SKF Nine-month report 2023: Resilient margins and strong cash flow despite slowdown in demand

Rickard Gustafson, President and CEO:

“During the quarter we continued to see a slowdown in demand from a weakening economic sentiment and customers reducing their inventories. Despite this, our profitability was resilient, and our cash flow remained strong as we continued to manage costs, prune the portfolio and reduce working capital whilst continuing to invest in innovation and further improving our manufacturing footprint as part of our strategic transformation and new decentralized way of working.

Solid performance in a challenging market environment

Net sales increased in the quarter to SEK 25.8 billion (25.0) with organic growth being relatively flat (-0.6%). Volumes turned negative in all regions and were compensated for by a maintained strong price and portfolio management.

Our Business in Europe, the Middle East and Africa remained resilient with organic sales growth of 4%, driven by a strong performance in Railway and Aerospace. India and Southeast Asia also continued to perform well with organic growth of 5% driven by strong demand in Mining. Organic growth in China and Northeast Asia declined 5% driven by a sharper than expected slowdown in Wind. In Americas, we noted a negative growth by 4% driven by OEM customers destocking and a phase out of lower profit businesses.

The adjusted operating profit in the third quarter was 3.0 billion (2.1) with a margin of 11.5% (8.5%). Pricing, cost management and continuing portfolio pruning actions contributed positively to profitability, offset by declining volumes and some negative business mix effects. As an example, we saw lower growth rates in our high margin Industrial businesses versus our Automotive business.

Our Industrial business remained resilient and delivered an adjusted operating margin of 14% (11%) despite negative organic growth. Our ongoing portfolio re-positioning within our Automotive business continues and the adjusted operating margin improved to 6% compared to 3% in the same quarter last year.

Cash flow from operations was a strong SEK 3.4 billion (1.3) as we continued our activities to improve net working capital, mainly through reduced inventories.

In the quarter we were also affected by the increased geopolitical tension in the world. In August our factory in Lutsk, Ukraine, was hit by a Russian missile attack. Three of our colleagues were killed and the factory was damaged. After the attack, production was suspended and alternative supply chain options and re-routing of production from Lutsk to other factories were quickly activated to mitigate any negative impact on our customers.

Continuing our strategic journey

In the quarter we continued to implement and execute our strategy. Investments were made in technology and innovation where we have many interesting projects in the pipeline, contributing to the overall profitability and supporting several high-growth segments, such as Railway, Agriculture and Machine Tools.

We also continue to invest in sustainability and further regionalizing of our manufacturing footprint. As an example, our greenfield factory investments in Monterrey, Mexico, which now has been inaugurated, will make our customer offer and position in North America even stronger.

In many industries, effective monitoring of assets and predictive maintenance are key to unlocking financial and environmental benefits. We see a strong demand for our asset monitoring services, and we recently signed a five-year agreement with the international mining and mineral group, LKAB, to develop monitoring solutions for all their assets.

Previously we announced a strategic review of our Aerospace business. I am pleased to report back the conclusions and outcome from this review. The Aerospace Industry is a high-growth, high-tech industry, where we have a strong and unique position.

To leverage our full potential within this industry, we intend to put even more emphasis on our core segments, Aeroengine bearings and Aerostructures. We have already initiated numerous pricing and contract management actions, that will step up the profitability further in the near term. In addition, these areas, will be further strengthened through accelerated investments.

In our strategic review, we have also identified some high-quality business lines, with strong market positions in their respective niches, but that fall outside of our core Aerospace offering. We will explore strategic options to exit these attractive but non-core business lines, representing annual sales of approximately SEK 1 billion, or some 20% of SKF’s current Aerospace business.

I’m convinced, that by focusing on our core business, and seeking strategic options to areas outside of our core, we will unlock the full potential of our Aerospace business.

I would like to thank all SKF employees for their hard work and ability to mitigate the impact of the gradual weakening of demand and the attack on our Ukraine factory in the third quarter. Going into the final quarter of the year, we expect a continued lower demand scenario, and volatility and geopolitical uncertainty continue to impact the markets in which we operate.