Executives: Patrik Stenberg - Head of Investor Relations Alrik Danielson - Chief Executive Officer and President Christian Johansson - Chief Financial Officer and Senior Vice

President
Analysts: Klas Bergelind - Citi Ben Maslen - Morgan Stanley Andreas Koski - Deutsche Bank Andre Kukhnin - Credit Suisse Daniel Schmidt - SEB James Moore - Redburn Andrew Wilson - JP Morgan Erik Golrang - Nordea Daniel Cunliffe - Liberum Peder Frolen - Handelsbanken

Patrik Stenberg: Good morning, and welcome to this conference call on the first quarter results. We expect it to last about an hour. Present today are President and CEO, Mr. Alrik Danielson; our CFO, Christian Johansson; Theo Kjellberg, who is setting up the media relations; and myself, Patrick Stenberg, from Investor Relations. We will start by presenting the results and after that, we will, as usual, continue with the Q&A session.

And with that, I leave the word to Alrik. Please.

Alrik Danielson: Thank you, Partik. Welcome and let's go and start with the second slide, where I talk about a busy quarter. And it has been a busy quarter as it is usually in SKF.

During the quarter, we have continued to work of course on our distinct value propositions around the rotating equipment performance and our products offerings. And just recently, we have invested in a new global software development center in Goteborg. In the quarter, we launched a number of interesting products connected to our offering around digitization. And I will talk more about that in a minute. We've also officially opened our new fully automated production channel of spherical roller bearings here in Goteborg with already more than 200,000 bearings produced and delivered.

We are also making good progress in our ongoing investments in new factory technology in increased automation in our production facilities in the U.S., Germany and in Malaysia. At the annual general shareholders meeting at the end of March, we presented SKF's new climate targets where we set out to reduce the CO2 emissions per ton of bearings sold and per ton of products shipped to customers by 40% respectively. Our customers, investors and society as a whole all benefit from the concrete actions we are taking to increase efficiency and reduce emissions. Every percent of friction we save, every gram of weight we remove and every drop of lubrication we avoid contribute to helping customers to reduce their costs and their environmental impact. Being at the heart of the rotating machinery and equipment means that we are in a unique position to work together with customers to provide the solutions needed.

In the quarter, we announced the consolidation of our technology function and our business and product development organization into one organization, which will further accelerate customers' driven innovation at SKF. With those words, I move to the next slide. We have launched a number of interesting digitalization products in the quarter. The SKF QuickCollect has been pre-announced, but we launched it this quarter. It's a versatile, portable and affordable sensor that connects wirelessly.

It can be used standalone with a smartwatch, a smartphone or tablets or connected wirelessly through the SKF cloud, enabling more advanced analytics. All in all, the QuickCollect enables Internet of Things before all things have the Internet and it's our first real move to massify the possibility to use condition monitoring. Also, the new SKF Multilog IMx-8 provides a complete system for early fault detection. It helps to improve reliability, availability and performance of rotating equipment with automatic advice for correcting existing or impending conditions. This compact device can connect to mobile devices as well as laptops for easy configuration and monitoring.

Machine intelligence from IMx-8 data will help you avoid unplanned downtime, prolong machine availability and minimize maintenance and repair costs. IMx-8 integrates easily to other IMx units and could connect you with the SKF cloud for storing and sharing data, enabling SKF remote diagnostics services for expert reporting and recommendations. With the new SKF Enlight centre for marine, we present the most valuable information for defined user roles in a simple interface with one single web log-in. Chief engineer, superintendent, site manager, remote monitoring specialist, class surveyors are ideal to use this tool. We can provide all relevant information for a successful condition based maintenance program.

By doing so, we help the customers to improve maintenance work, enhance operational safety and reduce downtime. The result is cost and time saving. Moving to the next slide, Q1 summary. Looking at the financial performance of the first quarter, we saw continued growth and improved operating margin and continued debt reduction. The increase in demand was broad based across all regions and most of our customer industries and strengthened gradually during the quarter.

Next sales rose by 11% to SEK 19.6 billion with the strongest development in North America and Asia. Sequentially, sales increased by 4%. During the quarter, we managed to ramp our product in a cost efficient way to meet the increase in demand. We were also successful in managing our fixed costs, which contributed to an adjusted operating profit of SEK 2.357 billion and an adjusted operating margin of 12%. Our industrial business delivered an adjusted operating margin of 14.2% and our automotive business delivered an adjusted operating margin of 7.2%.

Cash flow generation of SEK 64 million was impacted by increased working capital as a result of our growth in the quarter. We continued to strengthen our balance sheet and our debt decreased by about SEK 900 million in the quarter, taking our net debt ratio to 76%, which is below our target now of 80%. Turning to the next slide and our sales development by region compared to last year. SKF is, since the fourth quarter, growing organically again. The trend has accelerated during the first quarter when SKF grew both within industrial and automotive in all regions.

In Europe, organic sales increased by 5%. In Asia, we experienced strong growth in both automotive and in industrial, and in total organic sales grew by 12.8% in the quarter. Our organic sales in North America grew 7.8%, compared to the first quarter of last year and we saw growth for both industrial and automotive. Organic sales in Latin America were 11.4% higher, and organic sales in Middle East and Africa grew by 9.5% in the quarter. If we move to the next slide, we talk a little bit about development by customer industry.

Sales to the automotive industry grew by 8.4% in the first quarter and we saw good sales growth for both cars and trucks especially in Asia, but also in Latin America and in Europe. In the U.S., we were growing again in cars and light trucks, as well as in the vehicle aftermarket. Sales within industrial segment grew by 7.9% in the quarter compared with the first quarter last year. Sales to our industrial distributors were significantly higher, driven by strong volumes in Asia and North America. Sales to the energy industry were significantly higher in Europe and in North America, while sales in Asia were significantly lower.

Sales to the rail industry grew in Asia and in North America, while it was slightly lower in Europe. Sales to the aerospace industry grew in Europe, but were slow across most other markets. And with those words, I hand over for more detail to Christian. Please, Christian.

Christian Johansson: Thank you, Alrik, and good morning to all of you.

So if we start with - on the next slide with the sales development, we see that total net sales increased with 11% in the first quarter, and as already mentioned, we experienced a broad based recovery in most markets and across most customer industries both within industrial and automotive. In total, organic sales increased by 8% in the quarter. When it comes to currencies, both the U.S. dollars and other U.S. related currencies like the Brazil reais and the euro strengthened and we had a positive currency effect sales-wise of close to 5%.

Last year's two divestments we did in the second quarter last year, which means that are still in the numbers here, and that's behind the structure component of minus 2%. If you turn to the next page and you have seen this before, the slide clearly shows that the business cycle upturn strengthened during the quarter with 8% organic growth. We should note though that calendar-wise we had a long first quarter this year, compared to last year. If we move to next page, adjusted operating profit in the quarter was, as you heard, SEK 2.357 million, some SEK 385 million higher than in the first quarter last year. Our results included items affecting comparability, as we call them one-time items nowadays, of SEK 62 million versus SEK 97 million last year and it's mainly related to the restructuring and cost reduction activities of our manufacturing footprint in Americas and China that we also have communicated to you earlier.

Adjusted operating income excluding items affecting comparability for the rolling 12 months was SEK 7.9 billion. If you look at the operating profit bridge and starting with the items that affects the comparability, we had a delta of positive 38 when we calculate in last year's exchange rates. Related to that, we had higher restructuring charges last year versus what we had this quarter. The two divested operations like our own Kaydon velocity control contributed SEK 50 million to the bottom line last year and the currency impact in the operating profit was SEK 202 million positive this year compared to last year. And if you look at the operating performance, we increased year-over-year with SEK 230 million in total organic sales, including volume effects in manufacturing was positive by SEK 572 million in the quarter.

And the positive contribution we had from increased organic sales in terms of sales and manufacturing volumes was partially offset then by continued negative price mixed effect in the same level as we have had in the previous quarters. As we mentioned several times before, we launched our new ERP system, Unite, on the 4th of January this year. We had a high activity level in the Unite program organization after the go-live to support users to learn the new way of working and to ramp-up the normal productivity. So in total, we had SEK 130 million higher cost in the profit and loss compared to last year. If you look at the next - for quarter two, we expect to have about SEK 80 million higher costs for Unite compared to quarter two last year.

Considering rates and inflation in general, increasing raw material cost and the usual - what we usually get, some extra costs when we ramp up production, I'm very pleased with our cost management. As you know, our cost case is above SEK 60 billion in a quarter and year-over-year we saw in this quarter a negative impact of SEK 230 million on that cost case. We saw increased raw material costs in the quarter, but we have other commercial activities - we have design and specification changes that has compensated for this raw material increase. And in the first quarter, we also had positive material and expense consumption. So all in all, the net effect on the material cost line came out around - about flat versus last year.

And also if you look at - into the second quarter on this item, I would say that I expect this to - with the raw material increases coming through here, I would say that we will worsen here about SEK 100 million in quarter two, as being as a year-over-year effect. So if we turn to the next page, performance by customer group and starting with industrial side, organic net sales increased then by 7.9% versus last year, significantly higher in Asia, North America and higher in Europe and in Latin America. Adjusted operating margin was 14.2% compared to 12.9% in the last year. Positive contributions from increased sales and volumes in manufacturing to some extent than offset by the negative price mix and also margin-wise somewhat negative from the divestments, where both divestments done last year belong to industrial. Automotive organic sales grew 8.4%.

Good sales both in cars and light trucks as well as trucks. Strongest automotive markets continue to be Asia. However, we started also to see good development in Latin America in this first quarter. Adjusted margins for automotive was 7.2% in the quarter compared to 7.1% last year. If you look at the income statement for the group, gross profit margin improved 0.5% versus last year, supported by fixed cost contribution.

Selling and administrative expenses decreased to 30.7% from above 40% last year. Financial net in the quarter was negative SEK 170 million. Exchange rate fluctuations had a positive effect this year, compared to a negative last year. Go to the tax line, we have a tax rate of 30.8%, compared to 31% last year. Cost management; and I've already commented our cost management, but a few more words to it here.

We used to talk about this fixed cost index and in the first quarter this decreased to 98 versus our baseline in the end of 2014. And this includes the high cost for the Unite Program versus the baseline. If you exclude that, the index was down to 96.So this means in practice that we have managed to - with our different cost reduction activities to offset more than two years of inflation. And we are continuing to do this, to work to reduce our fixed cost base by productivity, by optimizing our footprint and by simplifying our organization. When it comes to headcount, in the first quarter we increased 650 people, including 130 permanent and the rest is temporary and agency personnel, but we should note that when it comes to staff employees, we reduced also in this quarter with around 90 employees.

Cash flow; we achieved a cash flow after investments before financing and if you exclude - excluding the acquisitions and divestments of SEK 64 million, compared to SEK 510 million last year and if you take a 12 months rolling rate, we are at SEK 4.6 billion. Cash flow in the quarter was impacted by an increase in working capital, which is natural in this phase of a business cycle. It was also so that we have now - we are now seeing the increase in the investment programs coming through the cash flow. As you know, we have increased our ambitions to invest in our manufacturing technology and we also have a negative impact by under SEK 30 million and the cash flow related to that we have offered our retirees in Germany to manage the pensions themselves. So we have - you can say we have bought out some of our pension obligations there.

Net working capital 30.9% of sales in the end of first quarter, which was higher than last year. Excluding currency effect, it's around 0.5% higher. And I will say, we do progress when it comes to terms and conditions with our suppliers. I've already mentioned that we have increased our inventory slightly in the quarter in order to improve availability and service level, which as we see it is key in an upturn market. And receivables have been impacted negatively during the downturn quarters and we have now put very high focus to reverse this now when the market is improving.

If you look at the net debt, we decreased the net debt by around SEK 900 million in the quarter. We continue to make good progress in deleveraging in the balance sheet. And if we take the net debt excluding pension, we were at the end of the quarter at 32% of equity. Provisions for pension decreased by SEK 800 million, mainly then as a result of discount rate changes upwards in Germany and U.S., but also what I mentioned is buyout of retirees in Germany. Guidance for second quarter, financial net would be around SEK 225 million negative.

Currencies based on end of March rate is a positive impact of SEK 170 million. If we take the rates we had yesterday, it's slightly less, it's SEK 140 million. Tax level we remain at the 30% as the guidance and on investments we also remain what we have said before, SEK 2.2 billion for the full year. So with that, I will leave the word back to you, Alrik.

Alrik Danielson: Thank you, Christian.

And when we look at now the demand outlook for second quarter - in the first quarter we saw a broad based recovery in most markets, we grew by 8% organically. And during the second quarter, we expect to see growth in all major regions as reflected in our new volume outlook. So demand compared to the second quarter 2016, demand for SKF's products and services is expected to be higher for the group and for industrial, demand for automotives is expected to be significantly higher. Demand is expected to be slightly higher in Europe, significantly higher in North America and in Asia, and higher in Latin America. Demand compared to the first quarter 2017, demand for SKF products and services is expected to be slightly higher for the group including industrial and automotive.

Demand is expected to be relatively unchanged in Europe and in Latin America, slightly higher in North America and higher in Asia. With those words, I leave over to Patrick.

Patrik Stenberg: Thank you, Alrik. And finally before we enter into the Q&A session, a couple of words about our upcoming events. Next week we will be in Stockholm meeting investors and we hope to be able to meet with some of you there.

We will also attend some of the upcoming conferences later on here during the spring. The next report, as you know, is due in the middle of July - 21st of July. And until then, we will be available to meet with you here at Goteborg or elsewhere in the world. With that, we move into the Q&A session. Operator, please.

Operator: [Operator Instructions] We will now take our first question from Klas Bergelind from Citi. Please go ahead.

Klas Bergelind: Hi Alrik and Christian it is Klas from Citi. The first one on industrial distribution accelerating in Europe and North America, can you help us understand how much was underlying improvement versus pre-buy ahead of the price increases effective May? Do you expect distribution to slow down a bit into the second quarter? And I guess higher distribution also gave you a bit better mix in the quarter, but you say still negative price mix similar to what you've seen before, maybe down 1%. Did underlying pricing then get weaker? I'll start there.

Alrik Danielson: This is Alrik. I wish I knew exactly in this with this exactitude. What happens is the following. There are two effects I think we need to - or three effects you can talk about. One is that there is an underlying improvement of demands.

That triggers that. For a long time our distributors have been destocking, if you remember, we have been talking about that for quarters on end. And when there is a slow down, everybody is trimming their inventories and they don't feel that there is any problem to deliver, so they are trimming their inventories. As this turns, of course there is a tendency of saying, well, now I need to stock up again because I need to be able to follow the demand of my customer. And then there is a possibility of course where SKF goes out and says that we are going to increase please the prices.

And some people say, well then let's be a little bit opportunistic here. My assessment today the way we work is that in the U.S., for instance, due to the fact that we work with many of our customers now on a COGS basis in the sense that it's what they sell, it's not what they buy that gives the year-end bonuses and so forth. We have been talking about that, how we have been trying to transit and successfully so with many customers. I believe that's a smaller figure of this. But there is a sweet spot right now and it's a classical sweet spot.

So please understand, it's nothing special for this time around. When the underlying demand starts to increase, you see these kind of changes and it's always been like that. Just as much as when it goes the other way, in the beginning you have sort of a much steeper downturn in delivery than underlying demand. So from that point of view, this is a classical - in my view, a classical turn of the environment. And then when you talk about price mix, we have not - we have started to increase prices in the marketplace.

A situation where the price mix difference is of course that there are contracts signed, there are old pricing still in the marketplace. And as that plays out over time in the beginning of the turning cycle, you can still have these kind of situations. But right now we are in a price increasing mode.

Christian Johansson: Actually, one more sentence to that, Klas. I mean, you're right that distribution isolated is positive to the mix.

And as you know, we have two-thirds of our sales, which is - other stuff also which impacts the mix, but I would say the net effect of that - we talk margin and you know the level of SPL developments or price mix developments we talk about. So it's a tenths of a percentage that moves towards price and mix, but it's not the big - it's nothing in the market that is of importance for you to notice that.

Klas Bergelind: My second question is on the EBIT bridge, how did inventory move year-over-year and quarter-on-quarter ex-currency? And if you could help us there, Christian, on the raw materials. You said SEK 100 million more year-over-year in the second quarter on the cost line and you were flat on raw materials this quarter. Do you expect a similar impact year-over-year development in the second half, i.e., which will take total raw material headwind to SEK 300 million negative for the year or will the raw material headwind grow in the second half, i.e.

get worse?

Christian Johansson: I mean, if you take them one by one, inventories adjusted for currency and structure year-over-year was positive SEK 400 million. And if you take it sequentially, it was SEK 600 million up. I mean, we usually, as you know, build inventory after year end. And then when it comes to raw material, I think we have been very successful and we’ve talked a lot about that on the Capital Market Day that the underlying raw material - I mean, if you look at the indexes and scrap and so on, that has stepped up and we see those effects. And that's what I said, that that will come through stronger in second quarter.

But as I've said - I mean, we are quite successful in working on compensating activities. We are working on our design and our other parameters we can impact. And there we have offset the whole raw material in the quarter. I mean I would say - so that's the net what I see. I mean, if I should guide anything, it is SEK 100 million worsening in the second quarter.

What happens in the second half of the year, I cannot comment on that. I mean, we have also seen on the indexes that they are not continuing upwards. That's my look at it. That's standardized a little bit on the level where we are now. So we will continue to work in the way we do.

We think we work in a good way. So for the moment, I don't have any signals that we will see any dramatic change towards what is in our…

Alrik Danielson: But I would like to - a little word of a caution there of course. There is inflationary pressures in the economy. I am absolutely sure. And that's why we are so clear on that.

We think it's absolutely righteous of us to demand price increase at this moment.

Klas Bergelind: Thank you.

Operator: We will now take our next question from Ben Maslen from Morgan Stanley. Please go ahead.

Ben Maslen: Thank you.

Good morning Alrik, Christian, Patrik. Alrik, can you just talk a bit about working days and how much that boosted growth in the first quarter and then what reversal do you expect in the second quarter and is that reflected in your guidance for higher growth, which I guess is faster than you guided for the first quarter?

Christian Johansson: I mean I can take that, Ben. I mean, it's 1.5 day that you can say swaps between the quarters. So we have 1.5 day year-over-year more in Q1 and less in Q2. So I mean, how much - if you see the calendar effect - I mean, we have concluded that.

I mean as Alrik said on the previous question, the net effect of all things - I mean, if on one hand now we have calendar effects, on the other hand, you have now more of a robust feeling that the economy is coming back and that impacts on the restocking and so on. That is very difficult to know. I mean, we all note, as we have said before, when we do a forecast and so on, we are not on the decimals of the working days. So we see it as it is. And I cannot say that this is - but I mean you've seen our guidance and I would say we had some cautious in that related than to that we've had a longer first quarter.

Ben Maslen: But I guess that's what I am getting at. I mean, you guided for slightly higher growth in Q1 and then you debate and you're guiding for higher in the second quarter. So, I mean are you saying that you can do higher growth than 8% in the second quarter? Is that how we should read your guidance? It's a bit unclear.

Alrik Danielson: Oh, you should not read it. You should read it for what it is.

Benjamin

Gulliver Maslen: Okay. Thanks. And then on the inventory build of SEK 600 million sequentially in the first quarter, can you talk about what you plan to do with inventories in the second quarter? Do you expect to further significant sequential build ahead of the summer? Thanks.

Christian Johansson: Yes. I mean, we will most likely build or have a slight increase in quarter two versus quarter one.

Alrik Danielson: And I'll tell you, this is of course not because we don't know what we are doing. This is conscious. In a turnaround situation like this, it's imperative that we do what we can to supply. And as soon as, let's say, the - we come out of this ramp-up phase, we will of course diligently work to get our inventories down again. And I am absolutely confident that we will do that.

Ben Maslen: Got it. Thanks gentlemen. Thank you.

Operator: We will now take our next question. Andreas Koski from Deutsche Bank.

Your line is open. Please go ahead.

Andreas Koski: Thank you very much. So, I am coming back to the outlook as well and specifically on Europe. You grew organically by 5% in the quarter and now you guide for slightly higher demand in Q2, which corresponds to a volume increase of 2% to 4%, but do you expect daily sales to improve both quarter-on-quarter and be in your higher level range year-over-year? And should we see this guidance as fairly cautious because of the effect of the Easter?

Christian Johansson: I think you - first, you have to realize that you are talking about the quarter and knowing our business we are not - we don't have that visibility and we are not working on that detail level in the planning.

So, I mean we don't talk about the forecast on daily sales or so. I mean that's not where we are. We are giving you our best possible guidance from where we are and where we are seeing the first quarter considering the calendar as it looked in the first quarter, considering that we had some restocking in the system in this type of a cycle and so forth. So we cannot give you more speculation on that, I mean what - where we are in the range - in the guidance range we have.

Alrik Danielson: What you can say about SKF is that of course we are global, we are in most industries, et cetera.

So as you listen, if you put your ear to the rail, so to speak, during the quarter, that's probably the best advice I can give you to sort of judge whether or not we are right.

Andreas Koski: Okay. And then on cost savings and restructurings, despite very strong demand, you continue to take restructuring cost of SEK 62 million in the quarter. What should we expect from here in the coming quarters? And could you also explain how the fixed cost index can jump around 5% to 10% between different quarters?

Christian Johansson: I mean, one by one. Yes - I mean, if you take restructuring and what you can expect - I mean, what we take now is - and some of these projects, we call them activity based cost activities.

So, I mean that's footprint stuff and so on which takes a couple of years to implement. And that we have communicated to you and that's what we execute on and that will continue obviously that we will carry through now this footprint in the U.S. We will closely sight in China that we took cost for this quarter. So that will continue. And we have other such activities also that we are working on.

So that will be there. The cost index, I mean it's an attempt to show you how we develop versus a baseline. So you could of course say that you - since it's a quarter now compared to a quarter, it's not a year-over-year. You can have some seasonality in that of course. You could have some - but I mean it's not - it's no big swings I would say.

I mean if you go down…

Andreas Koski: 5% to 10%?

Christian Johansson: Sorry?

Andreas Koski: It's 5% to 10% of the fixed cost. For me it looks like fairly big swings, but I just was just wondering whether there was a good explanation for that.

Christian Johansson: Yes. I mean, sometimes you have also like - like we have talked about before, we have some of these activities. We do warehouse moves.

We get some extra costs that we don't classify as items affecting comparability. So of course you might have big customer events. You might have other things that impacts a certain quarter.

Alrik Danielson: So it's the long-term trends you should look at and you should look at how the profitability falls through into the income statement. That's what you should focus on.

In my mind, this is what's relevant.

Christian Johansson: And I think what we wanted to - and I hope you will appreciate that - I mean, we tried to have a clean, transparent way. We are talking about what we do on fixed cost excluding currency and so on so you get feeling of this. It's not the way to do your quarterly estimates based on that growth.

Alrik Danielson: And then I want to give you a last explanation also on this extraordinary items.

In the old days, you could sort of take a project and you took it all at once and you took - and then - and you used that to sort of smooth out. Now, as we - when we take a certain restructuring, we take it and then as it comes it falls in to this column. And that's why sometimes you see this coming. And we will continue to work on our footprint. The difference is of course that some of KBTs that maybe we had planned for this year will partially have to be postponed.

And that's positive because it means of course that we need the manufacturing footprints to supply to our customers. So some of the programs that we have maybe planned to announce and we are working on have to be postponed. But we will continue to work as we have announced previously and there is no change.

Andreas Koski: May I just clarify on a question earlier on the call? Did you say that the inventory buildup didn't have an impact on EBIT this year compared to last year in the EBIT bridge?

Christian Johansson: No, that we didn’t say.

Andreas Koski: Okay.

And what was the EBIT impact from the inventory build up?

Christian Johansson: No, but I mean - what you have to realize that - I mean, if you see it from production point of view, production is producing. And I mean for fixed cost average in a plant, it doesn't matter if this is something that stays in inventory somewhere or if it goes to part of a sale. So the effect of fixed cost contribution is there independently, or if it's in inventory, there change or if it is goes through the cost. So for sure you have the same fixed cost coverage from inventory build up as you have on sales volume.

Andreas Koski: Okay.

Thank you.

Alrik Danielson: Thank you.

Operator: We will now take our next question from Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin: Yes.

Good morning. Thanks very much for taking my questions. Just a quick follow-up; first, on inventory buildup that you sighted of SEK 400 million on like-for-like basis year-on-year, was that kind of proportionate across the two divisions?

Christian Johansson: I don't have that number. But you can assume that. And it's marginal differences, if not.

Andre Kukhnin: And then somewhat related to that, I know automotive also grew very nicely, but margins stayed flat. Could you just help us running through the key drivers of that there please?

Christian Johansson: In automotive?

Andre Kukhnin: Yes, please.

Christian Johansson: Yes, I mean in automotive you have also, I would say, one mix effect impacting, also it's the seasonality of the auto market. We see this - quarter one is not as the end quarter. It's more of a Q2, Q3.

I mean, those things comes in the quarter. If you take year-over-year, I don't have any - I don't recall if we had some special effects last year. It was a good progression we did last year, if I recall in Q1. But I mean we don't see any underlying - it looks good. I mean, we know what we should do there.

We don't have any particular effects.

Alrik Danielson: The positive thing in the automotive I think is that we - as we have been guiding and talking about is that we for a long time have been trading below market in the U.S. on the automotive OEM side and that we are now back trying trading I would argue even ahead of market.

Andre Kukhnin: Yes, I was just thinking year-on-year the growth is clearly there, but margin is - on underlying basis is stable at 7.2. So that answers the question.

Christian Johansson: As we've talked, it's a tough market to be in.

Andre Kukhnin: Got it. Thank you.

Alrik Danielson: But we have our TAT and we are set on delivering on our TAT. So we still have that ambition clear and we think we can achieve it.

Andre Kukhnin: Thank you. And just a quick one if I may. How has April developed for you so far?

Christian Johansson: We cannot comment on that.

Andre Kukhnin: Okay, got it. Thanks very much.

Operator: We will now take our next question from Daniel Schmidt from SEB. Please go ahead.

Daniel Schmidt: Hi, hello can you hear me?

Christian Johansson: Yes, loud and clear. Daniel Schmidt : Right. I think most of my questions have been answered, but just and more sort of reflecting on your profitability in the quarter.

You lowered your EBIT margin target a while back from 15% to 12% and now you are at 12% in this upturn. And if you exclude the ERP extra cost, you're at 12.6. Could you in any way sort of shed some more light on what you think is possible in terms on margin progression? And I think you've said that the 12% should be seen as a sort of mid-cycle target in a cycle basically. You have price mix against you as well and I guess you are working on that to change that.

Christian Johansson: But I mean as Alrik said before - and don't forget that we have a bit of a sweet spot situation now.

When volumes come, we have worked and we will of course continue, but we have worked focused on costs. We don't really see the peak, at least not what we can from history believe is a peak when it comes to inflation and price pressure from downwards, let's say. So we had a - I mean, this is a sweet spot, as we call it, quarter. Yes, price mix is negative, some other things are positive. There will not always be hedged on everything or always be on the opposite.

And then where we could marginalize - sort of sum it, yes, I think we are happy with the quarter. It's a decent quarter. I mean, seeing a relatively strong business cycle quarter. But as we said, there will be other threats coming in other quarters of the cycle.

Alrik Danielson: And like always, we want to see this consolidate now and see where we are, what will happen with the long-term demand, what will happen with inflation, how will it develop.

It's early to talk about this. From my point of view, it's good that we have reached the targets, so to speak, and now we need to see how we consolidate this level and that is our ambition. Daniel Schmidt : Alright. Okay, thank you.

Operator: We will now take our next question from James Moore from Redburn.

Please go ahead.

James Moore: Hi everyone. Alrik, Christian, my first topic, price raw material, when you talk about raw material SEK 100 million the second quarter, are you talking about the inflation on the SEK 1.6 billion raw material buy or just the scrap buy or including the SEK 9 billion component buy? And what sort of price mix do you need to see to pass this on and what list price increases are you putting into the market at the moment and are they even regionally?

Christian Johansson: I mean, it's a few things. I mean, raw material and how you measure that in a mixed basket of what you are buying in terms of pure raw material or more value adding components, it's a mix. What we try to understand, we might have to clarify that with more in what we write in our annual report on the sensitivity.

We have translated - we have tried to translate this raw material impacts into a scrap-related index. So that's on the whole basket of what we are buying, which is called the raw material related. So, I don't know how we can explain that more. So if the - the material inflation or the pressure we see then related to raw material price changes. So…

Alrik Danielson: But you are absolutely right in the sense that there are other - when you buy scrap, you have other kinds of in the process where inflation can have an impact on your cost.

One is of course when your component suppliers need to increase their price or have pricing leverage towards you, and the other one is of course the transport. If transport prices - when you take some components sometimes from a distance, if they increase, you have an increase there. So this is right now in the making. Honestly, just as much as I don't know exactly what kind of success we will have in the short term with our price increases, we don't exactly know also what kind of costs are coming in from that sense because it's in the making. These discussions are taking place as we speak as you can understand.

And they are driven by two factors and this is a little bit the same as we have with our customers. One is what kind of true cost increases are coming from the factor side of the economy, what kind of demand situation do we have. So of course for us, we see it becoming more of a seller's market than it has been previously, which gives opportunity for us. But also there are of course some of our component suppliers that are looking at a similar kind of a situation and we are trying to push back. So it's - I wish we had a planned economy in this sense, that it was so easy to just give you this, but it's actually in the making.

And my assessment is, long term this is going to work fine in the end, that SKF has pricing power and has the possibility to defend or place some of our margins in the market and our reason to be in the market. We are making excellent products and providing a lot of value to our customers. In the short term, it's difficult for us to exactly know how this is going to play up.

James Moore: And the list prices you are putting in the market, which are they?

Alrik Danielson: Yes, we are putting list prices out to distribution and I think we talked about that last time. They are different in different markets depending on many issues.

But it's a significant drive for price in the marketplace right now.

James Moore: Can you put a percentage on the average global list price increase?

Christian Johansson: No, we cannot.

Alrik Danielson: No, I can't, I can't. I wish I could, but I can't because it's very - it's a complex thing and you know how - probably you have the same in your own business. It's too complicated for me to give you unfortunately because I - it's happening right now.

It's playing itself out at this moment.

James Moore: That’s great, and the second one is much quicker. Unite, you talked about SEK 210 million in the first half. Can you give us some thoughts as to what the year-on-year change could be for the full year or basically how does the second half look?

Christian Johansson: I mean, the guidance that we have given remain. Otherwise I would have given you a new number.

So that means of course that versus last year we should be somewhat better. So it remains what I've said before.

James Moore: That’s why I was just checking. Thank you very much.

Christian Johansson: Thank you.

Operator: We will now take our next question from Andrew Wilson from JP Morgan. Please go ahead.

Andrew Wilson: Hi good morning everyone. And just a quick one on the sequential development that you talked about through the quarter improving, can you just give us an idea of how that varied across the different regions and if there was a difference between sort of your major regions of the acceleration you saw kind of March versus January please?

Christian Johansson: What you're after, sequential development quarter four, quarter one?

Andrew Wilson: No, sorry, just the development. As you went through the quarter, I think you mentioned in the presentation that demand had strengthened as you went through the quarter.

Can you just talk about what you saw across the different regions in that context?

Christian Johansson: I know, that part. No, I don't think we have seen a regional difference in that. Not what I [indiscernible] have opinion at this point.

Alrik Danielson: As the quarter progressed, we saw an improved demand. It's different of course in different business segments, as it is.

I can tell you it's - the interesting thing is that we see the underlying businesses strengthening in all of our major segments, some of with relatively modest figures and some a little bit more stronger figures. But of course we saw a stronger sales as the quarter progressed, which is also a little bit the normal that you see in the first quarter, normally in anywhere now.

Andrew Wilson: Okay, that’s good. Thank you.

Operator: We will now take our next question from Erik Golrang from Nordea.

Please go ahead.

Erik Golrang: Thank you. I have one question on the automotive side, perhaps going back to the question on the model development year-on-year. But on the investment level in automotive, if you could talk about what's happened there and your plans towards the last couple of months, we've seen an acceleration in the strive towards electric vehicles. Does that in any way pressured your business cost-wide leading to more specific investments? Thank you.

Alrik Danielson: Well, what we have - a part of this growth that you see now coming in and that we have been talking about not at least in the U.S. where we have said, also in Asia, where we have talked about the fact that we are working hard in the U.S. to get back and that we have been trading below market and that we see that we are now doing the activities necessary to change that. That has of course been followed with investments to be able to cope with that kind of increase in demand. The automotive side, especially on the car side, has been doing fine for a long time, which means also that the relative leverage is such that you need to increase your capacity to be able to make - through investments to be able to follow the market.

But there is no specific - in the automotive, it's almost always specific investments. You use the existing capacity and when there are certain items that come outside the capability of your machines, you sometimes need to invest. Or if in a region there is a certain business that you have taken, it means that you afterwards have to invest. So, I don't see in the automotive any different trend in this way.

Erik Golrang: Thank you.

Operator: We will now take our next question from Daniel Cunliffe from Liberum. Please go ahead. Daniel Cunliffe : Hi, thanks. I will ask Christian question on buybacks. You've sort of published a 76% net debt, including pension debt, so well below your 80% target.

I guess the question is, in your annual report sort of states that as you go below this 80%, historically you return cash to shareholders. You've certainly done so in the past, although not for a while. I think 2007/2008 was the last time given the - your target has been well above 80% for many years. So what's the priority here as the debt falls further? Buybacks, cash returns as you sort of state in the annual report, step up in M&A? Just a color on capital allocation over the coming 12 months. That's question Number 1.

And the second question is really a quick one. Just your confidence level on the price increases sticking here. Thank you.

Christian Johansson: I will try to elaborate on that further. I mean, this is obviously not a topic for a quarterly call.

It's a board discussion, and as you say, it's not a management decision what to do here. And I cannot answer for the historical thing. I mean, we believe it's good with a strong balance sheet and we will continue to work on strengthening that. And I mean it gives of course opportunities to act when opportunities come in terms of strengthening our competitiveness, in terms of M&A and other things and organic development. So, I mean this has not been up on the agenda here as a big issue, but I mean it's 76% versus 80%, we paid dividend here the other day.

So this is - we are not - mind set.

Alrik Danielson: But anyway, of course we will - either we will be able to find some interesting acquisitions, we will be able to invest in organic development or we will return money to shareholders. There are no other alternatives. So from that point of view, I think we should be happy with the fact that we have been managing to deleverage the balance sheet as we have. Daniel Cunliffe : Great, and then just the confidence -

Alrik Danielson: The one that's sticking.

As I said before, I'm absolutely sure, there has been sometimes discussion - I'm absolutely sure that the bearing industry has pricing power to defend its position in the value chain. And there's no - the fact that we have been doing so good, so relatively well during the downturn shows that there is pricing power. Of course there is a difference between in a negative deflationary environment where you sort of resist price decreases, where you suddenly go in and you actively have to increase prices, but I would argue that there's no difference that I see in the events occurring at this moment than in previous cycle terms. Daniel Cunliffe : Yes, thank you very much.

Operator: We will now take our next question from Peder Frolen from Handelsbanken.

Please go ahead.

Peder Frolen: Yes, thank you. I have a question on the bridge again. And as the savings programs have rolled out, that specific part in the waterfall has obviously gone as well. But maybe we should - I mean, you talk about maintaining the cost level, the fixed cost, the ramp-up production well.

Is it possible to help us to understand how much sort of savings that actually hit the quarter from a rollover effect sort of?

Christian Johansson: No. I mean, I can talk in general and you know and we talked about that also that we have - roughly we have some EUR 600 million just in salary inflation that we need to work with on yearly basis. So this is a continuous work here on productivity and it's a continuous work to simplify our organization and so on. So, I don't have a number for you. Since this is not big programs, we don't sit centrally and micromanage that.

We have targets. We have - how they do it out there - I mean, it's up to them how they execute on these things. So, it's difficult to give you a number on what is - it's part of a business and I think we should be happy that we are able to do it.

Peder Frolen: Yes, I agree. But how do you control the ramp-up and manage to fix cost base? I mean, did you have sort of a general efficiency improvement target across the board or how do you manage your -

Christian Johansson: I can give you one more thing on that.

I mean, if you take now what we report as fixed cost contribution, that obviously we have some baseline for what is - what should the volume give, which is you can say a standard cost. In a ramp-up situation here when things starts to move, you obviously you get over time, you get - you have to bring in agencies that are on average more costly than what you have in the base. You get some of more maintenance. You need to - things that goes over the OpEx. This is natural in it.

So of course we have productivity and all these things on our dashboards, but I mean this type of cost accounts is quite natural in this cycle.

Alrik Danielson: And this is a little bit also what we're talking about, about the sweet spot. This is coming. In the beginning you see some of it, but you don't see all of it. And then as you move forward, these costs come in on a more regularly basis.

So there's no difference. We're not running our factory different. They have already cost efficiency targets and they have technology step-ups. They have everything of this already clearly defined and it doesn't change with the ramp-up. So this is happening all the time.

And so from the management point of view, the trick is of course to - even though we are now doing better and we're having a better loading situation that we truly keep on the pressure. And I think that at least from a group management point of view, we have shown that during the quarter when we further simplified our structure and made the management smaller. So I think this is also a signal to the rest of the organizations that we're looking for them to do the same. Because this is a change in the business climate, but there's no change in sort of the worlds - how the world developed. The things we said during our Capital Market Day about how we see the future, the need for the digitalization of our interfaces with end-users, how we see the necessity to drive productivity and automation in our factories, it has not changed.

It continues exactly the same.

Peder Frolen: So the follow-up here would be then, given your previous guidance and the outcome on with a strong 8% organic growth, I suppose being a bit better than you dare to hope for although I think you were a bit positive also in previous guidance. Would you say that you are also positively surprised on how those volumes have been translated into earnings given that you - sort of demand quickly became better than expected?

Christian Johansson: Yes.

Alrik Danielson: Again, I do not think - it's not about surprise. What - if you talk - when we had the last call, we talked about the guidance that we had in the last call.

I didn't think at that point that we were going to have this strong quarter as we did at that point, if you understand, when we were in the beginning of this quarter. I am pleased, we are pleased with the fact that we have been able to leverage well on our manufacturing. But we must also understand that there are - there is a certain sweet spot when you have this turnaround. It has to be realized and it is always like that. If you look back in history, you will always see this happening.

So we are just only trying to give you as transparent situation as we can. Then of course I also hope that things will be better than our guidance, but this is how we see it.

Peder Frolen: Okay. That’s fair. Thanks a lot.

Operator: Our next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin: Oh yes, thanks very much for taking the follow-up, can I just check on the maths on the benefit from inventory build up? I know you can't quantify it exactly for reasons of just how the factories operate. But if we conceptually just take that SEK 400 million year-on-year and apply normal operational gearing to it, at 30%, and then look at what was happening in the bridge the year before, which in Q1 2016 I think you were still reducing inventory, so that had a small negative effect. And take basically the balance of that, the benefit from build and reversal of the previous burn, would that conceptually be right in your view?

Christian Johansson: I have left Q1 2015 since long, so I don't know what you are - when you're comparing Q1 2016 to 2015, so I cannot comment on that, but there's a principle on the leverage depending of course on product mix and what factories.

You have different, let's say, value add depending on products and so on. And you say you use 30%. I will not comment your 30%. But I mean as a principle, it affects the inventory downtime and you apply a normal factory leverage. That's correct.

Andre Kukhnin: And just on a fixed cost index, does that get rebalanced or restated historically as you go through quarters? I am just comparing the charts in your current presentation versus the one in Q4 from Q4 2016. And some of the levels of the index historically look quite different. So just wondered what changes the history, what changed the history.

Christian Johansson: Yes. I mean, what we do yearly is that we change the fixed currency.

Andre Kukhnin: Right.

Christian Johansson: So we do a yearly restatement backwards in order to have a more accurate, let's say, currency base when we do it. So that could with changes in currencies impact a little bit on the history. I mean, again, as we said on previous questions, see it more as a long-term trend rather than a short-term guidance.

Andre Kukhnin: Right.

So it's the currency that gets historically adjusted rather whole. Okay.

Christian Johansson: Yes. And also structure changes. We take away structure changes.

Andre Kukhnin: Yes. That shouldn't have changed from Q4 2016 from what I could see. And do you have a cash generation or cash conversion target for this year that you could share with us even in rough terms?

Christian Johansson: No, we don't have a target like that. I mean, we have obviously a - our own - what we have indicated on. I mean, you have our working capital target.

You have our additions to plant and property target. And then - so I mean I cannot give you another additional dimension on the cash flow side.

Alrik Danielson: Internally, we are driving of course our unit very hard on these issues, but the targets that we have for the group are the ones that you see here that we have communicated.

Andre Kukhnin: Maybe just a follow-up on that. I mean, do you think your cash conversion this year will be similar to last year despite the - as you say, sort of cash consumption requirements due to the inflection of business cycle?

Christian Johansson: I think you know this as well as we do that you have - cycles are impacting in terms of absolute amounts on cash flow.

I mean, it's obviously harder to have the same cash flow generation in an upturn than you would have in a downturn. I mean, I cannot give you more on that.

Alrik Danielson: It will depend of course how this plays out. But of course as the speed curve of the turnaround changes, our ability to deliver cash has not decreased. So the cash flow that has always been a forte with SKF is still the same.

Andre Kukhnin: Got it. Thank you very much both of you.

Alrik Danielson: Thank you.

Patrik Stenberg: Thank you. Thank you all.

I think we are a couple of minutes overdue. So, we would like to thank you for your interest in our first quarter and we hope to speak to you soon again.