AB SKF (publ)

Welcome to SKF's earnings call for the fourth quarter of 2024. We ended the year with solid margins thanks to strong execution in a challenging market. My name is Sofie Arnjus and I'm heading up Investor Relations. We will have a slightly different team than otherwise. Our CFO, Niklas Rosenlev, left by year end. So I'm very happy to have our acting CFO, Carina van den Berg, with us today. And we will also have our CEO, Rikard Gustafsson, with us today. After your presentations, there will be an opportunity to ask questions. And if you press 1 and star, if you are joining via the phone, you can ask a question. If you are joining via the webcast, you can already now type in your questions. So with that, I'm happy to hand over to you, Rickard.

Thank you so much, Sofie. And good morning, everyone, and warm welcome to this earnings call. Well, with no further ado, let's just dig into it. And as you heard Sophie mention in her opening remarks, we are continuing to managing a rather volatile environment. We are now reporting for the sixth consecutive quarter negative organic growth. This quarter, we're talking about some minus 3%, but we maintain our margin resilience. On a rolling 12-month basis, the margin is holding up pretty well, also compared to 2023, as you can see on this chart. And the drivers behind this are the same that we have talked about throughout the year. We are executing on the strategic intent that we have laid out. We are driving a lot of price mix. We are driving our portfolio management activities and we are continuing our regionalization efforts to ensure that we establish strong and robust value chains in those regions where we operate. And clearly in this quarter, we have also spent a lot of time and emphasis on the upcoming separation of our industrial business and automotive business. We're in an intense phase and we're working hard with all the planning and all the preparations for the work that is needed to make this kind of historical split of our business. Clearly, this means that we also take the opportunity to review the future setup for both our industrial business and our automotive business to ensure that we create a platform for profitable growth going forward with two highly competitive business units. But more of this will be shared in the fourth quarter at the Capital Markets Day that we have talked about before. And today I'm pleased to announce kind of a hold the date. We will be in Stockholm on November 11th. We're going to share more details on the upcoming separation and the cost of the separation, but more interesting, the value that we foresee that this will create for both entities. So I hope to see you all in Stockholm in November. But if you start by taking a look at our full year. Sorry, that's the slide. The full year. You see, we have a net sales of almost 100 billion Swedish krona. This is a negative organic growth of some 5%. But as I mentioned before, the operating margin is holding up pretty well. It's almost on par with the same number as we had in 2023, even though in 2023 we had positive organic growth. So the resilience, I think, is a proof point in these numbers. We also have a strong cash generation, almost just shy of 11 billion. And with all the activities that were ongoing and our belief that we are creating a strong foundation for the future, we have the confidence also to slightly increase or propose to slightly increase the dividend from 750 kronor to 775. So that was what we bring to our shareholders at the AGM later this spring. Looking into the quarter, the fourth quarter in isolation, as I said a couple of times, the negative growth environment is maintained. The margin is holding up pretty well. This time we're reporting some adjusted operating margin just north of 11%. It's worth noticing, though, that we have had some significant FX headwinds. of 0.9 percentage points that have had negative impact on the margin in this quarter. But also true that in this quarter, it is the first quarter where we have not been able to fully mitigate the negative impact from fixed cost absorption driven by the lower volumes. And this is especially true in automotive, which I will come back to shortly. Looking into cash flow, as you can see, I think it's a robust cash flow of 3.3 billion in the quarter. And as we talked about, the net sales just shy of 25 billion, representing a 3% negative organic growth. But this is not evenly spread across our geographies, as you will see on this chart. If I start with Americas, we're back into growth. We see a strong, positive growth, net sales growth in Americas. Clearly, we see more higher activity levels in the region, which is rather promising. I'd like to stress, though, that we have some time effects here. So some business that we may plan to see in Q1 slipped into Q4. But even if we even that out, we would have reported a positive number here. Turning to India and Southeast Asia. Here we also see high activity levels in a number of countries, India, Indonesia and Vietnam to be mentioned, the prime ones. We also see a lot of activities here in two wheelers. We see strong industrial distribution growth and also heavy industries. Turning to China and Northeast Asia, a rather significant negative organic growth in the quarter. As we said, now for a number of quarters in a row, we still have a low activity level in the wind industry. But here in China, also for industrial distribution, we have seen some destocking in the fourth quarter that is also having a negative impact on our growth number in that region. But clearly there are also some green sprouts in this area where we see extreme strong growth in the EV sector in China in particular. And finally, turning to Europe and EMEA, where we also report a rather significant negative organic growth, but it varies quite a lot between different parts of EMEA. In Northern Europe and in Eastern Europe, we do see a positive activity level where we see positive momentum in a number of different industrial verticals. While it's more flattish or stable or slow, pick the word you like, in the larger Western European economies, such as France, Germany and Italy. Looking into different industrial segments, we have seen strong growth in aerospace in this segment, while we see very low activity levels in automotive in primarily EMEA. So this gives you a little bit of a flavour of how the growth has developed and the activity levels in the different regions where we operate. Then turning to our industrial automotive segments. Again, our industrial business is holding up well in a very volatile environment. Negative organic growth of some 3% in this quarter, while the operating margin is not far from what it was a Q4 last year. For the full year, though, I think it's interesting to mention that our operating margin for our industrial business is actually somewhat higher than for 2023, despite that we're now into negative territory relative to growth. Moving then to automotive, which had had a tough quarter. As you can see here, a rather significant negative organic growth of some 4% and a rather weak adjusted operating margin of 2.6%. Here we have seen that in the quarter that many of our OEMs, especially in Europe, they really reduced their output from their manufacturing activities and prolonged the vacation period over the holidays, which also had an impact here and made it broader difficult for automotive to fully compensate the impact from fixed cost absorption. In the quarter, we've also seen that the product mix has shifted a little bit. We have sold more products that need more material and therefore material costs are also up a bit in the quarter. And finally, also logistics has cost a little bit extra in the quarter. On the good news, though, when we look into the underlying business and the new business that we quote for, they are all very accretive to the long term operating margin target that we have set for automotive. So we are optimistic and we believe that what we said before, it's still valid, even though the fourth quarter was a problematic quarter. Leaving the numbers for a second and sharing some insights on some of the strategic initiatives that we're working on. And this quarter, I'd like to draw your attention to two things. Give you an update on what we have talked about for quite some time, our efforts to drive a robust and sustainable supply chains in the different regions where we operate, i.e. what we call regionalization. And I also like to give an update on how we continue to strengthen our value chain to support the ongoing electrification by building strong value chains in our ceramic bearings. But starting with the regionalization. Here you see an update on what we have achieved during 2024. And I do think we see some significant movements in the pace in our regionalization. This is something that we talked about throughout the entire 2024, that this is high on our agenda. And I'm pleased to report that you can see that in the regionalization rates. America's, as you can see, touching 70 percent regionalization, up three percentage points in just one year. And in Asia, we are not far behind at 68 percent, up five percentage points in a rather short period in one year. While in MEA, clearly we already have a very solid regionalization base. Here it's more about how do we drive efficiency and also how do we shift more production from Western Europe to Eastern Europe, which is also part of our agenda. And just to remind ourselves, why are we doing this? Well, there are a number of benefits that we truly believe we gain from driving this agenda pretty rapidly. We do see increased flexibility in our value chains. We do see that it drives cost competitiveness for us. We do see that it creates more resilience in our value chains, which is clearly needed in the world that we live in, the volatile world that we live in. And it also provides higher customer satisfaction. And let's take a deep dive on this customer satisfaction. I'd like to share an example from China. And here you see the regionalization rate in the bottom of this chart and on the blue line indicates the development in our lead time to our customers. Clearly, you can see as we have ramped up regionalization, we have been able to significantly reduce lead time with some 25% in a few years' time. And the key success factors are listed here on this slide as well. Clearly, we have invested in local production and sourcing capacity, which has played out well. But it's not just about the sourcing and the production, it's also our efforts to build local R&D and manufacturing efficiency and competencies. And by doing that, we have been able to leverage the total know-how and knowledge base of SKF that has also helped to accelerate that pace. So good momentum, and I hope this gives an indication that it also provides customer value to drive this regionalization for us. Shifting gear and turning into what we do to take advantage on the ongoing electrification trend. For us, we are the world's leader when it comes to ceramic bearings, and they provide a significant value in itself. Clearly, they have a natural isolation for electrical erosion, which is a high interest in many electrical applications. that provides high capability for higher speed or better capabilities for higher speed. And it's more resistant, we're resistant and have an extended life. So what we've done here is actually, again, we are focused on the entire value chain, everything from ensuring that we have The raw material, we develop our manufacturing capabilities of rolling elements, both in-house and through partners. And we have accelerated our R&D capabilities and also our ability to test and prototype so we can be quick to market and short lead times to market. And when we talk about ceramic bearings, we normally talk about their application and how they fit into the EV space, which is true. And it's an important application for us and an important market for us. But it's not the only industrial vertical where this has a significant potential and provides significant customer value. You see here a number of other industrial verticals that are of a high interest, like high efficiency and heating and cooling, the HVAC being one prime example, aerospace being another. So clearly this is an interesting area for us and something that we invest in and we do see significant growth opportunities going forward. So with this, I end my part and I'd like to hand over to Carina. And I'm very pleased and grateful that you have stepped in to bridge this gap between Niklas and incoming Susanne. So more than welcome.

Thank you so much. Thank you. And hello, everyone. And I know you are not used to see me. I'm usually more behind the scenes. I'm globally responsible for the financial accounting and reporting as well as the sustainability reporting for the SKF group. So my name is Carina Vanderberg and I'm here to take you through some of the financials. Let's start with the bridge. So you see that Bridge has a slightly updated format where you are able to more clearly follow both the sales development and the operating profit development in the quarter. So if we start with some comments on the sales, we see that sales is up 1%. And this is driven by the FX effects, especially from last year, where we had the devaluation of the Argentinian pesos, which caused the sales to be lower last year. And this is then showing up as a positive 3.9 in this quarter. And this compensated for the organic sales decline of 3%. If we then turn down to the operating profit, we are very encouraged to see that for the first time this year, the price mix was very positive. And that actually offset the volume decline that we had in the quarter, giving a positive effect on the EBIT. On the other hand, as Rickard mentioned, we had some challenges when it comes to the cost development, partly driven by the low volumes that we had fixed cost absorption we could not account for. We also had some negative material mix. The price component in material is flattish or slightly positive, but the consumption of mix of material was slightly higher. And this was particularly true for the automotive business. And we also see some slightly higher logistic costs. If we then look at the FX component here, we see that this affected the margin quite a lot by 0.9 as the absolute number on EBIT was negative. And this is mainly driven by the Turkish lira and the euro. The structural component in this bridge relates to the acquisition of the John Sample Group. This was not a full quarter that we had them with us. And the operating profit also includes some transactional costs. What you don't see on this bridge is the item affecting comparability. I'd just like to comment on that, that they were 100 million higher than what we saw in Q3. And this is mainly related to the intense phase we are in when it comes to the separation of the automotive business. And we do expect that this will be slightly higher in the coming quarter as we accelerate that work. If we turn to cash flow, as you can see on the left side here, we had a very solid cash flow generation in the fourth quarter, although slightly behind last year or a half a billion behind last year. But this was a record quarter for us. So we are quite pleased with this number. And if we then look on the right side, where did this cash flow come from? We can see that the operating profit is actually higher than last year. And we have a good contribution from the networking capital. That's partly driven by seasonality, but also with some diligent AR work. But we do see that we have further potential to reduce our inventories. If you would look further down into the cash flow statement on the investments during the quarter, this also now includes the acquisition of the John Sample Group for about 570 million SEK. It will then turn to the balance sheets. As we have reported for quite some time now, we have a solid balance sheet. We see a slight reduction in the net debt year over year, but also quarter over quarter. And the net debt to EBITDA is now below one, excluding the pensions, and just slightly above, including pensions. Talking about the return on capital employed, we do see a reduction. And this is driven by the tougher market conditions that we are in today, but also the higher investments we have had a few quarters. And with that, let's turn to the future and the coming year. We have reviewed our guidance. We have also incorporated feedback we have received from some of you on this call. And given the nature of our business and the volatile markets we are in today, we have decided that we will not give a full year guidance any longer. And for the coming quarter, we will give a more qualitative rather than quantified guidance. So looking into the first quarter, we do expect that the organic sales is expected to weaken somewhat year over year. On the other hand, we expect the FX to turn positive. And based on the year end rates, this would be approximately 200 million seconds. On the CapEx side, we for the full year foresee some four and a half billion second CapEx. And this is down from where we ended in the 2024 figures. And with that, Rickard, I hand back to you.