Tom JohnstonePresident and CEO
SKF Capital Markets Day ● 10 September 2014
© SKF Group
• Business update - Group and Business Areas
• Activities/actions to support strategic priorities and financial targets - growth, operating margin, net working capital, ROCE
• Development in Asia and particularly China
• Specific industry/area focus - renewable energy, marine and lubrication
• Asset life cycle and mobility
• Customer view on SKF
SKF Capital Markets Day 2014 – Main topics
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Agenda
10.00 Group overview Tom Johnstone
Finance Henrik Lange
11.00 Strategic Industries incl. Q&A Rakesh MakhijaBernd StephanRobert Law
12.15 Coffee break
12.35 Regional Sales and Service incl. Q&A Vartan VartanianThomas FröstChristian Gill
13.50 Guest speaker Bruno van den Heuvel, RWE Power AG
14.20 Lunch
16.00 Automotive incl. Q&A Tryggve SthenLuc GrauxUlrich Selig
17.15 Coffee break
17.35 Summary and Q&A Tom JohnstoneHenrik Lange
18.30 Cocktail reception
CMD 2014
© SKF Group
Alrik Danielson, Designated CEO
New President and CEOas of 1 January 2015
Born: 1962
B.Sc in Business Administration and International Economics from the University of Gothenburg
1987-2005 Previous positions within SKF:
• Financial controller in Gothenburg
• President, Industrial Division in Spain and Portugal
• President, SKF do Brazil
• President, Industrial Division
and several other managerial positions.
2005-2014 Höganäs AB, President and CEO
CMD 2014
© SKF Group
Key topics
• Half year performance and outlook for Q3
• SKF Group financial targets and priorities
• Specific focus
- purchasing
- inventory reduction
- UNITE
- Kaydon
CMD 2014
© SKF Group
Key topics
• Half year performance and outlook for Q3
• SKF Group financial targets and priorities
• Specific focus
- purchasing
- inventory reduction
- UNITE
- Kaydon
CMD 2014
© SKF Group
SKF Group – Half year 2014
Financial performance (SEKm) 2014 2013
Net sales 34,689 31,544Operating profit 4,120 3,317Operating margin, % 11.9 10.5Operating margin excl. one-time items, % 11.9 11.9Profit before tax 3,548 2,864Basic earnings per share, SEK 5.26 4.10Cash flow after investments before financing excl. EU payment 1,164 255Cash flow after investments before financing -1,661 255
Organic sales growth in local currency:
SKF Group 5.2% Europe 3%
Strategic Industries 9.0% North America 3%Regional Sales and Service 2.2% Asia 13%
Automotive 4.5% Latin America 1%Middle East and Africa 18%
Key pointsSales volumes up by 5.0% y-o-y.Manufacturing was higher compared to last year.
CMD 2014
© SKF Group
Sales development by geographyOrganic growth in local currency YTD 2014 vs YTD 2013
Europe
3%
Asia/Pacific13%
Middle East& Africa
18%
LatinAmerica
1%
NorthAmeric
a3%
CMD 2014
© SKF Group
Components in net sales
2012 2013 2014
Percent y-o-y Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Volume -0.8 -2.8 -5.0 -5.9 -8.7 -1.6 2.2 7.1 6.2 3.6
Structure -0.1 0.0 0.8 1.0 1.5 2.6 1.1 4.8 4.7 3.8
Price/mix 1.9 2.0 0.5 0.7 0.7 -0.6 -0.2 -0.2 -0.4 1.0
Sales in local currency 1.0 -0.8 -3.7 -4.2 -6.5 0.4 3.1 11.7 10.5 8.4
Currency 0.4 3.6 -2.7 -3.6 -4.0 -5.0 -2.2 -2.1 -0.1 1.1
Net sales 1.4 2.8 -6.4 -7.8 -10.5 -4.6 0.9 9.6 10.4 9.5
CMD 2014
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SKF demand outlook Q3 2014, main regions
Share of net sales 2013
Europe 42%
Asia Pacific 24%
North America 24%
Latin America 7%
Total
Q3 2014 vs Q3 2013
+/-
++
+
-
+
Sequential trend for Q3 2014
CMD 2014
© SKF Group
SKF demand outlook Q3 2014, main business areas
Share of net sales 2013
StrategicIndustries
29%
Regional Sales and Service
39%
Automotive 27%
Total
Q3 2014 vs Q3 2013
++
+/-
+/-
+
Sequential trend for Q3 2014
CMD 2014
© SKF Group
Key topics
• Half year performance and outlook for Q3
• SKF Group financial targets and priorities
• Specific focus
- purchasing
- inventory reduction
- UNITE
- Kaydon
CMD 2014
© SKF Group
Financial targets
CMD 2014
15%Operatingmargin
-20
-15
-10
-5
0
5
10
15
20
0
5
10
15
08 09 10 11 12 13H11
4
05
1015202530
08 09 10 11 12 13H1
14
8%Changes in sales in local currency
incl. structure
One-time item
20%Return on
capital employed
One-time item for the individual year
© SKF Group
SKF’s priorities
Sustainable profitable growth• Expand the platform concept• Exploit the asset life cycle approach• Develop new products and grow SKF BeyondZero portfolio• Extend and grow second brands• Acquisitions
Investments & Innovation • New and existing facilities• Research and
development• IT systems• Mobility
Cost reduction• Business Excellence• Consolidation of manufacturing• Optimization and productivity
improvements• Reduction in purchasing costs
Capital efficiency• Fixed capital• Net working capital
CMD 2014
© SKF Group
SKF’s priorities
Sustainable profitable growth• Expand the platform concept• Exploit the asset life cycle approach• Develop new products and grow SKF BeyondZero portfolio• Extend and grow second brands• Acquisitions
Investments & Innovation • New and existing facilities• Research and
development• IT systems• Mobility
Cost reduction• Business Excellence• Consolidation of manufacturing• Optimization and productivity
improvements• Reduction in purchasing costs
Capital efficiency• Fixed capital• Net working capital
CMD 2014
© SKF Group
Key topics
• Half year performance and outlook for Q3
• SKF Group financial targets and priorities
• Specific focus
- purchasing
- inventory reduction
- UNITE
- Kaydon
CMD 2014
© SKF Group
Purchasing in SKF
© SKF Group
SKF Global Spend
Total SKF spend 2013
Total SKF spend is SEK 36 billion – direct and indirect representing ~ 50% respectively
18%
44%
38%
Rings & Subcontracting
Components
8%
12%
13%
21%18%
27%
CAPEX
IT
Logistics
Professional Services
Facility Management
MRO
SEK 17.7 billion
Direct Material
Indirect Material & CAPEX
SEK 15.6 billion
17 034
36 153
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
19 119
IndirectMaterial
DirectMaterial
Total
Steel Raw Material & Rolling Elements
CMD 2014
© SKF Group
Vision, strategy & future state
New process framework
New competence framework
New organizational design
Operational set-up
What should purchasing be doing?
Which processes are necessary to execute
the role?
Which competencies are required to execute the
processes?
What organizational design best ensure we match
processes, competencies and roles?
What is the most efficient way of delivering the
processes with minimum cost?
New governance model
Who is responsible for what decision in the
processes?
New job roles
Current state & opportunity assessment
How are we performing today?
What titles and job roles do we need to perform
the processes?
The foundation is in place
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Our global presence
Sourcing centres in• Chicago• Gothenburg• Pune• Shanghai
International purchasing offices in • Japan• Korea• Turkey• Russia• Ukraine• Slovakia• Mexico
CMD 2014
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Responsible sourcing
SKF Care in action – integrated part of purchasing strategy
CMD 2014
© SKF Group
Regional supplier base
Supplier Rationalization
TCO – Q C D I M – Cash
AGILE – ADAPTIVE & ALIGNED
Strategic supplier relationships
Purchasing Strategic Direction
Supply Chain Agility
People development
UNITE
CMD 2014
© SKF Group
2012 Actual 2013 Actual 2014 2015 20160
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Su
pp
lier
Co
nso
lida
tion
DM
Strategic Suppliers
Preferred Suppliers
Transactional Suppliers
Developing Suppliers
INDIRECT & SERVICES
Target 14 -5,000 suppliers
DIRECT MATERIAL
Target 14 -1,000 suppliers
Supplier relationship Management - Consolidation
CMD 2014
© SKF Group
77% 80%
90%
70% 75%
75%
13% 15%
25%
80% 85%
90%75% 80%
90%
85% 85%
90%
10% 10%Sourcing localization 2012 2013
Target 2014
Supplier relationship management – Localization
CMD 2014
© SKF Group
1.5 2 2.5 3 3.5 4 4.5 50
20000
40000
60000
80000
100000
120000
140000
Sheet Metal PartsStarted Q3 2014
CastingsStarted Q2 2014
ElectronicsStarted Q2 2014
FastenersStarted Q1 2014
• Strategic sourcing projects are addressing a purchasing spend of ~ SEK 1,275 million
• Potential annual reduction of TCO (Total Cost of Ownership) of >15%
• Supplier consolidation potential estimated to ~ 250 suppliers
Strategic Sourcing projects – Components
Potential savings
Ease of Implementation
CMD 2014
© SKF Group
Strategic Sourcing projects – Indirect material
30.000
60.000
5.000
40.000
15.000
45.000
25.000
20.000
35.000
10.000
65.000
0
70.000
109876543210
115.000
110.000
105.000
100.000
95.000
90.000
50.000
85.000
80.000
75.000
55.000
Potential savings
Ease of Implementation
Packaging Corrugated
Company cars SwedenM&S Printing project
Lubricants
Packaging Plastics
Strategic sourcing projects 2014 addressing a spend of SEK 1.3 billion
Under implementation
• Packaging / Lubrication / Printing/Car Lease
• Addressable spend SEK 550 million with >230 suppliers
RFx ongoing
• Office Supply /Tool to drawing/ Metal Cutting tools / Abrasives / Gifts and Sales promotion
• Addressable spend SEK 703 million with >900 suppliers
CMD 2014
© SKF Group CMD 2014
Strategic sourcing projects bringing down TCO
TCO down 15 %on total spend for lubricants
no of suppliers from 215 to 16
TCO down 10%
on total spend for plastic & corrugated packaging
no of suppliers from 160 to 30
© SKF Group
Purchasing ramp up and saving plan (vs 2012)
• New GPU org. in operation
• New process framework
• New competence framework, role descriptions and career path model
• Sourcing waves 1 / Speed sourcing started to leverage spend across all BUs
• Integration of BU Purchasing
• Localization of the strategic supplier base
• Separation of strategic tasks from transactional tasks
• Sourcing waves and continued Speed Sourcing activities
• Supplier Innovation Forums with strategic suppliers
• Strategic Partnership Agreements
• Common purchasing processes
• Competence mapping and competence development program
• Supplier consolidation through increased sourcing leverage
High Performance Purchasing organization
• One SKF in Purchasing for full leverage of all spend in SKF
• Category and business driven organization fully leveraging SKF’s purchasing power
• Global job roles and decision matrix (RAPID) clarifying responsibilities and decision making
• GPU supporting the full internal value chain (R&D/PD, After market)
• Focus on Total Cost of Ownership (TCO)
• Strong alignment with the business through a clear target setting process
• Highly competent purchasing professionals
• Reduced supply chain risk and costs through top performing suppliers in Q C D I M
2013 2014 Fcst 2015
SEK 400 m
SEK 800 m
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Inventory reduction activities
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Suppliers Manufacturing Distribution Customers
Business mix and demand variations
Supply structure and flexibility
Forecasting and planning
Product range and
service policies
Inventory
Focus areas to reduce inventory
CMD 2014
© SKF Group
Program cornerstones and objectives
•Improve forecasting and planning process to drive entire demand chain end-to-end
• Reduce lead times from supplier to customer• Reduce manufacturing set up times and increase frequency • Balance regional manufacturing/ supply/ regional demand
Improve forecasting and
end-to-end planning
Optimize product range
and service policies
Increase supply flexibility
•Review/reduce product assortment •Review number of stocking points and stocking policies•Eliminate duplication of inventory across stocking points
CMD 2014
© SKF Group
Program timeplan
2014 2015 2016 2017
Pilots in selected product lines and
regionsRollout to all product lines and regions
Implement improved process (global roll out)
Improve forecasting and
end-to-end planning
Optimize product range
and service policies
Increase supply flexibility
CMD 2014
© SKF Group
UNITE
UNITE
© SKF Group
Background
CMD 2014
• Current systems landscape is fragmented and partly based on old mainframe solutions that need to be replaced
• Strategy to become the Knowledge Engineering Company puts new requirements on our processes and systems support
© SKF Group
What we want to achieve
CMD 2014
Purcha-sing
Manufac-turing
Distri-bution
CustomersSalesSuppliers
Easy for customers to do
business with SKF –
One coherent interface across
all platforms
Leverage SKF full global scale
in sourcing
Improve forecasting and end-to-end planning
Streamline processes to reduce waste
Standardize processes and master data globally
One modern, integrated systems landscape
© SKF Group
UNITE – our approach
CMD 2014
• A business led program
• Dedicated development and roll out organization
• SAP as main software partner
• Scope is sales, supply chain, purchasing and finance processes/systems
• Gradual design and testing of new processes/systems in a series of pilots before fullscale rollout
© SKF Group
UNITE rollout plan
CMD 2014
Germany , France
Italy
Purchasing pilot
Country pilot 2
Finland pilot
Country pilot 3
Design phase
Rollout phase
2013 2014 2015 2016 2017 2018 2019 2020
EMEATemplate
ASIA-PACIFIC
AMERICAS
© SKF Group
Kaydon update
© SKF Group
Kaydon Corporation
CMD 2014
Net sales: around USD 475 million
Employees: around 2,180
Headquarter: USA
Manufacturing: Friction control products (primarily bearings),velocity control products and specialty products, including environmental services.
© SKF Group
Kaydon brands in the SKF Family
CMD 2014
© SKF Group
Kaydon integration - Synergies
CMD 2014
Cost synergies• Finance and legal
• Purchasing
• Logistics
Target – USD 30 million by end 2016
Status – USD 12 million fcst for 2014
Sales synergies:• Renewable energy
• Medical
• Aerospace
• Industrial aftermarket
Target – additional sales of USD 50 million by 2018
Status – new business agreed, new wind order for USD 200 million (50% synergy?)
© SKF Group
Kaydon integration – Financial performance
CMD 2014
• Sales development
- growth is 7% in local currencies
- good growth in both velocity control and friction control
• Operating margin
- Excluding PPA it has improved by approx. 300 basis points
- PPA impact is some 500 basis points
• Outlook Q3
- Continued good growth
- Integration work continues
- increased focus on sales synergies
- continue activities on cost synergies
© SKF Group
SKF’s priorities
CMD 2014