SKF Half-year report 2020: Continued very strong operating result, despite sharp fall in demand

Alrik Danielson, President and CEO:

“We have delivered another very strong operating result, despite sales falling by 25% during the second quarter. This performance allowed us to continue to build a stronger SKF, maintaining high levels of investments in our factories and new customer offerings whilst at the same time capitalizing on new ways of working. In June, we also announced that our manufacturing operations will be carbon neutral by 2030.

Net sales fell organically by 25% to SEK 16.6 billion. Sales in both Europe and North America decreased by about 30% while sales in Asia were 10% lower compared to last year. Sales continued to be impacted by both government-imposed restrictions and lower underlying demand.

Despite this significant drop in demand, we continued to improve our cost flexibility and were able to deliver an adjusted operating margin for the second quarter of 9.4% (12.7% last year), with an adjusted operating profit of SEK 1.6 billion. Items affecting comparability, including restructuring costs and customer settlements, totaled SEK 896 million.

The Industrial business delivered an adjusted margin of 14.0% (15.7%), despite a drop in organic sales of 17%. The Automotive business, which continued to be impacted by customer closures and lower underlying demand, delivered an adjusted margin of -8.4%, largely driven by a 45% drop in organic sales.

We continued to reduce costs and adjusted the size of the business, with the ambition to be even more flexible and to support customers in an even better way. Investments in modernizing and automating our factories, as well as increasing our regional manufacturing capacity continued. During the quarter we announced a further SEK 400 million investment in our Xinchang ball bearing factory in China.

During the first six months of the year, our efforts to reduce fixed costs regrettably resulted in a reduction of 1,350 permanent employees and 750 temporary/agency employees. This contributed to restructuring costs of SEK 657 million. These efforts will continue and, as a result, we expect to see a continued elevated level of restructuring costs during the second half of 2020. These are difficult but necessary steps that we need to take to protect the business and make sure we have the foundations in place from which to emerge from this crisis as an even stronger SKF.

Cash flow during the quarter was SEK -838 million, as a result of the lower operating result and increased working capital, which in turn was driven by increased sales during the month of June.

Our colleagues around the world are doing a fantastic job keeping our factories and offices as safe as possible. “The new reality” brings a lot of challenges for our customers but it also makes the value of our connected monitoring and lubrication offers even more relevant. With our ability to offer remote analysis and AI-based maintenance, we continue to help customers’ machines rotate, without the need for on-site support.

The uncertainty continues but we are taking action to make sure that we emerge as a stronger company. We continue to invest in innovation and automation, and we feel confident that we will be able to respond to different demand scenarios, continuing to support our customers and protecting our cash flow and financial strength.”

Key figures, SEKm

   Q2 2020    Q2 2019    Half year 2020    Half year 2019    

Net sales    16,599    22,488    36,684    43,766    

Adjusted operating profit    1,565    2,856    4,137    5,576    

Adjusted operating margin, %    9.4    12.7    11.3    12.7    

Operating profit    669    2,539    2,937    5,197    

Operating margin, %    4.0    11,3    8.0    11.9    

Profit before taxes    580    2,261    2,436    4,703    

Adjusted profit before taxes    1,476    2,578    3,635    5,082    

Net cash flow after investments before financing    -838    1,448    1,092    2,132    

Basic earnings per share    0.75    3.32    3.5    7.09    

Adjusted earnings per share    2.72    4.02    6.13    7.93    

Net sales change y-o-y, %, Q2

   Organic    Structure    Currency    Total    

SKF Group    -25.2    –    -1.0    -26.2    

Industrial    -17.1    –    -0.8    -17.9    

Automotive    -45.4    –    -1.6    -47.0    

Net sales change y-o-y, %, Half year

   Organic    Structure    Currency    Total    

SKF Group    -17.1    –    0.9    -16.2    

Industrial    -12.1    –    1.0    -11.1    

Automotive    -29.5    –    0.5    -29.0    

Organic sales change in local currencies, per region y-o-y, %, Q2

   Europe    North America    Latin America    Asia    Middle East & Africa    

SKF Group    -31.0    -29.8    -37.5    -10.4    -12.8    

Industrial    ---    ---    ---    --    ---    

Automotive    ---    ---    ---    ---    ---    

Organic sales change in local currencies, per region y-o-y, %, Half year

   Europe    North America    Latin America    Asia    Middle East & Africa    

SKF Group    -19.9    -20.9    -18.2    -10.3    -3.7    

Industrial    ---    ---    ---    --    --    

Automotive    ---    ---    ---    ---    ---    

Outlook and guidance

Demand for Q3 2020 compared to Q3 2019

The industries and regions in which SKF operates are being impacted by initiatives by authorities and by SKF’s customers related to the spread of the Covid-19 virus.

As a result of this significant level of uncertainty, it is not feasible to provide a reliable demand guidance for the third quarter.

Guidance Q3 2020

Financial net: SEK -225 million

Guidance 2020

Tax level excluding effects related to divested businesses: around 29%

Additions to property, plant and equipment: around SEK 3,300 million