AB SKF (publ)

Hello and welcome to the SKF Q2 results conference call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press start, followed by one on your telephone keypad. You can submit your questions via the webcast. There is a questions tab above the slide. Your question will be addressed during the live Q&A session. I'll now hand it over to your host, Patrick Steenberg, to begin. Please go ahead.

Thank you, and good morning, everyone, and welcome to this presentation of the SKF Q2 results. As usual, we'll start with the presentation by Rikard, our CFO, and followed by the numbers from Niklas, our CFO. The presentation part of this event will last some 20-25 minutes, and after that, we will move into Q&A, where you can post your questions either by following the operator's instructions on the chat or by using the call function of a voice. We have a sharp stop at 9 o'clock. Many of you are waiting for other companies as well, so we'll try to stick to that. And with that brief intro, I leave the word to Rikard, please.

Thanks very much. And good morning, everyone, and welcome to this quarterly report presentation. In 2022, as I guess most of you recall, we initiated our profitable growth journey based on intelligent and clean strategic framework. We've become an even more fast-moving, innovative, and customer-centric company. At the starting point, we put the place a strong foundation. We launched a new operating model with six separate business areas, all with full P&L responsibility and balance sheet responsibilities. We strengthen the management team, and we enhance our emphasis on portfolio management. The new model is becoming more and more embedded in the organization, and our execution capacity is building momentum. This is clearly visible in our Q2 results. And I guess I have a sound issue. All right. Hopefully you can hear me now. Well, in today's presentations, besides sharing insights on the quarterly numbers, I will also provide you with some examples on how we progress the strategic execution in specific areas. But let's start by taking a look at the quarterly numbers. As I mentioned, our strategy execution is gaining momentum, and I'm really pleased to report a record quarter in several dimensions. We saw strong organic sales growth, 8%, fully in line with our Q2 guidance. This actually representing the ninth consecutive quarter of an organic growth rate above 5%. In absolute terms, we had record sales north of 27 billion krona, record adjusted profit of 3.6 billion krona, and a net cash flow from operations at 3.7 billion. Our operating margin came in at 13.3%, significantly up versus 10.5% the same quarter last year. And this is clearly another step towards our 14% margin target. But let me now turn to the performance in our business segments, industrial and automotive, where I will also share more insights on the regional growth development. starting with industrial business, representing some 70% of sales and 85% of operating profits. Here, we saw a solid organic growth just shy of 6% and primarily driven by price mix. If you break it up by region, we saw a limited growth in Americas of roughly 1.6% due to OEM destocking in some industries, agriculture being one example, But with that said, there are also industries in America that remain on a double-digit growth rate, like railway being a prime example. Organic growth in EMEA was resilient and was up 7%, with very strong growth in aerospace and railway. Organic growth in China and Northeast Asia came in at a moderate 6.4%, Clearly, a weaker market rebound in China than we hoped for when entering the year. Still solid growth in China, but maybe not as significant as we were hoping when we started the year. We saw good growth in industries relying on domestic demand, like wind and industrial distribution, while export-related businesses were a bit slower. And finally, we saw continued strong momentum in India and Southeast Asia, with an organic growth of just above 11%, mainly from off-highway, material handling and automation. We continue to drive efficiency and cost competitiveness in our industrial manufacturing footprint. And one example of this is the recent announced intention of ours to consolidate our spherical roller bearing manufacturing in Europe. by moving our current production facilities in Luton and capabilities in Luton in the UK to Poznań in Poland. All our industrial business areas continue to drive price, execute cost initiatives and ensure rigorous portfolio management. As a result, We report an improved adjusted operating profit of some 3 billion Swedish krona, a significant uplift versus the same quarter last year that ended at 2.4 billion krona. This corresponding to an adjusted operating margin at almost 16%. And then turning to automotive. Automotive saw very strong growth of 14% and an adjusted operating margin just above 7%. This is equivalent to an adjusted operating profit of almost 600 million Swedish krona compared to 100 million the same quarter last year. For the good order, the automotive growth rate should be viewed in the light of a rather weak comparison period last year. But nevertheless, the improvement of the automotive profitability is a significant achievement by the team. and a clear step up towards our 2025 annual market target of 8%. We are pleased to note that the continued strong growth in EVs, vehicle aftermarket and commercial vehicles, this fully aligned with an ongoing repositioning in our automotive portfolio. So now let's leave the numbers and let me turn the focus on back to the strategic framework and our execution of it. We continue to embed and execute on all dimensions of our intelligent and clean framework. In today's presentation, I will share progress in high growth segments, portfolio management, technology development, and the area that is actually underpinning the entire framework, namely sustainability. Starting with the high growth segments, and again, I am happy to report tangible progress amongst most of them. As you can see on this chart, growth was particularly strong for electrical vehicles, up 26% in the quarter. And here we have the exceptionally strong growth in Europe among both pure EVs as well as traditional OEM customers. In high-speed machinery, the slowdown is in line with our expectations. as last year was exceptionally strong due to high incentives in the market. And within agriculture, food and beverage, we have noted some destocking among OEM customers, primarily in North America, as I mentioned before. But the world's transition towards a more sustainable future is naturally a driving force behind the EV growth. But also for other sectors and industries, such as renewable energy and railway. And speaking about railway, a truly global industry where our know-how and technical solutions are in high demand. In one example, we won some sizable contracts in Egypt during the second quarter. And Egypt is currently investing in its rail infrastructure, both for passenger and freight operations. and we have secured orders from three large OEMs for various train platforms where we will provide a broad set of products such as wheelset bearings, axle boxes, gearbox bearings and sensors. Moving on to our work within portfolio management. As I mentioned, During this presentation, all business areas are active driving a broad set of portfolio management activities. Today, I would like to give you some examples of this, one from our industrial business and one from our automotive business. Starting with industrial and industrial lubrication, where we have decided to focus our core lubrication business, such as automatic lubrication systems, lubricants, and lubrication tools. As a consequence, we have announced the divestment of our business named Spandau Pumpen, our coolant pump manufacturing unit based in Berlin, Germany. In automotive, we have now completed the previously communicated target to part from roughly 1.2 billion Swedish kronor on unprofitable contracts. In half of these, we have concluded to step out of the business. While in the other half of the contracts, they have been renegotiated at favorable terms. Technology innovation is also an important component in our strategic framework, and today I would like to share some details related to ceramic bearings. Generally speaking, we notice an increasing demand for our ceramic bearings. And there are several benefits with ceramic solutions such as electrical insulation, higher speed capacity, higher wear resistance and lower weight. And due to these superior qualities versus traditional bearings, we see a growing ceramic demand in many industries like industrial e-motors and of course electrical vehicles. And this despite the rather significant cost differentiator approximately four to five times traditional bearings. And to order to meet the growing demand, we are investing in our industrialization and localization of our ceramic supply chain. We have increased our own powder capacity. Many of you may not know that, but since many years, SKF own a world leading ceramic powder producer. The company is named Vesta, and it's located in a place called Djungaverken in Sweden. We also recently announced a joint venture with Sonoma Nitrate in China to ensure a regional supply of high-quality ceramic rolling elements. And SKF is in fact, through the company Vesta that I mentioned, already today an established key supplier of silicon powder to Sonoma. But we're also seeing signs of increasing demand for ceramic solutions in more demanding applications, such as clean tech, hydrogen, and green energy. And this brings me on to the sustainability transformation that is ongoing within SKF. As you can see on this chart, our clean tech solutions are in high demand and revenues are growing rapidly. We also note that our customers increasingly request bearing product sustainability data. To satisfy our customers' request for reliable, transparent and comparable sustainability product data, SKF initiated and led the development of Product Category Rules . a new global standard for the bearing industry. Through PCR, we will enable customers to make more informed choices, promote greater transparency and accountability in our customer supply chain, and allow for industry-wide lifecycle assessments based on common standard. And this is actually something that's already in high demand in certain industries, such like rail and electrical vehicles. But in the quarter, we have also made some significant progress in our own net zero journey. In May, we signed the Virtual Power Purchase Agreement, or VPPA, with the energy company Enel. In this agreed VPPA, we will purchase guarantees of origin for a period of 15 years from Enel's upcoming solar plant in Spain. And this will enable us to get access to new renewable energy on a yearly basis equivalent to one third of electricity consumed in our European operation in 2022. Clearly, this is an important step towards our target of 100% renewable energy in our own operation by 2030. Another milestone In our net zero journey is the decision to phase out fossil gas used in our own global operation. This is backed by a three billion investment frame over six years. The frame will be exclusively used to fund decarbonization projects to remove fossil gas used for process and building heat. And we do anticipate to utilize approximately half a billion or 500 million Swedish krona per year until 2029. And finally, I would like to mention a customer case where SKF actively supporting the emerging transformation of the aviation industry towards a more sustainable future. We have signed an agreement with the company Lilju developing the first all-electric vertical take-off and landing jet. For this new application, SKF will provide and design electrical bearings for the electric motors. The emerging electrical aircraft market has great potential to change the way we look at aviation and logistics. allowing for a more sustainable way of transporting people and goods. And we'll be truly happy in SKF to be part of this transition. So with these remarks, it's time for me now to hand the clicker over to Niklas and ask him to take you through the numbers in more detail.