AB SKF (publ)

A warm welcome to SGF's Q1 2024 earnings call. For those of you who I haven't had the opportunity to meet with yet, my name is Sofie Arnjus and I joined SGF end of February as Head of Investor Relations. For today's event, our CEO, Richard Gustafsson, and CFO, Niklas Rosenlev, will take us through the highlights of the quarter, where the ongoing transformation of SKF is showing in a more resilient and competitive company. And of course, there will be opportunities to ask questions after their presentations. And there are two ways to do that. So if you're joining via phone, you dial SKF, star and one to ask a question. If you instead is watching via the webcast, you can, during the event, type in your questions in the question tab and you find that just above the slides. So, without further ado, it's a great pleasure to hand over to you, Rickard.

Well, thank you very much, Sofie, and warm welcome to the team. And good morning everyone and thank you for joining us for this report out. This quarter marked another step towards a more resilient and competitive SKF. Key to our competitiveness and long-term success are our innovation spirit and application engineering capabilities. This is something that we'll come back to later in this presentation. But first, let's focus on our first quarter numbers. and I am very pleased to report yet another resilient performance. Net sales came in at 25 billion and we delivered a strong adjusted operating margin of 13.4%, which was somewhat ahead of Q1 last year. The margin improvement clearly demonstrates our improved resilience given that organic growth shifted from plus 10% in Q1 last year to negative 7% this year. This is a result of both our ongoing strategic transformation initiatives as well as from more tactical activities to manage the business cycle. Key tactical activities include decentralized accountability for pricing, portfolio pruning and cost management. In parallel, We continue to execute on our strategy, including investments in regionalization and in building competitive value chains. This to ensure that we're ready to quickly ramp up production once demand bounces back. And when that happens, we are well positioned to capture profitable growth opportunities. All in all, I am pleased with our strong court performance in a more challenging economic environment. When it comes to our geographical regions, organic growth in India and Southeast Asia was slightly positive, driven by strong performance in heavy industries and light vehicles. In Europe, Middle East and Africa, most industries saw negative growth, while two key segments, aerospace and railway, contributed positively. Americas was impacted by a combination of OEMD stocking and us, actively exiting low-performing businesses. Here we see a potential to broaden our customer base and industry exposure. And this is a top priority for our new leadership in the region, and it's actually great to now have Manish Bhatnagar in place to develop our American business further. China and Northeast Asia had a mixed development, with wind sharply down, a continuation of what we have seen in prior quarters, while other industries developed more favorably, actually being at last year's level or even above. So, let's take a deeper look into China, which is a good example of our ability to create competitive and intelligent value chains. As you can see on this slide, Our localization rate in China has increased by 10 percentage points since 2021. And this has allowed us to swiftly adjust volume outputs and improve our flexibility to better respond to changes in customer demand. Our local value chain also enables swifter assortment optimization. As an example, We are now refocusing on heavy industries to offset the weaker wind sales development in China. We are also targeting growth opportunities supporting green industries, such as battery equipment producers and vacuum pumps for semiconductor industries. Moving on to our industrial automotive business segments. Again, I am happy to report that our robust industrial business representing more than 70% of net sales continued to perform well in the quarter. As you can see, we managed to maintain a strong adjusted operating margin above 16% despite the sales decline of some 7%. Again, this is explained by our active and ongoing focus on business cycle management in combination with strong price mix development. The adjusted operating margin for automotive business improved 6%. And this demonstrates our progress towards 8% annual target in 2025 from the ongoing portfolio repositioning. Now, turning to our strategic execution. We continue to diligently work on implementing and execute on our strategy. increasing our efficiency and reducing fixed costs. Key focus areas in 2024 are, firstly, further optimization of our supply chain and footprint, driving regionalization, manufacturing excellence and footprint consolidation. Secondly, managing and restructuring our portfolio, active pruning and pricing, assortment simplification and new product introduction for profitable growth. And thirdly, gearing up for intelligent and clean growth, driving decarbonization and circularity. A common theme across these priorities is innovation. And let me share a couple of exciting examples on this. We are a global leader within railway. This is an industry that represents 5% of our sales, and we have been outgrowing the market in recent years. Here we constantly drive innovation in close cooperation with our customers for enhanced fleet efficiency and reliability. High speed is an important and demanding segment within railway, where wheelset bearings are critical. As an example, for this segment, we recently developed new ceramic bearings for railway drives, delivering increased reliability and lower maintenance costs. Customers also value our condition monitoring offers as they enable additional efficiency and reliability. Here, we recently launched new monitoring capabilities for gearboxes. Turning to another example, capitalizing on the growing demand for sustainable solutions. To gear up for intelligent and clean growth, Investments in decarbonization, high speed rotation and low friction products and services are key. We have developed a bearing tailored for the robotics industry with reduced CO2 manufacturing footprint of 70%. This is equivalent to 130 tons of emission savings per year. Looking at the end customer application, This bearing also enabled an additional CO2 reduction of some 20%. So sustainability is a really core element of our strategy. Therefore, I am very happy that I received top sustainability ratings, both from Ecovadis and from CDP. This demonstrates that we are making progress in our sustainability efforts and that we're strengthening our position as a sustainability leader. But before I hand over to Niklas, let me put our journey in a broader perspective. We are transforming SKF into a more resilient and competitive company. And as you can see, we are now delivering a consistent margin performance regardless of demand fluctuations. Our decentralized accountability has been key to increase agility and to accelerate execution of our strategy. Based on this, I am convinced that we are well positioned to capture profitable growth when market conditions improve. So on this positive note, I will now hand over to Niklas to explain our Q1 performance in more detail. So, Niklas, over to you. Thank you, Rickard.

And good morning, everyone. As Rickard mentioned, we are pleased with the progress we are making and the financial performance in Q1, where we improved margins despite declining sales. On the note of sales, the soft market conditions that we experienced in the second half of 2023 continued, as you can see, also in Q1. Sales amounted to 24.7 billion, and this is down from 26.5 a year ago. Year-on-year volumes continued to decline, and this was partially offset by continued good price mix execution. Compared to last year, very much as Rickard mentioned, sales declined organically by 7%, and we had almost no impact on sales from FX or from M&A. Well, of course, 7% is a significant decline. It's worth noting that we had a significant variation in sales performance between different industries. So for instance, wind declining sharply, while on the other hand, aerospace and rail growing. Moving on to profitability, we delivered an adjusted operating profit of 3.3 billion in the first quarter. The adjusted operating margin was 13.4% compared to 13.1% last year, and this is a strong performance, not least considering the sales decline. I must say that the teams have done a great job managing the business in this softer demand environment. The improvement, very much as Richard commented on, is explained by our efforts to adjust our cost base to lower volumes, a continued positive effect from price mix, and then our work to improve or exit low margin businesses. If we take a look at the bridge step by step, we can see that the net effect from currency was a negative 300 million. And this is mainly related to our relatively high cost base in Euro countries. The sales decline had a negative impact of 430 million, and this was driven by lower sales and manufacturing volumes, partly offset by continued solid price mix. Total costs declined by 550 million, where materials and energy contributed positively, logistics was slightly positive, while then personnel costs impacted slightly negatively. On the note of personnel costs, we had a salary inflation which continued at a relatively high level. On the other hand, we had a positive impact from the efficiency program that was concluded end last year. So all in all, the teams did a good job managing the profitability by taking down costs, continue to work with pricing and manage the portfolio. Moving on to cash flow, cash flow from operations came in at 1.8 billion, which we see as a pretty normal level for a first quarter. As you can see on the graph to the left, cash flow was down versus Q1 last year, But we need to keep in mind that last year we had an unusually high or strong cash flow for the first quarter. This year we saw a typical seasonal pattern as receivables and inventory in general increase in the first half of the year, while it's then the opposite in the second half. So I am very pleased that we have made good progress over the Last year, taking down inventories, even if inventories are still too high and the work continues to take them down. Looking at overall networking capital as a percentage of sales, it went down from 32% to actually over 32% last year to just below 31% this year. And 30% to 31% is a pretty normal level looking back in time. but we do see potential to reduce it even further. And on that note, our longer-term networking capital to sales target is 25%. And to be able to reach this level, we need to continue with our regionalization efforts and also additional working capital activities. So all in all, it was a solid cash flow in the quarter, and we will continue to work across all businesses to further improve it or improve the networking capital with a special focus on inventories. Moving on to our balance sheet, continues to be strong and our liquidity to be solid. Net financial debt amounted to 7.8 billion. And this is, as you can see, a significant reduction compared to last year and roughly on par with Q4 last year. However, Note that last year we paid a dividend of some 3 billion or so in Q1, while this year we paid a dividend in early April, so in Q2. When it comes to return on capital employed, we have seen a positive trend with an improved return on capital over the last year. The 12-month rolling return on capital employed was 15.1%. driven by solid profits compared to 13% last year. Finally, before handing back to Rickard, turning to our outlook. Outlook in the second quarter of 2024, we expect a mid-single-digit organic sales decline year over year. And for the full year 2024, we maintain a low single-digit organic sales decline outlook, and this again compared to 2023. And with that, I hand back to you, Rickard. Great. Thank you, Niklas.