SKF interim report Q2 2024: Margin resilience in continued soft markets

Q2 2024
Net sales:  SEK 25,606 million (27,123) 
Organic growth:  −6.6% (7.9%), driven by lower market demand across regions and industries, except for aerospace and railway showing continuous growth.
Adjusted operating profit: SEK 3,324 million (3,614). Continued strong price/mix contribution, driven by pricing actions and active portfolio management, as well as good cost control largely offset lower volumes.
Adjusted operating margin:  13.0% (13.3%)
Net cash flow from operations:SEK 2,152 (3,664)

Rickard Gustafson, President and CEO:

“We continue to effectively manage the soft markets, deliver resilient margins, and execute on our strategy by investing in areas such as innovation and regionalization. While there is some short-term cost pressure from regionalization and lower production volumes, our actions will make us even more competitive and prepared when demand improves.

Solid margin in continued soft market conditions

In the second quarter, we effectively managed the continued challenging market conditions. I’m pleased that we retained a solid adjusted operating margin of 13%. This is yet another quarter with resilient margins, not least given that organic growth shifted from +8% in Q2 last year to –7% this quarter.

We continue to see soft market demand across most regions. This was partly offset by our continued strong pricing execution, which, together with our ability to launch innovative products as well as active portfolio management, resulted in a positive price/mix in the quarter.

Effective cost management

We continue to manage our costs effectively, enabling us to offset significant wage inflation as well as somewhat higher ocean freight costs. At the same time, the intensified regionalization of our manufacturing footprint, where we are moving production across different regions, resulted in somewhat higher costs in the quarter. The increased regionalization pace is also reflected in items affecting comparability, which was high in the quarter. This was primarily driven by the extensive downsizing actions in Germany to strengthen cost competitiveness and improving lead times to customers.

Looking into the second half of the year, the current lower volume environment, combined with the ongoing footprint regionalization effort, implemented at a speed and scale not seen before, may have a short-term impact on our cost efficiency. Even if this could put some temporary pressure on our margins, regionalization is fundamental in our strategic transformation and strengthens our competitiveness in the longer term. This will put us in a favorable position when demand starts to improve again.

Strengthened position through R&D and innovation

Our strategy is designed to create significant customer value in targeted markets through sustained innovation leadership and increased efficiency and agility. This means that innovation and technology development are at the core at SKF. About a month ago, I joined our first SKF Tech & Innovation Summit. It was fantastic to hear several customer testimonials on the value derived from our innovation capabilities and solutions.

Innovation is a fundamental part of our ongoing portfolio management agenda. We have during the last years transformed our R&D portfolio so that more than 90% of the projects are focused on our high-growth segments and all these projects target an adjusted operating margin well above our target of 14%.

Finally, I would like to acknowledge the invaluable efforts from our employees to manage the business cycle, find the next breakthrough innovations, and to increase our regionalization pace. Together, we make SKF an even more innovative, agile and competitive company.

Outlook

We expect to see continued market volatility and geopolitical uncertainty, and the business is prepared to tackle different scenarios. For the third quarter of 2024, we expect organic sales to be relatively unchanged, year-over-year. For the 2024 full year, we expect a low single-digit organic sales decline, compared to 2023.”

Financial overview, MSEK unless otherwise stated    Q2 2024    Q2 2023    Half year 2024    Half year 2023    

Net sales    25,606    27,123    50,305    53,672    

Organic growth, %    −6.6    7.9    −6.8    9.0    

Adjusted operating profit    3,324    3,614    6,627    7,093    

Adjusted operating margin, %    13.0    13.3    13.2    13.2    

Operating profit    2,489    3,213    5,482    6,592    

Operating margin, %    9.7    11.8    10.9    12.3    

Adjusted profit before taxes    2,946    3,231    5,978    6,272    

Profit before taxes    2,112    2,830    4,834    5,772    

Net cash flowfrom operating activities    2,152    3,664    3,933    6,411    

Basic earnings per share    3.36    4.48    7.50    9.03    

Adjusted earnings per share    5.19    5.36    10.02    10.13    

Net sales, change y-o-y, %, Q2    Organic1)    Structure    Currency    Total    

SKF Group    −6.6    0.1    0.9    −5.6    

Industrial    −7.4    0.1    1.1    −6.2    

Automotive    −4.7    0.0    0.4    −4.3    

1)Price, mix and volume

Net sales, change y-o-y, %, Half year    Organic1)    Structure    Currency    Total    

SKF Group    −6.8    0.1    0.5    −6.2    

Industrial    −7.3    0.1    0.5    −6.7    

Automotive    −5.5    0.0    0.4    −5.1    

1)Price, mix and volume

Organic sales in local currencies, change y-o-y, %, Q2    Europe, Middle East & Africa    The Americas    China & Northeast Asia    India & Southeast Asia    

SKF Group    −6.3    −5.3    −12.4    0.2    

Industrial    --    --    ---    -    

Automotive    --    --    -    ++    

Organic sales in local currencies, change y-o-y, %, Half year    Europe, Middle East & Africa    The Americas    China & Northeast Asia    India & Southeast Asia    

SKF Group    −5.7    −7.5    −11.9    0.7    

Industrial    --    --    ---    -    

Automotive    --    --    -    ++    

Outlook and Guidance

Outlook

Q3 2024: Organic sales expected to be relatively unchanged, year-over-year.

FY 2024: A low single-digit organic sales decline expected, year-over-year.

Guidance Q3 2024

Currency impact on the operating profit is expected to be around SEK 150 million negative compared with the third quarter 2023, based on exchange rates per 30 June 2024.

Guidance FY 2024

Tax level excluding effects related to divested businesses: around 26%.

Additions to property, plant and equipment: around SEK 5 billion.