Operator: Ladies and gentlemen, thank you for standing by, and welcome to the SKF Conference Call Fourth Quarter Results. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I am delighted to advise you that your conference is being recorded today Tuesday, the 4th of February, 2020.

I'd now like to hand the conference over to your first speaker today, Patrik Stenberg. Please go ahead, sir.

Patrik Stenberg: Thank you and welcome everyone to this conference call on the fourth quarter results. Speakers today are Alrik Danielson, our CEO and President; also Niclas Rosenlew, our CFO. We will as usual start with a presentation that will take 20 and some minutes and after that, we will be more than ready to take on your questions.

So with that, I will leave words to Alrik, please.

Alrik Danielson: Thank you, Patrik and thank you for listening in on our call today. 2019 has been a solid year for SKF. During the last six months, we maintained a strong operating result despite falling demand. A consistent focus on cost reductions has allowed us to continue to deliver solid results, whilst continuing to invest in our factories and in R&D.

During the fourth quarter, we delivered a strong underlying operating margin of 10.3% and an underlying operating profit of SEK2.181 billion. We saw a drop in organic sales of 2.9% with net sales of SEK21.2 billion. Sales were higher in Asia, driven by strong demand in China, slightly lower in Europe, significantly lower in North America, and significantly higher in Latin America. We have a strong financial performance. We have reduced our debt, and been able to increase investments in manufacturing and R&D, as I mentioned, in recognition of this, the board has proposed to increase the dividend to SEK6.25 per share.

If we go to the next page and talk a little bit about the Industrial business, we can see that the Industrial business delivered a good operational performance on lower sales with an underlying margin of 13.3% higher than last year despite in drop in organic sales of 1.2%. Sales were significantly higher in Asia, relatively unchanged in Europe, and Latin America and significantly lower in North America. The picture comes that you see here comes from Boliden Aitik copper mine where SKF has installed new online condition monitoring system. Assets are being monitored from one of our REP centers. If you turn to the next page, and we talk a little bit about the automotive business, we can see that the automotive business saw a drop in organic sales of 7% and delivered an underlying margin of 2.4%.

Sales were significantly lower in Europe and North America, lower in Asia, and significantly higher in Latin America. Of course, we are not pleased with the Q4 performance of our automotive business. However, we’re continuing to work diligently in reducing our costs. We expect lower demand for automotive in Q1. But however, we have a competitive offering and healthy long-term order book.

If we turn to the next page and talk about a little bit about the world and we see as expected, we saw a decline in organic sales as we had guided 2.9% compared to last year with net sales of SEK21 billion. Sales in North America were 15.9% lower driven by a broad-based underlying decline in Industrial activity. This was accentuated by continued destocking at a main distributor and the impact on certain OEMs which SKF has a significant exposure to. In Europe, organic sales were 3% lower than last year with relatively unchanged Industrial demand, while Automotive volumes were significantly lower compared to last year. The negative development in Europe is mainly due to tough market conditions in Germany.

On the other hand, for example, Eastern Europe and the Nordic countries have performed well. Organic sales in Asia increased by 4.3% with significantly higher Industrial demand and lower demand for Automotive. We saw strong developments in China during the quarter, but as you will see in our outlook for Q1, the coronavirus had some uncertainty for Q1. In Latin America, sales grew organically by 8.2% compared to last year and we saw relatively unchanged volume within the Industrial and significantly high volumes in Automotive. If we take the next page and talk a little bit about some of the interesting new businesses that we have taken, I want to highlight the Gerdau case.

With Gerdau is one of the world's largest steel producers, and we have signed a new fee-based agreement aimed at increasing productivity and reducing unplanned downtime in two of their main mills in Brazil. These contracts include our full range of products, services, and remote monitoring. You have also seen during the quarter with similar contracts announced for customers like BillerudKorsnas and Nordic Paper which we are also very proud of. This is something that's continuing. If we then turn to the next page and we talk a little bit about new technologies.

Here you see the sensor roller system that we have developed in our Sven Wingquist Test Center in Schweinfurt that has proven its capability. And all of you who were with us in the last our Capital Market Day in Schweinfurt, you also saw the centers and we talked about several developments and this is course one of the most significant one. The sensor roller allows us now to monitoring the remaining useful life of the bearing and even better the use of the load measurements, we could in the future even has controlled the process, thereby increasing production or extend the life of the barrier. One of the main applications of this is within the wind industry, where failures can be extremely costly. If we then turn to the next page, and I gave the word to you, Niclas.

Niclas Rosenlew: Thank you, Alrik. Thank you. And if we turn to the next stage, I'll take you through our financials for the quarter starting with sales. So the net sales increased by 0.1% in the fourth quarter. Organic sales were, as Alrik mentioned, 2.9% lower than last year.

For Industrial, we saw a decline in organic sales by 1.2% and for Automotive, there was a decline of 7.3% in the quarter. The currency effect on sales was positive in the quarter by 4.8% with largest effect as usual coming from the U.S. dollar, the Euro, and the Renminbi. The structure component was a negative 1.8% and is related to the divestment of last year, the L&AT business. If we turn to the next page, we have seen a significant slowdown in growth and this is something you're all aware of, growth since the peak in Q2 2018, since then we'll be working quite hard on adapting our operations and our business to a lower growth scenario and reducing our cost base.

Looking at the operating profit development, we have been reasonably successful in this process or quite successful actually. In the fourth quarter, we managed to deliver an underlying operating profit of SEK2.2 billion which is actually on par with last year despite the lower sales. If we move to the next page talking about the operating profit bridge for the quarter. Firstly, we had a negative effect from divested companies of SEK1,274 million. And that's again related to the L&AT divestment this divestment that we did in December last year, so in December 2018, to be specific.

Furthermore, the currency impact was positive SEK101 million compared to last year. And just to note that's actually lower than what we guided for which was SEK250 million. And then in terms of operational performance, we saw an improvement by SEK181 million year-over-year. Organic sales and manufacturing volumes was SEK357 million lower, we had a negative effect from lower sales and production volume, pricing on the other hand continued to be positive, but was offset by negative mix and cost development was good, and we had higher realized cost savings than cost increases, which we are very pleased with, resulting in a positive net contribution to operating profit in the quarter of SEK252 million compared to last year. We also had SEK286 million lower costs for restructuring impairments and customer settlements compared to last year.

If I comment on the just take the opportunity when we have the bridge here ahead of us -- in front of us to provide some perspective on the bridge for Q1 2020. In terms of M&A, we expect no effect. In terms of price mix, we expect to see continued negative price mix with price slightly positive then -- more than offset by a negative mix. When it comes to cost development in Q1, we expect to see -- to continue to offset the cost inflation with cost savings. If we move to the next page, and the performance by customer group in the quarter, in terms of Industrial as mentioned the organic net sales in Industrial decreased by 1.2% with sales in Asia significantly higher, sales in Europe and Latin America relatively unchanged, and sales in North America significantly lower.

The underlying operating margin for Industrial was 13.3% compared to 12.9% last year. Cost savings contributed positively to the results, while lower sales and production volumes as well as material costs had a negative effect in the quarter. For Automotive, the organic sales declined by 7.3% in the quarter with significantly lower sales in volumes or lower sales volumes in North America and Europe, sales in Asia were lower, while sales in Latin America were significantly higher. The Automotive business had an underlying operating margin of 2.4% compared to 3.8% last year. The result was negatively impacted by lower sales and production volumes.

Moving on to cash flow, we had a strong cash flow during the year despite having increased our investments in manufacturing significantly over the last couple of years. As Alrik mentioned earlier, we invested significantly. We invested SEK3.4 billion last year, up from SEK2.6 billion in 2018. Cash flow in Q4 excluding acquisitions and divestments was SEK947 million compared to SEK1,937 million the year before. The decrease is mainly due to higher investments, as you can see here, some SEK800 million more in investments, so higher investments in 2019.

The cash flow excluding acquisitions and divestments for the last 12 months was SEK5.7 billion. Move to next page on networking capital. The networking capital was 27.7% of sales at the end of the fourth quarter, which was 0.1 percentage points lower than in the fourth quarter last year, and 2.2 percentage points lower than in Q3. A few comments on our capital structure. Net debt to equity ratio, our net debt to equity ratio was 59% at the end of the quarter.

The net debt equity excluding leasing and pensions was 10%. We saw a reduction in provision of SEK1.7 billion for post-employment benefit due to higher discount rates in Germany and in the U.S. And as has been discussed in the past, we’re not adding to the postemployment benefits plans, but they do move with market rates. Moving on, sustainability is very much at the core of our business model. And in October, we launched SKF’s new Green Finance Framework.

This is connecting our funding strategy to the climate objectives. We also issued our first green bond. We were among the very first green bond issuers as an industrial company in the world, so quite pleased with. The bond was very well received in the markets. It has a 10-year maturity, €300 million at record low interest rates.

And then, we take the opportunity here as a team obviously, is our margin stability. We take the opportunity to share a bit of kind of light additional light on some of the activities that we’re doing. As you know, we've been working on reducing costs and improving productivity and we will very much continue to do so. We have two updates to provide or two examples of what we’re working on. First of all on the ERP system, we made good progress recently with our ERP rollout.

And we are now taking steps to make sure that the rollout can be done in a more efficient way. We will use for purpose systems for instance, sales, finance, and manufacturing which should make the roll-up faster. We in this area, we expect that the cost is at about SEK400 million to SEK500 million per year, which is about half of what we have discussed some years ago or guided for earlier when it comes to the ERP rollout. And timeframe here is until 2025 in different stages. We’re also implementing a new structure for support functions; regional centers of excellence are being created and we’re very much kind of adopting a more digitalized way of working.

We expect this to be implemented during 2020 and 2021 and savings to be fully realized on an annual basis by 2022. And just to give you some perspective on the support function, financial impact, we expect the savings -- run rate savings again from 2022 to be in the region of SEK400 million annualized run rate and we expect some SEK400 million in one-off costs in the next two years 2020 and 2021. And actually, related to this, or taking the opportunity just to comment on another thing here. We're considering to introduce adjusted profitability and also reporting on our items affecting comparability from Q1 onwards. That's just a head-up, heads up and will obviously come back to that then in Q1.

Moving to the next page please. In terms of the demand guidance, demand in the first quarter of 2020 is expected to be lower for the Group. As Alrik mentioned, the current coronavirus outbreak in China, of course contributes to the general uncertainty in the market. And as of today, we expect to open our factories on 10th of February which is one week later than originally planned and very much in line with the directive from the local governments in China. I'm happy to say which is of course most important, happy to say that so far none of our staff have been infected.

Next page please. Finally, some additional guidance for the fourth quarter. We expect the finance net to be about SEK225 million negative including IFRS 16 effects. Based on the exchange rates at December 31, the currency impact on the operating profit is expected to be positive by about SEK60 million compared to the first quarter last year and for the full-year, we expect the tax rate of about 28%. And as discussed, over the last couple of years, we have consistently increased our investments.

And we’re actually continuing on that path. 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. With that, I give the word back to you, Alrik.

Alrik Danielson: Thanks, Niclas.

And then if we turn to the next page, to summarize, I'm proud and happy to be able to say that the team has delivered a continued strong performance in the fourth quarter, despite lower sales. This is of course, not something that just happens. But it's a result of the activities that we've talked about several quarters on how we sort of have prepared for this. We delivered a stable underlying operating margin, and as we stated previously, we have been able to offset cost inflation by cost savings. With our strong financial position, we have been able to increase investments in our manufacturing to record levels, which will of course give very good effects in the future.

Whilst at the same time, investing in reducing both our own and our customers CO2 emissions, through technologies and services that help improve the performance of the rotating equipment and activities. Beyond that, as you will see in SKF, you will hear more about In the future. We're also continuing to invest in technologies that enable us for our fee-based offering, machine learning, data analytics, and of course, condition monitoring, using Cloud and Edge computing technologies. With those last comments I hand over to you, Patrik.

Patrik Stenberg: Thank you, Alrik and Niclas.

With that, we are ready to take on your questions. So I leave the word back to the operator. Please go ahead.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

[Operator Instructions]. And the first question comes from the line of Olof Cederholm from ABG. Please go ahead. Your line is now open.

Olof Cederholm: Hello everyone, it's Olof with ABG.

I have a question regarding the -- if we start there with pricing, very impressive strength in pricing here. Are you seeing any short-term pressures at all going into Q1? Or are you still defending price well?

Alrik Danielson: I think we're defending the position well. Of course, like we've always said in a weaker market, there's always a different possibility. But as you see with technology and working well, the value chain is still possible to defend our margins in a good way. And I'm specifically pleased with when I look into the long-term order book for instance in Automotive, it’s solid and with good profitability.

Olof Cederholm: Great. And then question on the cost savings, which are also an equally impressive. The -- we got some information of course on the longer-term cost initiatives that you have, is it possible to also give some indications on things that you've done that will affect 2020 and 2021 in a material way?

Alrik Danielson: Well, so I mean we also are quite pleased with the way we've come so far, and the couple of examples that we went through are just again examples. I mean, there's a number of different things, we are doing, and as you might have noted, we’re not having a -- a program per se, but it's part of our normal operations. So it's continuous improvement and its cost down is one thing but it's also very much investing in productivity, the investment levels hopefully should mean lead to kind of higher productivity, lower costs going forward.

So a number of things around that. So there is no magic to it, something that we’ll continue to work on.

Olof Cederholm: All right. And then lastly from me, in the bridge on the cost, then on cost savings and cost inflation, bit of the bridge, is it possible to split out sort of, so we get a sense for how big the cost savings actually are year-over-year versus the cost inflation and so forth?

Patrik Stenberg: Olof, it’s Patrik here. Of course if you look at the bridge, obviously if we strip out the operational things, we had a net saving of SEK252 million in the quarter, which we’re very proud of obviously.

And then we have a continued headwind from raw material actually slightly worse than we guided for to an extent to about negative SEK90 million or so. We still have the underlying cost inflation that is relatively on par with what to have about SEK225 million negatives, and obviously offsetting that quite a significant contribution from savings.

Operator: Thank you. And the next question comes from the line of Erik Golrang from SEB. Please go ahead.

Your line is now open.

Erik Golrang: Thank you. I have few questions, starting in Q4 and the demand outcome that was that I get the sense that it was a bit better than expected. Is that correct? And if so in what areas and then the second quarter on your first quarter, second question, first quarter guidance would that have been any different if you would have done this a couple of weeks ago, say prior to the Krona concerns. And then on the third question regarding the ERP implementation and the cost to that, should we interpret your comments there on the numbers that costs come down by around SEK100 million per quarter already in the first quarter of 2020, or it is more of a gradual phase into that lower cost level?

Alrik Danielson: So if you start, I'll take Alrik here take the first two questions, I can tell you that of course, yes, as you know, we have come in better and we're specifically happy with what we see in Asia with a very, very solid growth not only the traditional segments, but also general sort of distribution in general industry doing well, in the fourth quarter.

Europe outside of Germany is actually also better maybe than what we had expected before. When we look at Q1 definitely so that we have taken consideration with the effects of what's happening with the virus in China on the supply chain, in our assessment for Q1. So we have downgraded our view a little bit there. We don't believe that over the year it’s going to be such a large, I mean if it's solved now in relatively quickly, we don't believe that there's going to be a long sort of effect of this. But of course, during the Q1, we're just stopping one more week and then when it starts again, we will certainly have some kind of logistics hiccups and we’re sort of taking that into account.

Erik Golrang: Yes. So without being the guidance of slightly lower demand and without the corona consideration?

Niclas Rosenlew: I don't think we want to speculate exactly that what is the effects. But as Alrik said, I mean yes we have kind of downgraded our thinking a bit and now talk about minus four to minus eight, but exactly would it have been, minus two to minus four or whatever without the corona kind of is better not to comment on that, but it has a negative effect. And on the ERP, so the main driver really for the changes we are making and the improvements we are making is speed. So of course, cost is an additional bonus, I mean, now we have a combination of speed and costs down or higher, more speed and lower cost.

I don't think it's as straightforward as you said SEK100 million per quarter. I mean we have had -- we've taken down the ERP costs over the years already a bit 500 and change closer 550 or so was the number I believe for 2019 and now we say that we’re aiming more for numbers between 400 and 500. So in that sense it's not a major, major cost improvement but again combination of slightly lower costs and kind of better speed is what we’re aiming for here.

Operator: Thank you. And the next question comes from the line of Klas Bergelind from Citi.

Please go ahead, your line is now open.

Klas Bergelind: Yes, hi Alrik and Niclas, Klas from Citi or C-I-T-I. First on the cost savings. Sorry to come back to this, a big number well done. But Niclas savings around SEK300 million ahead of expectations this quarter, how much could you help us a little bit, should we carry forward as you are talking also about SEK400 million from support functions, I'm trying to understand if the SEK400 million is coming on top of continued savings like we saw this quarter or is that is just a -- the new savings which you carry? And if you could also say something about the raw materials impact likely and the impact from restructuring in the first quarter, I will stop there.

Niclas Rosenlew: Yes, if I comment on the overall cost picture here, so as we said, I mean the guidance is that we will offset the inflation which is an estimated SEK225 million. So, that's -- that's what we at a minimum want to do. Then we’ve been bit more successful here in the Q4 and actually in Q3 as well. And of course, if that happens only better or even better, but I don't think we should just assume that this SEK500 million and change of savings that we saw now in Q4 will be the case in every quarter. So, you can call it cautious, but the guidance is will offset inflation.

And then on the longer-term, yes, if we talk about the support functions for instance and combine that with some savings from ERP, over time this would be in addition to what we’re talking about here. But do kind of remember that it will take time to get there. So, we deliberately said that we have 2022 run rate there.

Klas Bergelind: Road map?

Patrik Stenberg: It's Patrik here. Road map we expect almost nowhere affecting Q1, actually it’s less of an issue in terms of headwinds during 2019.

Klas Bergelind: Okay. And then my second one is on price mix, understand that it was negative now but with pure pricing flat, but I struggle a little bit to see why the mix turns so negative in the quarter when I look at how Industrial traded versus Automotive, Industrial was pretty solid, or what's the impact from wind, et cetera that begin the quarter? So I'm trying to understand how we should think about the mix component going forward?

Niclas Rosenlew: Yes and I mean pricing was actually slightly positive, not only flat but then offset by mix. And I mean mix is you see it in the page where we have all the custom industries, the pluses and minuses. I mean, essentially, we have a larger proportion of, for instance, wind bearings, as a proportion of total sales and the margins there are somewhat lower, and that then leads to the kind of negative mix.

Klas Bergelind: Okay.

My final one is on China for you Alrik and coming back to the strength here, you're guiding total Asia-Pac slightly higher now and I appreciate that the comp is 8% easier but you also highlighted some caution from corona in your guidance, so what are we seeing on China right now interested to hear more Industrial versus Automotive towards the end of the quarter but also into the first year?

Alrik Danielson: Well, as we said in the quarter we saw a good broad sort of performance not only in the traditional wind and railway and so forth, but in the Industrial space really broad-based as you can see from our reporting, really good development and of course in Automotive is still a negative. So what's happening now? Well, it will also of course depend on how quickly this situation with corona is solved and we started very, very quickly with a network insider SKF. We contacted everybody we know; we have 6,200 employees in China. And we have no cases of anybody being infected. And we have even helped some of our suppliers who have less prepared in this to do this.

And we see completely different way, this time around how the government is also really taking very fast and good measures to contain this. So at the same time, of course, we're stopping one more week because of the regulations. Our logistics center has already been approved to start-off, so that's we're starting but we have to wait until the 10th of February to start our factory. And what we believe then is best you have one week there. And then you have of course as we start, there's going to be some logistics hiccup that will affect the Q1.

But if this now sort of culminates rather quickly, as time goes by, well -- we'll -- we think that part of this will be recovered during the year and maybe there will be the stimulus from the government who knows that to try to offset this. So if we look a little bit positive on it and that the government will actually release activities and we have now seen the culmination we'll then it will affect our Q1 but it will not really be a major issue for the full-year.

Operator: Thank you. And the next question comes from the line of Andre Kukhnin from Credit Suisse. Please ask your question.

Your line is now open.

Andre Kukhnin: Good afternoon, thank you. It’s Andre from Credit Suisse. I will go one at a time. Can I ask about the manufacturing impact in Q4 in the P&L on the bridge and what you expect for Q1, please?

Patrik Stenberg: Hi Andre, it’s Patrik here.

On the manufacturing side it was almost no impact, we actually managed to reduce our inventories of finished goods slightly more than we did during the fourth quarter last year. So in fact we had a very slim negative effects on EBIT in the quarter.

Andre Kukhnin: Got it, thank you. And for Q1, how are you thinking about your manufacturing plans?

Patrik Stenberg: Usually we have a seasonal build-up of inventories in the beginning of the year as we always have. Added to that, I would say we still have an ambition over time to reduce our inventories.

Also to get closer to our networking capital to sales targets of 25%. We have started to move towards the 25% targets now we were at 27.7%, so that is still the overarching ambition but there will be some seasonal build-up as usual in Q1.

Andre Kukhnin: But year-on-year is that you expect inventory to be down or about the same in Q1?

Patrik Stenberg: We probably do not expect any major changes in that.

Andre Kukhnin: Got it, thank you. And on savings, just understand the kind of the drivers of it a bit better.

So you've generated kind of well over SEK1 billion of savings in 2019, and I guess SEK400 million or so is from low ERP costs, but even the remainder of it is very impressive given that I think the charges for restructuring were barely SEK0.5 billion and the headcount reduction is about 1K or 1K-and-a-half if you compare averages. So is this kind of the wrong tracker for us, tracking your kind of charges and headcount to gauge future savings. Is there something else there that that you’re doing that we should be aware of for 2020?

Alrik Danielson: Well, first, just a small correction, the impact from ERP 2019 compared to 2018 wasn't that material. I think we haven’t read the report but it -- it was less than what you said. I mean, I think the reference to the higher amount is many years back when we had around SEK1 billion per year, but now again, it's been in the region of maybe 600 or 600.

So and it will come as I said slightly down from there, depending on the speed of the rollout. I would go back to kind of the earlier comment on the costs. This is I mean we are taking action and we are working on productivity. And cost, of course across the board, you can say. So yes, as you've seen the headcount has also continued to come down.

And that is one indicator and of course, direct trigger for costs down. And then there's other efficiency measures. So I would love to give you a very specific kind of reason which you could then track all action, but it's actually a broad-based set of actions which we’ll continue working on.

Andre Kukhnin: Got it, thank you. And on support function costs, you've laid out clearly the run rate and the one-off costs.

But do you expect savings already in 2020 or 2021 of any magnitude from this program?

Alrik Danielson: Yes, so we will do it gradually. I mean there's almost monthly activities happening in the next 24 months, so this year and next year, so there will be a gradual impact coming from it. And then the SEK400 million that I mentioned should be around right in two years' time. So gradually moving towards that over two years and then you have the one-off costs.

Andre Kukhnin: Right.

So we get to SEK400 million run rate at the start of 2022?

Alrik Danielson: Yes, exactly.

Andre Kukhnin: Okay, okay, that’s clear. Thank you. And just one on raw materials, very clear in terms of near-term indications, but kind of fundamentally for 2020 up to current spot rates. Do you expect a tailwind towards the end of the year or kind of more of a neutral evolution across the year?

Alrik Danielson: That's correct, Andre.

If you look at the price of the raw material, they have been coming down over the last six to nine months and obviously as you know we have a time lag before it affects our costs obviously two to three quarters. So we have had still headwind throughout 2019. We expect it to be a wash for Q1 and then mostly going forward.

Operator: Thank you. And the next question comes from the line of Gael de-Bray from Deutsche Bank.

Please go ahead. Your line is now open. Gael de-Bray: Thanks. Good afternoon, everybody. I have two questions please.

Firstly, I'm trying to gauge the risks on global supply chains from the coronavirus. So I mean, when you get Chinese components being imported say into the U.S., how many weeks of inventory do you usually keep on hands and have you been generally working on any mitigation strategy for the kind of risks related to the corona, so that's question number one. And the second question I have was on the cash flow side, I was surprised not to see a greater reduction in working capital this quarter as usually happened in the fourth quarters. So, can you talk a bit more about this and whether you really consider the current level of inventories to be appropriate right now, given demand is where demand is expected to be and given the uncertainties, obviously related to China?

Alrik Danielson: So if you take, this is Alrik. If you take the inputs that we’re doing to the American market from Asia, there is quite a significant inventory in this, where we’re living on the fact that we have very good delivery performance in the U.S.

and there are some possibilities to mitigate this through actually, I mean if the supplies is now starting in our factory started as decided by the government now on the 10th and we get it going, I don't think it's going to be an issue for us. What we see is of course in general for China, China is for us today mostly an import market where we are shipping bearings mostly from Europe to China. And again there, if it's now starting us again here in a week and so we hope that that we're going to be quite stable on this. And as I said, our warehouse has already been allowed to start working.

Niclas Rosenlew: Okay.

And on the cash flow, I mean I think it's a good observation that the -- let's say the positive impact coming from changes in working capital wasn't that high compared to the year before. The year before on the other hand i.e. Q4 2018 we had a very high reduction maybe you can say abnormally high but very high. And we had less so this year, going into Q4, 2019. I think I mean as you know, and this is kind of a recurring theme, and it's very much something that we’re working on internally.

I mean we have -- we think about our working capital as a percentage of sales, it's higher than what our target is and we absolutely want to get to the target. At the same time, we need to be realistic here. And it's going to take time because it's very much related. It's not just about reducing inventories, but it's very much related to our footprint activities, where do we manufacture. And as you know, we're making gradual changes there.

And then also the so-called World Class investments, which is both kind of digitalization and then automation of our manufacturing. And over time this should really lead to us being able to have a lower level of inventories and getting more towards that 25. That's I know, that's a bit of a vague answer but hopefully that helps somewhat.

Operator: Thank you. And the next question comes from Guillermo Peigneux-Lojo from UBS.

Please ask your question. Your line is now open. Guillermo Peigneux-Lojo: Good afternoon, Guillermo Peigneux from UBS. Good morning or good afternoon Alrik, Niclas and Patrik. I just wanted to ask actually a couple of questions really, one is related to industrial in particular to the wind market outlook, I guess in China, we’re moving away from the tariff framework to the auctions framework.

And I wonder whether you're seeing double ordering or total booking of orders or a little bit of unsustainable activity there, especially when you think towards the mid to the end part of 2020 going into 2021? A very similar question with regards to the USA at the moment, we’ve seen record volumes on wind, but then you've seen significantly lower volumes. So I wanted to make sense on some of these numbers if you could shed some light, it will be great. Thank you. I have a second question, but I'll keep it for a bit after you answer.

Alrik Danielson: If you take China and what's happening in China and of course, we all know that there is an uncertainty going into 2021 as far as wind, but we're not.

So when we look, try to understand what's going to happen. It's not clear yet, if the government will not take the opportunity to maybe continue to see similarly in the wind sector also into 2021. For us, it's not 100% clear if that's not going to continue. As far as in the U.S., you're absolutely right. It's a particular business that we have exited in the U.S., that's giving us this negative comparison in the U.S.

Guillermo Peigneux-Lojo: Thank you very much, very clear. And I want to follow-up with a question on the SEK400 million to SEK500 million against implementation of ERP, would you be spending most or capitalizing some of these costs as we go forward? Thank you.

Alrik Danielson: Well, I mean, at least so far I mean we've capitalized a relatively small portion of it. And there's not a plan to change that. So maybe the best assumption for the time being is that the majority will be expensed and then a slice of it will be capitalized.

Guillermo Peigneux-Lojo: Thank you so much for checking out this.

Operator: Thank you. And the next question comes from the line of Lars Brorson from Barclays. Please ask your question. Your line is now open.

Lars Brorson: Thanks, maybe just first to you, Niclas. I mean I think it sounds like it would be helpful if you could remind us what the P&L impact was from ERP in 2018, 2019 and expected in 2020?

Niclas Rosenlew: Yes. I mean, if you take this with a kind of a grain of salt now out of memory, happy to come back to this if these are completely wrong. But we had closed while call it SEK650 million, SEK600 million to SEK650 million has been the impact statement or income statement impact in the last couple of years, two years. And then this is a combination of project costs and then some license spend, so in Q2 2020 -- 2019 we had a specific kind of license S/4 HANA license.

Lars Brorson: So there wasn't a step-down in 2019 just to be clear?

Niclas Rosenlew: No, there wasn't a step-down in 2019. That's correct.

Lars Brorson: And your expectation for 2020?

Niclas Rosenlew: Again, as I said, we have spent some time on kind of ERP and system landscape, and digitalization, as I guess everyone else is doing as well. But concluded that there is a faster way to roll-out, and it's very much driven by speed now. So we also looked into the costs as described here earlier and estimates that the run rate costs or the annual costs should be around SEK400 million to SEK500 million which is a step-down from 2019 and 2018 as well.

But I would add some caution there that speed is the most important thing and if we figure out a way to roll-out the systems much faster and take a slightly higher cost, then we'll definitely do that. So this is an approximation this SEK400 million to SEK500 million a year.

Lars Brorson: Thank you. Can I ask secondly Alrik to your aerospace business, I've got that to be about a sort of SEK5 billion or so revenue business maybe SEK6 billion, SEK6.5 billion if I include part of your Industrial distribution business. Can you talk a little about the impact associated with the production cuts from Boeing’s 737? So not just your direct exposure there, but more broadly across the supply chain? How much of that have you already seen, if you like how much is embedded in your Q1 outlook? How should we think about that part of your business through the course of 2020?

Alrik Danielson: Well, yes, of course we have seen some in this case but there's also we’re a abroad supplier to all the engine programs and aircraft programs, both in the U.S.

and in Europe. So a little bit what is reduced in one-end. Hopefully it's coming back in the other.

Lars Brorson: So you think your aerospace business will be a stable business in 2020?

Alrik Danielson: We continue to deliver good growth also in 2020, that’s what we foresee.

Operator: Thank you.

And the next question comes from the line of Andreas Koski from Nordea. Please ask your question. Your line is now open.

Andreas Koski: Thank you very much. I have a couple of questions.

The first one is on your customer settlements and impairments that you have been taking for several quarters now. Are they related to any specific customers and how long do you expect them to go on?

Alrik Danielson: Well, it's a number of different cases. So it's not related to one specific customer over the years.

Andreas Koski: Are they related to any specific product groups because as far as I remember they haven't been asked regular?

Alrik Danielson: Yes, Automotive is the short answer.

Andreas Koski: Okay.

Should we expect them to continue from here or?

Alrik Danielson: Well, that is I mean, this relates to old cases, five goes five years back or so. So it's a continuation of that, it's very little kind of new that has popped up. And we obviously hope very much hope to close on all of these ASAP. But there, it's quite hard to give a definite timeline or a promise.

Andreas Koski: Okay.

And then coming back to your cost savings of around SEK500 million, SEK550 million in the quarter. How much of that was realized already in Q1 2019. And I'm looking at my bridge; it looks like you had cost savings of SEK200 million or so back then. But do you have a better answer?

Patrik Stenberg: Andreas, it's Patrik here. The simple answer is obviously if you look at the numbers we published regarding the stock levels, we have had quite significant reductions in personnel throughout the fourth quarter of 2019 compared to end of last year; we're about more than 1,000 people less in the Group today.

And that has been a gradual production for us, Q1, Q2 more significantly also in Q4.

Andreas Koski: Okay. But yes you don’t have a number to give what your savings were in just to try to get an understanding, what the rollover savings will be for Q1 2020?

Patrik Stenberg: I would say the savings, we've been having good contributions throughout last six months mainly. We were about flat on the cost savings -- cost line in Q2 but more significant contributions in Q3 and Q4.

Andreas Koski: Yes, yes, okay thank you very much.

And then lastly just maybe for Alrik, I'm looking at your gross profit margin it's been between 24% and 25% for the past five years now at the same time, as you have been working a lot with productivity improvements. What's your view on the gross profit margin? Do you see a lot of upside or is this the level we should expect SKF to be at around 25% or so.

Alrik Danielson: Well, it's always interesting right you have in bearings and our products there are the most common industrial product you can find in the world and of course there are businesses with very, very differentiated with very, very hard -- high margins and then there are some other businesses that are more competitive and that you can choose to be in or not choose to be in and of course as we work forward at the same time, I think there is a possibility for us to both take market share as we become more competitive and work with efficiency, but of course also to strengthen our margins. So my long-term ambition is of course to improve our margins as well as maintain and our place in the marketplace and expanding.

Operator: Thank you.

This does conclude our question-and-answer session. Patrik Stenberg, please continue.

Patrik Stenberg: Okay, thank you very much for listening-in to this conference call over the fourth quarter. I know we're out of time. I also do know that we have a couple of listeners that did not get their question through.

We would be happy to take your questions directly on the phone after this call if possible. With that, thank you all for listening-in.

Operator: Thank you. That does conclude our conference for today. Thank you for participating.

You may all disconnect. Speakers, please stand by.

Alrik Danielson: Thank you.