AB SKF (publ)

Hello everyone and welcome to the SKF Q2 2022 results call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypads. If you have joined via the webcast, please use the questions tab above the slides. I will now hand over to your host, Patrick Steenberg, Director of SKF Group Investor Relations and Mergers and Acquisitions to begin. Patrick, please go ahead.

Thank you, and welcome everyone to this presentation on our Q2 results. It's a very warm day in Europe, as I'm sure you're aware. As usual, we'll start with the presentation. It will last some 20 minutes. It will be introduced by our CEO, Richard Gustafsson, and followed on by Niklas for the financials. After that, we are more than happy to answer your questions. And as the operator stated here, you can post your questions either through voice on the web or use the chat function. And we'll try to answer most of them as we go along. So with that very brief introduction, I will leave the word to Rickard, please. Thank you very much.

And good morning everyone and warm welcome to this interim presentation and thank you for joining us this morning. I start by sharing some of the highlights here and we do close a rather special quarter with some specific and strong headwinds, especially in the month of April and May, then followed by a more normalized June from an earnings point of view. But if I may start with the tailwinds, we saw a maintained and strong demand throughout the quarter, which is very positive. We are constantly watching for, are there any turns towards a more negative economic environment? Do we see a softening demand? But so far, we still struggle to actually keep up with the demand and deliver all as required. So yet no real signs, but of course, we are preparing for a different scenario. We do see that in the quarter, we get real price realization coming through in all parts of our business. And I will come back to that as we go through this presentation. And I'm also pleased to see that the key megatrends that are sweeping across our society, such as automation, digitalization, electrification, continue to drive strong growth opportunities for SKF. And you will see that also as we go through this presentation. When it comes to the headwinds, as I mentioned, they have been specific and severe in this particular quarter. After the war broke out in Ukraine, we have seen a cost inflation, and I will touch more about that when we get into the industrial side, and also the lockdown for all of April and all of May in Shanghai. of course, had a significant impact on our business. But in terms of our intent to clean strategic growth framework, we are satisfied to report strong progress. As you will see today, we see continued good solid double-digit growth in most of our focused areas. We are actively now working with our portfolio across all our business areas, and really addressing the low-performing parts of our portfolio. We are continuing to deliver on new technology and new products, and in this report today, we're going to zoom in a bit on Recon Oil and the Recon Oil box that we just recently launched, that we believe have a high potential. And today, we also announced a small acquisition of the Italian seals manufacturer, Tenute, that will complement our industrial offering on the SEAL side. And then, if you may have seen, we also have announced some changes to group management. And I want to just briefly comment on those before we go into the numbers. These changes will not have a negative impact on our ability to drive our strategic framework forward, or that we will lose momentum. Firstly, our head of China and Northeast Asia, Patrick Tong. This is a planned succession. Patrick has decided to retire early fall. We have already secured his successor, and he will join at the time when Patrick will actually retire. And we will announce the name of this individual later this year, probably late summer or early fall. When it comes to Kent Wittanen, who has been the head of our EMEA region, he has been instrumental in designing this new operating model of ours. And he has embedded this now within the EMEA region. He has said that it's time for him to move on. And he'd like to hand over to someone else to take this into the future and really harvest on the opportunities that we see also for EMEA. And I have accepted this. And to ensure that we keep the momentum, one of the senior members of Kent's team, Aldo Cedrone, will step in on an acting basis while we have already initiated the recruitment process that is ongoing. So we still believe that we have good progress and good momentum in our intelligent and clean growth ambitions. Now, moving on to this quarter, and... Net sales came in just shy of 24 billion Swedish krona. It's a significant growth in real terms. We're talking north of 14%. A big chunk of that relates to FX. But the organic growth rate is actually north of 5%, which is a solid and sound organic growth rate. In this quarter... It's not driven, the organic growth is not driven by volume. Volume is actually rather flattish in the quarter. So the whole thing is a contribution from our price mix activities. Our adjusted operating profit came in at 2.5 billion Swedish krona. It's with a relatively low operating margin for the group at 10.5% compared to 15% last year. But I also need to remind everyone that last year is a tough comparison period. Probably Q2 last year was one of the best quarters in the history of the company. But the main drivers behind the relatively low margin in this quarter are those events that I mentioned previously, the Ukraine war and the COVID lockdown in China. And both of them had a significant impact on our earnings, primarily in the month of April and May. with a more stabilized and normalized earning profile in June. We estimate that these two events added some 600 million Swedish krona in our cost base in Q2 versus Q1 this year. But we are pleased to report that our ability to get price to compensate for the ongoing cost inflation is actually paying off. We have spent an enormous amount of efforts in really making sure that we compensate for the cost inflation. That work has continued in Q2. We have taken additional pricing actions to compensate for the energy price increases and so forth that were seen in the quarter. And those efforts will also show in our numbers in the month to come. But to give you a flavor on that, we quarter by quarter continue to improve our price compensation. I'd like to refer back to Q4 last year. At that quarter, we reported a positive price mix impact of 700 million Swedish krona. In Q1, that number had grown to 1 billion Swedish krona. And now in Q2, we report a number of 1.3 billion Swedish krona in positive price mix impact. In the quarter, We also completed our controlled exit from Russia. We regret that we had to take that decision to leave Russia, but we had no other choice given that the foundation for our business did not longer exist. And we had to take a one-off hit in our numbers in this quarter of 675 million Swedish kronor in our results. This is a bit higher than what we anticipated when we announced our controlled exit. Then we said we anticipated to take a loss of roughly 500 million Swedish krona. The difference, 175 million, solely relates to the change in FX for the ruble. The ruble has really strengthened since we announced this previously. So all in all, I think we close the quarter with solid organic growth. We do demonstrate pricing progress and pricing power in our business, and we have managed two exceptionally difficult months in this quarter. Taking a look into our strategic growth drivers, and I'm happy to report that we continue to see tangible process across all four growth levers. On the high growth segments, as I mentioned before, the key Trends, global trends, including sustainability, is really driving growth opportunities for us. And even though, as you can see on this chart, some of the growth rates for some of these industries may be somewhat lower than what we saw in Q1, there are still strong double-digit growth among most of our focus segments. We continue to deliver new technologies, and we launched Reconol Box, as I mentioned before. And we also have signed the first high-volume ceramic bearing contract with a major EV producer. And I will touch more on those two very recently. In the service and aftermarket, again, we see that sustainability drives significant business opportunities. Many customers, they do strive for more circular solutions, and therefore our remanufacturing capabilities are of high demand and highly interesting to many of our customers. And in this quarter, we have signed contracts with a steel producer and a large cement producer related to remanufacturing. And portfolio management, as I mentioned, we are constantly pruning our portfolio. We are aggressively looking into opportunities to strengthen our margin and earnings by also exiting low margin business. And you will hear me talk more about that as we go through our industrial business and our automotive business. But let's take a look into the industrial and starting with the growth. We report a solid organic growth for the entire industrial segment or industrial business of more than 6%, 6.4% to be exact. As you can see from this chart, strong and healthy growth in Americas and EMEA. A significant growth in India. To dig a bit deeper on India, of course, there's a very, very strong underlying demand that we've seen in India. But the comparison versus Q2 last year is also a bit skewed. If you recall, India was severely impacted by COVID restrictions at this time last year. So the comparison also boosts the growth rates a bit there. And then on China, you can see a negative growth there. Again, this really relates to the situation they had in April and May, where the Shanghai region was basically in lockdown, and we have a significant operation in that region. However, though, we saw a very strong bounce back on the industrial side in the month of June, not fully to compensate for the week April and May, but a small negative growth rate then for the total quarter. Moving into some of the numbers for our industrial business. And in this quarter, our industrial business represents north of 70% of our revenues or our sales and about 95% of our profits. The adjusted operating margin came in just shy of 14%. And again, the two main drivers to the relatively low margin is Ukraine and China lockdown. If I may delve a bit deeper onto the Ukraine situation, of course, the war has caused a significant spike in energy prices, especially in Europe, that has impacted us. We have been forced to double source steel. Some of the steel that we acquired from Russia that we ordered before the war broke out. We couldn't guarantee that we would receive those deliveries because that steel will be transported over the Black Sea by vessels. Therefore, to safeguard our capabilities to deliver our customers, we have double-source steel, which has cost us a quite significant amount in the quarter. Given the EU sanctions on Russian steels, we had to rebuild our supply chain very, very quickly. And that has also caused some additional pain and cost in the quarter. And constrained logistics has added to the equation. China, it's somewhat a different story, of course, than the war. But, you know, the close down of Shanghai has really impacted our volumes. But it's important to also explain that this is not just related to China. 40% of what we sell in China is being produced elsewhere within the SKF footprint. So this lockdown has impacted broadly on SKF and our industrial business. We do see, though, that we have been able to drive broad-based price increases in all parts of our business, both on the OEM side and the distribution side of our business. And we do see that we have more normalized earnings in June. We have been working hard on pruning our portfolios. And the way we do that is, of course, that we look into the low-margin accounts and either we try to compensate by price or we are prepared to walk away from that business. We are, where we can, prioritizing deliveries to the extent possible to more high-yielding customers. And we're putting new processes and procedures in place to ensure that we don't take in new low-margin business onto our portfolio. So all in all, I think that it's a rather strong performance to deliver just around 14% margin on the industrial side, given the circumstances. I think the SKF team has done a very, very strong job in a tough situation. But as I mentioned, sustainability also generates a lot of new customer success stories. And we, as I mentioned before, we manufacture as part of it. But we also see a big demand for rail-based transportation, urban transportations. And in this court, we signed a significant contract with an Italian rail operator, Trend Italia. And one key reason why we win those contracts is also our lubrication capabilities. And this is a rather sizable part of our business that we don't that often talk about. So I wanted to take this opportunity to share some more light on our lubrication management business. In this space, SKF is a clear market leader, and as you can see, we have a rather sizable business, just shy of 6 billion Swedish krona, and with a strong and healthy growth. In the first half this year, we have grown this business by 12% compared to the first half last year, and at industrial-like margins. The business is split in two parts, automatic lubrication system, which accounts for roughly 75% of our sales, and maintenance and power transmission, 25% of sales. Starting by the automatic lubrication systems, again, sustainability is a key driver here. Green value in lubrication managers is growing in importance and generating more and more customer interests. Combined with our deep knowledge of OEM and end-user applications being a key differentiator in market is really driving growth opportunities for us. And railway is being one example. Here we have won more than 20 metro or public transportation contracts in the last 18 months. And why do they select us? Why is actually lubrication management the key enabler for this? Well, The right lubrication systems helps those customers to increase reliability. It helps them to prolong their service intervals. And it also reduces noise, which is an important key differentiator for many of our customers. Turning to maintenance and power transmission, it's a smaller business based more on traditional trading model with the growing e-commerce presence, which is exciting. This is attractive. We sell here at attractive margins, and we're eager to continue to develop this business and grow it further as we move forward. Related to lubrication also is recon oil, and I mentioned the recon oil box before. So let's take a look at the recon oil box. This is the product that we launched during the spring. It is what I call a pure plug-and-play solution for a broad range of segments. As you can see in this chart, we're talking about marine, pulp and paper, energy, mining, general manufacturing, and so on. And the key value drivers for customers by applying the Recon Oil box to their manufacturing footprint is first and foremost, of course, to reuse oil and thereby drive down costs. So that's of course a key value driver for them. But to clean our oil and to have very, very clean oil in the production also brings other key benefits. It will increase productivity for our customers by reducing downtime of the manufacturing equipment or provide higher availability within the factories. It will enhance also the end product quality and performance of what's being produced. And of course, like everybody, like most companies across the globe today, they are all doing what they can to reduce their CO2 footprint. And these solutions also support in that regard. So far, after launching this, we have received a significant interest in the market. We have sold approximately 400 units to date. And even though net sales is still a rounding error in our books, But we do see that this has the potential of a very sizable, addressable market, close to 50 billion Swedish krona. So Recon Oil is an attractive startup that we have in our portfolio. Moving on to automotive. Starting with the growth rate here. And despite a very problematic situation with the close down in China, we still report a growth, an organic growth rate of close to 3%. for the entire automotive business. As you can see on the bar chart here, America's growth had a nice growth. We also see a magnificent growth in India and Southeast Asia with north of 50% growth. Again, I think we need to reflect that it's a strong underlying growth, but also the situation in Q2 last year makes the comparison a bit skewed. A big negative number in China and Northeast Asia, close to 20%. Really, there are two drivers behind that. First, of course, is the lockdown in April and May, having a significant negative impact on growth rate, with a strong bounce back in June, also on automotive. But then we also have a negative comparison or a skewed comparison to Q2 last year on the commercial vehicle side, which was extremely strong in Q2 last year. given that after the end of Q2 last year, there was a new emission taxation scheme enforced in China. So people were piling up or buying equipment or vehicles before that new taxation scheme. So comparison levels are a bit skewed here as well. But looking into the financials or the profitability of our automotive business, We have an adjusted operating margin of roughly 2% or 1.7%. Same story goes here as it relates to industrial. The Ukraine situation with the energy costs and logistic costs has a significant negative impact in the quarter on our automotive business. I talked about the Shanghai lockdown, but it also brings one other dimension. Normally, we have a somewhat better margin in our automotive business in China than we have in other parts of our automotive footprint. And therefore, of course, the lockdown in China had a negative impact on the margin mix in the quarter. We do drive pricing also in this part of our business aggressively, and we do see that we get price both on the OEM side and the aftermarket. And when it comes to pruning, I think the team is really staying firm to the strategic direction that we set for our automotive business to primarily focus on the areas where we have clear leading positions. And that is, we are the number one in EV. That's where we focus. We are the number one player in commercial vehicles and we're a clear number two in the aftermarket. Other areas... we are now starting to prune, and so far the team has identified sales worth about 1.2 billion that we are about to exit from the portfolio due to that doesn't really fit into that strategic framework. We continue to see very, very strong demand for our EV capabilities, and our EV business is growing north of 50%, and that is also reflected in some key wins in the quarter. I'm excited about this first high-volume ceramic bearing contract that we signed with a major global EV producer. And to give you some flavor on this, when we're at full run rate, we're going to sell or this producer will source two million pieces of ceramic bearings annually from us. So it's really now a sizable contract and making our first big inroad into this exciting technology. And we also signed another important contract, and that is with Volvo Cars for their electric powertrain. And they selected SKF for a number of reasons, of course, from a product performance and price perspective. But more importantly to me, we share the same values as Volvo cars to really make sure that we have as low CO2 footprint as possible. And there we stood out and could demonstrate that our solutions really helped in the total CO2 footprint for delivering and making the future Volvo cars. So we're excited about that. And with those comments, I like to hand over to our CFO, Niklas, to give you some more details about the numbers.