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The SKF Group

The SKF Group. Tom Johnstone, President and CEO 19 October 2010. Agenda. Nine-months report and outlook New financial targets Acquisition of Lincoln Industrial. Agenda. Nine-months report and outlook New financial targets Acquisition of Lincoln Industrial. Key points, Q3 report.

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The SKF Group

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  1. The SKF Group Tom Johnstone, President and CEO 19 October 2010

  2. Agenda • Nine-months report and outlook • New financial targets • Acquisition of Lincoln Industrial

  3. Agenda • Nine-months report and outlook • New financial targets • Acquisition of Lincoln Industrial

  4. Key points, Q3 report • Strong performance • Operating profit:SEK 2,309 m (957). Operating margin:14.9% (7.2) • Profit before tax: SEK 1,950 m (689), including SEK 150 m related to Ovako. • Cash flow: SEK 1,936 m (1,359) • Organic sales development in local currency: • SKF Group: +19.3% • Industrial Division: +17.9% Service Division: +22.7% Automotive Division: +15.0% • Outlook for Q4 • Demand • Significantly higher compared to Q4 2009 • Slightly higher sequentially compared to Q3 2010, adjusted for normal seasonality • Manufacturing level • Significantly higher year over year • Unchanged compared to Q3 2010, adjusted for normal seasonality

  5. Highlights Q3 2010 – investing for the future • Two new factories announced: • - Dalian, China for medium-sized bearings • Investment: around SEK 400 m • In operation: in 2011 • Employees: 250 people • - Mysore, India for seals • Investment: around SEK 160 m • In operation: second half of 2012 • Employees: 600 people • Investment of around USD 18 m in a new heat treatment facility in Falconer, USA. • Two new SKF Solution Factories were inaugurated, one in the UK and one in Turkey.

  6. Highlights Q3 2010 – customers and sustainability • Contract gained with Guohua Energy Investment for 180 SKF WindCon systems for existing turbines, and 58 SKF WindCon systems for a new wind farm in Beijing. • Over two billion USD documented savings by customers as a result of using SKF solutions. Data collected over a 10-year period with the use of SKF Documented Solutions Program. • Continued launch of new products. • SKF's factory in Tver, Russia achieved Gold and SKF’s headoffice in the USA Platinum awards to the U.S. Green Building council's LEED standard. • SKF was included in the 2010 Dow Jones Sustainability Indexes (DJSI) and in the FTSE4Good Index Series.

  7. Examples of new product launches Low friction X-Tracker Four-row tapered roller bearing SKF Engineering Simulation Services SKF Commutation Sensor-Bearing Unit SKF Hydraulic driven lubricator SKF Crane Asset Management SKF One Way Clutch SKF MetroCon – CBM for elevators and escalators SKF Idler Sound Monitor kit SKF Cam Follower Unit SKF solutions for special pumps SKF SPEEDI-SLEEVE

  8. Sales volume % change y-o-y 2008 2009 2010

  9. Sales in local currencies (excl. structural changes) % change y-o-y 2010 2009 2008

  10. Growth in local currency(Organic growth + acquisition/divestments) % y-o-y 13.2% 7.1% -19.0% Organic growth Acquisitions/Divestments

  11. Growth development by geography Local currency Q3 2010 vs Q3 2009 Europe+12% North America +24% Asia/Pacific +34% Latin America +19% Middle East & Africa +11%

  12. Growth development by geography Local currency YTD September 2010 vs YTD September 2009 Europe+4% North America +11% Asia/Pacific +34% Latin America +22% Middle East & Africa +11%

  13. Components in net sales 2009 2008 2010 Percent y-o-y

  14. Operating profit SEKm 2010 2009 2008 Restructuring and one-time items

  15. Operating margin % 2009 2008 2010 Restructuring and one-time items

  16. Operating margin % 13.9* 12.7* 13.7 12.2 8.0* 5.7 Restructuring and one-time items * Excluding restructuring and one-time items

  17. Operating margin per division % Service Industrial Automotive 2010 2009 2008 Excluding one-off items(eg. restructuring, impairments, capital gains)

  18. Third quarter 2010

  19. First nine months 2010

  20. Inventories as % of annual sales Long-term target level: 18% % 2008 2009 2010

  21. Cash flow, after investments before financial items SEKm Cash out from acquisitions (SEKm): 2008 1,284 2009 241 2008 2010 2009

  22. Return on capital employed % 24.0 20.7 9.1 ROCE: Operating profit plus interest income, as a percentage of twelve months average of total assets less the average of non-interest bearing liabilities.

  23. Net debt(Short-term financial assets minus loans and post-employment benefits) SEKm AB SKF, dividend paid (SEKm): 2008 Q2 2,277 2009 Q2 1,594 2010 Q2 1,594 Redemption (SEKm): 2008 Q2 2,277 2010 2009 2008

  24. Debt structure Maturity years, EURm 446 130 100 100 55 • Unutilized credit facilities: EUR 500 m 2014 SEK 3,000 m 2017 • No financial covenants nor material adverse change clause

  25. September 2010:Outlook for the fourth quarter 2010 Development compared to fourth quarter last year The demand for SKF products and services is expected to be significantly higher for the Group, the divisions and for the different geographical areas. Development compared to the third quarter 2010 and adjusted for normal seasonality The demand is expected to be slightly higher for the Group, the divisions and for the different geographical areas. Manufacturing level The manufacturing level will be significantly higher year on year and unchanged compared to the third quarter, adjusted for normal seasonality.

  26. Volume trends, regions(based on current assumptions and adjusted for seasonality)

  27. Volume trends, divisions(based on current assumptions and adjusted for seasonality)

  28. Sequential volume trend main segments Q4 2010(based on current assumptions) Net sales 2009

  29. Guidance for the fourth quarter 2010 • Tax level: around 30% • Financial net for the fourth quarter:Around SEK -175 m • Exchange rates on operating profit versus 2009 Q4: SEK -50 m • Full year: SEK -400 m • Additions to PPE: Around SEK 1.6 bn for 2010 Guidance is approximate and based on current assumptions and exchange rates.

  30. Agenda • Nine-months report and outlook • New financial targets • Acquisition of Lincoln Industrial

  31. SKF Group performance Operating margin Sales growth in local currency % % 13.7 13.2 12.9 12.6 11.8 13.2 12.2 10.8 7.5* 7.3* 7.1 9.9 5.2 8.0 5.7 -19.0 • * Excl. effects from sale of Ovako: 2005: 10.4% • 2006: 10.1% Return on capital employed % 24.9 24.0 23.0 21.9 • Long-term targets • 12% Operating margin, level • 6-8% Growth per annum (local) • 24% Return on capital employed 20.7* 19.0 14.0 9.1 * 2010 annualised is 23.9%

  32. SKF Group performance Operating margin Sales growth in local currency % % 13.7 13.2 12.9 12.6 11.8 13.2 12.2 10.8 7.5* 7.3* 7.1 9.9 5.2 8.0 5.7 Targets ACHIEVED -19.0 • * Excl. effects from sale of Ovako: 2005: 10.4% • 2006: 10.1% Return on capital employed % 24.9 24.0 23.0 21.9 • Long-term targets • 12% Operating margin, level • 6-8% Growth per annum (local) • 24% Return on capital employed 20.7* 19.0 14.0 9.1 * 2010 annualised is 23.9%

  33. New financial targets

  34. SKF Group, long-term view • World recovery will continue (with some uncertainties) • Growth will be uneven between regions - Asia +++ - L. America, Cent/East Europe, MEA ++ - N. America, W. Europe, Japan + • SKF Group focus on platforms/segments and delivering value will result in better growth than industrial production • Asia, Industrial business and the aftermarket will continue to increase as part of the Group

  35. SKF’s business strategy for achieving long-term profitable growth and attaining financial targets • keeping a clear and dedicated customer focus • developing new products, solutions and services • improving price quality by applying the SKF platform and segment approach • strengthening the product portfolio through greater investment in R&D and through acquisitions • focusing on rapidly expanding segments and regions • reducing capital employed and fixed costs • attracting, retaining and developing the right people

  36. Main initiatives going forward • Accelerate profitable growth • Reduce cost and eliminate waste • Invest for growth One SKF and SKF Care as guiding lights

  37. Main actions going forward • Accelerate profitable growth • Continue to strengthen the platform/segment approach • Increase the development, launch and commercialisation of new offerings (green) • Value based selling – using Documented Solutions Programme • Strengthen our service business • Acquisitions to strengthen platform offer

  38. Main actions going forward • Reduce cost and eliminate waste • Build on Manufacturing Excellence into other areas - Business Excellence • Increased manufacturing and sourcing in Best Cost Countries • Reduce product cost through ICR* activities * ICR means Integrated Cost Reduction

  39. Main actions going forward • Invest for growth • Increase sales and engineering resources • Additional factories in growth markets • Additional SKF Solution Factories • Increase spending in R&D and improve global network - accelerate plans for India and China

  40. Main initiatives going forward • Accelerate profitable growth • Reduce cost and eliminate waste • Invest for growth One SKF and SKF Care as guiding lights

  41. SKF Group – operating margin development

  42. SKF Group – sales development (in local currencies)

  43. New SKF long-term financial targets 15% Operating margin level 8% Annual sales growth (local currencies) 27% ROCE 18% Inventory to sales

  44. Agenda • Nine-months report and outlook • New financial targets • Acquisition of Lincoln Industrial

  45. SKF Group Vision To equip the world with SKF knowledge

  46. What is SKF knowledge?

  47. SKF’s platforms Managing and reducing friction

  48. Increasing need for lubrication systems • Increase performance and productivity • Improve reliability and component life-Protect in harsh conditions-Reduce catastrophic failures • Lower maintenance and service costs -Reduce labour spend-Reduce lubrication consumption • Reduce energy consumption Dual-line lubrication systems pumps, reservoirs Oil and air lubrication systems Progressive lubrication systems Lubricant distributors, metering units

  49. Lubrication systems market • The lubrication systems market comprises two main technologies: • Oil-based systems • Grease-based systems • The total world market incl products and services is estimated to be >20 BSEK • The main segments for lubrication systems are: • -Heavy industrial machinery (e.g metals, mining, pulp & paper) • -Special industrial machinery (e.g machine tools, marine) • -Energy (e.g wind, oil & gas) • -Off highway • -Agriculture

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