AB SKF (publ)

Welcome to this conference call. This call will cover three parts. First, we will start with the presentation on the fourth quarter results as usual. We will follow on by a presentation on our new and updated strategy. After that, we will have a joint Q&A session, which will be live, where you can put your questions either through the phone or by using the chat function in the channel. As usual, Rickard will start the presentation and Nick Slav will follow on afterwards. So with that very brief introduction, I leave the word and the controls to Rickard, please.

Thank you very much, Patrick. And good morning, everyone. Starting by looking at the full year of 2021, it was a very strong year for SKF with solid growth and improved margins. The performance in the first half of the year was especially strong, while the second half saw challenges in the form of supply chain constraints and cost inflation. In this very dynamic environment, SKF managed to deliver a strong set of numbers. 13% organic growth, 10.8 billion Swedish krona in adjusted operating profit, and an operating margin of 13.3%. None of this would, of course, be impossible without an enormous contribution from all the people of SKF. And I would like to express my sincere appreciation to all my colleagues around the world for a job well done. The board of directors is proposing to increase the dividend to seven Swedish kronor per share, of course, subject to AGM approval. Now, let's move on and take a look at the fourth quarter. Net sales for the quarter came in at 21 billion Swedish krona compared to 19.6 billion in the same quarter last year, representing an organic growth rate of approximately 4%. Our industrial business saw very strong demand across most industries with organic growth of 9%. As expected, our automotive business continued to experience volatile demand environment with organic sales down by 8%. The adjusted operating profit was 2.3 billion Swedish krona compared to 2.6 billion in the fourth quarter last year, and the adjusted operating margin was 10.8% versus 13.2% last year. Our results continue to be impacted by significant cost inflation, which totaled roughly 1.7 billion Swedish krona in the quarter, of which approximately 700 million was compensated for. Naturally, we are not satisfied with the negative margin development, and we have initiated additional broad-based pricing initiatives to protect our earnings and future investments. And it goes without saying that we're also continuing to drive cost efficiency measures across all parts of our business. Cash flow generation in the quarter was just north of 800 million Swedish kronor compared to 1.9 billion in the same quarter last year. The low cash flow level is due to the increased inventories caused by logistic constraints, a volatile demand in automotive, and the general cost inflation. Nevertheless, the Q4 cash flow generation is significantly below what we have historically generated and mitigating actions. have been initiated. But all in all, continued strong sales momentum with industrial and relatively strong automotive performance given the rough circumstances. When breaking down our revenues growth by region, you can see on this chart that EMEA is still our largest market, representing some 41% of sales, followed by Asia-Pacific, about 32%, North America or Americas about 90% and Latin America at approximately 8%. Industrial demand was strong across all regions with double-digit growth in Europe and Latin America, followed by high single-digit growth in Asia and North America. As I mentioned before, the automotive business continued to experience some challenges, especially driven by the OEM business. where we saw a negative growth rate across all regions. However, the gradual improvement during the quarter, so the automotive business coming out of the fourth quarter with a somewhat positive trajectory. It's also worth noting that the vehicle aftermarket has remained strong and growing well in all our geographies. starting with our industrial segment, which you're aware represents some 70% of our sales and 90% of our profits. As I already stated, the industrial demand is currently very... 9% in the fourth quarter, and net sales were just north of 15 billion Swedish kronor. Sales in almost all industrial segments saw strong growth rates, like industrial drives, off-highway, railway, food and beverage, marine and industrial distribution, while only aerospace and energy experienced a sales level at a lower rate than last year. From a results point of view, the industrial business delivered an operating profit of 2 billion Swedish kronor and a margin of 13.5% compared to 14.6% last year. The result was affected by increased cost inflation in materials, logistics, and also at the end of the quarter from energy. Naturally, we are not satisfied with the margin development and will continue to use all possible levers to mitigate the cost inflation as we move into 2022. On a more positive note, though, we also noted several customer wins in the quarter, including a bearing maintenance contract with a large rail operator in Latin America. From a sustainable point of view, it's encouraging to see the growing demand for our remanufacturing capabilities and services. As more and more customers strive to reduce their CO2 emissions, our remanufacturing offer is also growing in attractiveness. It not only helps to reduce emissions by approximately 90% compared to buying new bearings, but it also provides additional value in form of reduced lead times, especially for larger bearings. As an illustration, the maintenance contract that we just mentioned with this large rail operator in Latin America includes remanufacturing, new products, technical support and knowledge transfer, all of this enabling SKF to provide value across all these dimensions. Another important enabler to capture growth in this segment is being close to our customers. Therefore, we continue to invest in developing our manufacturing capabilities across all regions. As part of our 5 billion Swedish krona world-class manufacturing program, we have inaugurated the second phase of the Sinchang factory ahead of schedule in the quarter. The Sinchang factory produces bearing variants for electric vehicles, industrial high-speed applications, Within the Xinjiang extension is up and running, we're not only enhancing delivery capabilities to our Asian market, but also improved availability for many customers globally. Furthermore, we are also installed our Recon Oil solution in this factory and thereby improving the overall quality of our products. And speaking about Recon Oil, we are continuing the high pace recon oil rollout in our own factories as planned. The external launch is an early phase still, but the first contracts are signed with customers within industries such as paper, mining and steel industries. Turning to the automotive business, representing some 30% of our sales and 10% of our profits. As expected, our automotive business continued to experience a volatile demand driven by logistic bottlenecks and component shortages among OEM customers globally. On the other hand, our vehicle aftermarket business saw continued demand across all regions. All in all, and despite significant challenges and organic sales down by 8%, the automotive business delivered an adjusted operating margin of almost 4%. in part due to the mitigating actions that we announced and initiated the previous quarter. But also within automotive, we had some good and new customer wins in the quarter. A new SUV platform contract with the major OEM in North America being a prime example. And it's also very satisfying to note the sharp increase in demand for components to electrical vehicles, especially in Asia. up some 180% versus Q4 last year. In general, our electric vehicle rated sales to traditional OEMs tripled in the quarter, demonstrating our strong footprint and value add in this growing part of the automotive industry. So let me now hand over to Niklas to provide you with some more details into our numbers. Niklas, over to you.

Thank you, Rickard. If we then move on to some further details about the financials in the quarter. So as Rickard mentioned, we had a very solid demand for products and services in Q4. Our sales grew both sequentially and compared to last year. Compared to last year, the net sales increased by 7.2%. and the organic sales increased by 3.8%. The currency effect was positive. The currency effect on sales specifically was positive, with the largest effect coming from the dollar, the euro, and the Brazilian real. So all in all, strong demand, and we could likely actually have had even more sales if it wasn't for the supply chain squeeze and bottlenecks in production. So in this volatile environment with constrained supply chain and bottlenecks in production, we are pleased to say that we managed to serve most of our customers very well as we continue to strengthen our position in the market. In Q4, we continued to experience a significant cost inflation coming from, for instance, raw materials, components, transports, and lately also energy. The cost inflation affected our adjusted operating profit, which was 2.3 billion, or a margin of 10.8%. We do expect the cost inflation to continue, and we are taking further actions to mitigate it, including further price increases. So let's take a closer look at the profit drivers. Overall, the profits were affected by high cost inflation and supply chain bottlenecks, partially offset by our actions with driving price and mix. go through it step by step in the bridge firstly currency impact was negative at 26 million compared to last year our organic sales and manufacturing volumes contributed on the other hand with a positive roughly 1 billion and approximately 700 million of this 1 billion was driven by price mix positive price mix We continue to increase prices and we remain confident that we can mitigate current cost inflation during 2022. What comes to cost inflation, we saw continued headwinds from increased prices on materials, components and logistics. And this amounted to roughly 1.7 billion compared to last year. Cost development continued to be good. and costs were 361 million lower than last year. So to sum up, our operating profit was 2.3 billion, with a 10.8% margin affected by significant headwinds from increased inflation. Moving on to cash flow, we generated a cash flow of 823 million in the fourth quarter, compared to 1.9 billion last year. The cash flow in the quarter includes approximately 700 million in proceeds from a sale of real estate. And if I summarize the decrease in cash flow compared to last year, it is primarily driven by higher inventories. Compared to Q4 last year, our inventories increased by a net of approximately 2 billion. So last year in Q4, it went down by approximately 800 billion. and this year it went up by approximately 1.3 billion in Q4. If I comment on the inventory increase and give you some further details. So firstly, as some automotive customers have adjusted their productions or production levels at very short notice, this has led us to have a higher than normal inventory in automotive. Secondly, we've been impacted by logistics disruption across the value chain. So this is, for instance, longer lead times or component mismatch. Networking capital in percentage of annual sales was 30.7, and this was compared to last year's 26.1. And again, this was driven by the temporary increase in inventories. Return on capital employed was 14.9 for the last 12 months. This is a slight decrease again due to temporary increase in inventories. And we do expect the elevated inventory levels to reverse when supply chain squeeze or the supply chain squeeze improves and we take further actions. Our balance sheet and liquidity position is very, very strong. Our net financial debt amounted to 2.9 billion and the net debt to equity ratio excluding pensions was 12.5% at the end of the quarter. This strong balance sheet will support our clean and intelligent growth strategy as announced earlier today and as we will hear more about soon. With that, handing back to you, Rickard. Thank you, Niklas.