AB SKF (publ)

Welcome to our Q2 2025 earnings call. We achieved strong underlying margin through effective commercial execution and cost control, navigating well in markets with mixed demand. In the quarter, we continue to lay a strong foundation for the future, and we will in this call update you on the ongoing rightsizing activities. I'm Sofia Arnjus, heading up Investor Relations. With me, I have our CEO, Richard Gustafsson, and our CFO, Susanne Larsson. After their presentations, we will open up for questions. And there are two ways to ask questions. If you have joined via the phone, you press star and one. And if you're instead watching via the webcast, you can already now type in your questions And you do that in the tab above the slides. So with that, happy to hand over to you, Richard.

Thank you very much, Sophie. And good morning, everyone, and warm welcome to this earnings call. I am pleased to report another quarter of modern resilience given the market circumstances. As you can see on the right-hand side of this chart, Our organic sales was actually rather flattish versus the same quarter last year. And this time, the growth in our industrial business almost offset the decline in automotive. We have a strong operating margin, adjusted operating margin, despite rather tough market conditions and a significant FX headwind in the quarter. Our automotive separation is continuing and building momentum. And at the same time, we are creating a more competitive industrial business. And in this earnings call, I like to give some flavor on what we do when it comes to building this competitiveness in our industrial business. I will touch on how we drive operational efficiency through the right sizing program that we announced in Q1 this year. And I will also touch on how we work with commercial excellence. And here I'm going to use our aerospace business as an example on how we drive progress in that particular field as well. But let's look into our overall numbers for the quarter. Net sales ended at just north of 23 billion Swedish kronor, representing an organic decline of 0.2%. In absolute terms, the decline is significantly worse, almost 10%, but clearly driven by FX. But turning to the operating margin, there's actually a slight improvement here versus the same quarter last year to 13.3%, despite rather tough market conditions, as I said, and FX headwinds. When it comes to tariffs, we have largely been able to compensate for tariffs in the quarter, so they don't have a significant impact on the margin in this quarter. And as we look into the future, and given what we know right now, we anticipate that that will be the case also in the third quarter, that we largely will be able to offset the tariffs cost increase, where the net impact will be visible in our automotive business. And the main driver for this strong and resilient margin performance is actually reflected by the diligent work that we continue to drive in the areas that we talked about in the last few quarters. I'm talking about pricing, portfolio management, cost efficiency and good cost control. And on top of that, we also benefit from the automation, investment and automation and manufacturing footprint that we've done in the last few years. That is also helping to upheld the operating margin in the quarter. Net cash flow is strong, 2.8 billion up from 2.2 billion in the same quarter last year. And you will get more color on this when you hear Susanne shortly. Turning to our regions. I'm pleased to say that in this quarter, our industrial business reports organic growth across all our regions. while our automotive business is still facing a more difficult market situation with low demand in significant parts of our geographical coverage. Some green shoots there as well, but in general, a rather tough market condition for automotive in general. But if we take the regions and starting with EMEA, here you see an organic decline of just shy of 3%. We have growth in our industrial business, as I mentioned also here, but primarily driven by lubrication, aerospace and magnetics. There's a continued weak demand in automotive and rather tough market conditions in European automotive market and not at least within light vehicles. Turning to America's also an organic sales decline of just roughly 1%. Here we see good growth in our industrial business, partly driven by price mix as a consequence of our tariff compensation activities. But we also see strong growth in some industrial verticals such as aerospace and also off-highway. Automotive in general is rather weak in America in the quarter as a market and also in the terms of demand. And both light vehicles and commercial vehicles report rather weak numbers in the quarter. Turning to China and Northeast Asia, positive there, organic growth of 4.3%. We do see an improved industrial demand in the region. However, though, some of it is also timing related due to some policy-driven pre-buying effects within our wind business in China. But in general, Distribution is holding up well and also generally energy is growing nicely in the region. In terms of automotive, it's a rather solid development in automotive with a clearly strong growth in EVs, electrical vehicles in that particular region. And finally, India and Southeast Asia, good growth, 5% organic growth in the quarter, driven by countries or markets such as India, Australia, Indonesia. Turning to some of the industrial verticals that are really growing in the region is distribution, rail and agriculture would be examples of that. And it's a rather solid automotive performance also in that particular region. So if we then turn and look into our segments and starting with our industrial business, this quarter representing 72% of sales, and 89% of the adjusted operating profit. After quite a number of quarters with negative organic growth, I'm really pleased to report a positive organic growth of 2.4% in the quarter. As I mentioned, driven by Asia, but partly timing driven. I mentioned Europe and the industries and businesses there that are growing. aerospace, lubrication, and magnetics. While general bearings in Europe is more kind of wait and see, not really taking off, the uncertainties related to tariffs is still putting this wet blanket over the market in Europe. And both on the OEM side, but also in the aftermarket, the distribution market end users are a bit hesitant to play offense And we don't see a lot of stock orders coming through yet. But in terms of the adjusted operating margin, very strong development, 16.6%, upwards of 16.3%. Again, we have been able to manage tariffs pretty well. We have been good at driving solid price mix and a good cost-efficiency ratio. is enabling us to maintain and actually further improve our operating margin in the industrial business. Turning to automotive, 28% of our sales and 11% of the adjusted operating profit. As I mentioned, a rather tough market conditions with a lot of volatility and low demand. And here we have an organic decline of 6.2%. As I mentioned, it's primarily driven by Europe and Americas, where we see that light vehicles and also commercial vehicles are the main drivers behind the decline, while we see more stable development in China, Northeast Asia, and India and Southeast Asia. But I must say that I do think that the margin performance is actually pretty decent given the circumstances. In an environment of very low volumes, and a significant FX headwind to basically kind of maintain and uphold the adjusted operating margin just north of 5%, it's pretty good given those circumstances. And again, it comes from the same activities as I talked about within industrial, focus on price, portfolio management, cost effectiveness, and good cost control or efficiencies in cost control. And that's not just one thing that contributes. There are, you know, I many many things that we work on but i like to draw some color to one item in this quarter and that's related to uh to cost for material where we do see a positive deviation in the quarter and that is not due to that pricing of material has gone down but rather a continuous work from the team to manage our work with our suppliers but also to intelligently find new ways to find a more cost-effective material mix in our end products. That is also helping to uphold, upheld the margin. So all in all, I think it's a decent performance given the circumstances. We continue to work with our automotive separation. As I mentioned in my earlier remarks, it continues to gain momentum, but at the same time, we're also working hard to create an even more competitive industrial business. And as I mentioned, I like to share some color on this, both when it comes to commercial efficiencies and right-sizing and commercial excellence. And there I'm going to talk about aerospace. But let's start with the efficiencies. And to just give you some color and background to this, of course, and you know this, this is not something that we have started this quarter. We have been working on this for quite a couple of years. to make sure that we adopt and adjust to market conditions and drive productivity within our business. A couple of things that we've done in the last few years that I think has made a significant impact is the simplified operational sales organizations. I refer to the decentralized organizational structure that I put in place that has enabled us to have a more lean setup and drive more efficiencies in that regard. You know that we have invested heavily in regionalization and automation in our manufacturing footprint over the years, and that has helped to increase operational efficiency. And given that we are now closer to our customers, closer to the markets, we are able to have a more agile response to changes in circumstances or demand in different regions. And that has paid off. And I use the illustration on the right-hand side as a proof point of that. The blue line that you see represents sales per FTE from 2020 to 2025. And it's an uptick of north of 30%, as you can see. The grayish bar is the adjusted operating profit per FTE. And it also demonstrates an uplift north of 30%. So 30% in the quarter. Sorry, in the period. Again, a proof point that we actually done a couple of things to drive our internal productivity. But we know that we need to do more. And with the automotive separation, that will enable further efficiencies. And we need those to make sure that we create long-term competitiveness in our business to cater for profitable growth also in the years to come. And that's why we announced in Q1 the right sizing program. And today I'm able to give you some more details and color to that program. It will imply painfully and regretfully, but necessary, a rather significant gross reduction of staff positions in our business. Some 1,700 positions will actually be redundant. Given that we also continue to drive our regionalization and shift some of our business into different regions, there will be some rehires. So the net impact, FTE impact, will be 1,200 there or thereabouts. It will generate savings of some 2 billion Swedish krona with full run rate savings expected in 2027 and a linear profile during 26 and 27. These savings will more than offset any synergies derived from our automotive separation. And it will further strengthen our competitiveness and build a foundation for growth as we move forward. Those savings will come with the restructuring charge. It's around 2 billion Swedish kronor. And we take the full amount of this in items affecting comparability in this quarter. the cash impact will be primarily visible during 2026. So it's a rather sizable program as we announced in Q1, and now we have been able to provide some more color to this, and it's going to be an item that we will work on from now and throughout 2025 and into 2026 with full run rate effect in 2027, as I mentioned. Turning to our commercial excellence capabilities, and as I mentioned, I like to use the aerospace as an example of this. Aerospace is a significant industrial vertical in our industrial business, as you can see here, representing some 9% of our industrial sales. We have announced a few years ago the strategic review of this industry, of this aerospace industry. And it's really made some significant inroads and helped us to improve our performance in it. We have taken some structural actions where we concluded through the strategic review that we wanted to focus on some core segments, i.e. air engine, air structure bearings, which would imply that we needed to divest some non-strategic assets like the Hanover business that we have in the US that's already been divested, and also the Elgin business that we also have in the US, that transaction is now well underway, but not yet completed. We have driven our commercial capabilities and have been able to be much better in our pricing management. We have significantly increased our off-the-market presence, and we have secured customer contracts with all major customers beyond 2020-30. And as we also said in our strategic review, we want to accelerate our investments to further strengthen this business. And we actually increased investments pace with two times in this period to drive productivity, automation, but also to cater for the capacity needed to meet the very strong demand in this market. And you see kind of the results here from 2022 to 2025. we have seen a CAGR of 12% on the net sales in this segment. And at the same time, improved the adjusted operating margin with some eight percentage points. And we're now well positioned for the future. We have a very focused portfolio to make sure that we really serve our customers in the air engineering structure segment very, very effectively. And that we are also a key supplier for defense applications, which in these times is a growing segment. We have a global footprint, primarily with a focus in the Americas and in Europe that will also help to protect our customers from geopolitical turbulence. And we have a very modern operation to drive efficiency, to ensure high quality, and on-time delivery to our customers. So all in all, I think we're well positioned here to drive profitable growth, and we're going to use this and replicate the efforts here also in other industrial verticals and business units to further enhance our commercial capabilities. So with this, it's now time for me to hand over to Susanne to share some more details on the numbers. Please, Susanne.

Thank you, Richard, and good morning, everyone. So let's dig deeper into the financials. So as a financial overview here, starting off with the net sales, we are down almost 10%, which is a lot explained by the negative effects year over year, where we had an organic development being flat. Our gross margin was down 2.4% this fall, but this is fully explained by the right-sizing program. So the restructuring charges was mostly impacting COGS as staff people and their costs are related both to COGS and S&A. The adjusted operating margin strengthened compared to last year from 13 to 13.3%. This in spite of FX headwind of minus 0.9%. And I will elaborate a little bit more on that on the following page. As Richard said, quarter two item effecting comparabilities was sizable and amounted to 1.8 billion Swedish krona, of which the right sizing program that we announced last quarter was fully charged to the result and amounted to 2 billion. Additionally, automotive separation work and costs are increasing, and amounted to 300 million in the quarter. There was an impairment charge of 200 million, also to the result. So these costs were finally offset by the profit from the sale of the aerospace business in Hanover, amounting to 800 million. And finally, footprint regionalization costs were minor in this quarter, mainly due to timings. So let's look at the bridge where we explain how it came from an operating margin last year of 13% into 13.3% this quarter too, starting from the left to the right. So organic development, relatively flat, minus 0.2 percentage points, where the negative sales volumes were more than compensated by price mix. So key initiatives for this, Impacting price mix was obviously pricing, but also portfolio management and tariff management through price adjustments. The organic impact on the adjusted operating margin was 1.1 percentage points. Next one is cost. Cost development was well managed as Rickard elaborated on and impacted adjusted operating margin slightly positively with plus 0.3 percentage points. And this in spite of lower sales and manufacturing volumes and tariffs. We had a net positive impact, much explained by material, but also cost management and variability of costs. Currency had a significant impact year over year, taking down sales by 9 percentage points and had an impact on adjusted operating margin of minus 0.9 percentage points. The main currencies vis-a-vis CEC was US dollar and CNI, and that caused the main effects. Finally, we had a couple of structural areas. One was the net investment of Arrow Headover, and the other the acquisition that we did last autumn of John Sample Group, and they did not have an impact on the margin. So, cash flow. going from the left to the right, starting with an operating profit that we ended at quarter two, amounting to 1.3 billion. So then, of course, we add back the depreciation, amortization, and the impairment of 1.2 billion. And the third bar, the non-cash items, here we reverse the right-sizing charge that has not yet impacted the cash flow of 2 billion, netting off the profit of 800 million from the sales of the Arrow Hanover business. And that brings us to plus 3.7 billion, where we're just further non-cash items of 200 negatively. The paid taxes were 500 and somewhat lower than last year. And the change in networking capital improved vis-a-vis last year. And this is partly explained by accounts payable. This brings us to a cash flow from operations of 2.8 billion, which is an improvement of 700 million compared to last year. Further, investing activities for the quarter ended at a net positive 1.1 billion, of which the capex amounted to a negative 900 million, but we had a net payment from the divestment of tax of 2 billion. So net-net Cash flow after investments this quarter too ended at 3.9 billion kronor compared to 0.9 billion last year. Balance sheet then and some KPIs. This quarter has a similar development as last quarter. Very similar. Looking into the net debt excluding pensions, it decreased from year end of 8.7 billion to now almost or a little shy of eight. The net debt in relation to equity ended at 14.4, and the leverage net debt divided by adjusted EBITDA 1.0. Finally, the adjusted return on capital employed amounted to 13.9, where the capital employed remained on the same level as last year, or year-end, sorry, while the result in absolute amounts came down, and much of this, as we have said, explained by FX. Now to my last page, and that's around the outlook. So whilst the global economic development makes the outlook uncertain, we expect the organic sales to be relatively unchanged quarter three, year over year. When it comes to FX, we expect a similar development effect as we had in quarter two. So minus 500 million when we apply FX as per the end of June. When it comes to tax and CapEx, the guidance remains unchanged. So by that, Rickard, over to you.

Thank you very much, Susanne. And to wrap this formal presentation up then, I'd like to summarize by pointing to a few items here. As you heard us say, it's in the quarter, we have a rather mixed demand where we back to organic growth in the industrial segment while we still have a rather weak situation in automotive. Our margin resilience, the journey continues and we continue to manage effectively in very tough environments. and uphold our margins. And we continue to work diligently with all these activities that you heard us talk about for a number of quarters. The automotive separation, it's an important item and we pay a lot of attention to it. There's a lot of hard work going into that across the organization, but I'm very pleased to see that we continue to build the momentum there. And the right sizing of industrial. Yes, it is painful to have to reduce this number of staff positions, But it is all about making sure that we build a very competitive platform for long-term profitable growth. And that's what we're after. And this is enabled by the automotive separation. So with this, before I hand over to Sophie to help me manage the Q&A, I just wanted to make a reminder of an important date in November this year when we're going to have our Capital Markets Day. Well, I hope to see a lot of you in the sunny Stockholm as it always is in November. You can see that the registration will open in August or early September. Keep out and mark your calendars. I hope to see you in Stockholm. With this, we end the formal part of the presentation. I ask Sofie to help me navigate through the Q&A.

Thank you, Rickard. Let us open up for questions. Let me remind you on how to ask a question. So if you are dialing in via the telephone, you press star and one. And if you want to withdraw that question, you press star and two. And for those of you who are joining via the webcast, it's also possible to ask questions and you do that in the chat box just above the slides. And you can already now type in those also. Let's start with a question from the telephone line here, and it's from Rory Smith at Oxcap. Please go ahead, Rory.

Good morning. Thank you for taking my questions. It's Rory from Oxcap. I've got three questions, if I can. Firstly, just on the pre-buying that you've seen in China Wind, if we think back to Q1, I think you didn't actually see any sort of improvement in that market versus perhaps your competitor who had seen some tick up in Q1 in China Wind, which suggested that you maybe weren't chasing some of the lower returns work there, but obviously that's now changed and you're seeing some pre-buy. So anything that you can add color to there would be greatly appreciated. And then secondly, just whether you've seen pre-buying more generally, specifically in North America, And then finally, what you've seen in the first couple of weeks in July, whether that's a sort of continuation of Q2 trends, any color you can give there as well is greatly appreciated. Thank you.

Richard, would you like to respond to these three questions?

Yes, certainly. Hi, Rory. When it comes to the wind question in China. It is policy-driven, the pre-buys, and that a number of the customers there, they really try to get orders in before kind of the mid-year mark. You're right, in Q1, we did not see that much. It's more in this quarter. I can't really comment on my competitors, but I do believe that also the Chinese OEMs they divide their share of wallet among some of the different players and also the industrial ones. And maybe they gave others a larger share of the wallet in Q1 and us a larger share this quarter of these pre-buys. That could be one explanation to that particular question. Secondly, on the general pre-buys and in the US, I will give the same answer as I did in Q1. We actually don't really see anything. That doesn't mean that it may not actually be there, but we don't see anything that stands out, anything that is tangible. So again, so it's the same answer as we did in Q1 on that one. And then finally, your question on the trading kind of situation now in July versus June, nothing really has changed. We see basically a continuation of what we've seen so far. Thank you very much.

Thank you. Let's continue with the next question, also from the telephone line. It comes from Claes Bergerlind at Citi. Claes, please go ahead.

Thank you, Sophie. Hi, Richard and Susanne, Claes at Citi. First, on the growth in Asia, coming back here to the pre-buy first. Did China wind grow? Was it up from a very low level, up 50, or did it even double? Yes, we understand how much the pre-buy impacted growth at the group level. And then on India and Southeast Asia, am I right that the strong growth here was supported by particularly strong deliveries in the quarter, which might not be sustained? So I'm basically trying to understand to what extent we should carry the growth in Asia forward here into the third quarter. I'll start here. Thank you.

We had a little bit of trouble to hear you. I heard your question on the wind business in China. Could you repeat after that? I really got your question correctly. Please. I'm sorry for this.

Sure. Can you hear me now? Yes. Okay. So, Rickard, it was on the Indian Southeast Asia growth, where I also think that you had quite strong deliveries in the quarter, which might not be sustained. So for like both regions, I'm trying to understand to what extent we could carry forward some of this growth or how much we'll basically roll as we go into the third. Hope you could hear me.

Yes, loud and clear. Thank you. And thank you for your patience and for repeating your question. Much appreciated. Starting on the wind business in China. The wind business in China is roughly, you know, 1%.

It's around 1% of group sales, I would say, just to put it into perspective.

Correct. And exactly how much it's grown in the quarter, we don't really disclose. But, you know, we have been at rather low levels for quite some time. So the comparison is pretty easy. So it will quickly ramp up to some sizable percentage. But we do see it as pre-buy, so it is a bit inflated in the quarter. India is a little bit of a different story, or Southeast Asia. There, actually, we see that some volumes that we anticipated in Q1 actually came in Q2. So that's kind of the situation there. So there, I don't think it's more of a pre-buy. It's more that, you know, there was some timing of volumes that was designed or planned for Q1 that ended up in Q2, especially in Indonesia.

Very clear. My second one is on the guidance of flat-ish organic growth. I'm trying to understand to what extent This is somewhat boosted by further price increases linked to tariffs. Or if you think some of the improvement to volumes you see in EMEA in the quarter in particular could drive the growth further from a volume point of view into the third and more than offset the hangover then from the pre-buy in China. I guess I'm trying to understand the price mix dynamics relative to the volumes into the third quarter. Also, as your mix should have peaked here, you know, looking into the rest of the year. Thank you.

Rick, do you want to continue?

We don't foresee in this guidance a significant change, an uptick in EMEA. It's more kind of, you know, we are at best, we see it's bottoming out, but I don't dare to say that we see an improvement. And that's also part of our guidance. But you're right that we will continue and work hard to compensate for tariffs also in Q3 and our best estimate as I mentioned is that we will largely be able to compensate for that through prices and surcharges and that will show up of course as part of organic growth going forward. On the negative side on the price mix will be the fact that our pruning activities has now come to an end so that will not support price mix going forward when we compare quarter over quarter and then also we have a situation where we have had a positive contribution for a couple of quarters where our OEM business have had a larger decline in sales than our distribution business and therefore have had the positive mix implication. Now we see that that difference is equaling out, that the OEM business is not dropping faster than the distribution business. Hence, we then have a negative mathematical impact on price mix. So that would be on the negative side. So these are some of the components that make up our guidance for Q3.

Very clear. My final one is for Jose-San on the world-class manufacturing program. Your cash flow is better this quarter than in the first quarter, but you still have a long way to go on the inventory side. The world-class manufacturing program will help, but I guess you need more volumes to get the inventory turns working in your favor. Can you please update us on where you are on the localization strategy relative to your targets? And so we can get a better feeling for that when volumes are coming through, to what extent your inventory turns can improve. Thank you.

So your assumption is partly right then. So talking about the world-class manufacturing, that is continuing, and I think we see good impact out of that, and that is also helping us to see the good cost control and cost management that we see in our existing low-demand environment and our financial performance. The regionalization is continuing, so that is something that is ongoing, and we see We see effects of that when we compare ourselves year over year with more and more of regionalization. And we anticipate that that will continue also. When it comes to the inventory levels, you are right that we have a high focus on that internally. If we put the effects aside, we can even see that we have a positive trend in reduction of the inventory levels in our business. But certainly with low demand, small lot series and some short cancellation, I think it's fair to say that when the demand is coming, it will help us to boost the expected effects more.

Perfect. Thank you very much. Thank you.

Thank you. And I see that there are many of you that wants to ask a question. So from now on, please limit yourself to one question. And we will continue with Daniela Costa from Goldman Sachs. Daniela, please go ahead.

Hi, good morning. I wanted to ask sort of regarding portfolio topics, just what you mentioned in terms of parallels on other areas of industrials and aero that you can work on. Can you give us a little bit more color on likely size, areas, timeline, and related to portfolio, just a quick clarification. I didn't hear, sorry if I missed it, you mentioning the risk of delays in the automotive separation. that you had mentioned last quarter. So does it mean that we're out of the problem zone and you've gone through those tasks that maybe were more critical? Thank you.

So, Rikke, do you want to comment on this?

I'd be happy to. Related to the review, strategic review that we did in aerospace, we did bring, took some learnings with us and we implement those and we kind of being inspired by those in other parts of our business. It's more a generic comment and there is nothing specific that it can give you and that is any particular timeline on this. But clearly, we know that we can drive commercial excellence. We can be more effective in how we set up our aftermarket presence. We can be more effective in our contract management with our customers and so forth. And those type of things are activities or actions that we do in a broader scale in our portfolio. And on the automotive question on the separation, unfortunately, I'm going to be... have to say that we're not out of the woods yet. We still have some critical milestones this fall that we need to pass before we know exactly how things are going to play out. But as I said in Q1, that still remains. We are working very, very effectively on this at a high pace. We have a large number of activities that we need to complete. some of them outside of our own control, where we need government approvals or authority approvals and such like that. We have a tight schedule, a number of activities on the critical path, and we don't have a lot of headroom for delays in this. As of today, just as it was in Q1, I have no red flags to report. None of this risk has yet materialized, but I can say that we are out of the woods. So it's more kind of the same situation as it was in Q1.

Got it. Thank you very much.

And let's continue with a question from Magnus Kruber at Nordea. Magnus, please go ahead.

Hi, I'm Magnus here at Nordea. Could you comment a little bit on why the cost savings program came in so strongly per headcount and also a little bit about Apologies. Could you comment a little bit about why the savings program came in with such a high level per FTE and what drove that higher than previously alluded to level? And also, could you help us a little bit about the synergies that you anticipate to see from the separation? Thank you.

So Susanne, do you want to comment on that one?

Yeah, so as you said, we took the full charge of the restructuring program or the right sizing program in this quarter and have worked it through with our different countries and consultation during the quarter. So where we see 1,700 people with a net of 1,200 and we anticipate the saving of two. So how can we then anticipate that big question, that big amount? I think that's how I interpreted your question. And I believe that we will see partly, the main part will of course be people-related, but we are also anticipating some other impacts that are not related to the individuals. Taking down consultants is one of those examples.

Yes, and we have also other initiatives, operational and supply chain-wise, That is adding up to that 2 billion savings number. So as Susanne said, it's not just people related.

Another question on the synergies. Well, yeah, I can comment on those. If your question is if you want me to quantify them, I'm sorry, I'm going to disappoint you. I will not do that this time. But clearly, as in any separation, there will be some dissynergies. And that's the case also for us. The exact amount of those, the size of those and so forth, all of that will be very transparently described when we see you in November in Stockholm at the Capital Markets Day. Thank you.

Thank you. I hope your questions there, Magnus, was answered. So let's continue with a question from John Kim at Deutsche Bank.

Hi, good morning, everybody. Wanted to get a little bit more color on the bridge in terms of the normal components. Can you comment in terms of building blocks on raw mats, energy, logistics, anything we should think about as we progress through the year in the comps?

That's a question that sounds like a CFO question here.

Yes. Hello, John. So if we talk about the cost component of the bridge, we can see that we have been able to offset some of the negative volume impacts from, as you said, material. But we can also see that on some of the utilities and logistics. So that has a positive impact. And as Rickard explained, when it comes to material, it's not only a mix, it's also how we work in our operation to both redefine different components and steel, and also how we are utilizing our production better. So I think that is something that we are working hard on. So that is part of the explanation then.

Okay, thank you.

And let's continue with a question from Tore Fangman at Bank of America. Please go ahead, Tore.

Yes, thank you for taking my question. Just one more on the outlook for Q3. I guess the stable growth outlook is positively impacted by tariffs, negatively by the pre-buy effects you saw in China. Could you disentangle that a bit more and share some detail on how this would have looked without the terrorists and without the PREVA? Thank you.

So, Rick, do you want to share some light on this?

I'm sorry, but we will not be able to give you some and do that. But basically, we're trying when we do the outlook to give you the best view that we can provide. And there are so many different kind of inputs to this guidance. So try to break them apart will just confuse everyone. So you have to see it as a package. And the outlook that we have with relatively unchanged versus, you know, same quarter Q3 last year is the best guidance I can give you. And we have to stay as such.

Well understood. Thank you. Thank you.

And we will continue with a question from Andreas Koski at BNP Paribas Exxon. Andreas, please go ahead.

Thank you, Sofie. Good morning. I was actually also going to ask about the outlook, but I will skip that one. I don't think it makes any sense. So I will instead ask about the separation costs that increased in the court to around 300 million. Would you say that is what we should expect from here until the spin has taken place? And on top of that, we should also add, I guess, more costs related to the regionalization that was low in this quarter, or how to think about items affecting comparability from now on for the next 12 to 18 months. Thank you.

Let's hear from Richard to clarify this.

All right. The separation cost in the quarter of some 340 million. We also say that that is kind of the separations building momentum. So you would expect that to actually further increase as we go into Q3 and Q4 as we build the momentum. So it's not a fixed number quarter by quarter. And you're absolutely right. We still have regionalization that we need to complete. And that was due to time. It was a rather low amount in quarter two. So more of it was pushed into the second half of the year. So you should expect that as well. So, yes, I suspect comparability will continue to be fairly sizable also in the second half.

Thank you very much. And just quickly, what do you estimate the cash impact to be from this larger program that you announced now in this quarter?

So when we talk about the right-sizing program of 2 billion, we do not anticipate significant amounts to impact the cash flow for this year. We assume the majority of that will come through our cash flow next year.

What will the amount be approximately?

The amount will be similar to the charge we have taken.

All of that will impact the cash flow. Thank you very much.

Let's continue with a question from Erik Goldrang at SEB. Erik, please go ahead.

Thank you, and I hope it hasn't been asked. I've had a bad line on and off. So the same issue presented today is in industrial only, if I understand correctly, and you say we'll have to wait for the CMD. But when we think about auto and what you might do on the manning side there, any reason to assume that it's going to be a materially different correction level compared to industrial on a relative basis?

So, Rikard, please.

Yeah, it's a different approach there and something. since this is a a business that we are building and we are now creating the future in automotive organization a vast majority of the people that will be part of the future automotive business will come from the current organization but then they also need to build some capabilities that they don't have today uh as as becoming a standalone company so uh No, you should not anticipate that there's the same approach for automotive, given that they basically start from, I wouldn't say blank sheet of paper, but at least, you know, they're building a new business.

But they're building a lean business. That's for sure. Thank you, Erik. And we will continue with questions from the telephone line here. And the next comes from Tim Lee at Barclays. Tim, please go ahead.

Hi, thanks for taking my question. I just want to understand a bit more about the pricing. So I'm not sure that you can comment how much pricing you achieve in the second quarter, especially in the US market. And when it comes to the third quarter, do you think there will be more pricing needed? And in which volume, how much negative volume impact do you see in the second quarter?

Sorry, Tim, it was a bad sound. Could you repeat the volume question there?

Sorry, I was just wondering if you can tell us about the negative impact from volume in your EBIT in the second quarter.

So, Rikard... I can try to do the pricing question.

Maybe you do the volume one. Okay. We don't really disclose how much of our price mix comes from price and how much is mix. So we need to stick to that. But as we said, we have been able to largely compensate the tariff costs through price mechanism. And that is both price increases, but also a lot of surcharges. And as we move into Q3, we will not comment on exactly on what the price level or component needed. We will continue to say that we anticipate and we plan to largely compensate for tariffs also in Q3 using the mechanisms pricing and surcharges also in Q3. And then on volume, Susanne?

So I think on the volume side, I think what we say is that the organic sales, it was flat, out of which automotive declined six. And we saw an industrial growing by two. And that is, of course, the combination of volume offset by price mix down. So I think we will not comment on the volume specifically, but we, so we had a good price mix, then more than compensated for the volume, the sales volume drop that we saw.

Thank you. Thank you. Thank you, Tim. And we have our final question here from Ritzk Maidy at Jefferies. So please go ahead, Ritzk.

Yes, good morning. Can you hear me? Yes. Thank you. Yeah, perfect. Cool. Thanks for your time. Just a couple of follow-ups. Number one is, can you just walk us through the details of the surcharges and how they work? My understanding is that price increases are more sticky, just how the surcharges would work. And then secondly... just from the phasing of tariffs. So I think from the cost side, you know, if you could just talk us through how much of a step up of the tariff costs you will see from Q3 onwards and just mechanically excluding any efficiencies you do or, you know, manufacturing changes, how much of a price plus surcharges you need to offset those. Thank you very much.

So I will ask Rikke to address this one.

Sure. Starting with the surcharges and how they work. They are rather time consuming. So our sales organizations across our businesses, they have spent a lot of time with our customers negotiating and debating these surcharges. And then when there are changes to kind of the directions coming from the US administration, we have to go out there again and renegotiate. So do you question how sticky they are? Well, a price increase is pretty sticky. Surge charges, as the name indicates, actually will either increase or decrease depending on where the tariffs go. And if the tariffs disappear, surge charges will disappear as well. So that's how it works. I hope that is somewhat clear. And then the 423, the step up in tariffs. Again, there is a lot of uncertainty. We don't really know where things will end and where the negotiations between the US and a number of different countries and the EU, where they will end up. So it's hard to second guess. And we won't give a certain number. We do say, again, I repeat what I said before, we do believe that we will be capable to largely offset surcharges, given what we now know and what's being debated at the moment. And the net impact will be primarily visible in our automotive business. Exactly what pricing is needed, we don't really disclose. We just say, in fact, that we believe that we will be able to compensate, largely compensate.

Perfect. Thank you very much. Thanks.

Thank you. That was our final question for this time. And before we wrap up here, Rickard, do you want to share your key highlights of the quarter?

I'd be delighted to. And thank you for your insightful questions and your engagement in our company. Much appreciated. As I said, I think we continue to demonstrate a strong resilience in our business due to all the hard work that the employees of SKF is doing every day across our entire global footprint. And I am pleased to see that we are able to navigate in rather difficult environment with a lot of headwinds from different directions, but still demonstrate a rather robust and resilient performance. We are excited about the future. We are excited about the momentum that we're building in the auto separation and to create two strong and global leading businesses, one pure play industrial and one pure play automotive business. And to get there, especially for industrial side, we need to drive further efficiencies and drive competitiveness. And that will imply some staff reductions. It is regretful, but necessary. And I think we're on the path to build a very strong foundation for long-term profitable growth. So with that, I thank you so much. And I think we end this call and I wish you a wonderful summer.