Executives: Alrik Danielson - President & CEO Christian Johansson - CFO &

SVP
Analysts: Daniel Schmidt - SEB Peder Frolen - Handelsbanken Capital Markets Erik Golrang - Nordea Graham Phillips - Jefferies & Co. Andre Kukhnin - Credit

Suisse
Operator: Good day, ladies and gentlemen. Welcome to the Fourth Quarter Report 2016 Conference Call. Today's conference is being recorded and at this time, I would like to turn the conference over to Mr. Alrik Danielson, President and CEO.

Please go ahead.

Alrik Danielson: Thank you. Thank you very much, everybody, for listening in today and of course, today we released our report for the fourth quarter of 2016 and we saw a gradual strengthening in demand during the quarter unless of the season of pre-buying which we sometimes see towards the end of the year. In total, net sales in the quarter was $18.8 billion, 3 percentage points higher than last year. Organic sales increased at 1.2% during the Q4 quarter compared with last year.

Our automotive business grew organically by 3.3% in the quarter, while the industrial operation grew a little bit more than flat organically. Operating profits excluding one-time items was 1.741 million, which is slightly higher than last year and operating margin excluding one-time items was 9.3%. The cost in the quarter for our new ERP system amounted to $280 million, an impact of the margin negatively with 1.5% points. Meaning that excluding the UNITE project, we would have had almost 11%. As you see, we also have $533 million less of one-time items in the fourth quarter compared to last year.

Cash flow generation was strong, $1.4 billion in the quarter and we reduced our net debt by more than $3 billion in the quarter, bringing the net debt to equity ratio, down to 84%, close to our target of 80%. Early today, the Board decided to propose an unchanged dividend of SEK $5.50 per share which based on yesterday's share price translated to drive a return of 3.1%. Turning to the next slide and I apologize, I actually left the first slide uncovered, but it was more of a little bit of summary of last year and I'll leave it for you to read. But turning to next slide, which is Slide 5, I will comment a little bit on the sales development per geography. It is encouraging to see that we are growing organically again – both within the industrial and the automotive businesses.

In Europe, organic sales increased by 1%; in Asia we experienced strong growth in automotive segments and in total, our organic sales grew by 8% in the quarter, industrial activity continue to be low in North America. Even though the rates have declined, it's less than what we have experienced in the first half of the year. Our organic sales in North America were 4% lower than in the fourth quarter of last year. Organic sales in Latin America were 4.5% lower, primarily due to low volumes in Argentina; while organic sales in Middle East and Africa grew by almost 7% in the quarter. If we move to the next slide, into development by customer and industry; sales through the automotive industries grew by 3.3% in the fourth quarter.

We saw good sales growth both for cars and trucks especially in Asia and in Europe while sales to customers within the car and truck industries were significantly lower in the U.S., even though we saw higher sales to the vehicle aftermarket in the U.S. in the quarter. Sales within our industrial area turned into an organic growth in the quarter compared to the fourth quarter last year; sales to industrial distributions in total was slightly higher, but with significantly higher volumes in Asia, slightly higher volumes in Europe and slightly lower volumes in North America. On the other hand, we saw significantly higher volumes in North America to customers within the industry such as the heavy, special and off-highway industries, as well as the energy industry. Sales to rail industry were good in Europe, but continue to be on a relatively low level in North America and in Asia.

Sales to the aerospace industry on the other hand were slow across most markets. Going to the next slide, I will just talk a little bit about one case. I think you will remember from last quarter, we announced that we have made a deal that a joint venture together with GE for our magnetic bearing partnership and magnetic bearings we have been struggling many, many years to get our sales and get the technology introduced, but in October, as we close this data, we see that there's a clear change and of course already then we talked about a vision to create the impact of this combined solutions that we have on the turbo machinery market and I can happily say that this joined partnership has developed much better than we thought and I think we can now clearly say that we have a breakthrough in the magnetic bearing business. I think you will hear more about this as the year goes on, but this is a good news. Then I think you will see in the report, there are more highlights from businesses that we have done and I will not comment on them at this point.

Now, Christian, please take us through the figures.

Christian Johansson: Thank you, Alrik, and good afternoon to all of you. So if we turn page to sales development, total net sales increased with 3.1% in the quarter. Again, it's encouraging to see that we are growing organically again, both within industrial and automotive. Total net organic sales rose by 1.2% in the quarter.

Both the U.S. dollar and the euro strengthened compared to the Swedish krona, we have positive good currency effect in sales of 3.7% compared to the headwind we experienced in the first half. As you know, we have done some of that as during the year and adjusted for that, we have a structure component in the quarter forward of negative 1.8%. Next slide, if we look at quarterly passing on organic sales course, it continues to follow a difficult cyclical pattern and a business cycle of five to seven quarter seems to be fairly accurate also for this present cycle. Into the next stage, the talking development of our operating profit excluding one-time items.

In the quarter, the result was $1.741 billion, slightly higher than in the fourth quarter last year. The operating profit in the quarter included one-time items of negative $155 million where of $117 million related to restructure and then cost reduction activities primarily in America and Europe and the remainder related to impairment. A more detailed information about how these one-time items have affected the different lines in the income statement, you can find in the quarterly report on Page 4. If you look at the rolling twelve months trend, we are excluding one-time items at the yearly rate of $7.5 billion. To turn page, we come to the end of the bridge and we have done some changes to the EBIT bridge.

We have no other line anymore and we disclose the costs of our ERP system, UNITE separately. We have also moved the effects from changes in production volume that was part of the other line to the board and it's not called organic sales and manufacturing volumes. This is a wish from several [indiscernible] of our analyst in which now have effect. I truly hope that this will make the things easy for you and clear. Looking at the profit bridge, I would like to start with items that affect the comparability between the quarters.

One-time items was 533 million year-over-year and we calculate the losses exchange rates and that relates mainly to the high restructuring charges and impairments we have last year. The [indiscernible] companies this year contribute in last year with $40 million to the result. Currency impact on the operating profit was $130 million, position in the quarter compared to last year, main effects from dollar and dollar-related currencies. If we look at our operating performance, we have broken it up here as you see on the slide. Organic sales including manufacturing volumes was positive by 110 million for the quarter; positive contribution from increased organic sales in the quarter in terms of sales and manufacturing volumes was partially offset by continued tough pricing in the market, the negative mix.

As Alrik mentioned earlier, we launched our new ERP System UNITE for January. We have had a high activity level in the UNITE program organization with testing and training ahead of the launch and in total, we had $150 million higher cost in the profit and loss for the UNITE program in the quarter compared to last year. But together, we made this really a successful go-live. This is somewhat higher than what we talked about in the last quarterly conference and both due to somewhat high cost in the quarter than before forecast till at that time, but also the largest share of the activities who are with the GoLive and not for the Sign and Build coming releases that we usually capitalize. I will come back and I will give some more comments to UNITE in a couple of minutes here.

The savings from cost-reduction program in 2015 were $90 million in the quarter and as we have talked about before from 2017, we will not report it separate anymore if we report over the cost development line. And if you move to net cost development, that was negative in the quarter by $126 million partially due to continued high cost for cost of our logistics operations and that net effects of the cost-saving program, our cost increase with $36 million, compared to last year, which is on a cost base of $16 billion is about 0.2%. As we discussed in the phone conference last quarter, the effect of material cost saving, which is part of this are coming down due to increased [indiscernible] and other raw material and in the quarter for material cost was still lower than last year. So it was the positive adjustments on $20 million. If we move to the next page, operating performance by customer group, industrial, organic net sales increased by 0.3% in local currencies versus last year.

Stayed same [ph] in Asia and were relatively unchanged in Europe while sales in North America continue to be lower compared to the fourth quarter last year. Operating margin excluding one-time items was 11%. Positive contribution we had from increased sales and manufacturing volumes in the quarter was more than offset by high cost UNITE program and continue to have pricing in the market and the effects from divestment. Organic sales to the automotive industries grew by 3.3% in the fourth quarter. We saw good sales growth both for cars and light trucks, as well as forward trucks and strongest automotive markets were in Asia and Europe.

The operating margin for automotive excluding one-time items was 5.3% for the quarter, compared to 5.4% last year. And we continue to make good progress on the profit improvement learning automotive although we have of course also for automotive a high cost for UNITE in the quarter. So next page; income statement for the group, gross profit margin was 1.4%, six points higher in the quarter compared to the year before, excluding one-time items, 0.6% lower than 2015 fourth quarter due to negative mix in price. Turning in admin expenses, adjusted for one-time items and structure changes in currency was some 2 percentage lower quarter four 2015. Financial net in the fourth quarter was negative $207 million.

Exchange rate utilization had limited impact in the fourth quarter while it had positive impact in 2015. And also into fourth quarter 2015, we had some one-timers there related to buyback of bonds. Taxes in the fourth quarter was negative $406 million and the effective tax rate was 29.5%. Moving to next page, cost management first graph, number of employees including agency workers and temporaries from the start year end 2014. We have continued the trend of decreasing the number of employees and in the quarter were 265, and that was 282 permanents and some increase on the temporaries.

Excluding divestments we are now 300 employee less by the end of 2014. On fixed cost in the quarter, we increased index wise to 103, mainly as a result of the high costs for the UNITE program. Excluding UNITE, we increase with around 1% since the baseline in the end of '14. So we have almost offset two years of inflation. However, we are showing off pace with this and we continue to work to reduce our fixed cost base by productivity, optimizing our footprint and by producing to client our organization.

Moving to cash flow, we achieved a good cash flow off to the investment before financing and excluding acquisitions and divestments it was just about $1.5 billion in the quarter compared to $2 billion in Q4 2015. And adjusted for structural changes, the 12 months rolling base has been on or above $5 billion since the end of 2014. Next page, net debt was reduced by $3.1 billion in the quarter. We continue to make good progress in delivering of balance sheets and it should take the net debt excluding taxes we decreased $1.5 billion and we'll set the end of the year to 34% of equity and provisions for post-employment benefits and that decreased also by just about $1.5 billion in the quarter, mainly as a result of increased discount rates in Germany, U.S. and Armenia.

Net debt equity was 84% at the end of the year, so [indiscernible] target of 80%. Next slide, networking capital was 29.9% of sales at the end of the quarter, which was higher compared to the year before at 27.1%. Currencies has had a negative effect on this, over on 2.5 percentage points and adjusted for currencies, we were up around 0.3% versus the year before. We are doing well on cables; we did not reduce our inventories in the quarter as much as the year before. Due to that, we wanted to have some levy ahead of the UNITE implementation in the beginning of January and we also had anticipation with improved demand this quarter as suppose to the situation year ago.

So some additional comments to the UNITE and our new ERP system. This is a significant investment that as you know have been working for quite some years now. It's [indiscernible] with our all legacy IT systems across the board with a new ERP, supplied by SEP. It covers all our business processes such as sales, service, demand channel, fixed purchasing, manufacturing and finance. And we have now had a first broad-based Go-Live with three legal entities for physical sites in Sweden and Finland, impacting 1,700 users.

And we are very pleased to see this startup went according to plan without critical incidence or stoppages. Even if the Go-live was a major step for us, the program will go on as you see in this slide for many more years with additional functionality that we build also for future releases and with a global all out with European market as our first priority. Next slide, UNITE, the financials then. In 2016, we've had a very advanced year; building and testing templates as well as training and preparing for the launch. We have cash-wise spent $940 million in 2016.

This is fully in-line with if you remember when we had this on the capital market there in ultimate 2015. It's a full-year level, it was according to plan. If you look at the accounting while most of these was expense, that's the cost to the P&L. So in total, $620 million, impacted our results and $320 million was seen as investment and capitalizing the balance sheet. Going forward, we will have an annual cash spend for UNITE in the years up to an including 2022, or somewhere between $800 million and $1.2 billion a year.

For this year, for 2017, I expect the similar stand level as in last year, so $950 million and above $800 million will be expected then with P&L including amortization and what has been built. First quarter, if we take that isolated, quarter one '17, I expect the cost increase compared to the Q1 year-over-year over on $150 million. Our next slide, the guidance on the remaining items. Financial net, around $235 million, negative 41 and based on the exchange rates we had by end of last year, we expect the positive impact on currencies on operating profit of around $200 million compared to the first quarter 2016. And we have done a more recent calculation here also based on Tuesday, so [indiscernible] extended rates and that need positive impact of $150 million instead of $204 of first quarter.

Tax level, we believe we will be back to the 30% for the full year and if you look at the additional property plans and equipment, the guidance is somewhat higher than in the past year. So about $2.2 billion in line with our ambition to invest in new productions technology and automation. Coming to our demand outlook then and this is just to repeat the definition we have. No change. It represents the expected volume development in the coming quarters, adjusted for structure and it's the rule date of [indiscernible] it's sequential and it's not seasonized numbers we have.

With that, I'll leave it back to you Alrik.

Alrik Danielson: Okay. Thank you very much. Well, in 2016, we saw a demand gradual improve and during the Q4, was growing again. We expect to see growth in all major regions in the first quarter as reflected in this new volume that we had.

Demands compared to the first quarter 2016. The demand [indiscernible] good services is expected to be slightly higher for the group and for industrial., Demand for automotive is expected to be higher, demand is expected to be slightly higher in Europe, North America and in Latin America and higher in Asia. Demand compared to fourth quarter 2016, the demand for products and services is expected to be relatively unchanged for the group including industrial market, demand for automotive expected to be higher; demands is expected to be higher in Europe and North America; slightly lower in Latin America and significantly lower in Asia. So when we go to the next page, I just want to briefly go through the financial calendar and you are of course welcome to visit us in our capital market day on the 6th of April, but you see here on Page 24, how it works out. And tomorrow, Christian will meet the investors and next week we will both be on the road show in Boston and New York where hopefully we'll meet some of you.

With those words, we'll move over to you, Toe [ph]. Unidentified

Company Representative: Thank you. Operator, we're ready to take questions now and as always, we just like to ask everyone to please keep your questions concise so that we can get through as many of you as possible and if you have additional questions, just get back into the queue and we'll cover as many as we can. I'll turn it over with you, Operator.

Operator: Thank you, sir.

[Operator instructions] We'll take the first question now from [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst: Yes. Hi, Alrik and Christian. It's [indiscernible] from Citi.

I've got three questions, please. Firstly, just on the bridge, can I ask you what happened to inventories at currently and how much the higher manufacturing volumes impact EBIT in the bridge? And then if the price makes what's similar to the third quarter, I can see that industrial distribution is weaker, which should have weighed on the mix and then we see better growth, then industrial again, was the year-over-year price mix sale perhaps negative 1%.

Christian Johansson: Hi there. It's Christian here. Start off with the production.

We were slightly higher compared to Q4 year-over-year. We are relatively unchanged sequentially. If you look the inventories adjusted for currency year-over-year, pause it at [indiscernible] and we have a sequentially negative 150. When it comes to price mix, yes, relatively young change. It was four to three, so no change there, I would say.

The same picture we see. And what was the third one?

Unidentified Analyst: Can you come back to your [indiscernible]. What was the absorption impact in the bridge so we can look at almost a pure volume job to versus [indiscernible]?

Christian Johansson: I think you can take that from what you have in terms of say its volume and with that give you on inventories.

Unidentified Analyst: All right. My second question is on -- positive $20 million in the quarter.

I think there is a typically to three quarter lag and up in cog. Does this mean that raw mats in the bridge will start to turn negative now in the first quarter or later? And roughly by how much and could we talk about the leavers to compensate one good at the pricing power for anyone in your industry has got a little bit worried to see if the last one, if it booms compensate there or not.

Christian Johansson: Of course you're at a time and we started to see that comes down and as we've talked about before, it's not pure raw material. We have also activities on purchasing side and also respecification and so on. Yes, I think we slightly negative in Q1.

[Indiscernible] compensate after going forward of course, we start to see as we see in the guidance also, somewhat stronger market here. Of course that gave us at least some opportunity then to work on advising in a different way than what we have seen in cycle.

Alrik Danielson: This is Alrik here. I think that when you look on the pricing, I think it's absolutely clear that we have now had met few years where it has been more of the buyers' market and then price of course is soft and now when we see volumes coming up, it becomes more the sellers' market and then the possibility of compensating a possible raw material effect increases. As we said, right now in Q4, we don't see the same kind of situation we had in Q3.

We don't see that worsening and as volumes come up and availability becomes more of the sellers well then, pricing opportunity also rises.

Unidentified Analyst: My final one is on the charge as you take in the quarter there. You don't have an official restructuring program, but can we just talk a little bit about pay back on these one notes? Is it similar down to the previous program? We can see this play between cogs and OpEx, but would be good to get a bit more clarity on what kind of -- you can use.

Christian Johansson: We have already internal guideline if we should -- restructuring as we shouldn't have a certain payback of this and that has not changed. I guess that we've had a program.

So we had the same expectations on business cases in this. But the activities around efficiency and cost is of course as relevant even in an upturn as ever. It will change.

Alrik Danielson: I think what you're seeing now, it's like what have talked about during the year. We have -- I mentioned U.S.

as one part of it for this quarter, but we are closing in which is effective. We also have in Latin America some changes where we all saw some which just [indiscernible]. No change in terms of attractiveness in terms of these restructuring than the ones we've had previously. Yes.

Unidentified Analyst: Thank you, guys.

Operator: We take next question from Daniel Schmidt from SEB. Please go ahead, your line is now open.

Daniel Schmidt: Good afternoon. Daniel from SEB. I just wanted to ask a couple of question and starting off with your sort of forward-looking guidance, and when you look at the sequential guidance and of course you had a very strong sort of Asian market in Q4 and maybe that's the main reason why your guiding for significantly lower demand.

Could you give us some more color on why that's the case?

Alrik Danielson: Yes, I can. The main explanation is not that we had a strong Q4. The main explanation is that we have a Chinese New Year in Q1. So if you look at sequential development in Q1 last year you see it's [indiscernible] when it comes to Asia. So that's the driver.

Daniel Schmidt: Okay. Is it possible --

Alrik Danielson: You see also year-over-year that you have quite -- I mean our guidance is quite positive.

Daniel Schmidt: So if you exclude the Chinese New Year, you would have most likely had more positive sort of guidance for the group sequentially also?

Alrik Danielson: Yes. I mean in absolute numbers, sure yes.

Daniel Schmidt: And can I just ask you also in the sort of more long-term question, when you look at these investments that you've done in the night program, that thing sort of going on for quite some time and are you sort of going live in Sweden and Finland.

And is it possible in any way to quantify any benefit from that rollout in '17, '18?

Alrik Danielson: I think we have discussed this question before and I'm sure we will have a look on this one when we meet in the capital market. I mean we have quantified benefits process by process here and what we expect to see in purchasing and in our logistic functions and so on. On your question, how much of that we will see but the fact that we have rolled out in Sweden and Finland out of the total rollout plan, I mean that's limited. I mean obviously when -- because we should also know that this is a substantial change and our people are working. So I mean right now we are in the process of ramping that up, to come up to pace and productivity and which naturally has gone down now compared to -- I mean they all were working [indiscernible].

So of course we will see some effects from more modern tools and more efficient work processes as side by side when we're all adapt. But the overall benefits by having integrated planning, better tools for doing things on across the group, that will not come in short-term. I mean it will take some time and we will see that. Having said that we are of course trying as we see the opportunities to streamline processes across this so -- but it's difficult for us to actually give you a quantification. But behold, the program is -- will be a fantastic step forward on productivity as far as our administrative process is concerned and so forth.

So we need a little bit more sites online before we can give you some leads on that.

Daniel Schmidt: Okay. So would you say is it fair to assume that the level that you're running at now in terms of costs given your experience from this rollout; is that the sort of level that we'll see also into '18 and '19, do you have any visibility on that?

Christian Johansson: I mean you have the guidance on what I said, so then what type of cost it will be in different years depends a little bit on where we are. So when we -- so the spend level, I mean -- if we build new functionality that has value going forward, that will be capitalized if it's -- we are more in the phase that we are now in Q4 or training and getting things into operations, that would be more of a P&L but this is a big undertaking. We will change the way of working for the large part of all 45,000 employees.

Alrik Danielson: But from my point of view, you're absolutely right. I think that that the first time is always the toughest. And I think the big that we should be really happy with Christian and the team and the whole united team is that they will have now this successful launch in Sweden and of course the first time you do it, there is a learning curve and of course many of these learning's from Gothenburg [ph] and Finland would now be capitalized when we go forward. So it's an improvement that we do see, it's too early for us to sort of give you any -- some of the guidance we have today is the one we have but of course we will learn from what we are doing today and it will help us as we roll this out.

Daniel Schmidt: Alright, thank you so much.

Operator: We take next question from Peder Frolen from Handelsbanken Capital Markets. Please go ahead, your line is open.

Peder Frolen: Thank you. Good afternoon, Alrik and Christian. If I may, we touched upon these different sort of items in the P&L going forward and I appreciate that clarification.

When we talk about savings, we mentioned the savings impact in this fourth quarter, could you update us on the savings captured for 2017? And also taking into account then the automation and call it production investments done during the last year. That's my first question. Thank you.

Alrik Danielson: I mean, of course, we have an underlying inflation there and a big organization, that's a sizeable amount and to what extent we assess it. I mean we have been able to offset the inflation of [indiscernible] and what we have done so far.

Of course we are all having the wishes that we would have seen them. More than that I mean it's a lot of hard work, and we will continue that. I cannot say here that we will be able to offset inflation in the nearest quarters, we have activities, yes, on the other hand we start to see some cost pressure upwards on raw material and so on. So I cannot quantify that in the nearest quarter but I would say that it is difficult to offset inflation. When it comes to the automation and the new channels and where you know we are very much focused and we have very good business cases, we will obviously see some of that for what we put into production now in Sweden, and that's good business case but seeing on the group level, this is of course a small part of the cost of the $16 million a quarter.

But having said that in the complete equation you have to also take into consideration that as the market improves, the possibility of adjusting prices also improve.

Peder Frolen: That's very clear. If we looked at the trading conditions throughout the fourth quarter, you mentioned initially Alrik that gladly improvement and I guess [indiscernible] what's very strong, but could you help us to understand what happens in North America during the quarter where we see the -- it seems like demand is flatter or even slightly worse; and should we expect -- did we also see December in U.S. being much stronger than October/November and could we expect that to continue?

Alrik Danielson: Yes, I would say that if you take the big difference this year and I think we've announced that, we've been really trying hard to change the way we do business with our distributors to avoid this year end buying pattern you know, that in the end of the year they were all reaching to reach their targets, to get the yearly bonus and work with a more of a COGS kind of arrangement where it's -- the bonuses if any they are based on what you sell of products as opposed to what you buy. And we have been successful in doing that change and that is partly what you see of course with industrial distribution.

On the other hand on the OEM business, you know, there is actually some positive signs, if you look at industrial in general in North America compared to last year, it was a good quarter; energy in the U.S. was a good quarter. And when we look at it, we think that we see a broad based change in demand. So it's not -- in quarter it was Europe and Asia that drove the increase as such but when we look ahead in our outlook we also see Americas coming.

Christian Johansson: Maybe I could add that also.

If you take the automotive side, I would say VSM off the market is good, trucks, on the class A trucks still weak. Cars, we had and you know we've had a negative trend, if you take -- the fourth quarter year-over-year, we had in the end of '15 I would call it bit of a one-off transaction where we sold off sizeable event with one of the OEMs that we don't have coming back this year. So I would say the underlying North America automotive is stronger than what we show in quarter four.

Peder Frolen: That explains a bit, so thanks a lot for that.

Operator: We take next question from Erik Golrang from Nordea.

Erik Golrang: Thank you. I have one question that's not answered. The consortium [ph], you're sort of pushing to more standardized bearing, so product bearing and the development there; you've made a few comments during the year that you started to develop that offering. Is there a step change in terms of that offering and how is precision price going into '17?

Alrik Danielson: You know, when we say that we see the general industry growth in Asia, that's one of those areas where you have these more standard [indiscernible]. So I think that definitely -- and of course, this is like always, it's a process, it's gradual but of course we are already seeing successes in this field.

Erik Golrang: And just to follow-up, are those volumes coming through or did you see anything above deep the margin that are relative to further group average?

Alrik Danielson: Well, it's over the plate in the sense that there are segments where we're stretching ourselves more just to be present and push the way our offerings so that we are competitive and there are some areas where we're taking some clear winnings at very attractive margins. So it's like always in a global business with one of the most common industrial products in the world which are bearings, there is unfortunately just not one picture, it's all over. But you know, our ambition of course is especially now when demand is picking up, not to make that business.

Erik Golrang: Thank you.

Operator: We take next question now from Graham Phillips from Jefferies.

Please go ahead, your line is now open.

Graham Phillips: Yes, good afternoon, thanks for taking my call. Just a couple of questions; just looking at your share of the vehicle after-market, it had been on a declining trend for a number of years but I can see it actually rose during the year end figure which you gave us for the whole year, so I don't know what happened sequentially during the quarter? If you could talk a little bit about that, it's up actually in dollar terms and in Swedish kroner terms. And what that impact on margin should be just trying to understand the margin direction in the automotive segment.

Alrik Danielson: Yes, I mean if I take it VSM is of course a positive mix within automotive and we had it.

So from that perspective it's positive. I mean you talk -- when it comes I'm not sure I have a comment to it, I mean the market share development trend there. I think we have -- we are broadening a little bit of the channels, we are coming through and you know working a little bit on the channel, the distribution network we have I mean trying to be present also ecommerce wise and so on. So less with that I don't have -- I mean we don't have -- I mean we have fixed some holes in our offering, so obviously also that helps but I don't have any other comment to the trends which of course we are happy to -- that we have recognized.

Christian Johansson: And our turnaround plan is there and we have our targets and we're working towards that and we think that we will be able to deliver on that as we look forward, that has not [indiscernible].

Graham Phillips: I mean it didn't have a positive impact on the margin than you would have otherwise expected and so I'm not sure it's a development during the quarter. If there were any particular regions that's driving this and -- but you know, it actually has obviously risen as a share of the business?

Alrik Danielson: Now I mean if you take the automotive result, the absolute ones and you would adjust it with -- you can take us the automotive volume share of the total of the united increase you have a year-over-year improvement. So -- and that you will have that. And I mean on the rest, marginally I would add that, yes, we had somewhat negative -- some costs items coming in in the end of the year that we didn't foreseen but I mean -- so my answer is that if I dig into it, I expect that I could confirm that I see that positive margin effect. But with those comments I mean, I don't have anything in quarter four that changed our direction of what we have communicated on our roadmap towards 8%.

Graham Phillips: Okay. And just relating it to the pricing pressure comment that you made earlier; so one would imagine in the OE business, it is obviously greater. And just a bit can you say anything about the announcement you made in November about the automotive companies looking to get some [indiscernible] from the bearings companies for the EU finding from '14? Is there anything you can add there with the price negotiations on OE, does that make it more difficult to get increases?

Alrik Danielson: Well, basically I don't think at this point I don't have any specific comment on that. And you know, I think as we said, we don't see any reason at this point to change anything in the way we look at our outlook.

Graham Phillips: Okay.

But I guess just one final point then, in terms of the CapEx guidance for the New Year; it's down on last year, is there anything particular the way your savings or is it more of a normalization number that we're looking at for 2017?

Christian Johansson: You're talking about CapEx?

Graham Phillips: Yes.

Christian Johansson: I mean the guidance is up.

Graham Phillips: Okay, I was looking at 2.7 in the accounts and you're saying 2.2 for '17.

Christian Johansson: Okay, sorry. Because we give guidance on the property plant than equipment and then on top of that you have -- I would say the [indiscernible] size is more or less the capitalization of unite when we bear the things.

So that's what you see in the balance sheet. So the 2.2 guidance is up from somewhere, I don't have it but somewhere 1.9 to 2.0.

Graham Phillips: I guess it could be up about 10%. So again, what areas of that sort of in terms of new plant facilities, distribution centers?

Christian Johansson: I mean we haven't talked about that and you see, I mean we have done a number of releases where we are clearly determined to upgrade technology, to invest in automation, and invest in new production technology and that's what we are executing. And that means that the real problem before '17.

'18 move up a little bit in CapEx versus those levels.

Graham Phillips: Okay, thank you.

Operator: We take next question now from Andre Kukhnin from Credit Suisse. Please go ahead, your line is now open.

Andre Kukhnin: Good afternoon, thanks very much for taking my questions.

Could we just go one at a time, firstly, you mentioned a few times that with volume environment improving, it gives you more opportunity to increase price. Do you price increases planned in the pipeline for Q1 or Q2 as remember historically was the case for us?

Alrik Danielson: Yes.

Andre Kukhnin: And could you give us anymore color on this? Would that be along the usual lines or going into the industrial distribution and looking to increase prices there?

Alrik Danielson: Yes. I mean as opportunities arise with this -- as we see the matter changing, we will take the opportunities. At this point you know, it would not be right for me giving you more detail of that but the answer is yes.

Andre Kukhnin: Okay, that's great, thank you. And on the united cost ramp up, you're implying that there is going to be around $118 million increase in 2017 versus 2016. Am I reading this right? And then secondly, did you say that there is going to be $150 million increase in Q1; so I just wanted to double check that and whether that's all in P&L or partially capitalized?

Christian Johansson: The $150 million, I expect that to be in P&L. We are now working through this launch and so on and as soon as things have stabilized, we will move into unless build again for next releases but I mean to be on the conservative side, I would say that it's P&L effect of that. And then you said for the -- your question was for the full year '17?

Andre Kukhnin: Yes, just taking it [ph].

Christian Johansson: About the same spend, and yes, our estimate today is that we are $118 million up P&L wise which means that Q1 will be the main doubt versus last year, clearly.

Andre Kukhnin: Got it, thank you. And just on the cost savings, thinking about that line in the bridge going forward and for 2017; could you give us some help on what we can expect there or should we take -- kind of the level of charges that you've taken during 2016 and then assume some payback on that or is it going to be in line with some of your PEs or in line with what you've been doing with your previous program, i.e. kind of take the level of charges and have it and that would be your -- maybe forecast savings for 2017?

Christian Johansson: Yes, I think the best I can give you today.

Andre Kukhnin: Great, thank you.

And just as we kind of just close the year, I want to take a step back and ask you more about what the business is in terms of things like new product introductions and vitality ratio; I don't know if you could share any of that sort of how 2016 panned out for you on new product introduction or maybe number of patents versus the 2015-14? And what the vitality ratio is in terms of kind of products percentage of sales and products less than three or less than five years old, just a broader picture?

Alrik Danielson: This is an interesting discussion always we have. This is very difficult in the sense what is a new product and what is an adaptation and this should quite give you a number of that. I tell you -- within -- there is still a lot to do around the bearing, I can tell you that. When you go down to our -- in our executive hall, you see one shaft where you see how extremely we have been able to improve the product as far as it's the ability to carry loan, etcetera. So every bearing is sometimes customized to the customer which is the case of utmost of it where you have constant upgrades every new automotive platform has a new bearing that has the latest feature in it.

Then you have other industrial OEMs also where you have a fantastic opportunity and we have increased our ability to do that, kind of upgrades as we talked about before being more agile and actually working around the customer's application and giving the customers what they actually need as far as performance and so forth. And then you have another range where sometimes you take a general baring distribution where -- of course you're talking about ISO standards and there the changes around the bearings are slower and new features are sort of being brought in. So it's really difficult to give you any of these numbers but I tell you there is still a lot to do in the bearings and for us it's absolutely crucial to be out there and be very close to the application and innovate. And not believe, not around the bearing only, I mean the lubrication system, new greases, condition monitoring, service opportunities, you would be mad; you would be surprised to see how many opportunities you see in all -- around the room taking equipment performance at all end users. And one of the big things that we are doing is that we are extending out through a condition monitoring that is becoming more and more available to also smaller customers, the ability to differentiate around the rotating shift to increasingly smaller end users.

And so there is a lot of things happening right now and there is fantastic opportunity and many new things coming in. Having said that, don't ask me to give you a number on how big percentage of our sales was launched during the last because it's very -- what is it, what is it that we're talking about, what is the new bearing and what is an adaptation, what are you talking about. But as we said today, if you look at the papers, we're talking about a new grease for instance, that we are introducing for the automotive market, that's a big differentiator and that's probably one thing coming this quarter.

Christian Johansson: I think I would also add -- I mean you know also that we have talked a lot about how to use our -- I mean the competence on our -- in our second brand organizations, also to combine the offerings towards an OEM with SKF and [indiscernible] in order to have a differentiated product offerings for different performance classes and there we see very good progress in how we are working with those issues now.

Andre Kukhnin: Understood, thank you.

I appreciate it's quite hard to quantify but would you say that your condition monitoring in seals business grew faster than bearings in 2016?

Alrik Danielson: The interesting thing is, it's combined. When we are launching a new -- I don't know if you picked it up, we have this, we call quick collect that we are launching right now which is a very low cost sensor that is available now for smaller end-users to be able to also take advantage of what they can do with vibration analysis directly at their plants. And of course, the big thing here is of course not selling the sensor as such, it's that through this you can sell the whole offering of products around helping the end-user making his machine reach its technical end of life. So you have to see it as a way of selling the total portfolio around providing rotation, if you understand.

Andre Kukhnin: Yes, I get it.

Thanks so much for your time, I appreciate the elaborate answers.

Alrik Danielson: Operator, I think we have time for one more question before we wrap up.

Operator: Thank you. We take the final question from Ben [ph] from Morgan Stanley. Please go ahead, your line is open.

Unidentified Analyst: Thank you. Firstly, just a question on inventories; you took your production up year-on-year in the fourth quarter as you said. I think in Q3 you said you were going to build a little bit of buffer stock, more inventory ahead of the implementation of U9 [ph]. I mean so, would you plan to reverse that inventory build as you go through the first half of '17. I guess its bigger picture looking at inventories at 21% of annual sales over the course of the year, would you expect that to be stable or would you plan to take it down? Thank you.

Alrik Danielson: You know, in the market, I mean -- yes, and I think that was a wise decision that we made. I mean we have managed to keep our -- deliver seems to our customers from the Swedish plant, so I mean -- I think that was a good decision and obviously it's now about ramping up to the production pace in that plant because the mount is out there. So I mean that's isolated, that's already gone. I would say that inventory since we have an increased demand, we generally happen to take care of that by securing availability on service levels. And when it comes to I mean the coverage of 21% I mean it's overall our ambition to improve and to lower that and to get some leverage when volumes are improving here but I mean I cannot -- you can take the average of course a little bit up and down you see but I mean if you take a few [indiscernible] and make an average from that, that's what I would put in my forecast for the year.

Unidentified Analyst: Thank you. And then maybe just finally, Alrik, if you could just talk a bit about what you see on the ground in China at the moment. It sounds like you grew quite nicely but there is a big divergence across energy, rail were down, also distribution better, so maybe just a bit for some of the key segments in China what you see there at the moment? Thank you.

Alrik Danielson: Well, if we talk about what we saw in between Q4 compared to Q4 2015, we saw industrial distribution growing, clearly we saw this general industry which we talked about that was growing clearly, we saw some -- actually starting to grow in heavy industry and special industry, we saw energy still weak; aerospace, weak; railway weak; we still have a really weak freight sector; I mean it's really been down for long, long time and it's still depressed. We saw cars really growing fast and VSM, the after-market in Asia, not being so strong but trucks also growing very, very strongly.

So all in all, you know, it's -- and when you talk about the energy, I think it's more a change in programs and little bit increased; if we see -- we used to have a very, very dominant [indiscernible], we were almost the only ones when we started for the wind industry presence in China few years ago, now we have more competition. I think this is also something that we have seen. But all in all, I mean it's been really resulted and we feel still positive development. I'm going out there now in Spring, and meeting directly with all our distributors, both in Southeast Asia and in China and after that I will be able to tell you even more of the current flavor.

Unidentified Analyst: Got it.

Look forward to that. Thank you very much.

Alrik Danielson: Okay, thank you very much to everyone for dialing in today and joining us. The IR team is available to take any further questions, I know there were a few questions but we didn't have a chance to deal with. But once again, thank you very much from us here at SKF.

I'm looking forward to speaking to you again, next time.

Operator: This concludes today's call. Ladies and gentlemen, thank you for your participation. You may now all disconnect.