Operator: Ladies and gentlemen, thank you for standing by, and welcome to the SKF Q2 Report 2020 Conference Call. [Operator Instructions]. And I would now like to hand the conference over to your first speaker today, Patrik Stenberg. Thank you. Please go ahead.

Patrik Stenberg: Thank you. And good morning, all of you to this presentation of the Q2 results for SKF. As usual, we will start with a presentation of -- for about 20, 30 minutes, and after that, we'll follow on with a Q&A session. So with that very brief introduction, I will leave the word to Alrik Danielson. Please?

Alrik Danielson: Thank you, Patrik.

Thank you, everybody, for listening in today. We have delivered another very strong operating result despite sales falling by 25% during the second quarter this year. This performance allows us to continue to build a stronger SKF, maintaining high levels of investment in our factories and in new customer offerings whilst, at the same time, capitalizing on new ways of working. Net sales fell organically by 25% to SEK16.6 billion. Sales continued to be impacted by both government-imposed restrictions and lower underlying demand.

Sales in both Europe and North America decreased by about 30% while sales in Asia were 10% lower compared to last year. Despite this significant drop in demand, we continued to improve cost flexibility, and we were able to deliver an adjusted operating margin for the second quarter of 9.4% compared to 12.7% last year with an adjusted operating profit of SEK1.6 billion. We continued to reduce costs and adjust the size of the business with the ambition to be even more flexible and to support customers in an even better way going forward. Investments in modernizing and automating our factories, as well as increasing our regional manufacturing capacity continued. During the quarter, we announced further SEK400 million investment in our Xinchang ball bearing factory in China.

During the first 6 months of the year, our efforts to reduce fixed cost regrettably resulted in a reduction of 1,350 permanent employees and 750 temporary/agency employees. These efforts will continue, and as a result, we expect to see a continued elevated level of restructuring costs during the second half of 2020. These are difficult but necessary steps that we need to take to protect the business and make sure we have the foundations in place from which to emerge from this crisis in an even stronger fashion. Cash flow during the quarter was SEK838 million negative as a result of the lower operating results, increased working capital, which, in turn, was driven by lower payables and higher quarter -- sales. We continued to reduce inventories during the quarter, which I think is the highlight, so to say, negative cash flow, but for the right reasons.

If we turn to the next page and talk about the little bit at the Industrial business. The Industrial business continued to deliver very good operational performance on lower sales. The adjusted margins were 14% compared to 15.7% last year despite a drop in organic sales of 17%. Sales were significantly lower in North America and Europe and lower in Asia. If we turn to the next page and say some words about the Automotive business.

Well, the Automotive business was heavily impacted by customer closures and lower demand. The adjusted operating margin was negative of 8.4% largely driven by a 45% drop in organic sales. Sales were significantly lower in all major markets where many of our OEM customers have been shut down for parts of the quarter. It's, however, encouraging to see that we are continuing to win new business and that we are growing our share of the market. If we take the next page and talk a little bit more about the Automotive business.

Many of our Automotive customers have been severely impacted by the COVID-19 situation, and our teams have made fantastic efforts to serve our customers and to reduce costs. We're also taking more structural measures to improve operations going forward. These measures include simplified structure and organization; taking advantage of synergies with regional industrial sales; manufacturing moved to bearing operations where we, by this, consolidate our management of our factories in a more efficient way. All this with the purpose of being leaner in cost and to increase efficiency without any way losing focus on the Automotive business, on the contrary, becoming an even stronger partner to our Automotive customers. If we turn to the next level -- page and talk about a little bit about the different areas.

We can see that we saw a decline in organic sales of 25% compared to last year with net sales of SEK16.6 billion. Sales in North America were 30% lower within Industrial. Sales to marine industry were significantly higher. Sales to other industrials were slightly higher and sales to aerospace industry were lower. Sales to all other industries were significantly lower.

Automotive sales were significantly lower to both cars and trucks and to the vehicle aftermarket. In Europe, organic sales were 31% lower than last year. Demand from both Industrial and Automotive customers were significantly lower than last year. Within the Industrial, sales to the marine industry were higher but sales to all other industries were significantly lower compared to Q2 2019. If you take organic sales in Asia, it decreased by 10% with lower Industrial demand and significantly lower demand for Automotive.

We saw continued strong development in the energy industry and relatively unchanged demand in marine, while most other industries showed significantly lower sales compared to last year. In Automotive, sales to truck industry were significantly higher while sales to light vehicles and to the vehicle aftermarket were significantly lower. In Latin America, sales decreased organically by 38% compared to last year and we saw significantly lower sales to both Industrial and Automotive customers. If we turn to the next page and talk to things about what we're doing for the future. Well, sustainability is the core of SKF's strategy and will -- went well integrated in our business.

In June, we announced that our manufacturing operations will be carbon-neutral by 2030. We have been working with sustainability since SKF was founded more than 100 years ago. Reducing the impact of operations has always been a priority. To give an example, since 2015, we have decreased the CO2 emissions in the manufacturing by 36% per bearing, and we are already operating two carbon-neutral factories in Steyr, Austria and Tudela, Spain. Simply put, sustainability has always been key to SKF.

If we take the next page and talk a little bit about what we're doing to strengthen our regional manufacturing footprint. Over the last two years, we have made great progress in China, the world's largest market for deep-groove ball bearings. In June last year, we announced a SEK370 million investment in a new factory in Xinchang. The factory is now operational, and we are now making further investments in strengthening our manufacturing footprint in China. The next phase of the investment will allow us to serve our customers even better across wider applications and with a wider product range.

These investments is part of our strategic ambition to develop our regional manufacturing footprint, moving manufacturing closer to our customers. The second phase of the factory in Xinchang is expected to be operational during the end of 2021. And with these words, I hand the word over to Niclas.

Niclas Rosenlew: Thank you, Alrik. Thank you.

If we turn to the next page, please, I will take you through the details of our financials in the quarter starting with sales. Net sales decreased by 26% in the second quarter. Organic sales were 25% lower than last year. For Industrial, we saw a decline in organic sales of 17% and Automotive declined by 45% in the quarter. The currency effect on sales was negative in the quarter by 1% with the largest effects, as usual, coming from the U.S.

dollar, the euro and the renminbi. If we turn to the next page, please. We have seen a dramatic slowdown in growth since the peak in second quarter 2018. During this time, we've continued to invest in innovation, in competitiveness, and we are adapting our operations to a lower growth scenario and reducing our cost base. Looking at the operating profit development, we've been successful in this process.

In the second quarter, we managed to deliver an adjusted operating profit of SEK1.6 billion corresponding to a margin of 9.4%. We move to the next page, please, taking you through the operating profit bridge for the quarter. Firstly, the currency impact was negative SEK138 million compared to last year. Our operational performance was SEK1.153 billion lower year-over-year. Organic sales and manufacturing volumes was dramatically lower at SEK2.398 billion.

We had a negative effect from lower sales and production volumes. On the other hand, both price and mix were positive in the quarter. And then what comes to cost development, it continued to be very good and we saw higher realized cost savings than cost increases resulting in a positive net contribution to operating profit in the quarter of SEK1.245 billion compared to last year. Given the special circumstances during the quarter, I take the opportunity to give some further details on our cost development. The SEK1.245 billion included a gain from a land sale of slightly less than SEK200 million.

Out of the remaining savings, about half can be categorized as permanent, while the other half is more temporary in nature. Out of the temporary, less than half is related to government contributions. During the first 6 months of the year, our effort to reduce fixed costs resulted in a reduction of 1,350 permanent employees and 750 temporary or agency employees. These efforts will continue, and as a result, we expect to see a continued elevated level of restructuring costs during the second half of 2020, as Alrik already mentioned. If we move to the next page, please, here you can see the performance by customer group in the quarter.

We start with Industrial, organic net sales in industrial decreased by 17%. Sales in Asia were lower while sales in North America, Europe and Latin America were significantly lower. The adjusted operating margin was 14% compared to 15.7% last year. Cost savings contributed positively to the result while lower sales and production volumes had a negative effect in the quarter. When it comes to Automotive, organic sales in Automotive declined by 45% in the second quarter with significantly low sales volumes in North America, Europe, Asia and Latin America.

The Automotive business had an adjusted operating margin of negative 8.4% compared to a positive 5.1% last year. The result was negatively impacted by the significantly lower sales and production volumes partly offset by cost savings. We move to the next page, please. Net working capital was 30% of sales at the end of the second quarter, which was on the same level as at the end of second quarter last year. We are pleased that we have been able to reduce our inventories in the quarter despite the very sharp drop in demand and inventories as a percentage of sales is kept stable compared to the previous quarter.

We are seeing a reduction of both accounts payables and receivables, a natural effect due to lower business activity and reduced production levels. However, receivables increased somewhat in June due to higher order and sales. We move to next page, please. We are maintaining a strong focus on cash flow despite having increased our investments in manufacturing significantly over the last couple of years. Cash flow in Q2, excluding acquisitions and divestments, was a negative SEK854 million compared to a positive SEK1.849 billion last year.

The lower cash flow is mainly due to the lower result in combination with an increase in working capital. The cash flow, excluding acquisitions and divestments for the last 12 months, was SEK4.1 billion. We move to next page, please. We have a strong balance sheet. The net debt-to-equity ratio was 62.5% at the end of the quarter.

The net debt-to-equity ratio excluding leasing and pensions, was 12.7%. Provisions for post-employment benefits net decreased by SEK1.550 billion in the second quarter mainly due to net actuarial gains on plan assets and exchange rate effects. SKF's financial liquidity is strong. We have about SEK18 billion in cash and committed but unused credit facilities. In Q2, we issued a new SEK3 billion bond with a 4-year maturity.

The proceeds will be used for general corporate purposes, including refinancing of existing debt. We move to the next page, please. When it comes to the demand outlook, we are, of course, impacted by the fact that the industries and regions in which we operate are being impacted by initiatives by authorities and by SKF's customer relating to the spread of the COVID-19 virus. As a result of this significant level of uncertainty, it is not feasible to provide a reliable demand guidance for the coming quarter. If we move to next page, please.

Finally, some additional guidance for the third quarter. We expect the finance net to be about SEK225 million negative. For the full year, we expect a tax rate of about 29%. Over the last three years, we've consistently increased our investments. We are accelerating our investments in property, plant and equipment.

And in 2020, we expect to see additions to plant and property of SEK3.3 billion. And with that, I give the word back to you, Alrik.

Alrik Danielson: Thank you, Niclas. Well, to summarize, I am really happy and I think we've done a fantastic job to deliver a very strong performance in the second quarter despite dramatically lower sales. And I think also we see how we are able to reduce costs when we need to and we are finding new ways of working where digitalization is really getting a push.

We delivered an operating margin of 9.4%, and our efforts to reduce costs continues, both in the short and the long term. We are strong financially. We are continuing to invest in our manufacturing. We also continue to invest in new technologies and new products and service offerings. And looking into Q3, there is a high level of demand uncertainty, but we are taking every step to continue to make SKF an even stronger company going forward.

With those words, I thank you for listening, and I move over to you, Patrik.

Patrik Stenberg: Thank you, Alrik and Niclas. Operator, with that, we are ready to go into Q&A. [Operator Instructions]. Operator, please.

Operator: [Operator Instructions]. And we'll now take our first question, and this comes from the line of Olof Cederholm.

Olof Cederholm: It's Olof with ABG. Just my few questions. Is it possible to say anything about sort of a level of organic sales run rate in June or early July to give us a sense of what the momentum was when we go into Q3?

Alrik Danielson: Yes.

Of course, if we kind of look back a bit in time throughout Q2, I mean, April was the worst, May was much better and then June was a much better. And I wouldn't put too much weight, frankly, to kind of run rates. But anyway, I mean, what we see is that July has started roughly at the levels of June. But again, I would not put too much weight on those sort of run rates. And the reason is, of course, obvious.

You can see on the Automotive side, one of the things I see where the estimates did not understand properly that it was a complete stop in the Automotive business where lead times in industrial dynamic is very low so we saw that immediately. Then now when the car companies and truck companies have restarted their production, we have then come back to a different level that we see going into also the new -- into July. In Industrial, the same. We saw it coming down and we saw July ending stronger than April and May in line with what we had in June. And I mean, in China, we were even growing during the quarter.

And what we see China is, of course, that when we look forward, the uncertainty also there on demand is increasing as the effects actually of government interventions when they have been kickstarting, not the least the energy sector with wind, trucks and others, how will that now continue into the second half of the year. It's very difficult to say. But July started in the same way as June ended, a little bit better maybe.

Olof Cederholm: Very good. Thank you very much for that color.

Very useful. One -- my second question would be on price/mix. Did you -- were you able to have a positive price/mix also within the Industrial division on a stand-alone basis? And could you -- well, extended question, could you also maybe elaborate a bit on the pricing environment?

Alrik Danielson: Well, the answer is yes and -- but on elaborating on the future, so far, so good you can say. And even the businesses that we are gaining in the automotive space are also better than the portfolio we've held before. But going forward, it will all depend on how strong the recovery is, so to say how much capacity and what will be the activities from the different players in the market.

Having said that though, I think we're all -- everybody is aware of there's not so much margin to give away in these kind of circumstances. And I hope for good sense to prevail in the marketplace.

Operator: And we will now take our next question, and this comes from the line of Gael de-Bray. Gael de-Bray: I've got two questions, please. The first one is about some of the costs you've excluded from your definition of the adjusted EBIT.

Could you give us a bit more details on the customer settlement cost? I mean what are these costs related to? And I think we've seen them now becoming a sort of a recurring feature over the past 3, 4 quarters or so. So would you expect these costs to continue into H2? And I also can see that there was a capital gain of nearly SEK200 million within the EBIT and I'm not so sure what it is related to. So just a clarification around that. And the second question I have is about the Automotive business for which you flagged a good backlog and market share gains. Could you perhaps describe a bit more this backlog? I mean is this meaningful enough to give you a bit of visibility for the coming quarters? And how does the margin in that backlog compare to current margins?

Niclas Rosenlew: Yes, Gael, we'll split this.

Niclas here, I'll take the first and then hand over to Alrik for the Automotive. Yes, so we had one-off IAC costs amounting to SEK900 million in the quarter, which is clearly higher than what you've seen for instance in Q1, and we split that. Roughly SEK650 million of that was related to restructurings and then the remaining was primarily settlements. And settlement is essentially customer settlements related to the old EU case from 2014 and it's, of course, hard to say how it continues but that's it. In terms of the capital gain, it's very simply a sale of a real estate, land, of slightly less than SEK200 million.

Alrik Danielson: And just to add, now that I am also running the Automotive, my assessment is those settlements are now coming to an end. It's actually coming to an end. It's been an ordeal, but it's coming towards an end. When you look at the Automotive, well, it works in the following way. We have been doing well in the VSM segment in the aftermarket.

We have managed to stay open, for instance, in Europe during the whole quarter when some others -- other of our competitors were closed. So we have had a good development. We see that in the VSM in Europe, for instance. And we have also gained good business, but there, we still have this uncertainty how much of these -- how large will these businesses be because, of course, you know how it is. You get nominated for a program and then it depends how good that program actually sets.

So it's positive. It means that we are -- our order book is good, but we still -- the uncertainty is still there, how much cars will actually be sold. And then if you look at the profitability of those businesses, they are higher than the current business at the same time as, of course, we are aggressively restructuring also our Automotive business to be even more competitive going forward. And we're investing in new technology and new offers. But please understand, our main business is Industrial.

And in Industrial, we are excelling, I think, in our performance. I'm really proud of what we've been doing in Industrial during this quarter. And SKF is predominantly an industrial supplier.

Operator: Your next question comes from the line of Andre Kukhnin.

Andre Kukhnin: Can I just follow up on June, July run rate, please? If I may ask in the following way that some of your peers with very similar in market exposure talked about sort of minus 20% to 25% for June, July.

Would that be the right ballpark for you?

Alrik Danielson: Yes.

Andre Kukhnin: Sorry. That was the answer?

Alrik Danielson: I mean -- what do you mean lower than last year? Is that what you're talking about? 25 was...

Andre Kukhnin: Yes. 25% was year-on-year.

Alrik Danielson: We had a quarter of 25% and we were doing slightly better in the end of the quarter.

Andre Kukhnin: Slightly better, okay. And then just on the adjustments to reported EBIT, the SEK200 million is included in SEK1.565 billion adjusted EBIT. Is that right?

Niclas Rosenlew: That's right.

Andre Kukhnin: And which division is that in?

Niclas Rosenlew: It's in Industrial.

Andre Kukhnin: Great. And just finally, on the production, it looks like you have taken down inventory significantly. Could you help us with quantifying the P&L impact from that, from manufacturing?

Patrik Stenberg: Yes, Andre, it's Patrik here. Yes, of course, we've been -- we managed to reduce inventory sequentially during the quarter, about SEK260 million in terms of finished goods inventories, which is slightly more than last year. So we have a negative impact on EBIT of about SEK30 million or so from that.

Andre Kukhnin: Sorry, Patrik, my line broke up literally as you said the number on the EBIT impact. You said SEK260 million is the reduction and then...

Patrik Stenberg: The reduction this year. Last year, we had a reduction of about SEK100 million swing, SEK160 million. That would translate to a negative EBIT effect of about SEK30 million in the quarter in the bridge.

Operator: Your next question comes from the line of Andrew Wilson.

Andrew Wilson: I just wanted to dive into the cost development number that you provided. Just to try to understand the kind of the components within that, I think you talked about the kind of the SEK1.245 billion benefit year-on-year. And I'm assuming that is the net of the cost savings less the usual cost inflation. Is that correct? Just so I'm understanding that.

Niclas Rosenlew: Yes, correct.

Andrew Wilson: And could you help us a little bit with the cost inflation number? And maybe if that includes raw materials, for example. I'm just trying to clearly trying to work back to try and understand the degree of cost savings and obviously helpfully give us the split in terms of temporary and permanent. So wonder if you could just sort of drill down a little bit on that, that would be very helpful, I think.

Niclas Rosenlew: Yes, maybe Patrik has some comments on that level of detail.

I think -- I mean, as we all know, it was an exceptionally volatile and tough quarter for all of us, all companies -- or people actually. So I think -- I mean, the way we look at it is again the big picture. So we have the SEK1.245 billion, we had the land sale. And then out of the remaining, you can, roughly speaking, categorize, put half of it in temporary and half off temporary. But short term, shorter term and then half of it in more permanent type of cost savings effect.

And there, as you understand, there's a lot of moving parts, volatility ups and downs there. So maybe trying to stay away from the decimals in this case.

Andrew Wilson: So I mean could we then assume that the cost inflation was similar to the kind of numbers you've given us in previous quarters? Is that a reasonable starting point?

Patrik Stenberg: Patrik here. I would say things are a bit special during these circumstances. And as Niclas pointed out, I think we leave at looking at the bigger picture.

But obviously, wage inflation is, of course, lower than usual. We don't expect to see the same kind of salary increase that we normally have then there's a time lag in that, of course. So I would say underlying cost inflation is probably slightly lower than usual. But it's the big picture here that really matters. And I think we are doing our utmost to shed costs, both in the short term, but also in the long term.

And we have seen a lot of activities during this quarter, a lot of people unfortunately leaving us. High restructuring costs, you will see more of that during the second half of this year as well both in terms of restructuring, but also in terms of cost reductions.

Alrik Danielson: And it's interesting, I think you hear that from many companies. These new ways of working with digitalization, you're hooking up to your customers from a digital point of view and you're monitoring their equipment, you're not traveling so much out to customers, et cetera, this will prevail in larger state. I don't foresee that we will come back to the kind of moving people around that we used to do to be able to do business with new technologies actually really taking a grip.

It was already in the making. This is nothing new, but it's getting a push. People rapidly see the benefits of it, and those kind of savings, they will stay.

Andrew Wilson: That's helpful. I appreciate all the details and clearly a lot of moving parts.

Maybe if I can ask a broader question just around kind of some of the comments you've made on energy and wind specifically. Could you just kind of give us a little bit of, I guess, a recap on what you're seeing in wind markets across each of the 3 geographies? And kind of how -- if you can give us any help in terms of how you see that developing or changing, that would be helpful.

Alrik Danielson: Well, you know that what we have seen clearly and not the least in China where we grew during the quarter is that in the industries where the government is sort of incentivizing growth, it's actually growing. And of course, there, you see the energy sector growing very clearly in Asia, with a very, very strong growth in Asia and also in Latin America. And with a lot of projects coming also in the future in Europe and so forth and you see -- and I think you can see -- perceive it also in the way governments are portraying what they're doing with the kind of support they're giving to industry, there's a clear drive for clean tech and environmental technologies.

And there, SKF is in a good position to be able to support that. The same -- one of the things that we've seen is in marine for instance. We've seen the growth, and there, a lot of companies taking the opportunity now when they've been sort of docked and they have made their repairs. That kind of marine growth, I don't believe it will be as strong going forward, for instance. And the same on car and trucks.

For instance, if you see trucks business in China, it's been very strong due to an emission change. There's been really good growth. How strong the growth will be on the truck segment during the next half year is going to be very, very hard to say. And the same in Europe. If you look at industry, we see industry sort of coming back.

Many sectors are -- especially with food sectors and certain parts of paper, et cetera, they've been doing okay and growing fast. So it's -- this is what we see.

Operator: Next question comes from the line of Madhi Singh.

Madhvendra Singh: First question, just following up on the growth trend. If you could give us a bit of regional color on how July has been compared to June, let's say, in China especially, Asia, Europe and Americas, if you could talk about that.

Niclas Rosenlew: Again, Niclas here. I think as commented earlier, I mean, we had an improvement throughout the quarter, April, May and June, on a global level. And as said, going into now July, what we see with the limited visibility we have looking forward, I mean, July has started roughly similar to June. I would not like to comment on the separate regions per se kind of the run rate because of the significant uncertainty that we have even with the kind of global figures in this environment.

Madhvendra Singh: I was particularly interested in trends you are seeing in China because that has been 1 region, which has actually been recovering quite well.

So if you could talk about the growth trends there, that will be quite good and helpful.

Alrik Danielson: And like I said, we saw it very clearly in -- coming back at the lockdown, there was a need to recover, and we saw that coming in many segments. We had a net growth during the quarter. We saw specifically strong growth in energy and in the truck market. We saw good activity also in most segments increasing in China.

But of course, it's still a great uncertainty how much of that is picked up from the lockdown and how much is resilient into the future. And that's why it's so difficult for us to tell you. And you can imagine, for instance, the part of China that's dependent on exports to the rest of the world, for instance, will be dependent on how strong that -- those markets so the rest of the world's markets actually recover and so forth. So that is one of the reasons that it's so difficult for us to give you any specific flavor on what we see more than what we have already said, that the quarter was good and July started in a similar way as it did in China.

Madhvendra Singh: May I extend then what I'm trying to -- what I'm understanding here is that if the expectations were that recovery will be a bit V-shaped, especially in the short-cycle businesses, you are not really seeing enough evidence on the ground to say that recovery will be V-shaped.

Likely much slower than expected. Is that a fair understanding?

Alrik Danielson: But it's very much like -- you understand, there's a large sector -- industrial sector in China that is export driven, right?

Madhvendra Singh: Yes.

Alrik Danielson: So of course, depending on how the exports out of China develops will influence how that part of the industry develops during the next coming quarter or quarters. That's what I'm trying to say. Of course, that we can't see yet.

That will depend on how quick Europe and U.S. and other markets recover from the pandemic.

Madhvendra Singh: Okay. And -- but the question is...

Alrik Danielson: SKF is in a good position.

SKF has shown that we are flexible in adapting to reality. We are investing in China to be able to take advantage of future growth, and we are confident that we will continue to have this kind of flexibility that we have shown during the last quarters.

Madhvendra Singh: Okay. And second question, on the cost cuts, as you have said, you have let go of several employees. I'm wondering in case you see recovery coming, let's say, better than expected, how flexible or how easy would it be for you to ramp up the production to match the increased demand? Or it would -- could it be a hindrance in, let's say, when the things recover at a similar level, you're not able to meet demand...

Alrik Danielson: History tells us that ramping up is seldom the problem. It's more actually being on the ball when it goes down. And that's why I am so pleased that we have really been able to adapt ourselves in the downturn. There will -- if and hopefully there will be a strong recovery, we will be ready to take advantage of it.

Operator: Your next question comes from the line of Joel Spungin.

Joel Spungin: Just a few, and if I could just come back on some of the one-off and restructuring costs. What's the -- I was wondering if you can clarify, was the SEK896 million one-off charges that you took in the quarter, were they entirely cash costs?

Niclas Rosenlew: Yes. Mainly cash, yes, but to be expensed over a period of time, of course, but they're largely cash.

Joel Spungin: Okay. So in terms of the impact on the cash flow, it was predominantly felt in this quarter.

And going forward, you said that there will be further restructuring charges. Should we assume, therefore, that they will also have a pretty direct impact on cash flow?

Alrik Danielson: Well, I argue that it's quicker in the beginning. And the more you work in the future, the cash effects will be more over time. And still some of the things we have been doing during the quarter has still not had the full cash effect in SKF also in this quarter. You understand when -- the more -- in the beginning, it's quicker.

As you work more in depth, so to speak, it becomes more a longer process and the cashouts will take longer going forward.

Niclas Rosenlew: Yes. This is very much -- as you know, it's very much related also to local legislation and accounting rules what you should book upfront and what you cannot book upfront and so on and so on. So it depends a bit on the level of activity going forward. So yes.

Alrik Danielson: But what I think is a good thing with the cash flow to understand is that since we've not been building inventory, we have actually been reducing inventory, we have a good possibility to defend our forte, which has always been to create cash. SKF, if you look back, we -- this is one of our absolute strong points, to create cash. And of course, as the situation stabilizes, we should be able to return to good cash flows.

Joel Spungin: Understood. And then maybe just one more, apologies if I may have missed this.

But can you comment at all around raw material pricing in the quarter and what your view on that is currently?

Niclas Rosenlew: We haven't commented on it, so you didn't miss it. But it's still positive, but it's a small amount. So it doesn't really move the needle in these circumstances.

Operator: Your next question comes from the line of Ben Uglow.

Benedict Uglow: I appreciate that you probably had more than enough questions about sequential trends, but I just wanted to ask one more.

You very kindly gave some details around wind. On auto, obviously, it's clearly not the strong point, but sequentially, do you see any kind of differentiation in auto? Should we be more enthusiastic about China? What are you feeling in North America? How are things progressing in terms of auto production coming back, if at all?

Alrik Danielson: Well, in China, I think we have covered it clearly. We saw it coming back. And the question now is how resilient is this, and of course, it will entirely depend on auto sales now going forward and what kind of -- the market in itself and also the kind of subsidies that may -- or support that the government may or may not put in place in Asia. And on the truck side, it was a clear government change of emission rules that helped also the sales during this quarter.

And the question is here how resilient is that. In the rest of Europe and U.S. you can understand, with the lockdown in April, it was a complete standstill. I mean I've never seen that before that all factories are basically standing still at the same time. Then we thought -- the lockdown stops, people start coming back, we see sales starting to -- inventory levels going down, sales starting to come up, production starting to come up.

There are some rebate programs going on in Europe and so forth. But the big question,

of course: how resilient is this? How resilient is this sort of comeback in sales in Europe and also in the U.S.? And that is why it's so difficult for us to say anything because it's always going to be dependent on how resilient the sales are during the coming months. And now summer is coming and it's a big question mark. But there's no secret to it in the sense that when you see sales of cars and trucks developing positively, you know it's also going to influence SKF positively. The same in the industry.

As you see, industrial activity coming up and you know now how strong and resilient we are in this sector, and you will be able to evaluate this as the coming months actually develop.

Benedict Uglow: Understood. That's helpful. One further question. It's really a bigger picture question about strategy.

Some of your competitors were sort of seeing -- beginning to kind of pull back a little bit in terms of their capacity and CapEx. When I look at your CapEx guidance, SEK3.3 billion, you're still really going kind of full steam ahead, more than 4% of sales. It was only a couple of years ago that we were looking at SEK2 billion to SEK2.5 billion of CapEx. And obviously, we're expanding in Xinchang at a time that we're also doing pretty aggressive restructuring. So what is the thinking behind that, Alrik? How -- at what stage would you potentially consider changing direction around the CapEx spend, if at all?

Alrik Danielson: Yes.

Well, it is clear so that -- the world is changing and it's always -- it's been changing also before the COVID crisis towards automation, digitalization, efficiency, et cetera, that will drive productivity in a very, very significant way. That has accelerated, I argue, during this pandemic meaning that is going to be more important than ever to be close to the end market, to have state-of-the-art manufacturing facilities and have the technology to be able to hook up to your customers with remote monitoring and give your value propositions in a more indirect and digital way. And this is what you see. You see today what we have announced in Xinchang is actually we built a factory and we were successful in filling it. And so now we're expanding it.

Niclas Rosenlew: I just wanted to clarify one of the earlier questions where we maybe left it a bit unclear specifically on the land sale. So the question was whether it's in Industrial or Automotive. And it's actually roughly split, so call it 70 Industrial and 30 Automotive. Just to be clear there. And if I may still add, so this land sale, it's actually an old SKF site and the sales process started a long time ago and just happened to close it now in April.

Operator: Next question comes from the line of Jay Moore.

James Moore: It's James. I've got a two-parter on savings and then I'd like to follow-up on Ben's questions on automotive. So maybe go one at a time. But thanks, Niclas, for the helpful split on cost development.

If we do the math, it suggests roughly, without being precise, SEK600 million of savings from your permanent actions, which I presume is the automation, the footprint, the support function costs, the IT plans, which, to me, looks like a really nice acceleration from the SEK300 million, SEK400 million running rate on those savings in previous quarters. And I guess my question is this acceleration was it helped by COVID or is it an acceleration that could have almost happened without COVID?

Niclas Rosenlew: James, I mean, it's a good one. I mean, Alrik will comment on this as well, but much of this, of course, are things that you could say that we would have needed to do anyway. So we would have done them anyway. But yes, COVID has accelerated things in Q2, closing some of the things that we should have done anyway, but would probably have taken a bit longer.

Alrik Danielson: It's interesting. When we look at this change in digitalization, automation and where you have your plans in the future, we've discussed it many times, and it's been on our agenda. And of course, in a normal environment where factories are more or less loaded, et cetera, this becomes more a delicate matter and you have to plan it very, very diligently. You need to have capacity so that you can do the changes, et cetera. In a crisis like this, of course, there are certain things that can accelerate.

At the same time, when you talk about new ways of working, the same. I mean we always believe that we were going to have more customer interactions using the Internet and Teams and Zoom and Skype or whatever they're called, and we saw that. But we saw a certain resistance in some industries and you still were looking for face-to-face meetings, et cetera. But now everybody has been forced into it in record speed, and it works fine, it's great. We get -- the meetings are more concise and you get really nice interaction with customers.

And you get everybody around the table. And I believe that, now, that's not going to go back. Which means, for instance, that on an absolute basis, travel will be reduced for SKF and that kind of cost. So there are things also that are accelerating that are extremely positive, I argue, and ways of working that are changing much, much quicker than it would have taken maybe half a generation to change them in -- without this kind of shock and now they're being changed very quickly. And I can imagine in your industry, you're finding exactly the same.

James Moore: Totally. I can see very much on the support function side how that will accelerate. On the manufacturing and automation side, have you come to any structural thinking changes because of COVID as to how you can adapt that plan that was already in place?

Alrik Danielson: Yes. Well, of course, we're flexible to see how the world economy develops. So we will -- we -- there's no plan that's so rigid that we will not adapt to what's actually happening.

But you can understand that also here people are better at actually implementing things. We have done things -- implemented things around the world with experts where there was no expert on site. So we've seen new ways actually of implementing new technologies as well. And we see also at our customers a bigger sort of understanding of the need to make the change, and this is very encouraging.

James Moore: Interesting.

And the other question I'd love to ask is on your Automotive reorganization. I wondered if you could just walk a bit more through what it is you're really changing. And I'm thinking what does it mean for the longer-term financials of -- I know it's the smaller business, but of the Automotive division when and if demand returns to old levels?

Alrik Danielson: Yes. So what we're trying to do and what we're -- what was sort of left to do to put Automotive where we want it is to really -- we have been driving the structures, simplifying, taking away administration and silos, et cetera, during the last 5 years. Now we're taking the last step in the Automotive -- there's never a last step, but yet another step where, for instance, we have the automotive factory clusters under one head, but they are integrated into the general supply chain organization.

And by that, we can streamline. The same we are doing still with an enormous focus on Automotive, both on R&D and sales, with clear sales responsibility, et cetera, et cetera, but more taking advantage of the infrastructures that we have built now overall in the Industrial business as well. And by this, being able to be even more cost-efficient and flexible. And so the idea is actually to be able to reduce costs at the same time as we're keeping a very, very high focus on the Automotive business and taking that yet to another level. If you see traditionally, we have been doing okay, we've been improving in the last years.

Now we're taking the last step to try to improve even more.

James Moore: And just finally, if I could, Alrik. I mean your Automotive business is really a series of businesses from the U.S. OE, the European OE, the VSM, the truck, et cetera, et cetera. And does this new strategy make it easier to break out, sell, exit pieces? Might you think of doing that? Or is it still shared production facilities with Industrial and other areas that make that hard?

Alrik Danielson: Yes.

Well, 50% more or less of what we are selling to the automotive space is coming from factories making products that go to similar applications outside of the automotive space. And 50% are sort of specific automotive like wheel hub units, you can understand they are different. While electrical motors that are now increasing, of course, an electrical motor for a vehicle or an electrical motor for an industrial application, the kind of products that we are supplying are similar and coming out of the same value chain. So that doesn't change. But if you would like to restructure, the more profitable you are, the leaner you are, the more flexible and the more -- the better technically advanced product portfolio you have, the easier it is.

But the ambition is to make it a real profitable and value driver for SKF in the future. But it will increase our possibilities either way.

Patrik Stenberg: Operator, it's Patrik here. I think we are running short of time. So we would like to conclude the conference call here.

I know there are a couple of you that haven't been able to put your questions, but please give me a call afterwards, and we'll try to sort them. With that, I'll leave the word back to Alrik for some closing words.

Alrik Danielson: Thank you very much for listening in and for the good questions. From my point of view, I don't know if this is, given the circumstances, one of the best results SKF has been producing since many years. And rest assured, we will continue to try to give you an excellent performance going forward, and hope to see you next quarter.

Operator: That does conclude our conference for today. Thank you for participating. You may all disconnect.