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.