AB SKF (publ)

A warm welcome to SKF's earnings call for the third quarter of 2024, where we continue to deliver solid margin despite weak markets. Strategic portfolio management was clearly a theme for this quarter and is a key element in building an even stronger SKF. My name is Sofia Arnjus. I'm heading up Investor Relations and I will also be joined by our CEO, Rickard Gustafsson and CFO, Niklas Roselev. And there will, of course, be opportunities to ask questions after their presentations. And there are two ways to do that. And I'm sure for those that have been part of this call before, you are aware of those. But let me remind you. So if you are joining via the telephone, you press star and one. If you are instead watching via the webcast you can already now type in your question and you do that in the tab just above the slides. And it's now time to get this started and it's a great pleasure to hand over to you Rickard.

Thank you so much, Sofie. And a warm welcome everyone to this quarterly earnings call. And thank you so much for joining us this morning. Well, as Sofie mentioned in her opening remarks, the journey continues. As you can see in this chart, we're still navigating through some rather tough economic environment with a rather weak demand. across our geographies I will come back to that shortly with more details but despite that we are holding our profitability levels and our operating or adjusted operating margin at a rolling 12-month basis as you can see is holding up pretty well despite these tough headwinds in the market situation. And this comes from what we have talked about in the last few quarters, our diligence in terms of cost management, portfolio activities and also price mix activities. And all of this I will share shortly. But as you also heard, this quarter is also a quarter really moving us forward in our strategic portfolio transformation. We have a number of exciting things that have actually happened in this quarter, both related to new Bolton acquisitions, some divestments, and clearly also how we see the future for our industrial automotive business. And all of this clearly I will cover in the next few minutes. But let's take a look at the third quarter in isolation. Organic growth and negative organic growth of some 4%. clearly a little bit lower than what we anticipated walking into this quarter, but also reflecting throughout the quarter through a number of leading external macro indicators showing that the global demand has taken a turn. And for us in the quarter, primarily China and automotive came out weaker than what we anticipated in the beginning of the quarter. But despite this, as I said, we have done a good job in continuing to adapt to these circumstances and we have driven effective cost management. We continue to have positive price mix and we also continue to drive a number of portfolio related activities and effectiveness activities, enabling us to hold up the operating margin, adjusted operating margin to just shy of 12%. which is actually an improvement versus the same quarter last year, despite these negative headwinds. And cash flow, as you can see on this chart, came in very strong in the quarter. 3.6 billion Swedish krona, also slightly north of what we had the same quarter last year. Taking a look at our geographies and I start on the right hand side with India and Southeast Asia where you see the exception in the quarter with a small positive organic growth. Primarily driven by a strong industrial distribution business and light vehicles in that area. But otherwise you see we are in the negative organic growth territory across our geographies. EMEA going through a tough period. I don't think this may be any surprise but some of the key industrial countries in Europe such as Germany, Italy and France they do have a rather tough economic situation at the moment, reflecting in our numbers. And we have also noticed that this quarter a number of our OEM customers, they actually closed their factories longer during the vacation period than they normally do, also impacting the growth in the quarter. Americas somewhat less negative, some 3% negative organic growth. Here I believe it's a lot of uncertainty related to the ongoing elections that is actually having an impact here. But by industry we see strong growth in aero and industrial distribution. While we continue to have a challenge when it comes to agriculture and the vehicle aftermarket in Americas. China, Northeast Asia, really driven by China, significant negative organic growth, close to 9%. By industry, it's again wind and industrial distribution that takes this number down a bit. This is the reflection, especially on industrial distribution. I think that the main issue there right now is customer confidence. customer and SME confidence about where the economy is going and I think there is some hesitation from consumers and small enterprises to drive consumption and drive investments. The incentive programs that are being pushed now by the Chinese government I'm sure are designed to help and to boost confidence again but for us it's a bit too early to tell what the implications might be. But so far in this quarter, we had a rather significant headwind in terms of demand and organic growth, as you can see. But despite this, as I said, we're holding the fort and looking into our industrial business, I think it's a pretty impressive number to be able to report a 15% adjusted operating margin, significantly better than the same quarter last year, where it was at 13.6%, despite almost 5% negative organic growth. Clearly the activities and our ability to adopt to this environment has really played out during the quarter. And to some extent that also goes for our automotive business. They had a negative 4% organic growth and holding the margin at around 5%. They had a more kind of a volatile situation at the end of the quarter where a number of our customers there changed their orders and reduced some of their orders. given what you probably already know what's happening in the automotive market in the third quarter is also reflected here. Looking forward, you're going to hear Niklas talk about our outlook for the fourth quarter, which is coming down a bit, which means that we will continue to work hard to mitigate these headwinds from a volume decline through active cost management, continued portfolio management, price mix activities, and really driving efficiencies across our business, as we have done throughout the last few quarters. So that journey will continue. And we are convinced that we're tracking according to our strategic framework. We are improving our business and will be in a strong position once demand turns back up again. Moving on to the strategic part of this conversation today, this morning, and looking into what we have done in creating a stronger SKF longer term by active portfolio transformation. And here I'm pleased to say that we're actually doing what we said that we're going to do. We have said that when we started our transformation, we said we don't have capacity to drive a lot of small bolt-on acquisitions. We have mentioned in the last few quarters that we now come to a point where we are ready to pick that up. And I'm pleased to note that in the quarter we did sign a deal with John Sample Group, small but accretive. bolt-on ecosystem for us in the lubrication space really enhancing our presence in the important markets of Australia and Indonesia. We said that we're going to do a strategic review of aerospace a few years back. We concluded that review that we want to retain the majority of that business. But there were some interesting non-strategic assets that we were keen to try to find another home for. And as some of you have seen, last night we announced something in that regard. And I will come back to more details on that shortly. And thirdly then, already back in 2022, we did say that we wanted to create a more autonomous automotive business, and that has led to the initiative that we announced a month ago, our ambitions to actually create two standalone entities, one industrial business and one automotive business, with the intention to also list our automotive business in the first half of 2026. But the last two I'd like to give you some more flavor on, starting with aerospace. We have signed a deal to divest our aerospace Hanover business in the US. This is an exciting small business related to rings and seals. Clearly a strong business and an interesting business but it does not really fit into the core business of aerospace that we are keen to retain and further develop and grow. And this is a growing business. We're pleased to announce that we have found a good home for this business, a home that will be beneficial for our customers, our employees, and I'm sure also for the future owner of this company. And a business of some 700 million Swedish krona in revenues. We actually sold that for some 2.3 billion Swedish krona. So that gives an indication of maybe the quality of this business, of our aerospace business. But as you also can see on this chart, aerospace remains a key industry and after distribution or industrial distribution this is probably one of the largest industrial verticals that we have in our portfolio at the moment representing some nine percent of our business and this is a strong and growing business that has a strong tailwind and pick up still after the covid closed down a few years ago so clearly a strong growth and in an exciting business that we now can use these proceeds to further invest into our our strategic part of this business. So we feel good about this thing. And again, this is in line with what we said that we're going to do. And finally, just to reinforce some of the key messages I sent a month ago when we announced the separation of automotive and industrial into two different entities. And the rationale for it, we are convinced, are still there. They represent two very different business structures and different business logics. where the automotive business is really now impacted by a rapid transformation driven by electrification, while the industrial business is more about market exposure, being close to the customers and drive accessibility and speed is the key to win in that market. There are different manufacturing processes where an automotive is more characterized by large batches, few variants, while the industrial business is the opposite. Smaller batches, more variants, agility and speed is key to succeed there. Customers, clearly there is a very well-defined set of customers in the automotive space and a very well-defined and broad set of customers in the industrial space. And also from a sales and contracts point of view, these businesses, they do differ. And therefore, we felt that we're probably going to be able to create two world leading entities and stronger entities driving profitable growth and value as separated through dedicated focus. And focus is key. Focus, we believe, will really unlock significant value for these businesses. It will provide better resource allocation. It will drive further efficiencies. It will make sure that we continue to stay close to our customers and drive innovation and development even closer with our customers. We can have a better capital deployment by separating the entities and we will have an increased response and hopefully even closer and even faster in our response and our interaction with our customers. So all of this is something that we are very keen to go forward. It's a hard work that we had ahead of us, but we have clearly now started to build our organization to make sure that the majority of us, we stay very tuned and very focused on delivering our existing business. That's our main priority. and then we ring fence a smaller part of organization to really now enter into all the detailed work to also create this unlocking and split of these two entities. So that work is now being in the planning phase and as we said before the aim is to list the automotive business on the Nasdaq Stockholm by the first half of 2026. And I know that many of you have a lot of questions and would like to have more details on the value creation, on cost related to this transaction and so forth. And here I need to ask you to hold your horses. We will come back to you. The intention is that we will host a Capital Markets Day in the fourth quarter of 2025, where we're going to go for both businesses, share the value creation that we see in more detail, We're going to share the financial targets we will set for these businesses. And we will also clearly go through what are the related costs to unlock this value. All of that will be in a combined effort at the Capital Markets Day in the Q4 next year. So with that, it's time for me to hand over to Niklas to give you more details on the numbers. So Niklas, please. Thank you, Rickard.

So good morning and good afternoon. Let's kick off with sales and provide some additional details on top of what Rick had already mentioned. We had a sales of 23.7 billion in the quarter. This was down from 25.8 billion last year. So quite a significant reduction, actually. As Rick had commented, we had a broad-based, I could say, soft demand in the world. But at the same time, there were some nice green shoots, such as India, aerospace, and, for instance, magnetics. What comes to the growth percentages, we had an organic sales decline of 4.4. This was driven very much by lower volumes and then, as Rick had mentioned, a good performance, continuous performance when it comes to price and mix. We also continued pruning or looking at our portfolio, taking action when it comes to lower margin business. And that also had an impact here. Currency was negative at 3.6. So all in all, a soft market that we saw experienced in Q3. On that note, we had solid and good performance when it comes to profitability. We had an adjusted operating profit of 2.8 billion, down slightly from last year's 3 billion, but in margin terms, actually an improvement where this year we had 11.9% compared to 11.5% last year. so very good performance very good actions taken by the teams across skf Currency was negative by 284 million, Swedish krona strengthening. And on the organic side, we had said weak sales, but on the other hand, this was nicely offset by price and mix. And when it comes to costs, overall also a good performance in the quarter. Cost management, inflation, not so much of an issue anymore. Besides on the kind of people side, where we continue to see relatively high inflation, but this is then offset by our mitigating actions. So all in all, solid performance when it comes to profitability in the quarter. Cash flow in the quarter was strong, 3.6 billion, actually up a notch from last year's 3.4 billion. Operating profit at similar levels compared to last year. And then we had a positive contribution, small positive contribution from networking capital. Here, I just want to comment on networking capital. As you know, we've been talking about this for some time. We have significant potential when it comes to inventories. Our inventory levels are still on the high side. So that's an area we continue to push. Also, as a reminder, we do have historically a seasonality where cash flow typically is stronger in the second half compared to the first half. And then it's actually vice versa when it comes to margins, i.e. margins typically lower in second half compared to first half. So all in all, a strong cash flow in Q3. Also, balance sheet continues to be strong. We have a net debt of 9.3 billion. Now, this is excluding pensions. That's a notch improvement or better than last year, 9.8%. And in terms of net debt to EBITDA, this is somewhat below one times excluding pensions and then including pensions slightly above one times. Return on capital employed continues to be stable around 15%, not below 15%. If we then turn to outlook and guidance, what comes to our expectations on Q4, we expect a mid single digit organic sales decline. Very much as Rickard commented on here, relatively soft demand, which we see continuing also going into Q4. And as a consequence, for the full year, we also expect then a mid-single-digit organic sales decline. Currency is expected to be negative also in Q4. So with that, Rickard, I hand back to you.