SKF-B.ST FY2026 Q3 Earnings Call Transcript
Date: 2026-10-21
Source: Financial Modeling Prep

Sophie Arnius: A warm welcome to this call focusing on SKF's performance in Q3 2026. Also, this quarter, we improved our margin and organic growth, supported by selective higher OEM demand and stronger commercial execution. This was definitely evident in our Specialized Industrial Solutions segment. I'm Sophie Arnius, heading up investor relations, and with me, I also have our CEO, Rickard Gustafson, and our CFO, Susanne Larsson. There will, of course, be opportunities for you to ask questions after our presentations, and there are 2 ways to do that. If you have dialed in via the telephone line, you press star and one. If you are instead watching via the webcast, you can already now type in your questions, and you do that in the tab that you find above the slides. Without further ado, Rickard, it's great to hand over to you.
Rickard Gustafson: Thank you, Sophie, and good morning to all of you, and thank you so much for joining us for this earnings call. I'd like to start by us reflecting a bit, and I'm very pleased that we are now starting to see the end in our strive to establish 2 competitive and strong and fit-for-purpose businesses. After the approval from our shareholders at the EGM on October 1st, we are now starting to look somewhat different. As you will hear us report today, we are now viewing automotive as discontinued operations, while our industrial business is treated as continuing operations. So bear that in mind as we go through the numbers. Looking into the quarter and then focusing primarily on SKF continuing operations, i.e., our industrial business. Here we saw a strong organic growth of 4.3% in the quarter. The organic growth is driven by high demand in selective OEMs, such as defense, drives, and infrastructure, but also a strong growth in Specialized Industrial Solutions. There we have especially strong growth in Aerospace and Magnetics, which I'll come back to shortly. Turning to the profitability and adjusted operating margin is actually also coming in strong in the quarter, up 0.9 percentage points versus last year at 16.3%. The drivers here are strong commercial execution, a continued margin expansion in Specialized Industrial Solutions, and we also see a good progress in the execution of our rightsizing program. Here we are actually announcing today that the target to reach the SEK 2 billion run rate savings somewhat 6 months ahead of what was communicated earlier, i.e., we've expanded to complete that by this first half 2027 rather than the second half 2027 as per communicated earlier. Cash is also up versus last year to SEK 2.1 billion, and here we see that our higher operating profit more than offset components inventory buildup that we have in the quarter to support growth, especially in Specialized Industrial Solutions. Turning to our growth by region and starting with EMEA, our largest region, where we see a broadly unchanged demand. Here I would like to say that light industry performing somewhat better than heavy industries, but we do see some good green shoots in drives, high-speed machinery, and also in defense. Specialized Industrial Solutions is also growing nicely, in the region. Here, Aerospace is standing out somewhat ahead of the others. In Americas, very strong organic growth touching 10%, as you can see on this chart, where we see a strong improved demand in key OEM markets. Here I'd like to mention data centers, defense, off-highway, but also distribution and services have had a good quarter in this particular region. China and Northeast Asia, flattish growth, as you can see, but this should be viewed in the light of rather tough comparison in rail and wind over the same quarter last year. We do see good growth, though, in distribution and machine tools, and also here in commercial aviation is starting to pick up quite significantly. Finally, India and Southeast Asia, very strong growth, almost 12% organic growth. Growth we see across most industries. Some that stands out, in particular, would be distribution and heavy industries. While from a geographical point of view, we see very strong developments in India and Vietnam. If we then leave the geographies and start to take a deeper look on our segments, and starting with Bearing Solutions, which represent, in this quarter, 74% of sales and 85% of our adjusted operating profit. Also here, we see good organic growth of almost 3% in the quarter, and as I said on the previous page, it's primarily growth in Americas and in India and Southeast Asia, while there is more flattish in the other geographies. On a side note, if you may recall last quarter, we announced a venture in the humanoid space with Leaderdrive, and that initiative is progressing according to our expectation and plan, and we are still targeting to have that operational by the end of this year. Looking into the profitability and adjusted operating margin, we see a slight improvement to 18.8%, clearly driven by strong development in price mix that contributes, but also that we have the positive impact from the rightsizing initiatives that are progressing faster than anticipated, as I mentioned. In this quarter, we have had some production related to the automotive separation, but the impact on our earnings has been non-material in this quarter. Turning to Specialized Industrial Solutions. As you can see here, representing 26% of net sales in the quarter and 23% of the adjusted operating profit. Very strong organic growth and all 4 business units that make up Specialized Industrial Solutions, they actually grow. As I mentioned before, Magnetics and Aerospace are growing at an even higher pace than the other 2. The key growth drivers or growth verticals for Magnetics, I would say is data centers and semiconductors, and I will give you some more details on Magnetics shortly. The adjusted operating profit is improving very nicely, 2.4 percentage points to 14%. The key drivers here is the solid price mix, to some extent driven by pruning and portfolio optimization activities that we have taken in the past that now starts to bear fruit. We also have the fact that, as I mentioned, Magnetics and Aerospace are growing somewhat faster than lubes, lubrication and seals, which also contributes to a positive mix in the quarter. We also see a continued solid profitability development in our lubrication business. All of this is offsetting the general inflation and also some negative mix effect that we have where we have high demand in some products that comes with some higher material cost. That will also be seen in the bridges as we go through them. Turning to the discontinued operations, i.e., our Automotive business. Here we are still seeing a rather volatile and weak demand. We have a negative growth of 4% where we primarily with a weak development in Europe while we had a strong development or strong momentum in commercial vehicles and also aftermarket in Americas and China and Northeast Asia. The adjusted operating profit, though, is improving quite well to 4.6% in the quarter despite the negative volume. Again, here we see a very solid price mix, and good commercial activities in general, and also the fact that commercial vehicles and aftermarket is growing somewhat faster than light vehicles, which also has a positive mix impact. We also have some currency tailwinds actually in the quarter that partly offset the inflationary environment that we also are facing. Overall, demand remains challenging, as I said, and especially in Europe, but further improvements in our commercial capabilities really supported the improved profitability despite this rather volatile demand. If we leave the numbers for a second until Susanne will come back with the details, I'd like to give some highlights on some strategic initiatives that we are working on and also give you some more color to our Magnetics business. Starting on the left-hand side of this page, our Magnetic Solutions business is roughly a SEK 1.5 billion business, enjoying solid double-digit growth over the last few years. The growth is driven by good development in certain industrial verticals, such as data centers, semiconductors, and energy. To support customers in those particular verticals, we have a full suite offering where we have the magnetic bearings, we have the high-speed electrical motors, we have the electronic control cabinets, and the frequency drives, all combined with a very sophisticated condition monitoring capabilities that actually supports the whole ecosystem. This ecosystem, it provides significant value for our customers. It enables significantly enhanced energy efficiency, as up to 30% is not uncommon for customers to capture. We see an increased uptime and less maintenance, where we have no mechanical contact reduces the risk of failure, and this provides a very attractive life cycle equation for our customers. We do see that these solutions are very clean, silent, and compact, and an oil-free system is, of course, ideal for applications that require high level of cleanliness, such as in semiconductors and also in hospital applications. We have embedded sensors. They can really control and monitor the whole ecosystem, and it's also perfect for scaling AI, another key value for our customers. In order to secure growth in this highly interesting segment of ours, we focus on 3 pillars. First, in order to meet the growing demand, we need to scale our manufacturing capacity, and this is particularly relevant for our production facilities in Morocco and the build-out in China. It goes both for scaling manufacturing, but also driving automation in those factories to secure that we can meet the demand. Secondly, we are building for the future, and we continue to invest in R&D to stay relevant in these key verticals, such as data centers and HVAC, semiconductors, and energy. But we're also exploring into new geographical areas and trying to find ways to also grow in the Asian markets. And then finally, we are also securing a broader value creation for our customers. With our built-in sensors and the ability to scale AI, we can build even stronger customer relationships by providing optimization in areas such as energy consumption, system performance, and asset lifecycle management. All in all, these 3 pillars, they provide a very solid growth platform for our Magnetics business. Leaving the Magnetics and turning to the Vertevo journey. As I mentioned in my opening remarks, we had an historical event on October 1st with the EGM, where the shareholders approved to distribute the shares of its Automotive business to the SKF shareholders. So what should you expect next? That is what we are trying to outline here on this chart. In November, you will receive a prospectus, followed by a Capital Markets Day hosted by Vertevo on November 17th. And for all of you that have the interest to join that, which I hope is quite a few of you, then you should remember to register before November 3rd to take part of that exciting event. Then the ambition is to have the first day of trading out Stockholm Nasdaq on December 1st. As you also may recall, earlier this year, we announced a change in the scope somewhat, where we were transferring some additional production lines to automotive. We did that because it benefited both businesses. For Vertevo, it will provide faster track towards self-sufficiency, and for SKF, it reduces the need for future footprint optimization. The vast majority of all the assets and production lines now sits within Automotive, but with only a few production units to be transferred to Automotive, and that will happen in early 2027. So this means that the contract manufacturing will start to decrease from Q2 2027, and then further accelerate until mid-term. So that is what you should expect related to the contract manufacturing. With that, I would like to hand over to Susanne to take you through the numbers in the quarter.
Susanne Larsson: Good morning, everyone. Yes, let me try to enlighten a little bit more on the financials, starting with the profit and loss then. As Rickard said, this is where we are now talking about continuing operations for the majority of our financials, where the net profit is still including our discontinued operations. So again then, for continuing operations, we saw a net sales that increased 5.5% year-over-year this quarter 3, and this was driven then by the organic growth of 4.3%. We had a positive currency of 1.7%, and it was somewhat offset with -0.5% of structure. The adjusted gross profit margin was largely flat year-over-year at 34.9%. So while price mix and volume were positive contributors, we faced increased material, utilities, and logistic costs together with the general wage inflation that impacted negatively. We also had some separation preparations causing production disturbances in quarter 3. The adjusted operating margin was strong and improved with almost 1 percentage point to 16.3% year-over-year, and I will get more into that on the following page. Moving on to items affecting comparability. In continuing operations, we had SEK -67 million of those, and that was explained mainly by a profit from a divestment of shares in associated company, our Ningbo Haiya Trolley company in China, and that contributed with SEK +118 million. That was then further reduced by SEK 86 million related to the automotive separation and another SEK 68 million of optimization of footprint and some other adding up to SEK 31 million. This net allowed us to have a net profit that improved SEK 490 million compared to last year to SEK 1.8 billion, and that is explained by improved performance together with SEK 320 million less of one-off cost this year, quarter 3 compared to last year. Similarly then, the earnings per share improved to SEK 3.9 compared to SEK 3.5 last year. If we then add the discontinued automotive operation, our net profit for the SKF group was further reduced by SEK 349 million and ended at SEK 1.4 billion, and this corresponded to an adjusted earnings per share for the SKF group, including automotive, of SEK 4.2 compared to SEK 4.0 last year. Finally then, IAC for discontinued operation ended at SEK -500 million, which is mainly explained by separation-related costs. Let's then look at the drivers of the strong adjusted margin in continuing operation. Starting from the left then with organic growth, we have this strong organic growth of 4.3 percentage points that is driven by price mix and volume, and all of this improved the operating margin by 3.3 percentage points. We saw selectively higher OEM demand together with a strong Specialized Industrial Solutions, continuing their commercial execution very well. This quarter, the earnings impact from support production relating to automotive separation was non-material. Coming back to Specialized Industrial Solutions then. This is where we had an increased production volume to cater for stronger demand in selected markets, and that contributed nicely to our organic result. As we had stronger growth in Aerospace and Magnetics, this resulted in higher costs from a different material mix than last year, which is impacting the cost development negatively. But all in all, a positive net result from all of this. If I remain on the cost development, we did face higher costs from material utilities, logistics, and the general wage inflation together with ongoing transformational initiatives. Still, our rightsizing program contributed with some SEK 350 million and continued to more than offset the separation-related negative synergies. As Rickard mentioned before, we now expect our program to reach the SEK 2 billion annual run rate already by mid-2027, which is about half year prior to the original plan. We also continue to largely compensate tariff costs through price adjustments, and we expect to continue to do so also in the coming quarter 4. Net, the cost increases that impacts EBIT margin is -2.7 percentage point. However, was more than offset by the very strong organic growth. The impact from the currency turned positive in quarter 3 with an EBIT impact of SEK 98 million, and this was mainly this quarter driven by a stronger Chinese yuan vis-à-vis the Swedish krona year-over-year, resulting in a margin effect of 0.3 percentage points. Finally, the structure is the net of the divestment of the Aerospace business, Elgin, together with the acquisition of G-Tech that we completed by July, and that has a negligible impact on the operating margin. Moving on to cash flow for continuing operations. The EBITDA in quarter 3 amounted to SEK 3.6 billion compared to SEK 3.2 billion last year. Our non-cash and other came in at SEK -422 million, which was in line with last year's cash, and the tax paid was SEK 515 million. Moving on to net working capital, we generated a negative cash flow of SEK -587 million, which compared to quarter 3 last year was SEK 266 million worse. This deterioration is explained by an inventory buildup fully in Specialized Industrial Solutions and to the vast majority explained by material stock that is built up to support continued growth. Net that our operating cash flow came in at SEK 2.1 billion compared to SEK 1.8 billion last year. In the cash flow for this quarter 3, we have some SEK -500 million that is related to IAC payments from restructurings as well as the automotive separation related to the continued operation. We had the CapEx for the quarter of SEK -529 million and net cash flow after investment ended at SEK 1.546 million. Moving on to KPIs that we have here on the right to the picture, net leverage and return on capital employed for the continuing operation. We saw that net debt in relation to adjusted EBITDA ended at 1.1x, and the adjusted return on capital employed was 15.3%. As a consequence of Automotive by quarter 3 being reported as a discontinued operation, the KPIs here are based on the quarter 3 capital employed for continuing operations rather than having what we normally have a rolling 12 months average balance sheet. With Automotive being separated out, we do not really have comparable balanced data historically for the continuing operation. Let me instead try to relate to the SKF Group, including Automotive, to allow for some comparisons on these KPIs. Again, SKF Group including Automotive, improved the net leverage to 0.8x compared to 0.9x in quarter 2 as well as last year. For the adjusted return on capital employed with the SKF Group, it also improved and would have been 14.7 for the SKF Group, including Automotive, compared to 14.5% previous quarter and 14% last year. That's a reference. Moving on, outlook and guidance for the continuing operation. We expect the sales to strengthen somewhat in quarter 4 year-over-year. This because we see a similar market environment as we were facing in the quarter 3. However, we still have market volatility, and that allows for continued uncertainty. Currency guidance for quarter 4 and for continuing operation, we estimate to have SEK +150 million impact based on the exchange rate that we saw by the end of September. If I then turn to the guidance for the full year, the tax rate for the continuing operation, excluding divestments and separation of Automotive, is estimated to a full year of 27%. When it comes to the additions to property, plant, and equipment for the year, we anticipate that to end at SEK 2.5 billion. If we look at the guidance from last quarter, the previous guidance, this corresponds to a further decrease of SEK 0.5 billion due to optimization of SKF's continued operation and the planned investments that we have ahead of us. The full year guidance for items affecting comparability relates to the full group, including Automotive, considering the Automotive separation finalizing during quarter 4, and that allows us to remain at the range of SEK -2.5 billion-SEK 3 billion. This is fully in line with what we have communicated at the Capital Markets Day. Then finally, as Rickard mentioned, with the changed Automotive separation scope that we announced early this year, we have moved additional production lines to Automotive. This has a consequence of the one-off cost related to the Automotive separation, so we are increasing those with approximately SEK 0.5 billion, from SEK 2.5 billion to some SEK 3 billion. However, the industrial footprint optimization is lowered by the same amount because we will have less optimization need for the continuing operation than what was originally anticipated. With that, we stay intact with what we committed to at the Capital Markets Day last autumn with the total expected level of IACs in the coming years, and we do not see an impact of this overall. By that, I come to the end, Rickard, and over to you for wrapping up.
Rickard Gustafson: Thank you, Susanne. Before we move into the Q&A, let me just take a few minutes to summarize the highlights of the quarter. As I mentioned, we do see strong continued growth and margin expansion in SIS, which is very pleasing, and in the quarter, as I mentioned, is up 2.4 percentage points. This is an important part of the journey that we laid out to all of you for our industrial business at the Capital Markets Day in November last year. We also see a solid momentum in delivering on our rightsizing savings, as you heard both me and Susanne mention. I think this is a positive sign on our ability to execute on the initiatives that we put out to do for ourselves. We are especially pleased that we are able to do this in parallel with separating the company into 2 and still stay focused on our customers and capture the growth that is available in the market, as you also heard us talk about. Magnetics, it's an exciting business. It's not the largest business unit of ours, but it's a strong, growing, and well-positioned, as I hope I was able to articulate to you that we do see that it's well-positioned for structural growth as we move forward. Then finally, the Vertevo listing. I do see the EGM on October 1st as a milestone in the history book of this company. We are now seeing the end of this journey, and we are excited to complete it and see our colleagues ring the bell in Stockholm on December 1st. As I mentioned, there is an upcoming Capital Markets Day on November 17th. Don't miss it. In order to not miss it, you need to register before November 3rd. With this, I thank you for your attention, and I hand over to Sophie and the Q&A session.
Sophie Arnius: Thank you, Rickard and Susanne. We have now around 30 minutes for a Q&A, and I can see that quite many of you are eager to ask questions. So please limit it to one question per person, and if time allows, you are very welcome to rejoin the question queue. Let me, before we start here, remind you on how to ask a question. If you have dialed in via telephone, you press star and one to ask a question. If you would like to withdraw that, you press star and 2. For our webcast audience, you can type in your questions in the tab above the slides. We will start with a question from the telephone line, and it comes from Chit Sinha at JPMorgan. Chit, please go ahead.
Chit Sinha: Yeah. Hi, good morning, guys. Thank you for taking my question. I just wanted to get a bit more clarification on the near-term guide. So you've delivered a solid 4.3% in Q3 and are expecting similar market conditions in Q4. It seems to me that maybe comps are a bit easier in Q4, so I'd imagine a bit better growth rate. Is this the right way to think about the guide? If there are any headwinds to be aware of, that would be really helpful to touch on. Then if you could also touch on the pricing contribution both in Q3 and how you're thinking about this in Q4. Thank you.
Sophie Arnius: Let's have Rickard responding to this question.
Rickard Gustafson: On the growth forecast for Q4, we do foresee a maintained, rather volatile environment. We do see, as I mentioned, strong growth in certain geographies, while we still have some hesitation, especially in Europe, among some of our distributors that still are somewhat hesitant to fill their inventories due to the volatile environment. As always, there are also some volatility and some comparisons quarter-over-quarter that also you should consider. We do foresee roughly the same activity levels, and our best estimate is the somewhat improved growth in the fourth quarter. Still, given a lot of uncertainties, we are staying at that best outlook of ours. Then on pricing, we always try to be very forward-leaning here and be proactive, and we start to see that energy and logisticals started to move during the first half of the year. As you may recall, we took some pricing actions then. We will continue to monitor this very carefully. If we see the need to try to push further price, we will definitely do that. Of course, as always, continue to drive work with our own efficiency to compensate for the cost inflation. We do not see right now that the cost inflation will materially change in Q4 versus Q3.
Sophie Arnius: Also that, I believe, also answers John Kim's question, John Kim from Deutsche Bank here, around price. Let's continue with a question from the telephone line, and it comes from Klas Bergelind at Citi. Klas, please go ahead.
Klas Bergelind: Thank you. Hi, Rickard and Susanne, Klas at Citi. First on the bridge, it doesn't seem like overproduction was a big driver, but you had high production levels in SIS, good utilization. You also had good mix there because of Aero and Magnetics. I am trying to understand how sustainable this is. The end market outlook for Aero, Magnetics seems good, but how should we think about seasonality for Specialized? Do we have a step down in the margin in the fourth quarter, or will that be more marked in bearings, including the one-month impact from contract manufacturing? Thank you.
Sophie Arnius: Let's have Susanne answering this question.
Susanne Larsson: As you are rightly saying on the bridge, we have positive impacts from price mix and volumes that are, to a large extent, compensated by increased cost. One reason for that is also, as you rightly state, the SIS mix impact, where we have a higher growth in Aerospace and Magnetic, allowing for a mix shift with higher ingoing material components. We were also facing some separation cost, some separation-related activities that impacted our production efficiency in quarter 3, and this was then the last quarter of that kind of separation taking place, now having automotive fully as an independent company. We also saw as an example only out of that, having to turn electricity into 2 separate entities that allowed for some disturbances in this quarter that we were facing, that we do not anticipate to see in the coming quarter. We also didn't have a lot of support production for Automotive in this quarter when it came to overproduction, as we could see more of in quarter one and quarter 2, and that we are not seeing in this quarter either.
Klas Bergelind: But for—
Sophie Arnius: Klas, on your question there on seasonality for Specialized Industrial Solutions in terms of margin, unfortunately, we don't have that long a history here, only 2 years quarterly. But the sense is that they follow the same patterns as industrial. So Q4 is seasonally lower from a margin perspective than Q3.
Klas Bergelind: Correct.
Sophie Arnius: Answered your question.
Klas Bergelind: Yeah. Super quick one for you. Super quick.
Sophie Arnius: We will continue with a question.
Klas Bergelind: Thank you.
Sophie Arnius: From the telephone line, it comes from Alex Jones at Bank of America. Alex, please go ahead.
Alex Jones: Thank you. Maybe just to follow up on cost inflation. Can you confirm that your pricing actions that you took and you talked about in H1 offset the input cost inflation this quarter? Or did you need the additional cost and rightsizing that you are doing to do that? You talked about no material change in cost inflation into Q4. Could you just talk about what you are seeing into 2027 at this stage, recognizing that there is still a couple of months left in the year? Thank you.
Sophie Arnius: Let us hear from Rickard on this topic.
Rickard Gustafson: Right. Without disclosing all the details, but in general terms, I think our price actions and also commercial activities has helped to a large extent mitigate and offset the cost inflation. Then, of course, we also drive, as I mentioned, efficiency measures in the business. We are actively looking into price opportunities. We will continue to do selective price increases wherever we can. We monitor the development in the cost base and especially when it comes to energy and logistics and materials. If it's deemed necessary, we will do our utmost to put further prices into the market. My comment regarding the outlook in terms of cost development and inflation was related between what we believe is going to be in Q4 compared to Q3. I have no comments on 2027 at this stage.
Sophie Arnius: Thank you. We will continue with a question from the webcast, and it comes from Daniela Costa at Goldman Sachs, and it's, I would say, more of a CFO-related question here, Susanne. If there will be further restructuring required in the industrial divisions then, is Bearing Solutions and Specialized Industrial Solutions following the Automotive spin?
Susanne Larsson: We initiative in June last year, 2025, and that was there to fully offset the synergies and allow the industrial business to be in a good shape. At this point in time, we do not anticipate additional restructuring of that kind. What we have talked about in the capital market is that we still remain to have footprint optimization initiatives ahead of us, and that we are planning and working through in detail as an industrial pure-play company. Having said all that, we will, of course, continue to work on productivity measures along the way forward, but nothing else than what we have talked about already.
Rickard Gustafson: If I may, just to reinforce what we said at the Capital Markets Day in November last year, that these remaining transformation initiatives or rightsizing initiatives, is the right word to use here, will end by midterm, and thereafter, we should not have this high level of items affecting comparability anymore.
Sophie Arnius: Thank you. Let's continue with a question from the telephone line, Anders Idborg at ABG, please go ahead.
Anders Idborg: Yeah, morning. Thank you. Just maybe on this change of CapEx guidance, you're now running at more like 3.5% of sales in the remaining business, and I guess part of it is related to the accelerated shift to Automotive, I suppose. Could you help me with that? I mean, is that a new level that you think you can sustain? We've talked previously about 5% in an intermediary term.
Sophie Arnius: I will ask Susanne to respond to this. She's eager to answer.
Susanne Larsson: Eager to answer. No, we will stay with the guidance we allowed for at the Capital Markets Day, where we said that in the next 2 years until midterm, we will have a higher CapEx level to then gradually come down. You are right that this very year, we have been extremely busy, both with our separation activities, but also taken the opportunity to reassess what we had in the pipe and been able to actually challenge and reduce that scope. I think this is not how you should read the continuation. We stay with what we announced at the Capital Markets Day last November.
Anders Idborg: Okay, thanks.
Sophie Arnius: Thank you. Let's continue on the, perhaps, CFO topic questions. I have questions on our working capital, both from Olof Cederholm at SEB and Rory Smith at Oxcap here sent in to us. If we can talk then, Susanne, about the net working capital in the industrial business. So 38% of sales in the quarter, up from 32%, and that's 32% group then, including discontinued. Also on how this trend in the coming quarters will look like and our medium-term ambition.
Susanne Larsson: Starting about the current trend, where we have deteriorated from 32%-38%, as you rightly say. In this quarter, it's fully explained by the Specialized Industrial Solutions, building channel stock to cater for further growth then. We do see a somewhat of a reduction in our Bearings business. I think all in all, what we do remain with is the guidance of the longer term, where we should then improve and normalize and further improve, as we communicated at the Capital Markets Day. I think it's fair to say that we have some stocks still remaining in our inventory that has been disturbed by the separation activities that has been ongoing, and where we have had that in the bearing business particularly. It's also correct that we will remain with a somewhat higher channel stock in SIS that we are gradually reducing as we move along.
Sophie Arnius: I can just also remind ourselves what we said at the Capital Markets Day in terms of working capital targets and midterm, around 29%. This is for continuing operations, SKF post-separation, and long-term, 27% of sales. As Susanne said here with Specialized Industrial Solutions, we are on a higher level to cater for growth. We do not expect that to come down in the short term here. Hopefully, Olof and Rory, that answered your questions. Let us continue with the telephone line. We have Andre Kukhnin at UBS as first out here. Andre, please go ahead.
Andre Kukhnin: Yes, good morning. Thanks very much for taking my question. I just wanted to take a step back and ask a broader question on the margin mix between the 2 divisions, Bearing Solutions and Specialized. That lower margin profile in Specialized, is that just simply the business mix with lubrication being lower, or is it reflective of maybe different aftermarket versus new equipment mix? Essentially just trying to get an idea whether there is scope for Specialized to catch up to where the Bearing Solutions business is already with maybe further pruning or just the growth that it is delivering.
Sophie Arnius: Will you please respond to this question?
Rickard Gustafson: I would be happy to, and this is an important part of our long-term value creation plan. To be brutal honest, we do not really see any real structural drivers why the business units in Specialized Industrial Solutions should operate at a lower profitability margin than the Bearing Solutions business. They should be roughly on par, and that is what we are aiming for in our long-term plans. Also even in mid-term, we should get there and then build from that for the long term. That is really part of the equation here.
Andre Kukhnin: Thank you.
Sophie Arnius: Thank you. Let's continue with a question from, also the telephone line, James Moore at Rothschild & Company Redburn. James, please go ahead.
James Moore: Thanks, Sophie. Good morning, everyone. Hope you're all well. I wondered if you could help me with some quantification behind the cost development line a bit more. Susanne, thanks for your comments. Obviously, input costs are a massive theme at the moment. I see 100% freight rates, 30% steel, higher oil, and I guess price cost management is going to be critical going forward. Is there any way you can scale the raw material, logistics, and energy headwind in the quarter? Did you say earlier that basically that headwind is slightly bigger than the price mix positive? So maybe, I don't know, SEK 300 million together. Is that the kind of magnitude? More importantly, how do you think that moves going forward? Is that number from current spot rates, assuming they hold? Have you got visibility that that number gets materially bigger? When do you see at current market prices, the year-on-year bridge impact on input costs hits the peak point? If you could talk about whether you think you're going to be able to price that and whether there'll be any timing mismatches, or do you think you can move the price at the same speed?
Sophie Arnius: This a question for you then.
Susanne Larsson: Yeah. Thank you, James. I will really repeat what Rickard has already said. I think that we are monitoring all the input material and cost very detailed and trying to take the appropriate measures. We have acted already in the market earlier this year, and we are continuing to assess when that is appropriate to do again. I think we stay with what Rickard have said in the quarter that we have been able to compensate to a big extent, and we don't see a big difference, also in the coming quarter.
James Moore: Any chance of talking about—
Sophie Arnius: Thank you, Susanne Larsson.
James Moore: —whether it gets materially bigger?
Sophie Arnius: Let's continue with a question from Andreas Koski at BNP Paribas. Andreas, please go ahead.
Andreas Koski: Thank you. Thank you very much. I have a question about the near-term outlook as well, of somewhat higher organic growth. I think that implies a deceleration in the year-over-year organic growth to a level below 4% at least. I wonder if you can talk a little bit more about what you're seeing in both Europe and China, because looking at the organic growth now in the quarter being 0.5%, I guess that implies that volumes are actually declining year-over-year, despite some leading indicators implying that industrial activity is improving. So why do you think that you're not seeing any volume growth coming through? What are you hearing from your customers, etc, in both Europe and China? Thank you.
Sophie Arnius: Let's hear from Rickard on this topic.
Rickard Gustafson: Right. As I tried to explain before, there are some uncertainties and also the activity levels in the different geographies that creates this foundation for the guidance that we provided. I am not saying that it is a deceleration as such, but we do see the same activity levels, but that is our guidance that we are providing. Turning to your question about activity levels in Europe, you are right, PMIs are started to move in the right directions. We do see that clearly that also in our business that we have bottomed out. We start to see signs of an improvement in the underlying activity levels and in our order books. But the speed of change, if I may use that term, is not as aggressive as it had been in Americas or in India and Southeast Asia. As I also mentioned, in Europe, we do have a sizable distribution business, and there is still some hesitation among many distributors to really dare to be more forward-leaning and aggressive in this volatile environment. In China, I do believe that we do see solid underlying development in many industrial verticals, but we are also facing some tough comparisons on some large exposure that we have in rail and wind historically.
Sophie Arnius: Thank you.
Andreas Koski: Thank you very much.
Sophie Arnius: Let's continue with a question from Tim Lee at Barclays. Tim, please go ahead.
Tim Lee: Hi. Thanks for taking my question. I have the question on margin again. So, if we look at the bridge, we have a very strong organic contribution. Can you give us a little bit more color or detail on the contribution from volume and price mix, respectively? And also more specifically on SIS, I think the organic draw through is actually more than 100%. Can you give me a bit more color? It is more on pricing or on utilization, or is due to the mix that you just mentioned, with the higher contribution from Magnetic, Aerospace. Thank you.
Sophie Arnius: A question suited for Susanne, I would say.
Susanne Larsson: Yes. Hey, Tim. So when it comes to general for the continued operation, we have a good both price and mix as well as volume impact, and that is further fueled by the Specialized Industrial Solutions. Within the Specialized Industrial Solutions, we also have a somewhat of a mix effect as we have talked about, where we have had the 2 business units, Magnetic and particularly Aerospace, growing ahead of the other ones. So that also contributes with a mix impact. So we have strong price mix and volume implications that has impacted SIS particularly, but also the industrial business all in all.
Sophie Arnius: As we talked about previously here, with this strong growth for Specialized Industrial Solutions, to cater for that, we also had strong production volumes, and that is showing in the organic column in this bridge. We also talked about this also results in higher costs, driven by a different material mix as there is more expensive material for primarily the Magnetic and Aerospace, compared to last year than the mix then. So that is showing in the cost development column for Specialized Industrial Solutions and of course also the continuing operations bridge. You have to have these both, look at them together, organic and cost development, due to how we report these. All in all, it is a very good earnings impact from this. Also let me emphasize that Specialized Industrial Solutions, the inventory we have built has been on components and material, not finished products. Good sellout also in the quarter. We have a follow-up question from Chit Sinha at JPMorgan. So Chit, please, go ahead.
Chit Sinha: Yeah. Hi. Thank you for taking my follow-up question. Sadly, Q2, you mentioned that there might be a temporary benefit in Q3 on the cash side relating to tariff refunds. Do you mind quantifying that benefit in Q3? Then obviously I think maybe the outflow you would then expect for Q4. Thank you.
Sophie Arnius: Susanne, please.
Susanne Larsson: The tariff refunds. We have very limited impacts in quarter 3, because what we had was a positive tariff refunds in quarter 2, that we also then adjusted our price mechanics for, so we had a very limited effect in quarter 2. The settlement of that from a cash flow perspective is gradually taking place during quarter 3 and 4, and that is also not really visible. That is the impact out of that in the quarter 3 alone.
Sophie Arnius: Thank you.
Chit Sinha: Thank you.
Sophie Arnius: We will continue with a follow-up question from Klas Bergelind at Citi. Klas, your line is open.
Klas Bergelind: Thank you for the follow-up. Rickard, did you see some temporary boost to the growth in Americas? Was there any sort of lumpiness to it? Any projects that drove growth that would roll over? Did you see any pre-buy anywhere ahead of possible price increases? Obviously, you are saying that we will do our utmost to increase prices. It does not seem like you will do anything quite soon, but nevertheless, was there any pre-buy, do you think? Then also on the input cost inflation will be similar fourth quarter versus third quarter. If we look at the current inflation, whether it is trade, steel, energy, etc, and we sort of try to be a bit forward-looking, our model suggests that the SEK 452 million net will increase quite materially into the first half of 2027. If you could comment on that, thank you very much.
Sophie Arnius: Rickard, please.
Rickard Gustafson: I will try. When it comes to the growth in Americas, yes, there have been some pre-buys, especially in agriculture, in the quarter. Then we also have had some project-related initiatives. But the underlying is clearly a strong general improvement in the OEM market as we anticipated. Then on your questions on cost development, if I understood you correctly, you were asking more for 2027, and as I mentioned, I am not in the position to comment that at this stage. That will be something that we do when we release our Q4 numbers.
Sophie Arnius: I can just add—
Klas Bergelind: Thank you.
Sophie Arnius: —that sometimes there is a lumpiness in our sales, not necessarily pre-buys. Hopefully, Klas, that clarifies it. We will continue with a follow-up question from Andre Kukhnin at UBS. Please go ahead.
Andre Kukhnin: Oh, yes. Great. Thanks for squeezing me in. I just wanted to double-check first, from the earlier Q&A and your comments that the impact from overproduction in Q3 was immaterial. Is that correct? If I may also, could you just comment on how Q3 actually progressed in terms of monthly cadence of growth? Was September surprising in any way, and how is it looking so far into October?
Sophie Arnius: To your first question, yes, it was very limited. Let's hear from Rickard on your second question.
Rickard Gustafson: Sure. Nothing stands out in this quarter. Quarter 3 for us always indicates a rather strong development in September, since we have the vacation period in the beginning of the quarter. That was the case also this year, but as I said, this is more normal for us, so nothing that stands out. The trading environment, as we know, a couple of weeks into October, it's really in line with our expectations, in line with the guidance that we have provided. Nothing new there to report.
Sophie Arnius: Thank you, Rickard. Time flies, and we need to wrap up this call, so that was our last questions. Rickard, I hand over to you.
Rickard Gustafson: Thank you. Thank you for joining this call. We do think that we close a rather strong quarter with growth of 4.3% and an improvement in our adjusted operating margin to 16.3%. We do see that we have strong commercial execution. We are putting our rightsizing program forward 6 months, and we have had a rather important event in October that enable us to really move forward and finalize the Automotive separation. I leave with that, and a rather strong quarter and some highlights from us, and I thank you for your attention.