AB SKF (publ) (SKFB) Earnings Call Transcript & Summary

So welcome to our Q2 2026 earnings call. Once again, we navigated well in markets with mixed demand. And our strong underlying margin was mainly driven by our specialized Industrial Solutions segment, which grew in targeted areas, including aftermarket. I'm Sophie Arnius, heading up Investor Relations. And with me here in the room, I have our CEO, Rickard Gustafson and our CFO, Susanne Larsson. After their presentations, there will be opportunities to ask questions. [Operator Instructions] So without further ado, let's get started here, and it's a great pleasure to hand over to you, Rickard.

Thank you very much, Sophie, and good morning, everyone, and thank you for joining us for this earnings call. Starting on the first page and draw your attention to the up right corner with the bar chart, where you see that also in this quarter, we are in the positive organic growth territory. And this quarter, we reported an organic growth of 1.4%. It's driven by strong growth in Asia and also across our segment Specialized Industrial Solutions. We do see a generally a remaining and generally soft demand in Europe, whilst the OEM market in Americas shows early signs of improvement driven by certain industrial verticals. Profitability-wise, we have a strong quarter. The adjusted operating margin improved to 13.9% in the quarter. And there are some key drivers behind this. Firstly, we do see a significant uplift profitability device in our Specialized Industrial Solutions segment. Secondly, our rightsizing program continues to deliver. In this quarter, we have some SEK 350 million in realized benefits, which exceeds negative synergies from the separation. And thirdly, we have also improved our profitability in the Automotive segment, which we'll come back to shortly. And furthermore, there are also some limited contribution in the quarter from some support production at automotive as part of the separation activities and also some EPA tariff refunds that they have received in the quarter. . Turning to cash. We have a stable cash flow in the quarter at SEK 2.1 billion, as you can see from this chart. It's somewhat lower than the same quarter last year. But in this quarter, we have had a cash impact of roughly SEK 700 million from our rightsizing activities our automotive separation activity and also from some footprint optimization. Turning to our strategic priorities. I'm pleased to report that our automotive separation is progressing in line with plan, and I will share more details on that shortly. We have also announced an exciting venture in the human oil space, where I also will come back with more details during my presentation. And as part of building a strong business-driven value chain that are fit for purpose for a pure-play industrial business -- we have also initiated activities to modernize and standardize our IT platform and make them AI-enabled for the future. But let's move it in and start to look about our organic growth by geography. And when I speak here, I'm going to talk about all our 3 segments. So starting with EMEA, our largest region. You can see there kind of a flattish to negative organic growth. But if you pick that apart, you will see that we have very solid growth in Specialized Industrial Solutions, especially driven by aero and magnetics in this region. For automotive, -- we maintain a rather low demand environment where both light vehicles and commercial vehicles report negative or and also high-speed machinery in Europe. Turning to the Americas. -- where we have a growth of 2.3%. Here, I can say that, that number is somewhat reduced due to that we have received some tariff refunds, as I mentioned. So underlying organic growth is somewhat bigger than what is reported here. Also, as in for Europe, we have very strong magnetics business driven by the AI build-out and the data center build out in the region. Also aerospace are growing very, very nicely in this region. We have a stable organic sales for bearing solutions and also for automotive. But we start with bearing solutions. We do see that we have defense heavy industry is high-speed machinery, are also just like for Europe, areas that are growing very nicely at the moment. And for auto is more flattish where actually both light vehicles, commercial vehicles and the aftermarket comes in rather flat in the quarter. Turning to China and Northeast Asia, solid growth north of 3%, where we see a continued solid demand development. And here, I'd like to single out distribution, rail and high-speed machine as some examples of high-growth areas for us. For automotive, we're back in growth territory here as well and to some extent, driven by light vehicle and the EV export that we now see coming out of China, but also commercial vehicles have a strong quarter in the region. And finally, India and Southeast Asia, solid growth, just shy of 4%, clearly driven by India and Vietnam, growing very nicely as geographies for bearing solutions is distribution, wind and also heavy industries that I would like to highlight as in particular, good growth areas. And for automotive is a bit flattish, very good growth in light vehicles, somewhat offset by commercial vehicles in that region. So if we then turn to our segments and starting with Bearing Solutions. And as you can see, are representing 55% of group sales and 76% of the adjusted operating profit. Here, we have a flattish organic growth of positive 0.2%, driven by a price mix. We do see a solid growth across Asia, offset by a declining development in the EMEA region. We do have some tariff refunds, as I mentioned, that impacts growth somewhat in Americas. But here in Americas, we do see early signs of OEM market improvement from direct and indirect growth in these areas that I mentioned, like data centers, defense, AI and infrastructure. The adjusted operating profit is solid, north of 19% and -- and to give you some more color on this one, the -- we do have benefits from the rightsizing separation, as I mentioned before, that offset negative synergies from the separation and also some of the inflation. -- but we also have some negative cost items from a comparison versus the same quarter last year. We have some preparation costs for the IT modernization that I mentioned and also buildup of shared services beyond what we have in finance. And we also have less contribution from the world-class manufacturing program this quarter versus the same quarter last year. Moving on to Specialized Industrial Solutions, representing 20% of sales and 22% of the adjusted operating profit. Here, we do see very solid growth, north of 8%, as you can see on this chart. And it's actually not just price mix. Price/mix is part of the equation and an important part but also volume, underlying volume is driving growth there. All units contributed into the growth, but with a particular emphasis on aerospace and magnetics. The adjusted operating margin increases significantly up from last year just north of 10% to over 15% in this quarter. And the main drivers behind this very positive development are threefold. Firstly, we do have a strong aftermarket growth across our business segments or business units, I should say, that make up this segment. Secondly, -- as I mentioned, our Aero and Magnetic business are growing faster than our lubrication and seals business, and that implies a positive mix, margin mix for us. And thirdly, we also have a very strong margin uplift in our lubrication business, both from pricing activities, but also for good success in growing our automated lubrication systems. And for those of you who joined us for the Q1 call, we did do a deep dive on the lubrication business. And there, I tried to highlight the importance of automated lubrication systems in our lubrication portfolio. So we're pretty pleased to see that growth. Turning to automotive. -- representing 25% of sales and 11% of the adjusted operating profit. Here, we are still in a declining growth environment, negative 1.4% and in the quarter. And as I mentioned, there's generally challenging market conditions, especially in EMEA, where both light vehicles and commercial vehicles are down. Good development in China and Northeast Asia, as I mentioned, both on commercial vehicles, but also light vehicles, EV export is driving growth there. And in America, as I said, is more flattish across light vehicle, commercial vehicles and the aftermarket. But despite that we have a decline in growth we are able to improve our adjusted operating margin up to 5.7%, also visible on this slide. And we're starting to see benefits from being realized from becoming a more separated business. And we continue to see solid cost development, mainly driven by manufacturing efficiency and procurement management. If we then leave the quarter and the numbers. And before I turn back to -- turn to Susanne to give you some more details, I'd like to take this opportunity to do a few deep dives. And I want to start with the venture around humanoid that we announced a few weeks or days ago. As we mentioned in the past, we have done a rather thorough study here to identify where we should play in this potential market. And we have concluded that we should focus on humanoid for industrial applications and that we will remain a component supplier and that we should partner with key system manufacturers to rapidly build a proposition that covers most of the need for industrial humanoid. But with that said, we also remain open to explore potential expansions to this as this market matures and we learn more. But on the right-hand side, I'll try to give you some flavor of the bearings kind of contribution to humanoid and the number of positions where there are bearings. And in a demand, there are more than 120 bearings. And if you divide the value of those bearing broken down by builder material, you'll find that roughly 45% of the bearing value found in variances like Cross roles and flexible bearings. They go into something that calls harmonic drives. And I'll come back to Harmonidrive shortly. And this is an area we don't really have an offering today -- but that's where the venture with Leader Drive will come into play and really bridge that gap rapidly. Then some 35% of the bearings, they are related to thin section and other type of bearings. And here, we already have capabilities and knowledge in-house that we intend to build further and accelerate internally. So from these 2, we have some 80% coverage of the need for humanoids. Then the remaining 20%, they are related primarily to what's called miniature bearings that you find in hands and in fingers of humanoid. This is an area we don't really have a coverage and where we are still assessing if we should do a greenfield here or if we should try to find a partner. -- to also include this in our portfolio for humanoid or not. But 80% is what we now have coverage. Turning to the Venture itself and a little bit on Leader Drive. It's a manufacturer of harmonic drives and other robotic precision components. And you may wonder what is a harmonic drive. And let me try to the best of my ability to explain that for you very, very quickly. And AmeriDrive is the gearbox of a rotating actuator. -- with flexible gears that can continuously deform during operations, enabling high precision and torque. And for this type of gearboxes or harmonic drives. -- leader drive is the clear #1 in China and clear #2 globally after the Japanese company, HDI, who was the first commercialized and among drive. Leader drive, they supply manufacturers for both traditional robots and dummynoids, and the main emphasis will be on humanoid, and they have customers both in China and outside China. And before this venture, they produced in-house, the cross roller and flexor bearings that are needed to -- for these harmonic drives in-house. Now with the venture that will be carved out and moved into the venture. And the venture, it will provide a fast track for SKF into this new -- a new exciting growth area. So lead dry will contribute with the cross roller and flexible bearing production -- and our contribution will be large-scale manufacturing know-how support in actually scaling up and industrializing this and then coupled with our own engineering innovation capabilities. So SKF will be the majority owner of this venture, 60% ownership and the IP future IP will be retained within SKF -- the venture where I will start with a very strong position in Chinese market, which we then can scale globally. We will also have capability to support all types of robots traditional cobalts and humanoid, but clearly, the main emphasis will be on building human noise for industrial usage. And we expect this venture to be operational by the end of this year. Turning to automotive and the separation. And I'm very pleased to report that this separation is progressing with speed and fully aligned to our plan. Automotive is now structurally separated and also from an IT point of view. We -- the Board of Automotive or SKF veritable -- they have appointed Karsten Inogen as the CEO, a task to build an even stronger stand-alone automotive business. So overall, we are on track to complete the planned separation and listing by Q4 this year. This slide is also something that we used at the Capital Markets Day in November to lay out the 5 strategic levers that makes the foundation for the full potential plan of scrap SKF Vertigo. And in Q1, I gave some color to some of those levers. And this quarter, I'd like to draw your attention to leave #4, a lean company set up. As I mentioned before, we now see tangible benefits from operating as an independent company. A lean company setup drives speed cost efficiency and customer centricity. And let me provide you with a concrete example on how we actually accomplished this. In the past, preparing complete design packages for truck matched unit was a very manual and time-consuming process, taking more than 4 hours to complete. Now using AI-based automation, customer factory and supplier drawings are created in less than 4 minutes. This is, of course, creating significant value from a cost efficiency point of view. It also enabled us to more rapidly respond to customer quotes -- so it drives speed and also customer centricity. And it's freeing up valuable engineering time on innovation rather than spending time on documentation. So I stop there and I turn back, I'll hand over to Susanne to take you through the numbers.

Thank you. Good morning, everyone. So let me start with the profit and loss and the overview then. So as we have touched upon already, net sales was flat year-over-year with an organic growth of 1.4% being then offset by both currency and structure. We had an adjusted gross profit margin that improved by 1.1% to 32.7%, which we could also see visible in the strong adjusted operating margin that improved from 13.3% to 13.9%. I will come back to the different components of that on the following page here. Talking about one-off cost I see in the quarter, they amounted to SEK 1 billion where automotive separation costs represented roughly half of the part and the other half was related to the consolidation of our Americas footprint that we announced early in this quarter, early in quarter 2, and out of that restructuring charge SEK 345 million was related to impairment of assets. I also just want to remind us that last year, -- at this point in time, we took a charge of SEK 2 billion linked to the rightsizing program that we are now implementing. And we also had a profit of SEK 800 million from the divestment of the Aerospace business, handover. All in all, in absolute amount, both adjusted and non-adjusted operating profit as well as net profit was higher than last year, largely explained by less SIS improved operational performance, but also reduced FX headwind. Altogether, we ended at an earnings per share of SEK 2.8 per share and an adjusted [ SEK 1 of SEK 5 ] per share. . So let's look at the components that is building up our strong adjusted operating margin of 13.9%. Starting then with the organic growth impact. We see solid price mix that is the main contributor to the improved result. And as mentioned previously, it's mainly deriving from the SIS segment. Organic sales were negatively impacted by the customer refunds Ricka talked about from the battery reclaims, which we have received the majority of during quarter 2. payments to customers will follow the completion of the refunds, so they have not yet been done. The result, the impact of the tariff, all in all, around the reclaim is somewhat positive in the quarter 2 results. Also in this quarter, we had some support production ahead of the separation related to the transfer of production to automotive. So whilst the production volumes were positive in the gain the result impact was limited because these higher production volumes led to temporary less efficient production impacting our costs negatively. So net-net, we had a very limited result impact of that support production. With respect to the support production, we expect that to continue also in the second half of the year. Some further comments related to the cost development. Our rightsizing activities contributed with some SEK 350 million of savings, and they continue to more than offset the separation-related negative synergies. Material cost savings remain positive and particularly in the automotive segment. The overall cost development remained unfavorable, driven by weaker productivity in the support production that I just talked about. We see wage inflation and tariff costs and some industrial transformation initiatives. We continued to largely compensate for the tariff costs also in quarter 2, and we expect to continue to do so also in quarter 3 and as I've already mentioned, we had a slight positive effect from the tariff reclaims in the quarter 2 itself then. With respect to currency, the impact is notable, but much less severe than what we have faced previous quarters. So the impact our sales by a reduced 0.8 percentage points, and it reduced the profit by 0.3 percentage points, mainly driven by a weakening dollar vis-a-vis Swedish krona conversion year-over-year. Finally then, we have the structure column, and that is representing the divestment on the aerospace business, LDM that we closed during quarter 1 earlier this year. Let's move into cash flow. If I start with EBITDA for the quarter 2, that amounted to SEK 3.5 billion and noncash items and tax payments made the cash flow before changes in net working capital to end at SEK 3.2 billion compared to SEK 2.9 million last year. Tax payments was fully in line with last year's payment. Then we had a high net working capital buildup of minus 1. And this is mainly explained by the buildup of safe destock linked to automotive channel transfers together with higher accounts receivable caused by the ongoing separation of automotive. Looking then at the graph to the right, I would like to recall that we announced the rightsizing initiative in quarter 2 last year. And since then, we are paying out gradually every quarter, the SEK 2 billion that we accrued through the P&L a year ago. The automotive separation started in the late part of 2024. However, the speed of the separation has been at its peak during the first half of this year, where separation initiatives are now being finalized, and we are moving in doing listing preparations. In the quarter 2 cash flow, we included SEK 700 million of payments linked to such ISC charges. And with respect to quarter 1 last quarter, we had a similar SEK 700 million paid then. Finally then, we had a CapEx of SEK 700 million in the quarter 2 and the year-to-date of SEK 1.5 billion comparable numbers last year was SEK 900 million in this quarter and SEK 1.8 billion for the full first half year last year Balance sheet and return on capital then. Our net debt, excluding post-employment benefits, quarter 2 over quarter 1 increased by SEK 1 billion to SEK 7.3 billion, mainly driven by the dividend payment in net of cash inflows from our operations. Net debt divided by equity, excluding pensions, ended at SEK 12.3 million compared to SEK 10.2 million at year-end. Net debt in relation to adjusted EBITDA excluding pensions, ended at 0.5, which is -- sorry, which is 0.1% above last quarter. If we then look at net debt in relation to adjusted EBITDA and include pension, we ended at -- adjusted RSA improved to 14.5% vis-a-vis 14.4 million last quarter and 14.3% at year-end. So this is as a result of the somewhat improved result and reduced total after assets. All in all, our net debt remains on a low level, and our liquidity is high SEK 1.5 billion. This is to be 8.4 million in the previous quarter. And this is a lot explained by the drawdown of the EIB loan, where we now have SEK 500 million in loan Additionally, we have another EUR 800 million of undrawn credit facilities. That turns me to the last page, and that is around the outlook then. -- where we say that for quarter 3 then and we've given signs of improved market demand in certain industries, we expect organic sales to strengthen somewhat in quarter 3 year-over-year. considering still the geopolitical turmoil and the conflict in Middle East that is certainly remaining unpredictability. Guidance also for quarter 3 around currency on the operating profit. That is estimated to a positive SEK 100 million, applying the exchange rate as per the end of June. Moving on to guidance for the full year. talking tax levels, excluding FX from divestments and ongoing automotive separation, we now guided SEK 29 million. which is a slight increase compared to the earlier announcement of 28. And we'll do that because we have changed the assessment of a valuation reserve linked to the consolidation of our footprint in America, and you see the tax cost for that coming through the P&L in this very quarter. And that means that the full year tax rate is down rather around 29 and 28 million Additions to property, plant and equipment, we now take down SEK 1 billion and guide to SEK 4 billion, and this is mainly explained by further optimizing both existing assets but also our planned investments. And finally, then, when it comes to one-off costs this year is related to the automotive separation as well as our footprint optimization. We remain with a minus bill in line with what we have communicated previously and also at the Capital Market in the end of last year. Rickard, over to you.

Thank you, Susanne. And let's wrap the formal presentation up before we head into Q&A. I do think that we closed a rather strong quarter and there are some key highlights. I'd like you to take away from this conversation or this call. Firstly, we continue to deliver on our rightsizing program at speed and with accuracy. So -- and in the quarter, we have some SEK 350 million in benefits, as you heard both me and Susanne mentioned. We do have a strong operation of profitability uplift in our Specialized Industrial Solutions segments, coupled with a solid growth. And as you recall from our Capital Markets Day, this is 1 of key pillar for us to reach our mid- and long-term profitability targets. So we're pleased to see that, that is moving in the right direction. We're excited about the vans venture. We are -- we know that this is an industry that is kind of in its early phase stage. -- but it's being formed now, and we are keen to participate in that. So we also can learn this market and also play a role in defining the standards how this market is going to play out. So therefore, we are excited about this venture that will give us a fast track into this segment. And finally, the separation progress is going according to plan, and we stay firm in delivering on and completing this by Q4 this year. And on a personal note, I would like to take this opportunity to also congratulate Cash noon to her promotion. With that, I hand you back to the safe hands of Sophie to manage the Q&A session. .

Thank you. And we look forward to your question, and I can see there is a big interest to ask questions. So let limit yourself to 1 question. And then, of course, if time allows, you are welcome back to rejoin the -- but before we go to questions, let me just remind you on how to ask a question. So if you are dialing in via the telephone, you press star and 1 and if you would like to withdraw you press star and 2. And we will, of course, also accept questions from our audience watching the webcast. And so you can already now type in your questions in the tab that is above the slides. And let's start with a question here from the telephone line, and it is from Citi at JPMorgan. Please go ahead, it.

Ricard Susana Sofie. So just if I could ask about the tariff retains in the quarter. Could you please quantify the impact on sales and then of course, the benefit on the margin in the quarter? And I think you mentioned that you received the majority this quarter. So does that imply that we should expect a bit more in Q3?

So we will not quantify it, but we are stating that the majority of the battery refunds have been received during the second quarter -- and then since we had certain surcharges to customers, we are also accruing a reduced sales and as a consequence, we have still not paid customers because we are still waiting for some of that refunds to complete during quarter 3. But by that, the first big chunk is coming to an end. So this is the quarter where we see the significant impact of it. And similar to when we had the tariff cost where we -- so the vast majority offset, we are also generally guiding that now it's the opposite way around, but we have a slight positive impact, and that's the only indication we gave on that.

And let's continue with a question from Daniela Costa at Goldman Sachs.

I wanted to ask on the EBIT bridge, I guess, apart from the tariffs, the other 2 things that you mentioned sort of that move that bridge different to normal is the overproduction point and the savings net of synergies. First, can you comment that if we should assume the overproduction more or less at the similar base to what we had in the first half or if that's going to wind down as we get to the spin? And then on the savings, you've accelerated the savings part from SEK 300 million to SEK 350 million. Should we think about it accelerating as well? I believe before you had sort of talked about. It has more linear going forward. So if you could help with those 2 items. .

Will you take this one? For both Daniel.

S So starting off with the over production that we had now both in quarter 1 as well as envisage that, that will remain in the second half in a similar manner. Then we will have 2 different things that are explaining that, really. So the first 1 is really to prepare the channel transfers ahead of the taking place and being moved in real life. That is the kind of overproduction we have seen now in quarter 1 and 2, and we will, to some extent, also see in the quarter 3. Then -- what we will also see in the second half of the year is a buildup of automotive being a stand-alone company, and that allows them to have -- I mean, we will seek automotive separate customer, they will have unique SKUs and automotive starting also to build their own stock for the aftermarket primarily. So that is a stock buildup and preparation that is coming ahead of the spin of automotive. So both those will allow us to have a similar level of support production, if we call it that, also in the second half of the year. When it comes to the savings then, the right the rightsizing initiatives, net of the synergies then or the saving itself, then you're right. We saw a SEK 300 million in we saw SEK 350 million now in quarter 2, which allowed us to have somewhat of a positive impact -- moving on. Now it will be on a linear basis, and we will have more and more of a -- I mean, it will be a limited result impact as we move along, but it will continue to be on a linear path. -- with a limited result impact.

Sorry, Linear has increased .

And the negative synergies we saw in Q2 was very much in line with what we saw in and we expect that to continue on the same level. So for the full year, we expect a positive net impact then from the rightsizing savings versus then the negative synergies

Okay. I'll follow up. .

And we have a question here from the webcast and it is from Andre Kukhnin at UBS. And it's also about this support production. And if we expect that to become more efficient in second half and hence, benefit profitability. Susanne, do you want to -- so why did we --

I can do that. So probably putting some light on why we had less positive benefits out of it now in the second quarter compared to the first one. And that is because we are just I mean we have that additional production in channels that are fully to a big extent loaded already. So I think that is not the majority of the channel. So I think we have had less benefits of that now when we are into certain channel transfers of full load. So that's the constant accounts we have. Do we envisage that in the second half of the year, I think we envisage a certain but limited positive benefit of the support production that we will have also in the second half of the year. somewhat positive.

And also, we got a question here from Andreas. And just to clarify that where we said -- and it's about the time line for the automotive separation, and we may have said by Q4, we don't mean by end of September then. So it's -- during Q4, we aim for listing and separating than automotive. Of course, given shareholders approval and that the Board of Directors propose that.

Correct.

So let's continue with a question from our telephone audience, and this time, it comes from John Kim at Deutsche. John, please go ahead.

I'm wondering if we could go back to the humanoid opportunity. It'd be helpful to get a little more color here about SKF's longer-term strategy. When you think about your JV partnership with Leader Drive, is this is an exclusive relationship in the sense that you would use them as your primary path to market in China? Or are you open able to form additional JVs to perhaps other participants or entry points? .

Well, thank you. And we will be -- the venture will be a key supplier to leader dry, but it will not be in exclusivity. We will also have the ability to for partnership with others, and we can also -- we are free to develop other ventures outside of China as well. .

Okay. A quick follow-up question, if I may. If we think about the scope here in the medium term, is to intend to stay very focused on bearings, -- or would you look to build partner for adjacent capabilities or sub subsystem components perhaps like some of your peers? .

Right. As I mentioned during my presentation, I do not roll that out that we will move into some adjacent capabilities or areas related to the Humanoids. Right now, we are focused on building this presence to really be a strong component supplier for industrial Humanoids. As this market evolves, we will assess opportunities. And if something emerge, we will let you know. .

And before we take the next question, I see that some withdraw other questions. So there are opportunities to ask questions. just start and 1 to enter the telephone queue again. We will continue with a question from Tore Fangmann at Bank of America. So

Also on Hoerter. My question would be what percentage of the bill of materials of the humanoid do you estimate would bearings be going forward? And therefore, do you have any estimate of the size of the addressable market for you? .

Not on top of my head, I can't give you that. I tried to describe the bill material, the value of the different bearings that makes up a humanoid. And we have then coverage with the future venture with Leader Drive of roughly 8% of the assortment needed to support humanoids-- we still lack the ministry bearings. And as I said, the Azure is still out if you're going to go greenfield or if we're going to partner up with someone to also close that gap. But the total value of the humanoid and the size and the potential market. I think it's rather difficult to assess. There are a number of different sources that have done a thorough analysis of this that indicates a rather significant market potential. So are going to refrain from actually claiming if they're right or wrong, but rather refer to them as a source. .