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Henrik Lange Executive Vice President and CFO

Henrik Lange Executive Vice President and CFO. SKF Capital Markets Day  10 September 2014. Agenda. Financial development Cash flow, working capital Financial position Acquisitions Second brand Key business message. 1. Financial development. SKF Group – Half year 2014. Key points

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Henrik Lange Executive Vice President and CFO

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  1. Henrik LangeExecutive Vice President and CFO SKF Capital Markets Day  10 September 2014

  2. Agenda • Financial development • Cash flow, working capital • Financial position • Acquisitions • Second brand • Key business message CMD 2014

  3. 1 Financial development

  4. SKF Group – Half year 2014 Key points Sales volumes up by 5.0% y-o-y. Manufacturing was higher compared to last year. CMD 2014

  5. Business segment margins CMD 2014

  6. Long-term financial targets • Targets • Operating margin level 15% • Annual sales growth in local currencies 8% • ROCE 20% Definitions: ROCE = Operating profit/loss plus interest income, as aprecentage of twelve months rolling average of total assets less the average of non-interest bearing liabiities CMD 2014

  7. Financialtargets 8% Changes in sales in local currency incl. structure 20% Return on capital employed 15% Operatingmargin One-time item One-time item for the individual year • Amortization: • represents as margin around 0.5% in 2013, and 0.7% in H1 2014. • As from 2016 it is estimated to represent around 1.0% margin. CMD 2014

  8. SKF Group – operating margin development 3% Gap CMD 2014

  9. Howwewill close the 3% operating margin gap % 15 • Actions: • Restructuring and efficiency • Implement the restructuring and efficiency program • Implement business excellence fully • Salesgrowth • Continueto drive growth in the business • Drive R&D togeneratemore new products / soultions • Productivity and portfolio • Evaluate portfolio • Drive productivity in all areas 12 Sales growth H1 2014 Restructuring and efficiency program Productivity, portfolio Infl., other Target SKF Capital Markets Day CMD 2014

  10. Cost split, operating expenses 2013: SEK 57 billion Depreciation and amortization 3% • Improvementactivities: • Purchasing activitiesin the restructuring program Other 26% Material 36% Employees35% • Improvementactivities: • Productivity improvement and manufacturing footprint activitiesin the restructuring program CMD 2014

  11. Cost reduction – specific programme 2012-2015 • Main activities: • Consolidation of manufacturing - merger between sites - transfer to faster growing markets with more local production • Optimization and productivity improvements - in the manufacturing and demand chain processes - in administration and support functions • Reduction in purchasing cost - mainly through standardization and rationalization of the supplier base. • Reduction of annual cost by SEK 3 billion by the end of 2015 • Total cost for the programme around SEK 1.5 billion • 2,500 people impacted, CMD 2014

  12. SKF’s programme to improve efficiency and reduce cost Restructuring, SEKm: Giving future gross savings, SEKm: Realized gross savings from total programme, SEKm: vs 2012 vs 2013 Note: Run rate Q2 2014 SEK 1,340 million vs 2012. CMD 2014

  13. S&A and R&D cost development % % +1.5% Flat CMD 2014

  14. 2 Cash flow, working capital

  15. Cash flow, after investments before financingexcluding acquisitions and divestments • Summary: • Good cash flow generation • Going forward - use cash flow to deleverage balance sheet SEKm CMD 2014

  16. Free cash flow conversion • Strategy: • Profit improvement • Capex and workingcapital management Comments: FCF = Net cash flow after investments before financing excluding acquisitions / divestments 2013 adjusted for the SEK 3,000 million provision for the EU fine. CMD 2014

  17. Working capital management focus • Step-up activities to improve our net working capital % sales: • Reduce inventory in % of sales-Increase supply flexibility -Optimize product range and service policies -Improve forecasting and end-to-end planning • Improve A/R % sales ratio - Focus on reducing overdues - Outsource collection in selected countries • Get effects on A/P from new purchasing activities - Implement improved payment terms through Group Purchasing - Set-up supply chain financing structure CMD 2014

  18. SKF outsourcing of A/R collection • Collection process will be handled by an external party using appropriate system support for effective handling • Covering the following countries: Sweden, Denmark, Norway, Finland, Belgium, Holland, UK, Italy, France, Austria, Switzerland, Germany, Portugal, Spain, Czech Republic, Hungary, Poland and USA • Collection contacts will be done in local languages. • All countries within scope are expected to be implemented during 2015. • Benefits expected in 2015/2016 CMD 2014

  19. Supply chain financing process and set-up 1 Supplier sends goodsand invoice Supplier Simplified overview of setup SCF IT plaform 3 2 Supplier requests early payment SKF approves invoice 5 SKF pays invoice at maturity 4 Supplier receives payment BANK Benefits and cost: • Supplier benefit: Faster payment and lower capital cost • SKF benefit: Extended Days Payable Outstanding (DPO) • Cost: Bank charges suppliers equivalent to: SKF negotiated interest rate + service & IT fee CMD 2014

  20. Summary of supply chain financing • SKF plans to increase days payable to support working capital • Supply chain finance will create win-win for most suppliers driven by beneficial rates • Supply chain finance is a tool for suppliers in order to receive earlier payment of invoices • Implementation started by selecting a bank and on-boarding of pilot suppliers in Europe planned for Q4 2014 • Focus initially is Europe • Global roll-out in scope after implementation in Europe CMD 2014

  21. Net working capital 2013 and target • SEKbn 2013 % of sales Target • Net sales external 63.6 • Inventories 13.7 21.5% • Trade A/R 11.2 17.6% • Trade A/P 4.7 7.4% • Net working capital 20.2 31.7% 27.0% • Improvement to reach target = SEK ~3.0 billion Activities ongoing: • Flexibility, product range & end-to-end planning – inventory • Overdue reduction & outsourcing of collection of A/R • Payment terms & supply chain financing • Total SEK ~3.0 billion By 2017 CMD 2014

  22. 3 Financial position

  23. Capital structure, H1 2014 Actual Target Equity/assets ratio 29% ~35% Gearing 62% ~50% Net debt/equity 144% ~80% Credit rating BBB+,Baa1, stable outlook Debt 34,726 Net Debt 30,705 Financial position, debt structure and liquidity are balanced. CMD 2014

  24. Balancesheet and leverage Balance sheet H1 2014, SEKm Cash, fin assets 4,021 Debt 34,726 Net debt 30,705 Equity 21,360 • Strategy • Deleverage back totargetlevelthrough: • - Profit improvements • - Balancesheet management CMD 2014

  25. Current debt structure EURm 750 500 500 200 110 100 100 100 Credit facilities: EUR 500 million 2019 SEK 3,000 million 2016EUR 150 million 2017 No financial covenants or material adverse change clause CMD 2014

  26. History of strong cash flow generation and a shareholder friendly distribution policy 2003 - H1 2014, accumulated rounded figures, SEKm ________________________________________________________________________ EBITDA 93,000 Investments (23%) 21,000 Fin. Net, taxes, wc, others (40%) -37,000 Acquisitions (24%) 22,000 Cash flow from operations (60%) 56,000 Dividends/redemption (35%) 33,000 Extra pension funding (3%) 3,000 CMD 2014

  27. 4 Acquisitions

  28. Acquisition criteria • Strategic fit with clear potential synergies and ability to exploit these in a reasonable timeframe. • Strong commitment and ownership by acquiring business area. • Profitable high quality companies with strong management and preferably larger deals. • EPS accretive in the first full year, positive TVA effect in two to three years, including amortization of intangible assets. CMD 2014

  29. Acquisition strategy for profitable growth • Acquisitions are seen as one important driver for growth and value creation. • Integration of Kaydon and BVI is going well with synergies in line with plan. • SKF has the financial means and acquisition project resources in place to continue to pursue relevant acquisitions. • Focus is on SKF platforms and PT products. CMD 2014

  30. Acquisition 2003-2013Identifying gaps and opportunities in all platforms Seals Services Bearings and units Lubrication systems Mechatronics Safematic(2006) ABBA(2007) Economos(2006) SNFA(2006) Baker(2007) Jaeger(2005) Macrotech(2006) Macrotech (2009) GLO(2008) S2M(2007) Kaydon(2013) Vogel(2004) Lincoln Industrial(2010) PMCI(2007) ALS(2007) QPM(2008) TCM (2003) Sommers(2005) PB&A(2006) Scandrive(2003) Monitek(2006) Cirval(2008) Peer(2008) BVI(2013) GBC(2012) CMD 2014

  31. Major acquisitions performance Seals Services Bearings and units Lubrication systems Mechatronics Safematic(2006) ABBA(2007) Economos(2006) SNFA(2006) Baker(2007) Jaeger(2005) Macrotech(2006) Macrotech (2009) GLO(2008) S2M(2007) Kaydon(2013) Vogel(2004) Lincoln Industrial(2010) PMCI(2007) ALS(2007) QPM(2008) TCM (2003) Sommers(2005) PB&A(2006) Scandrive(2003) Monitek(2006) Cirval(2008) Peer(2008) BVI(2013) GBC(2012) CMD 2014

  32. Major acquisitions performance • The sum of the major acquisitions perform in line with the Group acquisition criteria. • The sum of the major acquisitions represent 14% of Group sales in H1 2014. • The sum of the major acquisitions represent 18% of Group operating profit in H1 2014. • Acquisitions form a part of the SKF profitable growth strategy. CMD 2014

  33. 5 Second brand in SKF

  34. Strategy for second brands • Capture mid-market growth • Lower cost manufacturing • Global market approach • Segment focus • - PEER, Industrial segments • - GBC, Auto, HD segments CMD 2014

  35. Second brand value proposition in normal application Engineering design vs cost Manufacturing consistency • Differentiate against 1st tier • Cost competitive in normal performance application • Customization flexibility • Speed and responsiveness Performance Normal Application Target • Differentiate against 2nd, 3rd tier • Industry leaders’ supplier • Consistency, long term sustainable approach • Globally local sales and engineering support Samples Production Samples Production Samples Production CMD 2014

  36. How SKF has developed PEER since acquisition • Sustainably achieved great financial results • Achieved 15% sales growth per annum • Solid operating margin and margin development • Strong cash flow generation • A more globalized brand • from 90% to 75% dependency on USA • Increased share of global customers • Business strength • Continuously maintain and win customer confidence • Developed and launched enhanced product offering, especially in Agricultural • Strengthened supply base of components and sourced products • Organizational strength • Accountable leadership, converting funnels into visible and connected value chain • Upgraded engineering, turn from contract manufacturer to development partner • Certified EHS practices ahead of similar competitors, improved worker conditions CMD 2014

  37. PEER market successes • Introduced a range of maintenance free tillage solutions • Expand a new range of elevator pulley solutions • Developped Ag distribution business • Improved taper roller bearing performance to access construction industry • 10 Years awards in Deere – main supplier in Ag Attachments CMD 2014

  38. 6 Key business message

  39. Key business message • Continued good performance • Strong cash flow and financial position - implement restructuring program - working capital focus - use cash flow to deleverage balance sheet • Acquisition opportunities - in the SKF platforms - “normal performance” companies CMD 2014

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