SKF Nine-month report 2022: Strong organic sales growth; severe cost inflation impacting results

Rickard Gustafson, President and CEO:

“Review of the third quarter

During the third quarter, we delivered strong organic sales growth of 11%, a clear indication that we are relevant for our customers. Our business in India and the Americas delivered a very strong overall performance and China maintained its solid performance, despite Covid-lockdowns. Our performance in EMEA was hampered by unprecedented cost inflation. We are delivering on our strategic transformation, with double-digit growth in targeted industries, while continuing to transform our portfolio and reduce fixed costs.

We continue to leverage our pricing power and have been successful in increasing prices and pruning our portfolio to further strengthen our business and market position. These efforts have resulted in another quarter with a growing, positive price/mix contribution of SEK 1.8 billion. As indicated last quarter, cost inflation continues to accelerate, especially in Europe, having a negative impact of SEK 2.9 billion in the quarter. On a positive note, we saw a somewhat reduced inflation rate for steel components and logistics at the end of the quarter. The adjusted operating margin came in at approximately 9%, driven by a challenging cost inflation, negative mix impact from high automotive growth, and our dependence on manufacturing in Europe. Considering our unhedged exposure to cost inflation, we expect to see margin tailwind once inflation and energy prices start to normalize.

Within Industrial, organic growth was 8%, driven by industrial distribution, heavy industries and agriculture. The adjusted operating margin was 11%, impacted mainly by material and energy costs, not entirely offset by a positive price/mix contribution. Our leading position in our most significant and profitable business area continues to support our growth ambitions. For example, we have recently extended our full-service agreement with a leading renewable packaging producer in North America, covering bearings, seals, lubrication, application engineering and condition monitoring.

In Automotive, demand rebounded strongly from last year with an organic growth of 18%, driven by light vehicles. The adjusted operating margin was 3%, mainly driven by material and energy inflation, which was not fully offset by a positive price/mix. Our ceramic bearing offer to the EV industry continues to strengthen, with significant new OEM contracts signed in both China and Europe. This is in line with our strategic portfolio shift as ceramic bearings have more attractive margins. At the same time, we continue to exit low margin and non-strategic businesses such as components for small, combustion-powered passenger cars.

Net cash flow from operations was SEK 1,268 million. Net working capital as a percentage of sales increased to 36%, driven by exchange rate fluctuations. Sequentially, inventory levels reduced in Q3, as we continue to prioritize customers, reduce excess stock and optimize our supply chains.

Delivering on our strategic transformation

In line with our strategy to drive profitable growth, we have initiated a group wide program to increase flexibility and reduce fixed costs across the Group, especially in Europe. In total, we expect the full run-rate savings of these activities to reach SEK 2 billion by the end of 2023, with anticipated restructuring costs of approximately SEK 1 billion and a net reduction of approximately 1,000 positions, predominantly in Europe.

Among the key ongoing actions are the implementation of a simplified operational and sales organization in EMEA, reshaping of support functions, including pruning our IT portfolio and bringing forward the final steps of our finance transformation program. We are increasing the pace of development within Connected Technology by focusing more on external partnerships. Consultancy and indirect expenditure is being reduced across the Group. In addition, we are increasing our targeted efforts to further improve pricing, reduce inventories, drive procurement and logistics.

We continue to invest in our regional manufacturing capabilities and in making our factories more efficient. We are also continuing to consolidate our footprint. As a result, the factories in Avon, Avallon, Poggio Rusco and Pianezza will be closed, with customers being served from other sites.

Outlook

Looking into the fourth quarter of 2022 we expect organic sales growth of about 10% and, as a result, we expect organic growth for the full year to end in the upper part of our previously guided range of about 4-8%.

We expect to see continued volatility and geopolitical uncertainty in the markets and as a result, we expect continued high levels of cost inflation, supply chain bottlenecks and volatile demand.”