AB SKF (publ)

Thank you, and good morning to you all, and welcome to this conference call on SKF's third quarter results. As usual, we will start with the presentations hosted by Rickard Gustafsson, our CFO, and Niklas, our CFO. After those presentations, we are happy to take on your questions. You could use either your phone, as instructed previously here, or you could use the chat function, as you prefer. With that, for a brief introduction, I'll leave the word to Rickard, please.

Thank you, Patrick, and good morning, everyone, and welcome to this interim report for the third quarter. I start by sharing that we continue to deliver on our intelligent and clean growth framework, and I'm very pleased to report that we have very strong traction on all four growth levers that we have defined within our strategic framework. We see that the key megatrends that are sweeping across the globe, such as electrification, digitalization, automation, and also sustainability, provides a strong ground for growth for SKF. And as you can see on this illustration to the right-hand side of this chart, we record once again solid double-digit growth in many of our focus industries, such as material handling, automation, agriculture, and high-speed rotation. There is also one key outlier here, and that's electric vehicles that are growing 66% in the quarter. And I will come back to more details around that when we touch on our automotive business later on in this presentation. When it comes to new technologies, we continue to make good inroads with our products and our capabilities and opening new opportunities, growth opportunities for us. Our ceramic bearings are key to the growth in EVs that I described, and I come back to them as well in the automotive section. Another proof point in this quarter is the fact that our magnetic bearings has been selected to power Tom Turbo's new generation of compressors. So that's a big win for us in the quarter. When it comes to service and aftermarket, it is an important piece to our total service offering to our customers today. We use our broad capabilities here to really make sure that we provide the right value to the customers and that we create loyalty and stickiness with our customer base by leveraging all of our components and technologies within lubrication, seals, bearings, condition monitoring, so forth. And in this quarter, we have signed a very significant condition monitoring contract with a large packaging producer in North America. that I will share some more details on as well during this presentation. And in terms of portfolio management, it's key to us, we continue to work actively to look for how we can fix accounts that are not delivering on the profitability levels that we expect, or if we can try to exit some parts of our portfolio that may not be strategic or at the very, you know, that is not in line with where we want to be. This is happening across the board, and it's very particular within our automotive business, and we'll talk a bit more about that as we move into this presentation as well. On top of this, we have also worked hard to accelerate the components of our strategic framework that relates to cost efficiency, and today we announced some progression also in that regard that you will see during the presentation. But let's dig into the numbers. And as I mentioned, the strong growth has been really strong in the quarter, and we have an organic sales growth of roughly 11% in the quarter. And again, I'm very pleased to report that most of that organic growth comes from those industry segments that we really want to grow in. That is part of our strategic intent and our strategic framework. So net sales comes in at roughly 25 billion Swedish krona up from 20.1 billion last year. If you include FX, it's 24% growth, but organically it's 11%. The adjusted operating profit came in at 2.1 billion Swedish krona with a margin, yes, shy of 9%, 8.5%, down from 13.3% in the same quarter last year. This is, of course, nothing that we are very pleased about. We do see that a significant cost inflation in the quarter, especially in Europe, has impacted our results negatively, despite the fact that we are driving our price and mix activities successfully. And I'm going to share some more details on this shortly to give you some more flavor on how the cost has evolved in the quarter and also our progression, our capabilities to drive price in this environment. Net cash flow comes in at 1.3 billion, down from 2.5 billion last year to a large extent due to the fact that, you know, the operating profit has come down a bit, and that is also reflected in the cash flow. But before we move on to the details, I'd also like to take this opportunity to welcome two new members on my management team. As of since a week back, we have a new chief technology officer on board, and that's Annika Ölme. And we also, since a couple of weeks back, we have a new leader for our China and Northeast Asia business with Henry Wang. Both of them, we welcome back to SKF. They have previous experience with the company. They have then, you know, done professional careers outside the group, and they're now coming back to help us drive our strategic framework forward. And I'm delighted to have both of them on board and being part of my team. But if we take a look more into this cost deflation and price momentum that we have, and if I start with the price momentum, and I'd like to draw your attention to the dark bluish or blackish bars on this chart. As you can see, we have significantly improved quarter over quarter our contribution from price mix. If I draw your attention to the first quarter in this year, we had a positive price contribution of roughly 1 billion Swedish krona. It grew to 1.3 billion Swedish krona in Q2. And now in Q3, it's up to 1.8 billion Swedish krona. A significant improvement, and it will continue as we move forward into the future as well. The problem, though, is that you can see that cost inflation, the grayish bar on this chart, have accelerated at an even higher pace. And we also need to recognize that a lot of that has happened in Europe. And in Europe, we have a significant presence. Our European business accounts for roughly 40% of our sales, but 6% of our production. So of course, the energy crisis in Europe and the cost inflation in general in Europe has impacted us negatively. You can see here that, you know, the delta between price mix and cost inflation has increased. And in the quarter, we have cost inflation of 2.9 billion Swedish krona, primarily driven by materials and energy costs. And Niklas will give you some more details about this later on in this presentation. But given that we are unhedged to our exposure both to energy and to some of this cost inflation, would also indicate that once we see more normalized levels on energy and other, you know, general cost inflation, it should mean that we have a tailwind to our margins going forward. And to try to give you some proof point on that, again, I like to draw your attention to the first quarter of this year. There you can see that the delta between the price mix and cost inflation, started to ease off a bit. We came from 1.5 billion to 1.6 billion, then it came down to 1.4 billion in Q1. And our margins at Q1 were 13.3%. Then the delta has increased and now reached kind of a record high of 1.1 billion, having, of course, a negative impact on our earnings. But on a positive note, I'd like also to mention that We saw at the end of the quarter some improvements in some of the cost items that we have in terms of the pace of inflation starting to ease off. And now thinking about logistics, I'm also referring to some of our components or steel components started to ease off a bit. But it's a volatile environment. We stay determined to continue to drive our price mix efforts to at some point in time fully compensate for the cost inflation, as we have said now throughout, you know, this full year. But staying within our strategic framework for a few more seconds, I already touched on the growth levers that we have, the four growth levers. And this time I'd also like to give you some more insights within two important growth enablers. How we do to operate more effectively and also what we're doing to maintain our focus to drive regionalization and enhance our competitiveness across our supply chains. But starting with operating more effectively. When we launched our strategic framework, we were very clear that as part of this, we were also changing our organizational structure. We created more autonomous business areas with full accountability end-to-end for our values, for respective value streams of value chains. That also implied that we saw opportunities to simplify our organizations, to change ways of working, to be faster to our customers, and have a more agile structure in general terms. That work has been ongoing since we launched the whole strategic framework. And now during the fall, we come to a point where these now start to materialize into concrete actions and savings that we are ready to share with the broader audience. As part of this, we are, you know, announcing a de-layering of our EMEA organization to drive simplicity and clear accountabilities and changing a number of the ways how we operate within EMEA. I think it's going to benefit our customers. We are trying to leverage more low-cost countries for some of our white-collar capabilities and labors. not just for certain competencies, but also trying to build regional service centers in different countries where it's more attractive from a wage point of view. As I said from the beginning, we said that we wanted to rethink our corporate functions. We wanted to push more of these accountabilities out into our business areas. And that is now happening. And we are changing some of the corporate functions. And we're also using this opportunity to look into our IT spend and our IT projects to ensure that they are fully aligned with our strategic intent. And we have found ways to also drive down some costs there. within a fairly short timeframe. Our connected technologies, it is an important piece of our offering, especially on the service side. We are keen and determined to continue to grow that, but we realize that we should not do it by having everything in-house. We need to leverage partners to help to build the software platforms and also the hardware on the sensors. So that, you know, we can be speedy, that we can be future proof, and that we can scale this operation more effectively together with partners. And already in Q2, we announced one step in this direction with the announcement of the collaboration with AWS on some of the, you know, low-end sensors. And it goes without saying, when you go through these things, we also constantly look into ways to reduce our consultancy spend and other indirect expenditures. So all in all, we see that we have an opportunity to reduce our cost base with some 2 billion Swedish krona with full run rate effect by the end of 2023. It will come with a restructuring cost at roughly a billion Swedish kronors, our best estimate at this point. And that's going to be, you know, impact our numbers, you know, sequentially from now through 2023. In totality, this will have an impact on a number of positions. Roughly, you know, 1,000 positions will be redundant due to these activities, with a majority of those being in Europe. On the regionalization and how we build our competitive supply chain, I'm pleased to report some good progress also in this quarter. We are today reaching out to you from our head office here in Gothenburg, and next to us we have our factories here, where we recently inaugurated a state-of-the-art, fully automated assembly and packaging line for medium-sized roller bearings. that will really drive cost efficiency and productivity in our Gothenburg factory. We have also continued with our efforts to consolidate our footprint, especially in Europe, and we announced some closures of a factory in the U.S. and three factories across Europe to be completed within shortly. And also, now we strive to develop a more balanced regional footprint. We have also completed our second investment in Jinan factory in China, which will really help us to increase our localization rate in China and support our China for China strategy. So, it's an important step on that journey as well. So, a lot of activities are also ongoing there, all in line with what we outlined in our strategic framework. But let's take a look into our two main segments, starting with industrial. Industrial also recorded a very, very solid organic growth in the quarter, up 8% versus the same quarter last year. And here you can see on this chart that the growth is actually coming from all parts of our region, with a significant and solid growth in India and Southeast Asia. Also, Americas is growing nicely. EMEA has a strong single-digit growth rate, primarily driven by price, where we have more of a flattish volume, while China has more modest growth. And I think the Chinese economy is still impacted by the COVID restrictions. And that's why we see that growth rates are more modest in that part of our footprint. Looking into some of the numbers for industrial, I already commented on the growth, and the adjusted operating margin came in just shy of 11%, down from 16.5%. Of course, this is not anything that we are pleased with, but it's clear indication that that cost inflation that is described primarily with our European manufacturing footprint is really having a negative impact on our earnings in this quarter. However, though, we are determined and we're confident that we sit on pricing power and that we will continue to work with our customers and find ways to compensate for this cost inflation and build back our earnings over time. Also important to note that some of our business units with longer order books They have had an even tougher time to compensate for, you know, the energy crisis and so forth and the fast volatility that we've seen in the quarter. So they have a longer lead time to find ways to compensate for that. And two examples of that being our aerospace business and our marine business having a negative impact in this quarter. But we also have a number of success stories to tell you in the industrial side in the quarter. I'd like to start by sharing one related to our drive towards a more sustainable future. I'm very pleased with the collaboration we have with Ova Kostil to find ways to demonstrate to the world and to ourselves that net zero is not just something, a kind of a vision that is unreachable. It's actually something that will happen and can happen. And in this case, we have already used a mid-size bearing, a sizable bearing with a 90% less CO2 emission than a traditional bearing. A clear proof point that this is really doable. Still, of course, we need to ramp this up and scale this, but we're excited about it. It comes from a kind of a circle effort together with Ovaco. Ovaco, they provide us with the raw material of the steel that we use for the bearings, come from scrap steel. We then, you know, manufacture the bearing here in Gothenburg at our net zero facilities here. And then we return the finished product back to Ovaco and into their production. So it's kind of, again, a proof point how, you know, we see the future and what that will look like. And we are determined. to play our part in the transformation towards more sustainable future. As I mentioned in the beginning, we also signed a new agreement with a major U.S. packaging producer, and I'd like to give you some more details on that one. Again, this is a proof point how we can enter with one area of our offerings and build a relationship and let that grow from there and over time enhance our service capabilities, our value to our customers and also create stickiness with our customers. This relationship started in 2019 where we got awarded to monitor one single asset of theirs. Our relationship with them have grown significantly, and today we monitor more than 5,500 of their assets. We provide a number of set of services from application engineering through lubrication management. And, of course, we also provide them with bearings and also with seals, which is another important component in our total offering. And speaking about seals, last quarter I gave you some more insights on our lubrication business. And this time I want to share some details on our seals business. Seals represent a sizable part of our portfolio, roughly six billions of revenue with attractive industrial margins. And why are seals important? Well, 20% of the bearings that fail is due to either contamination or poor lubrication. And that's where the seals application play a vital role. And if we do this right and combine these capabilities, our lubrication capabilities, our bearing expertise, and our seals expertise, we can find solutions that are state of the art and really solve pain points for our customers. One key example is what we've done within the agriculture industry with our SKF AgriHub, where we created a combined offering, where we combined our know-how and expertise in these fields and created this unique offering that really works extremely well in these extreme conditions that you find within the agriculture. And that has been the foundation for a very, very solid growth within this industry for quite some time now. And you saw on my first chart that agriculture continues to deliver solid double-digit growth. We continue to invest in our technical capabilities also within SEALS. Very often we work very, very close with our customers to define the materials and compounds that will solve their particular pain points or problems that they're trying to solve in their applications. And we find ways to also, in a dynamic way, do product design and testing of these applications together with our customers. That has been highly appreciated and proven to be successful. And also to strengthen our footprint here, we've done a recently, as you probably have seen, a small acquisition. We acquired a company in Italy called Tenuta that has unique competence in a small niche within the industrial sales segment that we're now delighted to have as part of our portfolio. Even here, we have an emphasis on looking into portfolio management and how we want to develop this business going forward. And you will see us put more emphasis on the industrial side of SEAS applications and less emphasis on the automotive side of our SEAS business and SEAS application going forward. And of course, because we do see that we have a more value add on the industrial side, and there we also can obtain more attractive margins. Moving on to automotive. Automotive also saw a significant growth in the quarter. Organic growth up 18% versus same quarter last year. However, though, I need to remind you that Q3 last year was a rather low quarter for the automotive industry. At that time, the semiconductor crisis was really intense, and a number of our customers then closed their, or our OEM customers, I should say, closed their operations. And, of course, when compared quarter over quarter, it makes a somewhat difficult comparison. But 18% growth, organic growth anyhow. You can see growth coming from all regions with significant growth in India, in EMEA, and Americas. And there we see growth both on personal vehicles, light vehicles, and commercial vehicles. China and Northeast Asia also see significant growth, just shy of 20%, as you can see. But here is primarily light vehicles and personal vehicles that drive growth. You know, commercial vehicles are still seeing a fairly low demand at the moment. Looking into the automotive numbers, I already mentioned the growth. Here we see that the margins can come in at 3% compared to 4.5% the same quarter last year. But it's actually up versus our second quarter this year. So automotive have also been impacted by these significant cost increases that we have seen. But they have also worked hard on their price mitigation actions, and they have also been successful in getting some surcharges that has also helped them to compensate for some of these energy spikes that we've seen, especially in Europe. Within automotive, we are making good progress on our announced transformation. As you probably recall, we're trying to focus on the areas within our automotive portfolio where we have a clear number one position or a number two position, and where we feel that we have an offering that is truly valuable to our customers. And this includes our focus on electrical vehicles, on energy, large commercial vehicles, and also to build our focus in the vehicle aftermarket. As part of this, we, of course, see now good momentum in our EV segment, as I said, up 66%. And a big drive for this, not only drive, but one key drive is, of course, the constantly increased demand for our ceramic bearings within this industry. Our ceramic bearings are in high demand due to the, you know, High speed capability and also electrical isolation capability really provide significant value for the EV industry. And in the quarter, we have signed some significant contracts with big OEMs for their EV platforms, both in Europe and in China. So with that, I end the kind of informal overview part of our presentation. I'm now going to hand over to our CFO, Niklas Rosenlev, to give you some more details on our numbers. So, Niklas.

Thank you, Richard. And let's start off with some details on our sales. So, in Q3, we had strong sales growth, as Ricard already mentioned. Our sales was just shy of 25 billion sec, and sales grew both sequentially and compared to last year, driven by a broad-based demand from multiple different industries, as well as multiple product segments. Compared to last year, our net sales increased by 24% total, Of this, there was a 2% negative impact from Russia, exit of the Russian business. The organic sales increased by 11%, and this was driven both by volume and by price mix. And the currency effect of sales was a positive 15%, with the largest effects coming from the dollar, the renminbi, the Brazilian real, and the euro. So all in all, strong and good sales performance. Moving on to our profitability. Our adjusted operating profit was 2.1 billion in the quarter compared to 2.7 billion last year. Overall, as Rickard mentioned, we had good momentum in price mix, which was then offset by sharply increasing costs, primarily in Europe, leading to a reduction in profitability. And if we go through this step by step, firstly, the currency impact was positive at 288 million compared to last year. And just to explain this number, so while we have a strong contribution on sales from, for instance, the dollar, we do have a relatively high portion of our costs in euro, resulting in a more limited benefit on our profit from FX. The Russia business was divested in Q2, and this had a negative impact of 54 million, meaning that we had a profit last year, which we did not have in Q3 this year. Our organic growth, which consists of volume, price, and mix, contributed with a positive 2.1 billion, and about 90% or 1.8 billion of this is price mix, while 10% based driven by volume. As noted, as Rikard explained, our price mix has sequentially continued to increase, 700 in Q4 last year, a billion in Q1, 1.3 billion in Q2, and now 1.8 billion in Q3. And these are year-on-year comparisons. What comes to inflation, we did see a sharp increase in costs in Q3, especially driven by Europe. This came from energy, but also materials. For some of the other elements, such as logistics, we actually saw inflation starting to come down a bit from high levels. For energy, we are largely unhedged and also saw costs coming down a bit towards the very end of the quarter. So the total impact from higher costs was 2.9 billion, and as a comparison, this was around 2 billion last quarter. Just to give you a flavor, so 2.9 billion, the component part of it is, call it half of it, so half of the 2.9, a bit less than half, while then energy added 400 million approximately, salary approximately 300 million, these being the largest elements of cost inflation. So to sum up, we had a continued good momentum with sales, price and mix. On the other hand, we did have a sharp increase in cost inflation, especially in Europe, resulting in a deteriorating margin. While we are confident that we will offset inflation over time, in Q3, the inflation just increased so quickly that we did not have time to offset it. Moving on to cash flow, we generated a net operating cash flow of 1.3 billion in the third quarter compared to 2.6 billion in, or 2.5 billion last year, mainly driven by lower operating profit and higher working capital. Just to comment on working capital, working capital as a percentage of sales increased to 36%, mainly driven by exchange rates. Sequentially inventories were actually pretty flat in Q3, marking a change after a year of increasing inventories. And finished goods, on the other hand, actually went down somewhat in Q3. We've continued to prioritize customer deliveries as demand has stayed on a high level. At the same time, we have seen some normalization of supply chain bottlenecks, although the environment still being quite volatile. And let's say regardless of these external circumstances, we will work with reducing networking capital across all of our businesses. There's no quick fixes here, but we are confident we'll start to see net working capital to come down. Moving on to our balance sheet, we have a continuously strong balance sheet and good liquidity. Our net debt amounted to 11.9 billion, a slight increase sequentially driven primarily by FX, but still at very healthy levels. Return on capital employed was a solid 12.6. And also during the quarter, we've continued to work on our capital structure and actually successfully issued our second green bond. And on that note, to comment on the green bond, So, we successfully issued this in September, and it highlights our commitment to work with sustainability, as Richard commented on earlier. And this was a bond of roughly 400, or actually exactly 400 million euros, and the reception was very good, and some six times oversubscribed. It's yet another example of our long history of working with sustainability and now also linking financing to sustainability. We use the proceeds for broadly speaking two purposes. Firstly, the first purpose is to strengthen our cleantech business and support our customers achieve for them to achieve better sustainability. Secondly, we also invest in our own operations to ensure that we reach our goal to be scope one and scope two emission neutral by 2030 and scope three neutral by 2050. And an example of internal investments is, for instance, reducing our own energy consumption by at least 25% in manufacturing. We do expect these investments to contribute positively to our competitiveness and our business. Turning to the outlook for Q4 and full year 2022, for the fourth quarter of 2022, we expect an organic sales growth of about 10%. And as a result, we expect organic growth for the full year to end in the upper part of our previously guided range of about 4% to 8%. We do, however, expect to see continued volatility and geopolitical uncertainty in the markets. And as a result, we expect continued high levels of cost inflation, supply chain bottlenecks and volatile demand. So with that, I hand back to you, Rickard.