AB SKF (publ)

A warm welcome to this call focusing on SKF's performance in Q3, 2026. Also this quarter, we improved our margin and organic growth as supported by selective higher OEM demand and stronger commercial execution. And this was definitely evident in our specialized industrial solutions segment. I'm Sofia Arneus, heading up Investor Relations, and with me, I also have our CEO, Rickard Gustafsson, and our CFO, Susanne Larsson. There will, of course, be opportunities for you to ask questions after our presentations, and there are two ways to do that. So, if you have dialed in via the telephone line, you press star and one. And if you are instead watching via the webcast, you can already now type in your questions and you do that in the tab that you find above the slides. So without further ado, Rickard, it's great to hand over to you.

Thank you, Sofie. And good morning to all of you. And thank you so much for joining us for this earnings call. I'd like to start by us reflecting a bit and I'm very pleased that we are now starting to see the end in our strive to establish two competitive and strong and fit for purpose businesses. After the approval from our shareholders at the EGM on October 1st, we are now starting to see a look somewhat different. As you will hear us report today, we are now viewing automotive as discontinued operations, while our industrial business is treated as continuing operations. So bear that in mind as we go through the numbers, but looking into the quarter and then focusing primarily on SKF continuing operations, i.e. our industrial business. Here we saw a strong organic growth of 4.3% in the quarter. The organic growth is driven by high demand in selective OVMs, such as defense, drives and infrastructure, but also a strong growth in specialized industrial solutions. And there you will have especially strong growth in aerospace and magnetics, which I'll come back to shortly. Turning to the profitability and the adjusted operating margin is actually also coming in strong in the quarter up 0.9 percentage points versus last year at 16.3%. And the drivers here are strong commercial execution, a continued margin expansion in specialized industrial solutions, And we also see a good progress in the execution of our rightsizing program. And here we're actually announcing today that the target to reach the 2 billion run rate savings, somewhat six months ahead of what was communicated earlier, i.e. we've explained to complete that by this first half 27, rather than the second half 27 aspect communicated earlier. Cash is also up versus last year to 2.1 billion. And here we see that our higher operating profit more than offset components inventory build up that we have in the quarter to support growth, especially in specialized industrial solutions. Turning to our growth by region and starting with EMEA, our largest region, where we see a broadly unchanged demand. Here I would like to say that light industry performing somewhat better than heavy industries, but we do see some good green shoots in drives, high speed machinery and also in defense. Specialized IndustrialSolutions is also growing nicely in the region and here Aerospace is standing out somewhat ahead of the others. In America, very strong organic growth, touching 10%, as you can see on this chart, where we see a strong improved demand in key OEM markets. I'd like to mention data centers, defense, off-highway, but also distribution and services have had a good quarter in this particular region. China and Northeast Asia, flattish growth as you can see, but this should be viewed in the light of rather tough comparison in rail and wind over the same quarter last year. We do see good growth though in distribution and machine tools. And also here in commercial aviation is starting to pick up quite significantly. And finally, India and Southeast Asia, very strong growth, almost 12% organic growth. Growth we see them across most industries. Some that stands out in particular would be distribution heavy industries. While from a geographical point of view, we see very strong developments in India and Vietnam. So if we then leave the geographies and start to take a deeper look on our segments and starting with bearing Solutions, which represent in this quarter at 74% of sales and 85% of our adjusted operating profit. Also here, we see good organic growth of almost 3% in the quarter. And as I said on the previous page, it's primarily growth in Americas and in India and Southeast Asia, where there is more flattish in the other geographies. On a side note, if you may recall last quarter, we announced a venture in the humanoid space with Leader Drive. And that initiative is progressing according to our expectation and plan. And we are still targeting to have that operational by the end of this year. Looking into the profitability and adjusted operating margin, we see a slight improvement to 18.8%, clearly driven by strong development in price mix that contributes, but also that we have the positive impact from the right-sizing initiatives that are progressing faster than anticipated, as I mentioned. and in this quarter we have had some production related to the automotive separation but the impact on our earnings has been non-material in this quarter. Turning to specialized industrial solutions so as you can see here representing 26% of net sales in the quarter and 23% of the adjusted operating profit. Very strong organic growth and all four business units that make up specialized industrial solutions, they actually grow. And as I mentioned before, magnetics and aerospace are growing at an even higher pace than the other two. The key growth drivers or growth verticals for magnetics, I would say, is data centers and semiconductors. And I will give you some more details on magnetics shortly. The adjusted operating profit is improving very nicely, 2.4 percentage points to 14%. And the key drivers here is the solid price mix, to some extent driven by pruning and portfolio optimization activities that we have taken in the past that now starts to bear fruit. We also have the fact that as I mentioned, magnetics and aerospace are growing somewhat faster than lubrication and seals, which also contributes to a positive mix in the quarter. And we also see a continued solid profitability development in our lubrication business. All of this is offsetting the general inflation and also some negative mix effect that we have where we have high demand in some products that comes with some higher material cost. So that will also be seen in the bridges as we go through them. Then turning to the discontinued operations. i.e. our automotive business. Here we still see a rather volatile and weak demand. We have a negative growth of 4%, where we primarily with a weak development in Europe, while we had a strong development or strong momentum in commercial vehicles and also aftermarket in America and China and Northeast Asia. The adjusted operating profit, though, is improving quite well to 4.6% in the quarter, despite the negative volume. And again, here we see a very solid price mix and good commercial activities in general. And also the fact that commercial vehicles and aftermarkets is growing somewhat faster than light vehicles, which also has a positive mix impact. We also have some currency tailwinds in the quarter that partly offset the inflationary environment that we also are facing. Overall, demand remains challenging, as I said, and especially in Europe. But further improvements in our commercial capabilities really supported the improved profitability despite this rather volatile demand. So if we leave the numbers for a second until Susanne will come back with the details, I'd like to give some highlights on some strategic initiatives that we are working on and also give you some more color to our magnetics business. Starting on the left hand side of this page, our main active solutions business is roughly 1.5 billion Swedish krona business, enjoying solid double-digit growth over the last few years. And the growth is driven by good development in certain industrial verticals, such as data centers, semiconductors and energy. To support customers in those particular verticals, we have a full suite offering where we have the magnetic bearings, we have the high speed electrical motors, we have the electronic control cabinets and the frequency drives, all combined with a very sophisticated condition monitoring capabilities that actually supports the whole ecosystem. And this ecosystem, it provides significant value for our customers. It enables significantly enhanced energy efficiency as up to 30% is not uncommon for customers to capture. We see an increased uptime and less maintenance where we have no mechanical contact reduces the risk of failure. And this provides a very attractive lifecycle equation for our customers. We do see that these solutions are very clean, silent and compact, and an oil-free system is of course ideal for applications that require high level of cleanliness, such as in semiconductors and also in hospital applications. And with our embedded sensors, they can really control and monitor the whole ecosystem. And it's also perfect for scaling AI, another key value for our customers. So in order to secure growth in this highly interesting segment of ours, we focus on three pillars. First, in order to meet the growing demand, we need to scale our manufacturing capacity. This is particularly relevant for our production facilities in Morocco and the build-out in China. It goes both for scaling manufacturing but also driving automation in those factories to ensure that we can meet the demand. Secondly, we are building for the future and we continue to invest in R&D to stay relevant in these key verticals such as data centers and HVAC, semiconductors and energy. But we're also exploring into new geographical areas and trying to find ways to also grow in the Asian markets. And then finally, we are also securing a broader value creation for our customers. And with our built-in sensors and the ability to scale AI, we can build even stronger customer relationships by providing optimization in areas such as energy consumption, system performance, and asset lifecycle management. All in all, these three pillars, they provide a very solid growth platform for our magnetics business. Leaving the magnetics and turning to the Vertebo journey. As I mentioned in my opening remarks, we had a historical event on October 1st with the EGM, where the shareholders approved to distribute the shares of its automotive business to the SKF shareholders. So what should we expect next? That's what we're trying to outline here on this chart. In November, you will receive a prospectus. followed by a capital markets day hosted by Vertevo on November 17th. And for all of you that have the interest to join that, which I hope is quite few of you, then you should remember to register before November 3rd to take part of that exciting event. And then the ambition is to have the first day of trading at Stockholm Nasdaq on December 1st. But as you also may recall, earlier this year, we announced a change in the scope somewhat, where we were transferring some additional production channels to automotive. And we did that because it benefited both businesses. For Vartevo, it will provide faster track towards self-sufficiency, and for SKF, it reduces the need for future footprint optimization. And the vast majority of all the assets and production lines now sits within automotive. But with only a few channels or production units to be transferred to automotive, and that will happen in early 2027. So this means that the contract manufacturing will start to decrease from Q2 2027 and then further accelerate until mid-term. So that is what you should expect related to the contract manufacturing. So with that, I would like to hand over to Susanne to take you through the numbers in the quarter.

Good morning everyone. Yes, let me try to enlight us a little bit more on the financials, starting with the profit and loss then. And as Rickard said, this is where we are now talking about continuing operations for the majority of our financials, where the net profit is still including our discontinued operations. So again then for continuing operations we saw a net sales that increased five and a half percent quarter over quarter sorry year of year this quarter three and this was driven then by the organic growth of 4.3 percent we had a positive currency of 1.7 and it was somewhat offset with a negative 0.5 of structure. The adjusted gross profit margin was largely flat year-over-year at 34.9%. So while price, mix and volume were positive contributors, we faced increased material, utilities and logistic costs together with the general wage inflation that impacted negatively. We also had some separation preparations causing production disturbances in the quarter three. The adjusted operating margin was strong and improved with almost one percentage point to 16.3 year over year. And I will get more into that on the following page. Moving on to items affecting comparability in continuing operations. We had minus 67 million of those, and that was explained mainly by a profit from a divestment of shares in associated company, our Ninggu Haiya Trolley Company in China, and that contributed with a positive 118. that was then further reduced by 86 million related to the automotive separation and another 68 of optimization of footprint and some other adding up to 31. This net-net allowed us to have a net profit that improved 490 million compared to last year to 1.8 billion and that is explained by improved performance together with less 320 million less of one-off cost this year quarter three compared to last year. Similarly then the earnings per share improved to 3.9 compared to 3.5 last year. If we then add the discontinued automotive operation, our net profit for the SKF group was further reduced by 349 million and ended at 1.4 billion. And this corresponded to an adjusted earnings per share for the SKF group, including automotive, of 4.2 compared to 4.0 last year. Finally then, IAC for discontinued operation ended at a negative half a billion, which is mainly explained by separation-related costs. Let's then look at the drivers of the strong adjusted margin in continuing operation. So starting from the left and with organic growth, we have the strong organic growth of 4.3 percentage points that is driven by price mix and volume. And all of this improved the operating margin by 3.3 percentage points. We saw selectively higher OEM demand together with a strong specialized industrial solution continuing their commercial execution very well. This quarter the earnings impact from support production relating to automotive separation was non-material. Coming back to specialized industrial solutions then. So this is where we had an increased production volume to cater for a stronger demand in selected markets. And that contributed nicely to our organic result. And as we had stronger growth in aerospace and magnetics, this resulted in higher costs from a different material mix than last year, which is impacting the cost development negatively. But all in all, a positive net result from all of this. But if I remain on the cost development, we did face higher costs from material, utilities, logistics and the general wage inflation, together with ongoing transformational initiatives. Still, our right-sizing program contributed with some 350 million and continued to more than offset the separation-related negative synergies. And as Rickard mentioned before, we now expect our program to reach the 2 billion annual run rate already by mid-2027, which is about half a year prior to the original plan. We also continue to largely compensate tariff costs through price adjustments, and we expect to continue to do so also in the coming quarter four. Net-net, the cost increases that impacts EBIT margin is a negative 2.7 percentage point, however, was more than offset by the very strong organic growth. The impact from the currency turned positive in Q3 with an EBIT impact of 98 million. And this was mainly this quarter driven by a stronger Chinese yen vis-a-vis the Swedish krona year-over-year, resulting in a margin effect of 0.3 percentage point. And finally then the structure is the net of the divestment of the aerospace business Eldin together with the acquisition of JTEC that we completed by July. And that has a negligible impact on the operating margin. So moving on then to cash flow for continuing operations. So the EBITDA in quarter three amounted to 3.6 billion compared to 3.2 billion last year. Our non-cash and other came in at a minus 422, which was in line with last year's cash, and the tax paid was 515. Moving on to net working capital, we generated a negative cash flow of minus 587, which compared to Q3 last year was 266 worse. This deterioration is explained by an inventory build-up fully in specialized industrial solution and to the vast majority explained by material stock that is built up to support continued growth. Net-net hour operating cash flow came in at 2.1 billion compared to 1.8 last year. In the cash flow for this quarter three, we have some negative 500 million that is related to IEC payments from restructurings as well as the automotive separation related to the continued operation. We had a capex for the quarter of a negative 529 million and net net cash flow after investment ended at 1.546 million Swedish krona. Moving on to KPIs that we have here on the right to the picture. Net leverage and return on capital employed for the continuing operation. We saw that net debt in relation to adjusted EBITDA ended at 1.1 and the adjusted return on capital employed was 15.3%. As a consequence of automotive by quarter three being reporting as a discontinued operation, the KPIs here are based on the quarter three capital employed for continuing operations rather than having what we normally have a rolling 12 months average balance sheet. So with automotive then being separated out, we do not really have comparable balance heat data historically for the continuing operation. So let me instead try to relate to the SKF group including automotive to allow for some comparisons on these KPIs. So again, SKF group then including automotive improved the net leverage to 0.8 compared to 0.9 in Q2 as well as last year. and for the adjusted return on capital employed with the SKF Group. It also improved and would have been 14.7 for the SKF Group, including automotive, compared to 14.5 previous quarter and 14 last year. So that's a reference. Moving on then, outlook and guidance. for the continuing operation. So we expect the sales to strengthen somewhat in quarter four year over year. This because we see a similar market environment as we were facing in the quarter three. However, we still have market volatility and that allows for continued uncertainty. Currency guidance then for quarter four and for continuing operation, we estimate to have a positive 150 million impact based on the exchange rate that we saw by the end of September. If I then turn to the guidance for the full year, the tax rate for the continuing operation, excluding divestments and separation of automotive is estimated to a full year of 27%. When it comes to the additions to property plant and equipment for the year, we anticipate that to end at 2.5 billion. And if we look at the guidance from last quarter, the previous guidance, this corresponds to a further decrease of half a billion due to optimization of SKF's continued operation and the planned investments that we have ahead of us. The full year guidance for items affecting comparability relates to the full group, including automotive, considering the automotive separation finalizing during quarter four. And that allows us to remain at the range of a negative two and a half to three billion krona. And this is fully in line with what we have communicated at the capital market day. And then finally, as Rickard mentioned, with the changed automotive separation scope that we announced early this year, we have moved additional production line to automotive. This has a consequence of the one-off costs related to the automotive separation. So we are increasing those. with approximately half a billion, from two and a half to some three billion Swedish krona. However, the industrial footprint optimization is lowered by the same amount because we will have less optimization need for the continuing operation than what was originally anticipated. So with that, we stay intact with what we committed to at the capital market day last autumn with the total expected level of IACs in the coming years. And we do not see an impact of this overall. And by that, I come to the end, Rickard. And over to you for wrapping up.