 3%
Strategic Industries 9.0% North America 3%Regional Sales and Service 2.2% Asia 13%
Automotive 4.5% Latin America 1%Middle East and Africa 18%
Key pointsSales volumes up by 5.0% y-o-y.Manufacturing was higher compared to last year.
CMD 2014
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Business segment margins
On sales including Intra-Group sales
H1 2014
On external net sales approx. figures
H1 2014
Automotive business (~27%)
AutomotiveAutomotive excluding one-off
4.0%4.8%
4.7%5.7%
Industrial business (~65%)
Strategic IndustriesSI excluding one-off
10.4%10.6%
Regional Sales and ServiceRSS excluding one-off
11.0%11.3%
Industrial businessIndustrial business excluding one-off
13.4%13.7%
CMD 2014
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Long-term financial targets
Targets
Operating margin level 15%Annual sales growth in local currencies 8%ROCE 20%
Definitions:ROCE = Operating profit/loss plus interest income, as aprecentage of twelve months rolling average of total assets less the average of non-interest bearing liabiities
CMD 2014
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Financial targets
Amortization:• represents as margin around 0.5%
in 2013, and 0.7% in H1 2014.• As from 2016 it is estimated to
represent around 1.0% margin.
CMD 2014
15%Operatingmargin
-20
-15
-10
-5
0
5
10
15
20
0
5
10
15
08 09 10 11 12 13H11
4
05
1015202530
08 09 10 11 12 13H114
8%Changes in sales in local currency
incl. structure
One-time item
20%Return on capital
employed
One-time item for the individual year
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SKF Group – operating margin development
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
H1 2014-4.0%
0.0%
4.0%
8.0%
12.0%
16.0%
Operating marginOperating margin excluding one time items
3% Gap
CMD 2014
© SKF Group SKF Capital Markets Day10 September 2014Slide 9
How we will close the 3% operating margin gap
%
H12014
12
15
Target
Actions:
Restructuring and efficiency• Implement the restructuring and
efficiency program• Implement business excellence fully
Sales growth• Continue to drive growth in the
business• Drive R&D to generate more new
products / soultions
Productivity and portfolio• Evaluate portfolio• Drive productivity in all areas
Restructuringand efficiency
program
Salesgrowth
Productivity,portfolio
Infl.,other
CMD 2014
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Cost split, operating expenses 2013: SEK 57 billion
Employees35%
Other 26%
Material 36%
3%
Depreciation and amortization
Improvement activities:• Purchasing activities
in the restructuring program
Improvement activities:• Productivity improvement and
manufacturing footprint activities in the restructuring program
CMD 2014
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Cost reduction – specific programme 2012-2015
Main activities:• Consolidation of manufacturing
- merger between sites- transfer to faster growing markets with more local production
• Optimization and productivity improvements- in the manufacturing and demand chain processes- in administration and support functions
• Reduction in purchasing cost- mainly through standardization and rationalization
of the supplier base.
Reduction of annual cost by SEK 3 billion by the end of 2015Total cost for the programme around SEK 1.5 billion2,500 people impacted,
CMD 2014
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SKF’s programme to improve efficiency and reduce cost
Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 2013 Q1/14 Q2/14 Total
Cost taken 200 250 190 0 50 490 0 100 790
People affected 530 410 320 0 130 860 0 170 1,560
Q1/13 Q2/13 Q3/13 Q4/13 2013 Q1/14 Q2/14 2014
Restructuring 15 35 75 75 200 70 50 120
S&A 50 50 50 50 200 0 0 0
Purchasing 100 100 100 100 400 60 100 160
Total 165 185 225 225 800 130 150 280
Restructuring, SEKm:
Realized gross savings from total programme, SEKm:
Full year gross saving 150 100 80 0 40 220 0 100 470
Giving future gross savings, SEKm:
vs 2012 vs 2013
Note: Run rate Q2 2014 SEK 1,340 million vs 2012.
CMD 2014
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S&A and R&D cost development
2007
2008
2009
2010
2011
2012
2013
12
12.5
13
13.5
14
14.5
15
S&A % Sales
2007
2008
2009
2010
2011
2012
2013
1
1.5
2
2.5
3
R&D % Sales% %
Flat +1.5%
CMD 2014
Cash flow, working capital
2
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2010 2011 2012 20130
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Cash flow, after investments before financingexcluding acquisitions and divestments
SEKm
Summary:• Good cash flow generation• Going forward - use cash flow
to deleverage balance sheet
CMD 2014
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Free cash flow conversion
2010 2011 2012 20130
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Comments:FCF = Net cash flow after investments before financing excluding acquisitions / divestments2013 adjusted for the SEK 3,000 million provision for the EU fine.
Strategy:• Profit improvement• Capex and working
capital management
CMD 2014
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Working capital management focus
Step-up activities to improve our net working capital % sales:
• Reduce inventory in % of sales- Increase supply flexibility
- Optimize product range and service policies- Improve forecasting and end-to-end planning
• Improve A/R % sales ratio- Focus on reducing overdues
- Outsource collection in selected countries
• Get effects on A/P from new purchasing activities- Implement improved payment terms through Group Purchasing
- Set-up supply chain financing structure
CMD 2014
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SKF outsourcing of A/R collection
• Collection process will be handled by an external party usingappropriate system support for effective handling
• Covering the following countries: Sweden, Denmark, Norway, Finland, Belgium, Holland, UK, Italy, France, Austria, Switzerland, Germany, Portugal, Spain, Czech Republic, Hungary, Poland and USA
• Collection contacts will be done in local languages.
• All countries within scope are expected to be implemented during 2015.
• Benefits expected in 2015/2016
CMD 2014
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Supply chain financing process and set-up
BANK
1 Supplier sends goodsand invoice
2 SKF approves invoice
3 Supplier requests early payment
SCF IT plaform
4 Supplier receives payment
5 SKF pays invoice at maturity
Supplier
Benefits and cost:
▪Supplier benefit: Faster payment and lower capital cost
▪SKF benefit: Extended Days Payable Outstanding (DPO)
▪Cost: Bank charges suppliers equivalent to: SKF negotiated interest rate + service & IT fee
Simplified overview of setup
CMD 2014
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Summary of supply chain financing
• SKF plans to increase days payable to support working capital
• Supply chain finance will create win-win for most suppliers driven by beneficial rates
• Supply chain finance is a tool for suppliers in order to receive earlier payment of invoices
• Implementation started by selecting a bank and on-boarding of pilot suppliers in Europe planned for Q4 2014
• Focus initially is Europe
• Global roll-out in scope after implementation in Europe
CMD 2014
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Net working capital 2013 and target
SEKbn 2013 % of sales TargetNet sales external63.6Inventories 13.7 21.5%Trade A/R 11.2 17.6%Trade A/P 4.7 7.4%Net working capital 20.2 31.7% 27.0%
Improvement to reach target = SEK ~3.0 billion
Activities ongoing:• Flexibility, product range & end-to-end planning – inventory
• Overdue reduction & outsourcing of collection of A/R
• Payment terms & supply chain financing
• Total SEK ~3.0 billion By 2017
CMD 2014
Financial position
3
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Capital structure, H1 2014
Actual Target
Equity/assets ratio 29% ~35%Gearing 62% ~50%Net debt/equity 144% ~80%
Financial position, debt structure and liquidity are balanced.
Goodwill, intangibles 19,775
Fixed assets 14,341 Equity 21,360
Inventories 14,769 Post-employment benefits 10,754
Other assets 21,132 Loans 23,972
Cash, fin. assets 4,021 Other liabilities 17,952
74,038 74,038
Credit rating BBB+,Baa1, stable outlookDebt 34,726Net Debt 30,705
CMD 2014
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Balance sheet and leverage
Balance sheet H1 2014, SEKm
Cash, fin assets 4,021Debt 34,726Net debt 30,705Equity 21,360
Strategy• Deleverage back to target level through:
- Profit improvements- Balance sheet management
CMD 2014
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2015 2016 2017 2018 2019 2020 2020 20210
100
200
300
400
500
600
700
800
Current debt structure
EURm
100100
500
110
500
750
100
Credit facilities:
EUR 500 million 2019 SEK 3,000 million 2016EUR 150 million 2017
No financial covenants or material adverse change clause
200
CMD 2014
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History of strong cash flow generation and a shareholder friendly distribution policy
2003 - H1 2014, accumulated rounded figures, SEKm________________________________________________________________________
EBITDA 93,000 Investments (23%) 21,000
Fin. Net, taxes, wc, others (40%) -37,000 Acquisitions (24%) 22,000
Cash flow from operations (60%) 56,000 Dividends/redemption (35%) 33,000
Extra pension funding (3%) 3,000
CMD 2014
Acquisitions
4
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Acquisition criteria
• Strategic fit with clear potential synergies and ability to exploitthese in a reasonable timeframe.
• Strong commitment and ownership by acquiring business area.
• Profitable high quality companies with strong management and preferably larger deals.
• EPS accretive in the first full year, positive TVA effect in two to three years, including amortization of intangible assets.
CMD 2014
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Acquisition strategy for profitable growth
• Acquisitions are seen as one important driver for growth and value creation.
• Integration of Kaydon and BVI is going well with synergies in line with plan.
• SKF has the financial means and acquisition project resources in place to continue to pursue relevant acquisitions.
• Focus is on SKF platforms and PT products.
CMD 2014
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Acquisition 2003-2013Identifying gaps and opportunities in all platforms
Products
Technologies
Geographies
Industries
SNFA (2006)
S2M (2007)
QPM (2008)
Economos (2006)
Macrotech (2006)
Macrotech (2009)
Baker (2007)
PMCI (2007)
PB&A (2006)
Monitek (2006)
Safematic (2006)
Vogel (2004)
ALS (2007)
Sommers (2005)
ABBA (2007)
Jaeger (2005)
Peer (2008)
GLO (2008)
TCM (2003)
Scandrive (2003)
Cirval (2008)
Lincoln Industrial (2010)
GBC (2012)
SealsBearingsand units
Lubrication systemsServices Mechatronics
BVI (2013)
Kaydon (2013)
CMD 2014
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Major acquisitions performance
Products
Technologies
Geographies
Industries
SNFA (2006)
S2M (2007)
QPM (2008)
Economos (2006)
Macrotech (2006)
Macrotech (2009)
Baker (2007)
PMCI (2007)
PB&A (2006)
Monitek (2006)
Safematic (2006)
Vogel (2004)
ALS (2007)
Sommers (2005)
ABBA (2007)
Jaeger (2005)
Peer (2008)
GLO (2008)
TCM (2003)
Scandrive (2003)
Cirval (2008)
Lincoln Industrial (2010)
GBC (2012)
SealsBearingsand units
Lubrication systemsServices Mechatronics
BVI (2013)
Kaydon (2013)
CMD 2014
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Major acquisitions performance
• The sum of the major acquisitions perform in line with the Group acquisition criteria.
• The sum of the major acquisitions represent 14% of Group sales in H1 2014.
• The sum of the major acquisitions represent 18% of Group operating profit in H1 2014.
• Acquisitions form a part of the SKF profitable growth strategy.
CMD 2014
Second brand in SKF
5
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Strategy for second brands
• Capture mid-market growth
• Lower cost manufacturing
• Global market approach
• Segment focus- PEER, Industrial segments- GBC, Auto, HD segments
CMD 2014
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Second brand value proposition in normal application
1st Brands PEER 3rd Brands0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Normal ApplicationTarget
Performance
Sam
ples
Pro
duct
ion
Sam
ples
Pro
duct
ion
Sam
ples
Pro
duct
ion
Manufacturing consistency
Engineering design vs cost
Differentiate against 1st tier
• Cost competitive in normal performance application
• Customization flexibility• Speed and responsiveness
Differentiate against 2nd, 3rd tier
• Industry leaders’ supplier • Consistency, long term
sustainable approach • Globally local sales and
engineering support
CMD 2014
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How SKF has developed PEER since acquisition
• Sustainably achieved great financial results– Achieved 15% sales growth per annum– Solid operating margin and margin development– Strong cash flow generation
• A more globalized brand– from 90% to 75% dependency on USA– Increased share of global customers
• Business strength– Continuously maintain and win customer confidence– Developed and launched enhanced product offering, especially in Agricultural– Strengthened supply base of components and sourced products
• Organizational strength– Accountable leadership, converting funnels into visible and connected value chain– Upgraded engineering, turn from contract manufacturer to development partner– Certified EHS practices ahead of similar competitors, improved worker conditions
CMD 2014
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PEER market successes
• Introduced a range of maintenance free tillage solutions
• Expand a new range of elevator pulley solutions
• Developped Ag distribution business • Improved taper roller bearing
performance to access construction industry
• 10 Years awards in Deere – main supplier in Ag Attachments
CMD 2014
Key business message
6
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Key business message
• Continued good performance
• Strong cash flow and financial position
- implement restructuring program
- working capital focus
- use cash flow to deleverage balance sheet
• Acquisition opportunities
- in the SKF platforms
- “normal performance” companies
CMD 2014