AB SKF (publ)

Hello, everyone. Welcome to this call focusing on our performance in Q3 2025. Also, this quarter, we improved our margin in a challenging market, and that was thanks to commercial execution and cost control. And this was definitely evident for our industrial business area. My name is Sofie Arnjus. I'm heading up Investor Relations, and I will also be joined by our CEO and President, Richard Gustafsson, and our CFO, Susanne Larsson. And there will be, of course, opportunities to ask questions before or after their presentations. And there are two ways to do that. And let me just remind you on how to ask a question. So if you have joined via the telephone, you press star and one. If you instead are watching via the webcast, you can already now type in your questions. And it's in the tab that you find above the slides page. With that, let's get started. It's a great pleasure to hand over to you, Richard.

Thank you so much, Sofie. And good morning, everyone, to this earnings call. And as you heard from Sofie, yet again, we are able to present a resilient and somewhat improved adjusted operating margin, despite a rather challenging market conditions. And also, as you can see on this chart, after eight consecutive quarters of negative organic growth, we're actually back to organic growth in the quarter. Actually, it's primarily driven by an industrial business where we have seen growth across our geographies, while automotive is still more volatile. This performance was actually slightly better than we anticipated walking into this quarter. However, though, the underlying market conditions have not significantly changed in this quarter versus the second quarter. And to some extent, we are also held by favorable comparison figures compared to Q3 last year. When it comes to our strategic initiatives, we are making good progress. Our automotive separation is progressing at a very high pace. And I will share some more lights on that today. But I will refer also to our upcoming Kappler Marks Day in a few weeks time on November 11th in Stockholm, where we will be able to share more lights on this. When it comes to our industrial rightsizing initiative that we announced the last quarter, it's also progressing according to plan at high pace. As we said when we announced it, we do not anticipate significant savings in this quarter. In the fourth quarter this year, the majority will come in 2026 and into 2027. And then we continue on our strategic journey to invest in our capabilities and effectiveness. And this quarter, I would like to put the spotlight on an initiative that we have developed in Italy, where we inaugurated a new global superposition bearing center that we are pretty excited about. And I would share some more details on that shortly. But if we move on and start taking a look at the high level numbers, Net sales ended at 22.4 billion Swedish krona, representing an organic growth of 2%, as I mentioned before. The adjusted operating margin improved slightly to 12.3% in the quarter, despite significant headwinds from FX and rather challenging market conditions. I refer them primarily to the tariff situation. The main reasons why we have been able to further enhance and retain the resilience in our earnings is our ability to drive commercial capabilities and execution on commercial activities. It's our good cost control and also that we benefit from previous investments that we've done in regionalization and in world-class manufacturing. Turning to cash flow. coming in short of the same quarter last year, primarily driven by higher items affecting comparability, where automotive separation is the main driver behind that. And you will hear more of this by Susanne very shortly. But if we then turn to our different regions, and as I mentioned in my opening remarks, I'm very pleased to say that we have growth, organic growth in our industrial business across the regions, where we have some more variation on the automotive side. But let's pick them one by one, starting with EMEA, our largest region, where we have an organic growth of 1%. It's driven by our industrial business, where some industrial verticals stand out and have very significant growth. I refer to aerospace and magnetics. While in general demand in Europe is still at a fairly low level, industrial demand is fairly low level, but has clearly stabilized in the quarter, but it's not yet taking off. When it comes to automotive, We're still in the negative growth territory. However, though, less so if you compare to the same quarter last year. And that is primarily due to a stronger rebounds in our commercial vehicles section. Turning to Americas, also a low single digit organic growth, again, driven by industrial. And of course, in this region, you know, the price mix activities to manage tariffs is part of the organic growth journey, but also some industrial verticals are also standing out. Here I like to mention marine and aerospace. Turning to automotive, a weak underlying demand that we have seen, and it's especially true for commercial vehicles in this region. China and Northeast Asia, mid-single digital organic growth, and here we see growth both in industrial and automotive. On the industrial side, it's primarily our industrial distribution that is growing and also our renewable energy business. Here I need to make the same comment as I did in Q2 last year. Some of the renewable energy growth is somewhat inflated from pre-buys or policy-driven pre-buys in China. On automotive, The growth there is pretty stable. And again, we report and see very positive development when it comes to EVs in this region. India and Southeast Asia, also a region where we have growth both in industrial and automotive, where we see very good activity levels in India and Vietnam, as examples. And from an industrial point of view, agriculture and material handling stand out in a positive way in the quarter. Well, automotive has a good development, both when it comes to vehicle aftermarket and commercial vehicles in this region. If we then focus in on our segments and start with industrial, that this quarter represents roughly 70% of our net sales and 90% of our adjusted operating profit. As I mentioned, we're back to growth here. I'm having organic growth just shy of 4%. But in absolute terms, as you can see from the chart, we are actually declining some 3% this quarter versus same quarter last year. And this is driven by FX. However, though, the adjusted operating margin continues to improve and now reaches 15.5% despite significant headwinds from currency. And also, we've been able to manage a volatile environment and the tariff situation. And the main drivers here are the same as I repeated for the group. But again, our commercial capabilities have played a significant role here. We have very good cost control. We benefit from investments in regionalization and world-class manufacturing, as I mentioned. And then we have a a small but not very sizable contribution from the right-sizing program. But as I mentioned, most of the value from that program, benefit from that program, will come later as we move into 2026. Turning to automotive. This quarter, roughly 30% of sales and 10% of adjusted operating profit. As I mentioned, still in the negative growth territory. but somewhat different across the regions. The negative growth, as you heard me say, is driven by Americas and Europe, or EMEA primarily. We have talked about the tariffs a number of times, and we said at the group level, we do believe that we will be able to largely compensate for the tariff impact. And that has been the case also in this quarter. We also said that the majority of the net negative impact from tariffs will be found in automotive. And that is also the case. So with that in mind, and also the fact that FX had had a really significant impact on the earnings in this quarter, I do believe that adjusted operating margin performance, not just shy of the same level as last year, is a rather good indicator. Good delivery. The main thing, the positive thing I'd like to put your focus on here is the fact that we continue to see a lower material cost that enables to offset some of those headwinds and maintain the margin. And this is not a one time event. It continues to be driven by very solid procurement activities and also a better material mix in our production. that is helping to reduce material costs. So that's something really positive. If we then turn our focus to our ongoing separation initiative. So it's progressing well and at a very high pace. It's still a large program and a lot of work to do. But in this quarter, we have some significant milestones that we have achieved. We have actually concluded a number of very important IT cutovers during the quarter. And they actually turned out fully in line with our plan and no negative surprises came out of those. Another key thing is what's happening in India, where you may know that we have our business there is listed also on the Indian Stock Exchange. And there we have been able to complete the separation. And we are ready to list the new entity in India before year end. Another significant milestone. But to give you some flavor on why we talk about that this is a very tight, tight schedule. And there are, you know, I mentioned a couple of times that, you know, there are always risks with this massive project like this or program like this. And a number of activities are on the critical path. And that has not changed. I don't have any red flags to report today. But to give you some color on this, we're talking about some more than 1,000 IT applications that we need to cut over. We're talking about more than 9,000 intellectual property rights that needs to be split. We're talking about more than 60 manufacturing lines that need to be transferred around in our footprint. So it is a sizable project. But as we said before, we believe, we still stand for, that we should be operational ready to list automotive by mid-2026. Then turning to another item, and as I mentioned in my opening remarks, that we are investing in a product line that is named Superposition Bearings, that we are pretty excited about. Today, it represents some 2% of our industrial net sales. But this is a product line that goes into a number of important industrial verticals, like robotics, advanced machine tools, and compressors, all of them that also benefit significantly from some key megatrends, such as electrification and automation. And why are these products, what value do they bring in these type of applications? Well, clearly it's about accuracy and speed. With minimal friction, exceptional running accuracy. And they also provide better stiffness and power density for these type of applications, enabling increased energy efficiency. Just to mention a few of the value creation that we have from these products. So what we have done and what we inaugurated earlier in the quarter, that we have now built a new, global cross-functional super persistence bearing center. It's based in Italy, in Arrasca, close to our normal operation there, where we have been able to co-locate our R&D, our engineering capabilities, and our production teams in under one roof. We have invested in a highly automated and digitized manufacturing capacity there, that can be able to very, very short turnaround times and also increase throughput significantly. And the benefits that we're beginning to get from this by getting this under one roof is clearly that can drive cross-functional synergies, but more importantly, we can then co-create with our customers and help solve their needs in very critical applications. And I have the joy myself to be part of the inauguration ceremony And I must say that was very rewarding to see the excitement among many of our customers when they saw our new capabilities in this field and what that could do for their business. So we do believe that this is an exciting opportunity where we will benefit from good growth and profitable growth, also driven by electrification and automation, as I mentioned. So with that, I end my part of this presentation and hand over to Susanne to take you through the numbers in detail.

Thank you, Richard. Good morning, everyone. So now we will really talk about the financial implications, and some of them you have also heard Richard commenting upon. But let me first start with a financial summary and an overview of the quarter itself then. So starting off with the net sales, it was down 5.1 percentage points. It was explained first by an organic growth of 2%, more than offset by a significant FX headwind. Our gross margin was down half a percentage point. However, if we put the one-off cost AICs aside, we saw an improvement of 0.4 percentage points. Our adjusted operating margin strengthened compared to last year from 11.9 to 12.3%. This in spite of FX headwind of minus one percentage point. Quarter three, one-off cost IECs amounted to 755 million, with the main areas being the automotive separation costs, representing 362 million. We had 230 million related to impairment charges of fixed assets, and finally, 141 million on ongoing restructuring activities. So net-net, we had an operating profit of 2 billion compared to 2.5 billion last year, where the main difference is explained by the increased one-off charges. So if we look at the bridge here, analyzing the operating margin from 11.9 to 12.3, I start with the organic dimension. So as I said, sales growth amounted to plus 2% with industrial contributing to the growth. Negative production volumes were more than well compensated by price mix. And talking about price mix, the key initiatives is pricing, portfolio management, but also managing the tariffs, mainly through price adjustments. The organic impact on the adjusted operating margin was 1.5 percentage points. Cost management was good with the development almost flat in the quarter, and this in spite of negative impacts of inflation, volume-related inefficiencies, and tariff costs. In the quarter, as Rickard said, we managed to largely compensate for tariffs and expect to do so also continuing into quarter four. Currency remained significant with a headwind, taking down sales by 6.9 percentage points and had an impact on the adjusted operating margin, as I said, on minus one percentage point. The main currencies remain the same. It's US dollar, it's Chinese yen and it's Turkish lira with the main effects vis-a-vis the Swedish krona. And finally, the structure changes. It's a small one. It's a net effect of the divestment we did in aerospace in Hanover and the last year's acquisition of John Sample Group. So let me try to explain the cash flow performance in the quarter. Cash flow from operating activities ended at 1.8 billion Swedish krona. And there are some reasons for that relatively weak cash flow. And it comes from what I will address now then. So first of all, we had one-off IEC cost with a relatively immediate cash flow impact. And that is particularly related to the automotive separation costs that is converting to cash flow relatively immediately, together with ongoing restructuring programs. And this explains 500 million in the quarter. In the bar other, we have 300 million negative explained by realized FX effects. Taxes paid in the quarter amounted to 700 million, which is higher than last year, 200. However, last year was low, so this is on a normalized level. And then finally, the networking capital. We had the change there of minus 400 million. And this was partly explained by accounts receivable and the timing within the quarter. And accounts payable being low due to seasonality, typically in our quarter three. Inventories, we are pleased to see decreasing in the quarter, where we saw reductions in both automotive and industrial inventory. And before leaving this, I just want us to remember that last year we had the change in the networking capital where we changed the reporting of consignment stocks. So we had both increase in inventory and accounts payable of one and a half billion Swedish krona each. So let's take a look at the balance sheet and the return on capital employed. SKF has a strong capital structure, and at the end of September, we had a net debt of 14.5 billion Swedish kronor. And if we put the pensions aside, it ended at 7.5 billion. Cash and cash equivalents ended at 7.6 billion Swedish kronor and were reduced as a consequence of a bond repayment of 3.3 billion Swedish kronor in the end of September. The SKF liquidity remains strong. Net debt excluding pensions in relation to equity ended at 13.3, while net debt excluding pensions in relation to adjusted EBITDA ended at 0.6. Finally, adjusted ROSE remained on a similar level as previous quarter, and that is 14%. So coming to my last slide with the outlook then. The global economic development remains uncertain, So the outlook expected is that the market demand remains similar as the one we just left in Q3. By that we mean that we expect an organic sales to be relatively unchanged Q4 year over year. The currency impact on the operating profits remains high and we estimate that to be minus 650 million applying their rates as for the end of September. The full-year tax rate guidance is adjusted to 28%, which is two percentage points higher than the previous guidance, fully driven by FX. And finally then, the CapEx guidance for the full year, we have taken down somewhat from 4.5 to 4 billion Swedish kronor. And by that, Richard, I hand back to you.

Thank you so much, Susanne. And if we wrap this up then, As you heard us say, the market conditions continues to be challenging with a lot of volatility and geopolitical uncertainty, which puts a negative push or downward push on demand. But with that said, though, we are very pleased that we after eight consecutive quarters, negative organic growth are back into organic growth. And as you heard us talk about, primarily driven by our industrial business. Also pleased that we continue our margin resilience story where we see that we are managing this rather volatile environment and managing headwinds in a decent way and holding up our operating margin. And this is due to that we actually execute what we said that we're going to do. We are driving commercial capabilities. We are standing firm on cost management and we are continuing to invest in our own business in terms of automation, and in terms of regionalization. I'm also pleased to report that we're making strong progress, as I mentioned, in our automotive separation. It's a lot of work still to be done. It's too early to claim full victory, but so far we are driving this fully according to plan. And as I mentioned, we have achieved some significant milestones in the quarter. And I'd like to, again, put some spotlight on the upcoming event in Stockholm in a couple of weeks, in November 11th. We look forward to see you all and share more details on how we see our future industrial business, some key highlights on our future automotive business and provide some more transparency on the cost also related to this separation. So with this, I'm going to hand over to Sophie that will then initiate the Q&A session.

Thank you, Richard. And yes, we hope that many of you can join us in Stockholm for the Captain Marcus Day. But there is also an option to join us online. Nevertheless, you need to register and the registration closes on Friday and you find the link to register on our website. So let's now open up for Q&A. And before we do that, let me just remind you on how to ask a question. So if you have joined via the telephone, you press star and one to ask a question. If you wish to withdraw it, you press star and two. And we will also accept questions from our online audience. And you can type in the questions in the box just about the slides. I know that there are many of you that want to ask questions. So please limit it to one question. And then if time allows, we are happy that you join the Q&A queue again. We will start with a question from the telephone line. and from Rory Smith at Oxcap. Rory, please go ahead.

Good morning. It's Rory from Oxcap. Thank you for taking my question. I'll stick to one as instructed. Sophie, thank you. And that is just if you could unpack that North America and particularly the US performance and even put a number to the volume versus price impact in the quarter. I'm just trying to separate out those tariff price increases from any underlying improvement or otherwise there, that would be great. Thank you.

Richard is happy to respond to that question.

Yes. We will not disclose how much is volume and how much is price mix as such. But when it comes to Americas, it is price mix that drives the growth. And we are actually still in a negative volume territory in Americas. So that's as far as I can go.

That's great. Thanks very much.

Thank you. And let's continue with a question from the line of Alex Jones at Bank of America. Alex, please go ahead.

Great. Thank you. Good morning. Just on the guidance that you've given for Q4, are you pointing for a sequential deceleration in organic growth, given you're talking about relatively unchanged? Or I think you talked about unchanged into this quarter and then delivered plus two. So is that still in the range of possibilities? And if it's more the former and you are talking about deceleration, can you just explain the moving parts for us, given I'd imagine the pricing gets sequentially higher as you continue to recoup tariffs? Thank you.

Let's hear from Susanne on this topic.

So what we are really saying is that we do not see a significant change in the market environment quarter four over quarter three. So since quarter two, I think we are seeing signs of bottoming out. So from the sequential question you asked, we have to remind ourselves that quarter four last year, we came in strong. And that we have in mind when we compare quarter over quarter. And that is the reason for us to guide flat.

Thank you.

Thank you. And let's continue with a question from Erik Goddard at SAP. Erik, please go ahead.

Yeah, thank you. A question on automotive, just for some perspective. I mean, currency, as you say, continues to be a heavy headwind for you from a profitability perspective, and the relative impact on automotive is quite significant. So, I mean, it's a sub-5% margin business on an adjusted basis. Is this sufficient for the company to be standalone, or is currency dramatically changing the outlook for automotive? Thank you.

Rickard, do you want to take this one?

Of course. Erik, as we have said also, and we announced our ambition to do this separation, we have higher ambitions for automotive than the current performance. And yes, we have entered up in a more volatile environment, maybe than we anticipated before, but we are managing through this. And in our internal plans, when we look forward, we're still very confident that we will create a solid and profitable automotive business as we move forward. But more details to come in a couple of weeks' time in Stockholm.

Thank you. And we will continue with a question from Daniela Costa at Goldman Sachs. Daniela, please go ahead.

Hi, good morning. My question relates to tariff impacts and Section 232. But first, I guess a clarification sort of on the bridge on the cost. You have 23 million headwind, which I guess sounds quite small. Is it because you've been selling out of inventory? And then is that repeatable in Q4? How do you size the direct and the indirect inflation coming from Section 232 going forward?

This is a CFO type of question. So, Susanne, please.

Hi, Daniela. I think we are very pleased to see that we have a cost development, which is only 23 negative, really flat. And I think what you see is a lot of effort coming in from managing the cost variability, looking into what we have done with automating our manufacturing operation and really driving a lot of cost initiatives, which is necessary from a long time in a negative decline. So I think that that is something that we see will continue to be a leverage that we can utilize moving forward. Talking about 2.3.2, I think what we are guiding now is to say that we anticipate that the majority of the tariffs, and also including 2.3.2, will be compensated and not ending up in our P&L.

Including suppliers in direct impact from 2.3.2 in their own? Including that, yes. Thank you.

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

Thank you and good morning. Just a short one on the pre-buy effect in China. What was the impact? How many percentage points did it support the organic growth in this region? Thank you.

Richard, please. As you know, we normally don't disclose that many details around these things for a number of good reasons, and I'm going to stick to that also today. So I'm not going to give you a percentage as such, but we do see that some of the organic growth that we report on the industrial side in the China region is somewhat inflated in the quarter due to these pre-buy impacts that we don't expect to see in the fourth quarter.

Okay, thank you.

And let's continue with a question from Ritzke Maidy at Jefferies. Please go ahead.

Yes, good morning. Thank you for the time. I just wanted, for your record, maybe just to draw a picture on the demand. I think even if I look at China, it does seem that industrial distribution has had maybe perhaps a little bit better performance. And then moving on to Europe, I think earlier this year, you talked about some green shoots. Just maybe if you could just give us an update, looks like from today's commentary, that things are stabilizing, not picking up. And maybe we could have a comment as well on America, just to draw sort of an overall picture. Thanks.

All right. I will try to do that then. Starting with EMEA then, if we go down that path. As I mentioned, we do see some growth on the industrial side, especially in a few verticals, such as in aerospace and marine. While I do sense that in general terms, we haven't seen a significant uptick in demand in EMEA yet. We're still waiting for that to come. We do feel more confident, though, that it has truly bottomed out. But activity levels are not yet picking up from that level. Turning to Americas, again, as I mentioned on a previous question, the growth there is primarily tariff-related, less so on volumes. Aerospace and marine are some green shoots in that particular region. And also industrial distribution is holding up okayish. It's not growing, but it's holding up okayish, which is also important from a profitability point of view and a mix point of view. So that's positive. Turning to China, where we do have a mid-single-digit organic growth for the group. where the industrial distribution has contributed to that. But I need to remind you that it's also a reclassification that will happen. So that's why the numbers may look more stronger than they actually are. But even if I compare light for light, it's a solid and somewhat growing performance also in distribution. So we see that in China. And I already commented on the renewable energy area. And for automotive, if I just touch on that briefly, we are very pleased to see that we continue at a very solid growth rate when it comes to EVs in that particular region. And India and Southeast Asia, primarily driven by very... good activity levels in economies such as India itself, which is the majority, and also like Vietnam, which is a smaller contributor to us, where India is the most important market for us in that particular region. And in general, good demand levels across industrial, and I mentioned too that stands out a little bit more than others, that is agriculture and materials handling. Again, I do believe that the tariff situation, the uncertainty, is having a negative impact on global demand. We do see some signs of bottoming out, as I mentioned, but we still wait for the uptick to come back. And as you also heard, Susanne, when we guided for Q4, We sense that the underlying kind of dynamics of the business in Q3 was roughly the same as in Q2. And our best estimate is that that will be also the case for Q4. Thank you.

Let's continue with a question from John Kim at Deutsche Bank. John, please go ahead.

Hi, good morning. I'm wondering if you could give us a little bit more color on the planned listing of your Indian asset. Any color there would be helpful.

Thanks. Likert, do you want to bring some color on that?

I'd be happy to. It's a massive achievement and such, but it's not so much to say. It's a kind of odd comment. I hear that myself. It is a complicated effort to split that business in India, both from a legal point of view and also to get all the authority permits and tax permits. So that has been a rather sizable effort. And now we have concluded that. Everything is set and done. So now we have a new entity that we are ready then to also put forward to the Indian Stock Exchange. And that's going to happen sometime between now and year end. So I think that's as much as I can say. Okay, thank you.

We will continue with a question from Tim Lee at Barclays. Tim, please go ahead.

Hi, thanks for taking my questions. So maybe a bit more on the session 2.3.2. Do you have any estimate on the cost impact from session 232 alone, both directly and indirectly? And have you already made any price hike because of session 232 and is there any pushback from customers in terms of further price increase? I just want to see whether there will be any comments on the further effectiveness on pricing activities going forward. Thank you.

Let's have Susanne answering this question.

Talking about the tariff environment, I think that is really one of the uncertainties that makes the demand still not really picking up. So I think the biggest impact of the tariff is the lack of recovery that we see. But generally speaking then, we have been successful in managing the tariff cost. We have worked through the 232 implications for SGF and we anticipate to be able to take that through with the majority also to our customers. We of course have a close relationship with our customers in this and we are normally applying surcharges while this situation remains.

And if I may add a few more comments. Of course we are having intense discussions with our customers on these items and We're not just using price as the only mechanism to compensate for this. We're also pushing forward activities to drive more of our assortment to become USMCA compliance, as an example. That's another key component in this. And when it comes to general price increases, the market cannot absorb more general price increases, but we will continue to do selective price increases. That has nothing to do with tariffs. But more where we see that we can drive price and especially when we come with new innovation and then we work together and co-create with our customers, we make sure that we also take our fair share of the value that's being created. And that will continue.

Thank you. We will continue with a question from James Moore at Rothschild and Redburn. James, please go ahead.

Thanks, Sophie. Morning, everyone. Thanks for your time. Could I ask a question on the new specialised industrial solutions business, which you basically renamed Independent and Emerging and brought in Hans Landin? Just It's going to be like, not on a third, but coming towards that, the future industrial company. And I wondered if you could say two things, really. What are you changing to improve the profitability of Specialized? And Specialized is mostly sales, lubrication, and aerospace. Could you say where your confidence is the greatest among those three for profitability, uplift, and potentially what you're doing to drive that?

I will ask Rickard to address this one.

And I will give you a cliffhanger. You're right. We are excited about what we then call the new name of this event, of this entity. And there are very important and exciting business units that makes this up. And with very solid growth. And some of them are further down the road and have already done some to reestablish their profitability levels and now in full gear growth. And others are still doing some kind of work to further enhance profitability before ramping up their growth. This is a key component in our future industrial story and growth journey that we foresee. And it's going to be a part and something that we will share in more detail when we're going to We put more color to our future industrial business on November 11th. So that's the cliffhanger. So you will see more there. But clearly, we drive them now much more as fully owned subsidiaries of this company than what they were before and without no overhead anymore. Thank you, Rickon.

And we should also just clarify what is included in Specialized Industrial Solutions, for those of you that have not seen the press release that we had out a few weeks ago. So it's aerospace, it's seals, lubrication, and our magnetic business. But as Rikard said, we will come back more on that topic, the interesting topic of Specialized Industrial Solutions at the Capital Markets Day. We will now continue with a question from Anders Idborg at ABB Sundahl Koljer. Anders, please go ahead.

Thank you. Good morning. So you're guiding CapEx to come down, but you're guiding extraordinary items or items affecting comparability to come up. So I was just wondering, could you give us an early look items trending in 2026.

Susanne, can you please respond to this question?

I almost repeat what Richard had said around cliffhangers. But you're right. The capex we took down that outlook for the full year from four and a half to around four billion. And we also say that we sequentially increase the one-off cost into quarter four. So when we meet at the capital market day, we will provide some further clarity on how we look upon CapEx moving forward, but also how we look upon the one-off costs and the right sizing that we are doing, including the spin of automotive.

Okay, can't wait.

Thank you. We are marketing our capital markets day as usual. So we hope that you all can be there or tune in. We will continue with a question from André Kuchning at UBS. André, please go ahead.

Hey, morning. Thank you very much for taking my question. Can I just start with a quick clarification first on the change of accounting for consignment stock? Could you just explain to us what that is and whether that took place in this quarter or was that the quarter a year ago?

Susan, can you add some light here?

Sorry, I was obviously not clear previously. When you compare the cash flow this quarter three compared to last quarter three line by line, I just wanted to remind everyone that last year we did the classification. which is not impacting the change of network and capital as such, but line by line. So we changed the reporting of consignment stock last year and by that increased our inventories with one and a half billion. And we also increased our accounts payable with one and a half. So the net net was zero, but line by line makes it more difficult to compare this year's line by line in the network and capital. Thank you for the question.

And Andrea, you had another question as well there. Yeah, sorry to try to squeeze in, but really I wanted to actually understand the cadence of profitability into Q4 versus Q3 a bit better. Just thinking about, obviously, normal seasonality, I think you see sort of 70, 80 bps decline normally in Q4 versus Q3. But then we've got, I guess, savings stepping up from the programme that you launched the last quarter. But then I also note FX of 650, I think, guidance versus less than 500 in Q3. And then the tariff pass-through, is that margin neutral? Or are you passing through the actual cost increase and hence there is a bit of a margin headwind? I just wanted to understand whether Q4 will be a normal seasonality or whether a combination of these factors will do it one way or the other.

Richard, do you want to address this one?

I will try to. I think the answer is yes. We do foresee that it's going to be normal seasonality in Q4. So you should bear that into your estimates. The negatives that we foresee in the quarter, coming quarter, is clearly FX. As we mentioned, probably going to have, if we remain at current levels, a negative 600 million impact in Q4. Tariffs, we do say that we largely compensate. We believe that we're going to do that also in Q4. But that largely means that there's some net negative impact in the numbers, but largely compensate. On the positives, we do see that we will continue with our cost control. We will continue to drive our portfolio management and price mix activities, as we have done in the past. And we do foresee that we will continue to yield benefits from right-sizing, sorry, from regionalization and from world-class manufacturing. And probably some, but not significant, also contribution from the right-sizing initiative. Most of that will happen later, though. So all in all, but it will be, you know, we do expect normal seasonality.

That's really helpful. Thank you very much.

And let's continue with a question from Klas Berglind at Citi. Klas, please go ahead.

Thank you, Sophie. Hi, Richard and Susanne, Klas at Citi. I was late on the call, lots going on, so you might have covered some of this. But first on North America, I was expecting higher growth driven by the pricing there to compensate for the tariffs, versus what I thought, that underlying volumes are weaker. Can you please talk through, Rickard, what the end market sort of weakened quarter on quarter? I mean, commercial vehicles, heavy machinery, and have you seen any improvement as we went through the quarter and into October? Just curious about the underlying volume development in North America, please.

Right. And yes, Klaus, we did touch on this a bit earlier, but I'll try to give you some color to this. When it comes to the numbers I report for Americas, it's both industrial and automotive. And we do see growth in our industrial business. And I have answered another question today where I do acknowledge that the growth in industrial is driven by price mix. We're still in negative volume territory, also on the industrial side in Americas. Areas that is growing nicely in Americas in this quarter is primary aerospace and marine that have very strong performance. And as you mentioned in automotive, we have seen a weak demand when it comes to commercial vehicles in the quarter and automotive is also reporting negative organic growth in the region.

Okay. When it comes to one follow-up, and I'm sure you talked about it, section 232, a lot of questions on this, but have you given any sort of clarity around the share of steel and aluminium out of your cogs at the moment, please, i.e. the share that is subject to the 50% tariff, so we can do, I mean, we're stumbling a little bit in the dark, right? We're trying to do our own models, but if you have said anything on that, Rika.

Stan, can

So we are not disclosing the share as you're asking for. And at this point, we are mainly saying that we will continue to compensate the majority of this out into the market.

So when we say largely compensate also for Q4, that includes what we know right now related also to Q3, too.

In the current scope, it has, yeah.

Okay, absolute final one, promise to be quick, is on the spin-out cost. I think when I spoke with Sophie this morning that you're guiding for a higher one-off quarter over quarter, I'm trying to understand the composition relative to world-class manufacturing spin-out cost, and also you had that sort of non-cash write-down, I think, in the third quarter. Are we going to see any more? I'm just trying to understand the level of one-off into the fourth quarter, please.

Yes, Susanne, do you want to?

I can take that. So you're right, we said that sequentially we will increase it then quarter four over quarter three. And I also want to just make you pay attention to our announcement that we are closing a factory in Argentina. So that is something that will also come into the quarter four as a one-off charge then. So that together with the continued expansion high level of effort into the automotive separation activities are the main reasons for that.

Thank you.

Very good. We will continue with a question from John Kim, Deutsche Bank. John, please go ahead.

Hi. Thanks for the second round of Q&A. I'm wondering if you could just give a bit of color on your right sizing, whether your headcount reduction or optimization has gone to plan versus the initial guide. Yeah, I'll leave it there.

Right. I'll take this one. The answer is yes. We are progressing well in line with our internal plan. And a lot of the necessary negotiations in the different jurisdictions or countries have been completed. And the vast majority of people impacted have been informed. And we now are going to start to see that the staff reduction to happen. As I said a couple of times, we do not anticipate a significant impact on our cost base or positive contribution to the cost in the fourth quarter. There will be some, but it will not be significant. But the vast majority will come as we enter into 2026.

Okay, thank you.

And... Then we have the final question from the line of Seb Grend at RBC. Seb, please go ahead.

Thank you for taking my question. You raised the tax guidance to 28% from 26%, and this is not because of any impairments not being tax deductible, but more because of your regional profitability structure. Do we now have to assume that the tax rate will also be higher in the coming seasons or coming years? And could you split that between industrial and automotive? Is it more industrial profits being in high-tax countries or more the automotive side? Thank you very much.

Susanne, that's a CFO type of question. It is indeed. So thank you for the question. Yes, we raised the the outlook for the full-year tax rate from 26 to 28. And I say that all of that is actually explained by FX. And we have some of our entities with the functional reporting in another currency than their local. And this is something that is then impacting the tax as well then. So that is the reason fully for us having that. And that also means that this is not necessarily something that you can assume is a going concern as we move along. but then having this impact where we have big FX implications as such. Talking about the two standalone companies and their relative tax rates, we have not disclosed that yet. So I leave that for now.

Sorry, the acoustics was a bit bad. So it's more of a one-off FX issue rather than underlying structural regional split of profits.

Correct.

Thank you so much.

Thanks. Very good. That was the final question. So, Rickard, please go ahead with your concluding remarks.

Yes, thank you very much. And thank you all for joining us for this call and for your energizing and engaging questions. As you heard us talk about, we are continuing to maneuver in a rather challenging and volatile environment. With that said, though, we are sticking to our strategy and we try to deliver on what we said that we're going to do. And that recipe is working. We continue to report a resilient and somewhat improved earnings that we are pleased about. We are also happy that we now, after eight consecutive quarters of negative organic growth, enter into a more growth territory, and especially that is driven this time by our industrial business. Again, we don't yet say that we've seen the shift and the uptick in the market. The activity levels are rather unchanged, but we are happy also with the progress that we'll make in the strategic transformation of the company. So with this, I thank you for your attention and I hope to see you, many of you, either in person or if you join through digital means in a few weeks time in Stockholm. I wish you a good day and thank you so much.