AB SKF (publ)

A warm welcome to this call focusing on SKF's performance in Q4 2025. We are ending the year with improved adjusted operating margins, both at the group level and in our large industrial business area. And this was mainly driven by strong cost management, but also solid commercial execution. I'm Sofia Arnjus, heading up Investor Relations. With me, I have our CEO, Ulrika Gustafsson, and our CFO, Susanne Larsson. After their presentations, there will be opportunities for you to ask questions. And there are two ways to do that. So, if you are joining via the telephone, you can, at any time, press star and one to ask a question. If you are instead watching via the webcast, you can already now type in your questions, and you do that in the tab just above the slides. So, without further ado, it's a great pleasure to hand over to you, Richard.

Thank you very much, Sofie, and good morning, and thank you for joining us for this earnings call. I am pleased. to once again report an improved adjusted operating margin year over year, despite very challenging market conditions and headwind from currency. As you can see from the chart on the right-hand side, in the quarter we do report flat organic growth, which is in line with our guidance. It's important to stress that This does not imply we compared to Q3 that we have deteriorated market activities in Q4 versus Q3, but rather a consequence of tougher comparisons. We do report organic growth in our industrial business, but we still see some softer demand in our automotive that are still in a declining organic growth territory. The automotive separation is, of course, continuous at high pace and strong momentum. And I am very pleased to say that we have identified an opportunity to further accelerate the phase-out of the automotive contract manufacturing that will benefit both businesses. It will require some additional transfers of assets, which means that we now plan to list our automotive business during Q4 2026. And clearly I will come back to more details around this later in my presentation. I will also take this opportunity at this call to reiterate some of the key messages from our Capital Markets Day in November, really outlining the foundation for how we see long-term value creation in both our future businesses. So with that then, if we move in and start by taking a look at the full year 2025. Net sales came in just south of 92 billion Swedish kronor, representing a flattish organic growth, or to be specific, negative 0.4%, where industrial growth was 1%, and automotive negative organic growth at around 4%. The adjusted operating margin actually improved to 12.7% in the year, despite very challenging market conditions, geopolitical tensions, and significant headwind from currencies. The net cash flow from operations ended at 0.8 billion, at 8.4 billion, which is somewhat lower, 2.5 billion lower than the year before. And the reason for this is spelled items affecting comparability, which amounted to almost 3 billion in the full year. And the main drivers there was our right-sizing initiative that we initiated in 2025, our ongoing footprint optimization activities, and of course, our efforts to separate our automotive business. When it comes to dividend, the board will propose to the shareholders at the AGM a maintained dividend at 7.75 Swedish krona per share, which actually is representing or reflecting our strong financial performance. They will also recommend that this year it will be paid out in two tranches, one in April and one in October. If we then turn to the fourth quarter and take a brief look at that, we have net sales at 22 billion, which is a flat year-over-year organic growth in line with our guidance. We do have organic growth in our industrial business, as I will talk to more shortly, while we have still a negative demand environment or slow demand environment in automotive. The adjusted operating margin moved up to 11.8%. And the main drivers for this improvement comes from good price activities to compensate for tariffs. The right-sizing program contributes with almost $200 million in the quarter. We have finalized our world class manufacturing program that is also contributing in the quarter. And we also have had generally very efficient cost management, not at least with an automotive and also when it comes to material costs. Net cash flow in the quarter, 2.7 billion. This is some half a billion roughly, less than what we reported the same quarter last year. And again, items affecting comparability is part of this. The main cash drains, though, has been the auto separation. And that's ongoing. Cost related to our right sizing is coming in here. And then we have also in the quarter closed our manufacturing operations in Argentina. But you're going to hear from Susanne and give you some more color to this as well shortly. If we then move on to our sales by region, and let's start from the top with our largest region, EMEA, where you can see we have flattish organic growth. But if we then break it up by the different segments, we see positive organic growth in our industrial business, primarily driven by aerospace, magnetics, and also off-highway. In general, I would say that for industrial in Europe, we see that the market has bottomed out. But we don't really see any significant signs of a significant bounce back or uptick in the market. But a sound and a solid bottoming out is clearly there. When it comes to automotive, it's more challenging, still rather soft market environment, and it's reflected in low demand for light vehicles and also commercial vehicles in Europe, while the aftermarket business is holding up a bit better. Turning to Americas, also flat-dish growth in general. Here as well, we have positive organic growth in our industrial business, to a large extent driven by tariff-related price increases to compensate for tariffs. But if we break out some geographies, or sorry, some industrial verticals, that actually seems good development. It's aerospace, it's also high-speed machinery and automation. When it comes to automotive, it's also a challenging market with soft demand, and particularly in commercial vehicles for us in this region. China, Northeast Asia, single-digit organic growth on the holistic view. Again, here we have organic growth in our industrial business, and was primarily driven by distribution, which actually had a good ending of the year. We also saw that the wind-related pre-buys, they did end in Q3 as we expected. We actually have a negative organic growth in automotive, but that is driven by a tough comparison, especially for light vehicles in the quarter. So if we break that apart a bit, I'm pleased to say that our EV business continues to grow at high pace in the region, as well as solid development in commercial vehicles. And finally, India and Southeast Asia, flattish on the total level. On the industrial side, there's also actually flattish growth. Here we are facing tough comparisons, which is the main driver. In general terms, we see good demand development in India, and industrial verticals such as heavy industries, agriculture, and automation contributes to growth. We have flattish and automotive in the region. where we see good development in commercial vehicles, while actually it's been a bit soft in the aftermarket business in this particular region. If we then turn to our segments and start with industrial business, as you can see on the top-hand chart, represents some 73% of our net sales in the quarter, and 96% of the adjusted operating profit in the quarter. As I said, we are reporting organic growth here, just north of 2%, driven by Europe, EMEA, Americas, and China, and Northeast Asia. The adjusted operating margin is strong, 15.6% up versus 14.6% the year before, driven by the price-maker activities that I mentioned to compensate for tariffs. The right-sizing benefits of almost 200 million hits here, which contributes here, because it's targeted towards our industrial segment, as you know. We also have the world-class manufacturing program that is helping and contributing in the quarter. And all of this enables us to actually offset a rather significant currency headwind that is eating some one percentage points into our earnings in the quarter. Then on automotive, representing 27% of net sales and 4% of the adjusted operating profit in the quarter. As I mentioned, more soft demand development, negative organic growth of close to 6%. Here, the main drivers we find in EMEA and Americas, but as I mentioned, also in China, but it's more kind of a comparison to last year on the light vehicle side. Again, EVs continue to perform well for us in China. The adjusted operating margin is weak, only 1.7% in the quarter, despite very strong development in cost takeout when it comes to material costs. But it struggles to fully compensate for a rather significant currency headwind, as you can see here, of almost three percentage points in the quarter. I think it's important to zoom out a bit and reflect on the auto business for the full year. And for the full year, The adjusted operating margin is relatively unchanged, just north of 4%, despite this thermal, low-demand environment and significant currency headwind. It's also comforting to mention that throughout 2025, we have won a number of strategically and marginally created contracts that builds a strong foundation for our automotive business as we move into the future. And some of those contracts are also related to the aftermarket business, which means that they will also start to contribute already in 2026. If we then leave the numbers and start to zoom in on some of the strategic initiatives, I want to focus today on the automotive separation, where the program as such continues at high pace with a very, very good momentum, and we're delivering according to our plans. But we have recently identified an exciting opportunity to actually faster reduce the contract manufacturing between the entities by moving or releasing some additional assets to automotive. This will be beneficial both for our future industrial business and our automotive business. It will drive further competitiveness. And what are those benefits then? Well, as I mentioned, it's clearly, you know, we can reduce the contract manufacturing faster. But it's also, for industrial, we can improve the capacity utilization. For automotive, they will have a better control of a larger part of their value chain that will drive competitiveness for them. And longer term, this will also further reduce the CAPEX need in our automotive business. But these additional transfers will take us some additional effort and that means that we now plan to list our automotive business during Q4 2026. But it's also important to stress that this additional asset transfer will be managed within the already announced cost and capital expenditure for the automotive separation as we presented it at the Capital Marks Day in November. And the contract manufacturing will, at point of separation, be roughly the same as we mentioned also in November. However, though, with a much steeper decline trajectory thereafter. So we're excited about this, and this will, you know, create an even stronger starting point for both businesses. Finally, before I hand over to Sun, just to reiterate some of the key messages from our capital markets today. How do we build and lay the foundation for long-term value creation? As we said, since we embarked on this journey, there are very different dynamics between industrial and automotive. And we laid out the plan for the value creation of industrial that rests on three pillars and seven levers, where the three pillars were reignite growth, innovation leadership, and business-driven value chains. And for automotive, their value creation plan rests on two pillars and five strategic levers, where the pillars are, you know, accelerate growth and then build lean and fit-for-purpose organizational and supply chain structures. For industrial, we also named the long-term targets that you can see here on this chart. While we were a bit more vague on the automotive side, and the automotive team will come back during 2026 closer to the listing with their own capital markets day and again then be more specific on their long-term targets some more to come here during 2026 and for those of you that may have missed the uh the information at the capital markets day are curious to learn more please visit skf.com where you find all the information So with that, it's time to hand over to Susanne to take you through the more details in the numbers. Susanne.

Thank you, Richard. And good morning, everyone. And I'm pleased to be here with Richard today and announce our quarter four results. So the financial summary. So as you have heard, net sales was down 11%. So while we finished the year with a flat organic growth, there was a significant and continued FX headwind. The gross margin was 25.7%, which is then slightly below last year. But if we then adjust for the one-off cost, the gross margin was instead 28.7% and slightly better than last year. The adjusted operating margin ended at 11.8%. Again, a proof of our improved margin resilience. And I would further comment on that on the following page. The one-off costs in the quarter added up to approximately $1 billion, where half was related to the ongoing automotive separation, and the other half was related to our footprint optimization, where the closure of our Argentinian manufacturing operation in October was the main one. Let me try to explain the resulting 44 year-over-year elaborating on the organic, cost, currency and structural explanations. Starting off from left to right. So although we had a flat organic growth, we had a positive result impact of 113 million Swedish krona and improved our margin with half a percentage point. This positive margin effect was mainly generated by the positive price mix actions within industrial business compensating for an overall weaker automotive. Our cost management generated a strong contribution to the profit and a 1.7 percentage point improvement to the margin. And there are some main drivers of that. The first one to talk about is the right-sizing activities that are now starting to give a positive contribution year-over-year of some 190 million. This impact falls positively through our results, as the dissynergies of automotive separation will come as from the start of next year, where automotive will be operating more independent within the SKF group. The main dissynergies will be derived from IT and their management structures and consequently offset the impact of the right size activities. By that, I still reconfirm the positive impact of the right sizing activities of some 2 billion and the relatively linear effect until the end of 2027. Moving on. We also have a positive impact of the world-class manufacturing savings that now have come to an end, and we have finalized the program. And we have continued positive material cost effects, and this comes mainly from automotive, but also from our product mix. And as you heard Richard say, when it comes to tariff, we continue to largely compensate for those also in this quarter. And we do expect that this is the case also moving into quarter one, given what we know today. Currency effects continue to be significantly negative and reduced our reported sales by 10.6 percent. and impacted our operating model by 1.4 percentage points of negative effects. And the main currencies are the same. They are dollars, C&I, and Turkish lira. Structure is minor and referred to last year's acquisition of Jöns Sample Group, net of the divestment of aerospace handover that we completed in the spring. Moving on to cash flow. In quarter four, we delivered a solid cash flow, where one of charges impacted cash flow by 1 billion Swedish kronor. In this picture, the starting point is the operating profit for the quarter, and that ended at 1.6 billion Swedish kronor, which is 0.8 billion lower than last year. And this is mainly explained by the higher amounts of one-off costs and the negative currency effects. The non-cash items is higher than last year as a consequence of reducing the provisions related to the right-sizing program from now payouts. Taxes paid in the quarter was 685 million, higher than last year while in line with the full year last year, if we look at the full year values. Changes in working capital was good, and we ended at a positive $1.4 billion, which is some $300 million better than last year, and explained by less buildup of AR and more AP at year end than last year, but also with a minor improvement in inventory. This led us to a quarter-four cash flow from operation of $2.8 billion. From that, we deducted $1 billion of cutbacks and ended with a cash flow after investments of 1.8 billion. For the full year, the operating cash flow amounted to 8.4 billion compared to 10.8 last year. And in 2025, we then have a cash out from IRCs amounting to 3 billion. Balance sheet and return on capital employed. Our net debt excluding pension declined from 7.5 billion Swedish kronor in the end of quarter three to 5.7 this quarter end and the full year end. And this is due to positive cash flow, but also a stronger Swedish krona. Net debt in relation to equity excluding pension reduced from 13 to 10%. Net debt In relation to EBITDA excluding pension, reduced further to 0.5, including pension, we ended at 1. The adjusted return on capital employed remains stable at the 14.3. So, as Richard said, SGF ended the year with a good cash flow, with a strong liquidity, and a low net leverage. Hence, the board has decided to propose to the AGM a dividend of 7.75 per share to be paid in two installments, one in April and the other in October. And this corresponds to 45% of the adjusted net profit. Now I come to my last slide related to the outlook. So we expect the market demand in quarter one to remain at the similar level of quarter four. Consequently, we expect an organic sales to strengthen somewhat in quarter one year over year, supported by also more favorable comparisons. The guidance for quarter one with respect to FX, we anticipate a further negative impact of earnings sequentially in quarter one. This is driven by a continued weakness of dollar against Swedish krona alongside with mainly Turkish lira. So we now estimate the impact to be minus 800 million year of the year for quarter one, given the rates we had by the end of the year last year. When it comes to guidance for the year, The tax rate is expected to be 28%, and there we exclude both automotive separation implications as well as divestments. Cutbacks we estimate to end next year at some $5 billion, where the industrial part is in line with what we communicated at the capital market day of 5% in relation to sales, while we for automotive have some further separation-related investments that are also included. We have also decided to guide for one of items related to the automotive separation and footprint optimization, as we also communicated those at the capital market day. So we anticipate these to be in the range of minus two and a half to three billion for this year. And this is fully in line with the six and a half billion guidance for the period of quarter four 2025 up until 2028. Finally then, the guidance for the full year NISC does not include capital gains from the divestment of LGN, and that we expect to soon close. So by that, over to you again, Rikard.