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SKF's Annual General Meeting 20 April 2004 - Address by Tom Johnstone,
Managing Director and Chief Executive Officer
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Ladies and Gentlemen, Esteemed Shareholders,
At the Annual General Meeting last year, I said I looked forward to being here this
year and perhaps making this address to you in Swedish. The ‘perhaps’ idea was
quickly forgotten I must admit, until I was reminded of my promise. So here it is this
year, in Swedish.
Year 2003 was another good year for SKF. We managed to retain margins at a good
level, and were able to show a positive price/mix development for the fifth
consecutive year. Our sales grew faster than the market, which meant that we
strengthened our position and our cash flow was strong. We launched a number of
new products and initiated a process to strengthen our management resources.
All in all, a good year for the SKF Group.
Regarding the margin, it was a good level both including and excluding the
restructuring that we informed of last year. The restructuring will increase our ability
to develop our business and our profit for the coming year.
Even with the inclusion of these costs, we performed better than most of our closest
competitors. This is despite the fact that one competitor was granted some ten million
dollars assistance by the American Government, contrary to what the WTO allows.
We should not forget however, that the operating profit deteriorated by 790 million
kronor and the margin by 1.2%, due to the weak dollar. But as an international
Group, we must be able to work with different currencies and manage currency
variations, as these are a fact of life.
What we are now working to achieve within the Group is a better balance between
sales and costs in the different currencies. This will take a few years to accomplish,
but already the work has begun.
I would like to take this opportunity to thank all colleagues within SKF for their hard
work that has made it possible to achieve such a good result in 2003. Our aim now is
to deliver our undertakings during the second quarter and for the rest of the year, and
to continue to develop the Group.
Let's now look at how we have done so far, from the perspective of the goals I set up
at last year's AGM.
10 and 10:
To maintain an operating margin of 10% and to increase sales by 10 billion kronor up
to years 2005/2006. Such growth corresponds to an increase in sales in local
currencies of 6 –7% per year.
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To achieve the operating margin we must focus on:
1. Price/mix
As I said earlier, we have had a positive price/mix now for five consecutive years.
It is not just a matter of increasing prices, but about delivering products with a higher
value for the customer and added value for SKF. We have many good examples of
how we do this, one being the new SKF Explorer family of bearings.
2. Decreased costs
This is our focus for increased productivity in the factories and lower purchasing
costs. Purchasing is now an activity of high priority within SKF.
Regarding growth, I said last year that we would grow particularly in China and
Central and Eastern Europe, as well as within fast growing customer segments. That is
our focus.
Growth in China last year amounted to 35%, which exceeded that of the market.
Last year we also opened two new factories in China; one in Shanghai for deep
groove ball bearings and one in Wuhu for seals. The Shanghai factory will deliver
mainly to customers who manufacture white goods in China, while the seals factory is
devoted to the fast growing car industry.
Today SKF has five factories in China. They are all joint ventures, and SKF owns the
majority, with management responsibility in all of them. Turnover last year amounted
to over 1.7 billion remimbi, and for this year more or less the same in kronor. SKF is
today one of the leading companies within the bearing industry in China. Naturally
our ambition is to be the leading bearing company.
In Central and Eastern Europe we increased our sales by 10% during the year. Not as
significant as in China, but at a rate well above the growth of industrial production in
the area. In other words, we captured market share.
SKF today has its own manufacturing facilities in Poland, the Ukraine and four
factories in Bulgaria. We have a sales organisation made up of 26 of our own sales
companies and 160 distributors.
Having one's own manufacturing presence is important for two main reasons – to
supply the growing customer base in the region as more of our traditional customers
move their manufacturing there, and to be able to supply our units in the West.
That we have invested heavily in these chosen markets does not mean we have been
taking it easy in other parts of the world. On the contrary, our sales in Latin America
increased by 15%, and in the rest of the world our increase was greater than the
increase in industrial production.
Turning now to the customer segments, I would like to highlight our efforts within
linear products.
In the market for medical equipment and furniture, which was a flat market last year,
we increased our sales by 12%.
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A strong contributing factor to this development is the acquisition a few years ago, of
the Swiss company Magnetic. This company specialises precisely in actuators for
medical equipment.
Within another of the main segments - the aftermarket for cars, mainly comprising the
USA and Western Europe - sales increased by 10%. This is considerably above that
of the business, which is around 2%. It is our concentration on ‘kits’ that is bringing
results. What we have done here is to package together everything needed, for
example, to change the wheel bearing or water pump in a car.
One last example is the railway industry.
SKF continued to maintain its leading position in both the European and the Chinese
markets. Growth last year amounted to 10%. Today there are SKF products in all the
European high-speed trains, and last year we managed to get into the Japanese trains.
Kawasaki Heavy Industries chose SKF bearings for the Japanese high-speed train
Shinkansen, when they got their first export order from Taiwan. And it was SKF's
technology that gave us the business in this very competitive Japanese market.
All in all, a strong development which we have every reason to be satisfied with!
Our growth last year was about 5%, which is well in line with the organic growth
needed to achieve our goal.
One area where the pace was not in line with our ambitions was acquisitions. In my
address at last year's meeting, I said that of the 10 billion kronor which we would
increase our sales by, approximately one third would come from acquisitions. We are
clearly behind schedule here, but for good reasons.
We devoted much of last summer and autumn to systematically and very carefully
investigating the areas, both geographically and in terms of customer segments, where
we would like to grow.
We identified the companies that are able to provide SKF with the competences and
business which will strengthen the Group's offering to the market.
The companies are listed in order of priority and we now have a list of 15 companies
which we believe are the absolute best for SKF. We also have a list of about the same
number of companies, which we deem to be interesting and which would suit our
strategy. We are now actively working with this list.
I can assure you all that we take a thorough approach in this acquisition process. We
are careful with analysis of the synergy effects for SKF, with the company's financial
position, the market potential, technology, environmental aspects and so on. This
takes time and we take the time necessary to make the right acquisition. There are all
too many examples of acquisitions that have failed, and I want to be absolutely sure
that we are using the Group's money in the right way.
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After one year I can verify that we are on the right road to achieving the goals we set
last year, with regard to margin and organic growth.
When I stood here last year it was my first day as CEO of SKF. I took over an
excellent company which had already gone through an extensive process of change.
That had been an exciting process in which I had had the privilege of taking part.
Concurrent with the continuing work of making changes within the Group, I have
made certain changes to management, for the purpose of adapting the organisation to
the strategy we are pursuing and thereby further increasing our effectiveness.
We have switched to a higher gear in order to increase our growth in a profitable
manner. It’s about developing our business, both existing business and those we want
to connect with us so that we can strengthen our offering to our customers. It's also
about entering new markets, new customer segments.
In order to support this change efficiently, and at the same time maintain a high speed
and have a satisfactory overview of all the various possibilities, I have strengthened
Group Management with a new function - Group Business Development, headed by
Henrik Lange.
I have asked the Group's two deputy managing directors, Gunnar Gremlin and
Christer Gyberg to take over responsibility for China and Germany respectively. Both
these markets are extremely important for SKF, and by making these appointments we
send a strong signal to the markets.
At the same time, Christer Gyberg was given the responsibility for a new unit, Group
Supply Chain, IT and Purchasing.
I have appointed Alrik Danielson, formerly head of our Brazilian operations, as the
new head of the Industrial Division.
A few weeks ago we also appointed a new head of the Group's personnel function,
including sustainability issues, to replace Bengt Olof Hansson, who will head SKF's
activities in Britain. Eva Hansdotter takes over on May 1. She was formerly head of
Personnel for the Industrial Division.
Let's not forget that it's people doing business, and the right people with the right
knowledge and in the right place that are decisive factors in securing our success.
SKF has decided that Six Sigma will be the process to help us improve both our
service to the customers and our profitability. Magnus Johansson, previously Group
Personnel Director and head of SKF Sweden, will be supporting me in my work to
drive Six Sigma in the Group.
Six Sigma is based on many of the things that we already do within SKF, but in a
more systematic and detailed way. After a successful launch within the Automotive
Division over the last two years, we are now rolling it out within the entire Group. I'm
convinced that Six Sigma is the right way for SKF.
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Through these changes we have an organisation that reflects the needs and priorities
we have today. But it is important to constantly make sure that the organisation is
continuously adapted to, and can support, the Group in its different development
phases.
Let's now see how we did during the first quarter of the year.
Our sales in local currencies increased by 6%, we achieved a positive price/mix factor
- we add a further quarter to the five years of a plus on price/mix already achieved.
We can also show a continued strong cash flow.
The operating margin was 8.5%. Somewhat lower than what we achieved for the
corresponding period last year, but considering the currency development that meant a
minus of approximately 120 million kronor, the price development of raw materials,
and also restructuring costs of approximately 50 million kronor already announced
last year, it is my opinion that we delivered a good result.
Let's briefly go through the most important figures for the first quarter of this year.
Sales increased by 1.4% to 10 689 million kronor. In local currencies, sales increased
by 6%, which shows that we continued to increase our volumes and maintain our
position in the market.
The operating result amounted to 907 million kronor and the profit before tax
amounted to 819 million kronor. Profit per share was 5:69 kronor.
With regard to prospects for the nearest quarter, our opinion is that we will continue
to see an increase in volumes. Western Europe continues to give us a certain growth,
but the picture will vary both geographically and between the different customer
segments.
In the USA we expect to see improvement, mainly from sales to industrial customers,
but also to some extent from the industrial aftermarket.
Regarding our sales in Asia, Central and Eastern Europe and Latin America, we
anticipate continued good growth.
Before I conclude my presentation, I would like to call your attention to another
important process of change going on within the Group.
Our trademark - the three letters SKF, has a value that is difficult to estimate in
monetary terms. It is without question the strongest brand in the business and one of
the strongest within the entire engineering world.
Our trademark has not changed and it will not change. However, we must be aware
that the contents of the trademark have gradually changed over the years.
SKF today is very much a knowledge company, providing its customers with
solutions. Solutions that, where SKF products are included, make the customers'
products become more competitive, or help customers to optimise their plant asset
efficiency.
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To illustrate the changes, we have developed a new vision for the Group:
To equip the world with SKF knowledge
We feel that this vision, in a clear and positively challenging way, illustrates our task
and makes it clear to all employees what is expected of us.
In line with this evolution taking place within the Group, where SKF now means
much more than bearings, we have chosen to show this process in a more tangible and
visual way.
For decades, the symbol for SKF has been a box with the three letters SKF and a
bearing symbol. We have now removed the bearing symbol and will keep only the
logotype consisting of the three letters.
This means that in future you will see our logotype as the three letters SKF, or as our
flag looks today, and has looked since the end of the 1980s.
In conclusion, allow me to summarise my image of SKF. We had a good 2003 and
we have made a good start to the new year, especially considering the currency
development.
We will maintain a strong focus on improving the price/mix factor during the rest of
the year, we will continue our work on decreasing our costs, where implementation of
the restructuring obviously constitutes an important part, to ensure a good operating
margin. Cash flow continues to be important and we are moving our position forward
in the area of acquisitions.
In other words, we will continue to implement our strategy, to make SKF a growth
company with a persistent and steady improvement in results.
THANK YOU