AB SKF (publ)

Good morning everyone and welcome to the SKF third quarter 2021 results call. My name is Emily and I'll be coordinating your call today. To register a question at Q&A, please press start followed by one on your telephone keypad if you've joined the conference call or type your question into the tab above the slides if you've joined on the webcast. I will now hand the call over to Patrick Stenberg, Director of Investor Relations. Patrick, please go ahead.

Good morning to you all and welcome to the conference call on the third quarter results. As usual, we will start with the presentation by our CEO, Rickard Gustafsson, followed by a presentation by Niklas Rosenlev, our CFO. Following the initial presentations, we will be ready to take on your questions. And for that session, please make use of the dial-in number provided in the invite. If you prefer, you can also use the chat function. With that brief introduction, I'll leave the word to Rickard.

Thank you, Patrick, and good morning, everyone. The third quarter saw continued solid demand. Our industrial business, which represents approximately 75 percent of sales, maintained its strong momentum despite supply chain challenges exceeding our expectations. In addition, our automotive business was also significantly impacted by reduced production amongst key car manufacturers, especially in September. Through diligent efforts and effective actions, we have been able to mitigate supply chain headwinds to a large extent, especially within our industrial business. Organic growth in the quarter came in at 8%, with industrial growing by a very strong 13% and automotive down by 5%. Net sales were 20.1 billion Swedish krona compared to 18.6 billion the same quarter last year. We saw double-digit growth in EMEA and Latin America. North America saw continued strong growth. Asia is still growing, but at a slightly lower rate than before. The adjusted operating profit ended at 2.7 billion Swedish krona versus 2.5 billion last year. corresponding to an adjusted operating margin of 13.3%, which is roughly flat versus last year. Our industrial business delivered a strong result, further increasing its adjusted operating margin to 17%. This is especially satisfying given a challenging quarter in terms of cost inflation in raw material, transportation and energy. Our automotive business was impacted by reduced production at key customers, often with short notice, resulting in lower sales, reduced productivity and a build-up of inventories. These delays intensified during the quarter, with a sales drop of more than 15% in September only. And as a consequence, the adjusted automotive operating margin was negatively impacted and came in at 4% compared to 8% in Q3 last year. Cash flow generation in the quarter was 1.5 billion Swedish krona compared to 2.3 billion last year. The drop versus last year is driven by higher footprint and efficiency investments and increased inventories caused by the constrained supply chain situation. All in all, continued strong industrial performance in a volatile quarter with automotive challenges. Speaking about supply chain challenges. This is an area that has caused significant headwinds in the quarter, impacting both cost and availability of raw materials, components, logistics and energy costs. However, Through effective measures, we have been able to mitigate approximately two-thirds of these cost increases. Throughout the third quarter, demand within our industrial business maintained strong, but due to logistical bottlenecks, we have struggled to fulfill the demand and therefore missed out on some additional growth opportunities. As illustrated by the chart on freight rates, these costs have continued to increase at a very rapid pace. At the end of the quarter, rates were 4.6 times higher than the same quarter last year and 1.7 times higher than the previous quarter. We are currently managing a moving target where mitigating actions have a somewhat longer lead time than the direct cost inflation, but we remain diligent and confident in our efforts going forward. Within our automotive business, We have also faced an additional challenge derived from the global shortage of components. The component shortage has caused several of our automotive OEM customers to reduce or postpone production, often at short notice. Naturally, this has had a direct negative impact on our automotive sales and margin figures in the quarter. In addition, it has increased our inventories. Taking a deeper look into our two segments, starting with industrial, which I highlighted before, represent approximately 75% of our sales and 85% of our profits. We recorded an organic growth of 13% at the solid adjusted operating margin of almost 17%. Latin America growing some 27%, EMEA growing by 18%, and North America growing by 14%. Growth in Asia was approximately 4%, a moderation from previously high levels due to the development in China. Demand in China continues to be high in many segments, but as expected, overall growth is held back by weaker demand in the wind industry. In contrast, sales in India are showing strong growth. Organic sales in EMEA, Asia and Latin America are now at the level above what we saw before the pandemic. All in all, net sales reached almost 15 billion Swedish krona. From an industry perspective, we are seeing particularly strong growth in industrial drives, industrial distribution and off-highway applications. One win in the quarter is a contract signed with the Berlin Underground, We have entered into a long-term agreement to equip and service rolling stock for the U-Bahn in Germany. The contract includes a number of FKF solutions, ranging from wheelset bearings and axle boxes to lubrication systems. Turning to the automotive business, representing some 25% of sales and some 15% of our profits. Automotive was significantly challenged by the customer close-down, which were driven by logistic bottlenecks and component shortages. As discussed, sales for car manufacturers across all regions were affected by these disruptions. We note the negative sales development across all regions, with North America most impacted with a decline of 12% compared to last year. followed by Asia-Pacific down 6%, and EMEA and Latin America down at 3% respectively. However, as a contrast, we see continued growth in the vehicle aftermarkets across all regions. On the positive side, we are well positioned within the electrical vehicles market, and currently more than two-thirds of our powertrain bearing orders are for fully electric cars. SKF's business within electric vehicles is growing, and for 2021, sales are expected to reach approximately 800 million Swedish krona, an increase by more than 80% versus last year at acceptable margins. Looking ahead, we continue to see an accelerating momentum with orders outperforming sales. We have a strong collaboration with OEM customers all over the world, and we have recently been selected by GM as their partner for the Hummer EV. All in all, organic sales were down by 5% and the adjusted operating margin was 4%. Even though we are far from satisfied with automotive results, it has been difficult to fully mitigate an extremely challenging and volatile supply chain situation in the global automotive industry. However, We are naturally taking specific actions to manage the situation to the best of our ability. To illustrate the volatility in the current market conditions, a growth within global light vehicle production of almost 50% at the previous quarter has quickly turned into 18% decline in the quarter. Unfortunately, there are yet no signs that the situation will improve in the fourth quarter. To safeguard our business, we have initiated several measures to mitigate the situation. Production adjustment across our entire automotive footprint to reduce variable costs. We are reassessing our commercial terms and conditions in our contracts. And finally, we are aggressively pursuing purchasing opportunities. In addition, in general terms, we must also continue to drive our manufacturing footprint and agenda forward at a high pace. We are maintaining a high pace of investments and a consolidation of our manufacturing footprint. The last time we met, we had closed six sites since 2019, and at year end we will have permanently closed 12 manufacturing units. Some of these initiatives have, regretfully, a negative impact on some employees, but they are absolutely necessary to line our manufacturing footprint with customer demand to increase automation levels and secure growth opportunities. We continue to invest in our factories and investments are expected to reach 3.8 billion Swedish krona for the full year. These investments make us more flexible and efficient, as well as being an important foundation for winning more business from customers in fast growing segments and regions. So far, these investments and consolidation efforts have realized 1.2 billion Swedish krona of the 5 billion in annual savings that we expect to generate by the end of 2025. Last year, we announced the goal to achieve net zero emissions by 2030 for all our operations, which includes Scope 1 and Scope 2. As you can see from this chart, we have already made significant progress on reducing emissions from our own operations. It is absolutely important to highlight that we've been able to decouple business growth from emissions caused by our production activities by driving energy efficiency, waste elimination and increasing use of renewable energy. But we cannot focus on Scope 1 and 2 and ignore Scope 3. i.e. we need to focus on our entire value chain. Last week, we announced an even more ambitious goal to take our entire value chain to net zero greenhouse gas emissions by 2050. There are already several customers that require net zero products, especially within segments such as renewables and automotive. This demand has increased during the last couple of years, and we expect it to continue to increase going forward. We estimate SKF Scope 1, 2 and 3, and that is upstream emissions from approximately 1.8 million tonnes of CO2 per year, of which Scope 1 and 2 represents around one fourth. The largest part of our emission is caused by sourcing direct material, primarily steel and steel components, followed by emissions from our own operations and logistics. To reach this very ambitious goal, we need to collaborate broadly with customers, partners and suppliers. As one example, to accelerate the availability of green steel, we have joined forces with organizations such as Steel Zero, Responsible Steel and Luleå University. By committing to this goal, We are also strengthening our position as a leading company within the industry in technology development and sustainability, and thereby also strengthening our leading position in the bearing industry. At our Q2 presentation in July, I informed you that I intend to initiate a strategic review project to unlock our full potential. This work is now being conducted at a high pace and involving a large number of colleagues across all parts of SKF. We are looking at our business from many angles and perspectives. From an outside-in point of view, we are assessing how global megatrends such as sustainability, digitalization, regionalization and a shift towards the East will impact our customers and then ultimately us. We are scrutinizing our current portfolio performance, assessing additional growth opportunities, challenging our cost competitiveness and how we can best align our global footprint and future investments plans to stay relevant and win. Furthermore, we are taking a deep look into our operating model, digital capabilities and ways of working to further accelerate speed, agility, accountability and customer centricity. By the end of this year, we aim to have a clear roadmap to accelerate our profitable growth, unlock our full potential and deliver on our financial operational targets. I'm fully convinced of our ability to continue to build on our strong brand and technological leadership. The review will be completed by the turn of the year And I'm truly looking forward to presenting the outcome in conjunction with our full year results in early 2022. So with this, it's time to hand over to our CFO, Mr. Niklas Rosenlev, to take you through some of the more financial details. Over to you, Niklas.