AB SKF (publ)

A warm welcome to SKF's Q2 2024 earnings call. I'm Sofie Arnjus, and I'm heading up Investor Relations. Our CEO, Rickard Gustafsson, and CFO, Niklas Rosenlev, will take us through the highlights of the quarter, where the performance marked another step towards a more resilient and competitive SKF. After their presentations, there will be opportunities to ask questions. And there are two ways to do that. So if you are joining via the telephone line, you press star and one to ask a question. If you are instead are watching via the webcast, you can already now type in your questions in the tab and you find that just above the slides. So without further ado, it's great to hand over to you, Rickard.

Thank you, Sofie, and a warm welcome to all of you joining on this earnings call. As Sofie mentioned, the story continues. We are creating a more competitive company capable of delivering consistent margins regardless of demand fluctuations. And to support this statement, I'd like to draw your attention to the right-hand side of this chart. The solid line represents our adjusted operating margin on a rolling 12-month basis. And as you can see, it actually holds up pretty well despite a rather volatile organic growth quarter by quarter. And the reason for this is found on the left hand of this chart, our continued diligent execution of our strategy. We have talked about it before. We have a decentralized organizational model getting us close to our customers and providing more agility in our operations. We are driving effective cost measures across our businesses. And we constantly drive an active portfolio management also across all parts of our business. And at the same time, we are investing into our future. We are driving regionalization and building strong and competitive value change in all of the geographies where we operate. And we continue to drive innovation. And I will come back to innovation later in this presentation. But all in all, we believe that we're creating a company that is very well positioned to take advantage of profitable growth once demand turns back into growth again. But with that said then, let's take a look at the quarter in isolation. We report some 25.6 billion in net sales. That equates to a rather stable operating margin, adjusted operating margin of 13%. This is a strong performance given that we have had a rather negative organic growth of almost 7% in the quarter to be compared with a positive growth of 8% the same quarter a year ago. And the reason for this are the same reasons as described on the previous page. Clearly, we have been able to drive price mix effectively in the quarter. We continue to drive our portfolio management activities and dare to walk away from unprofitable business. So some of this decline in organic growth is actually self-inflicted, but for the right reasons. And we've also been able to drive effective cost management. Later in this presentation, you will hear Niklas share some more insights to this. But we have been able to offset a rather significant wage inflation in the quarter through other cost measures. So all in all, I think it's a decent and strong performance in the quarter. If we then move on and take a look at our demand across our geographies. And as you can see on this chart, it's a fairly soft situation across all our geographies where we operate. But it's also important to mention that, as you all know, we have exposure to so many different industrial verticals and all of them are not at the same point in their cycle. There are some that have a rather strong development globally and others that struggle a bit. If I start with being on the struggling side, one industrial vertical that is rather soft demand across all geographies still is wind. But otherwise, it varies a bit by region. So if you take a look and start by EMEA, negative organic growth of some 6%, as you can see on this chart, a little bit worse than what we saw in the first quarter this year. So clearly, the EMEA demand situation has not improved in the quarter. But there are pockets of growth to be found also here. Aero and rail being two prime example of strong growth in the quarter, while most other industrial verticals are experiencing a softer situation when it comes to demand. A somewhat different story, negative 5% organic growth in the quarter, a little bit less worse or a little bit better, regardless of how you want to express yourself, versus the first quarter this year. This is primarily driven by strong price mix in the quarter, but also here we find strong development in industrial verticals such as aero and marine, while agriculture continues to be in its low point in its cycle. Turning to China and Northeast Asia, clearly a significant negative organic growth of just above 12%. Here, wind is the main driver behind this. And if we would exclude wind from these numbers, we would have reported a flattish organic growth. So other industrial verticals are actually holding up pretty well in China and Northeast Asia. Rail and off-highway are being two prime examples of that. And finally ESEA on a total level fairly flattish as you can see. Here you have heavy industries and light vehicles being strong performance while agriculture also has a rather low point in its cycle also in this region. Turning to our segments and I'd like to start with sharing some insights on our industrial segment. Here we report some 18 billion in net sales. That corresponds to more than 7% or around 7% negative organic growth. But despite this, we are actually able to slightly improve our operating margin to just above 16%. A clearly strong performance, and again, driven by a strong price mix, effective cost management, and also active pruning in our portfolio. Turning to automotive. minus five percent organic growth and an adjusted operating margin of just above five percent. This is somewhat lower than the same quarter last year but we also have a very different demand situation this quarter than what was the case a year ago. I'm still confident that our automotive team, they have line of sight of the 8% operating margin target by 2025, and they continue at a high pace with the strategic transformation on this portfolio. And we continue to have a very strong progress in the important EV segment, and especially in China. Looking into the second half, As you will hear Niklas share shortly when we come into the outlook, we don't really see a significant change in the demand situation going forward. And we will continue to drive and leverage the momentum we have in our regionalization to create a stronger and more competitive company. These two together may potentially put some additional pressure on our cost competitiveness, but it's the right thing to do. By continuing to drive in this, we will create a stronger company that is geared for profitable growth once demand turns again. Taking a look into our strategic priorities, they have not changed. And we continue to deliver on these and execute on these priorities with diligence and rigor. I have talked quite a bit on the competitive and intelligent value change. We have built up a strong momentum when it comes to driving that in our business. And it's also visible in this quarter in terms of items affecting comparability, which is rather high in this quarter. And Niklas will share more details on that shortly. But we also continue to manage and drive our portfolio and continue to innovate, to build for intelligent and clean leadership. And it's important to reinforce that Portfolio management is more than just pruning unprofitable accounts. It's really how do we transform our portfolio to be geared for profitable growth long term. And here innovation and product development plays a vital role. So let me share some more insights on what's happening on innovation. Firstly, All our innovation clearly and naturally starts with our customers. How do we create customer value and how do we eliminate pain points for our customers? That's kind of always in the forefront of what we do. We have paid a lot of attention and worked very hard to transform our innovation portfolio so that it fully fits with our strategic intent. And as you can see from the numbers on this chart, the vast majority of all ongoing innovation projects and product development projects, they are now supporting our high growth segments. But maybe even more importantly, they all need to contribute to our long-term profitability target of 14% operating margin. And all projects that now it's in the pipeline and being worked on, all of them have operating margin targets significantly above the 14%. But we have also felt that we wanted to share more insights on what we do with innovation and create more kind of engagement, the excitement around our portfolio. And therefore, we have decided to host something that we call tech and innovation summits. And we plan to host them twice a year. And we actually had the first one in the beginning of June. And it was a true joy to participate in that summit and listen to some of these customer testimonials on the value that our innovative capabilities provide to their businesses. And at this summit, we also introduced some new products to the market or showcased a few products that we're introducing into the market. And I'd like to give you a short flavor of a few of them. As you can see here, we have introduced new seals for heavy industries. This seal will really improve uptime in very tough conditions. We showcased a new split bearing, also designed for heavy industries, that significantly reduces downtime, but even more importantly, enhances safety in hard-reach locations. We introduced a new super precision bearing platform, and this platform has a unique solution to meet the performance requirements in the machine tool industry. And finally, we also introduced a new monitoring and lubrication solution that will improve reliability and reduce noise within the railway industry. And this is just a few examples. We do have a very strong pipeline of new innovation that we're working on. All of them will continue to help to build a stronger, more competitive and resilient SKF as we move forward on our strategic journey. So with this short introduction, I'd like to hand over to Niklas to take you through the numbers in more detail. Thank you. Niklas, over to you.

Thank you, Rickard, and hello, everyone. So as we just heard from Rickard, the quarter can be characterized as relatively low volumes, but excellent in holding up margins and profitability. So if we start off with the volumes or the sales. 25.6 billion was the sales in Q2. This is down from 27 a year ago. But on the other hand, it's roughly at the level that we've had the last few quarters since the downturn for SKF started in Q3 last year. What comes to the bridge, sales bridge, we had a positive effect, a slight positive effect from currency. When it comes to the organic component, we had an organic decline of 6.6%. And here within the organic, we have a negative volume, but we have a clearly positive price mix. So good job, continued job by the team managing both price and mix. On that note, if we move on to profit and adjusted operating profit, it was 3.3 billion in the quarter, slightly down from 3.6 billion last year. If you look at this difference, this delta between 3.3 and 3.6, as you can see in the bridge, half of that actually comes from currency. When it comes to organic, of course, the lower volumes, slightly lower volumes or lower volumes affected negatively, but there was a very good offset in terms of price mix. So the organic component in the bridge being 244 negative. What comes to cost, I would say that was well managed by the team. We had materials slightly better than last year, so slightly lower than last year. No big change, but still. Same actually goes for energy. Logistics, on the other hand, were slightly higher than last year, so more cost. But then a large component, of course, is our wages and salaries. And here, despite a 5-6%, wage inflation, the wages and salaries total cost was reasonably flat in the quarter. One thing to note in the quarter was our relatively high IAC. So one-off costs and the main part of the one-off costs of roughly 800 million came from all the good activities that we are doing in Germany. And this is very much part of regionalization. So long-term thing that we want to do, need to do in order to further improve competitiveness of SKF. We are taking down some of the activities and focusing Germany. We are moving some of the volumes to other geographies closer to customers and thereby improving our competitiveness, lower costs, and also shorter lead times being closer to the customers. Moving on to cash flow, it was solid in the quarter, 2.2 billion. Yes, it's a bit down or it is down compared to last year. But on the other hand, it's up compared to 2022. And for being a Q2, this is actually quite normal. In Q2, we typically build inventories ahead of holiday seasons, which we then deplete in Q3 and in Q4. And that's exactly what you can see here in the bridge with networking capital being 700 million negative. This is when we were building or in Q2 inventories. And again, expect to deplete that in the second half. What comes to a balance sheet? it remains strong. We had a net debt of 10.7 billion, and this is excluding pensions. If you would include the pensions, it's roughly 19 billion. We have a return of capital employed, which is moving in the right direction, somewhat up from last year, and very much towards our target of 16%. On net debt, a couple of specifics to note in the quarter. We paid our dividend, roughly 3 billion, which, of course, then increases net debt somewhat. So that's the reason for the increase, essentially. And we also repaid a 3 billion bond in the quarter. Of course, that doesn't have an impact on net debt, but it does on cash. So all in all, strong and solid balance sheet. Then if we move on to the future and the outlook, we do expect markets to be volatile and the geopolitical tensions to continue also in the near term. For Q3, we expect organic sales to be relatively unchanged year on year. And for the full year, we reconfirm our guidance, our previous guidance of low single digit organic sales decline. year over year. One thing to note here on the guidance part is that we have decreased the capex or additions to property, plant and equipment from the previous 5.5 billion to 5 billion now. And this is actually very much in line with the strategy where we have said that we are going to peak around 2023 and then gradually start to come down in capex. So with that, hand back to you, Rickard.