Apollo Commercial Real Estate Finance Inc

NYSE:ARI

A warm welcome to this call, where we are focusing on SKF's performance for the first quarter of 2025. And once again, we delivered solid margins and that's thanks to our diligent strategic execution. My name is Sophie Arnius. I'm heading up Investor Relations and I will also be joined by our CEO, Rickard Gustafson; and our new CFO, I should say, Susanne Larsson, who rejoined SKF in mid-February. And after their presentations, we will open up for questions. And there are 2 ways to do that. [Operator Instructions].

So let's get started, and it's a great pleasure to hand over to you, Rickard.

Thank you so much, Sophie, and good morning, and warm welcome to all of you, and thank you for joining us on this webcast. Today, we're going to present the story that the actually journey continues. As you can see on this chart, we now present for the seventh consecutive quarter, a negative organic growth, while at the same time, our margin demonstrates strong resilience. And this is due to diligent strategy execution, both in terms of driving commercial capabilities and operational capabilities. And I will touch more on this shortly.

Furthermore, our work to establish 2 competitive and fit-for-purpose businesses continues at a high pace. And clearly, the ongoing discussions around tariff and geopolitical issues have required some significant attention from all of us during the quarter. And of course, I will also bring some more flavor to this as we go through this presentation. But let's start by looking at our numbers from -- at the top. Starting with net sales. We report a net sales just shy of SEK 24 billion, representing a negative organic growth of some 3.5%, clearly helped and offset by a strong price/mix, so i.e., demand has been low, but somewhat offset by a very strong price/mix.

Turning to the operating margin, which again demonstrates resilience, as I mentioned, coming in at 13.5%, just ahead of the same quarter last year. And the main drivers here are primarily our pricing capabilities, our portfolio management, effective cost management and also a little bit of tailwind from currency in the quarter. And then turning to cash flow, which was actually weak in the quarter, driven by an increased or higher net working capital and also some headwind from FX when it comes to cash. And you will hear Susanne share more about this shortly. This is something that now all our business areas are focusing highly on and scrutinizing their plans and activities to make sure that we bring back cash generation to more normal levels as quickly as possible.

If we take a look at our sales by region, as I mentioned, we are still navigating in a rather soft market environment and it's reflected by these regions, starting with EMEA, where we saw a negative organic growth of some 7% in the quarter, where we see continued weak demand in many of the main geographies in Europe, primarily Germany, Italy, but also Turkey turned -- had a rather soft demand during the quarter. We'll look into some industrial verticals, starting with automotive. Automotive had a rather soft demand, both for commercial vehicles and light vehicles.

While on the positive side, we have noticed on the industrial business, we see that the incoming order book, order intake in our industrial business for the last few months have actually shown a positive trajectory, providing some indication that markets are about to bottom out. And longer term, we are positive about the commitments that have been made by some of the countries, main economies in Europe, where we have state back investments for defense and infrastructure and that could in the longer term, be a positive injection to the European economy.

If we then turn to China and Northeast Asia, which being the bright spot on this chart in this quarter. After 7 consecutive quarters of negative organic growth, they have now turned into a positive organic growth of 2%. To some extent, due to a favorable comparison versus the same quarter last year. But more importantly, the destocking in the industrial distribution market that we have discussed in the last couple of quarters have now flattened out. And we see very strong demand in automotive and especially in the EV space in China and Northeast Asia, and I will come back to that later on.

Turning to Americas and India and Southeast Asia. Well, it's a different story than the China and Northeast Asia story. Here in Q4, we reported a positive organic growth that has now turned into negative organic growth. To someone as expected, if you may recall, we did say that in Q4, we had some timing effects that some sales that we had planned for Q1 or January slipped into December and therefore, had some inflationary effect on the growth numbers in Q4. And now we see that, that has now come back in this quarter.

On the positive side, though, in Americas, we continue to see a very strong demand in aerospace, while automotive, especially related to commercial vehicles, continue to see a rather slow demand. And India and Southeast Asia, similar story, automotive having a rather soft environment, while an industry like rail is a bright spot in this particular region in the quarter. But as I talk about sales by region, it's hard not to also move over and discuss the current tariff and trade situation. So this is, as we all know, a highly dynamic topic. And we are constantly fed new information that we need to digest and figure out how we should act upon it in the best possible way and how to navigate in a very, very volatile environment.

What we have done in the quarter that we have initiated a number of mitigating activities. We have established a tariff command center that is meeting on a daily basis, making sure that all the new information that we receive, actually, we work with that throughout our entire value flows and value chains in the organization. We have already put in force price changes and tariff surcharges that is also helping to navigate in this space and mitigate some of the cost derived from these tariffs. We are on an ongoing basis, constantly looking over can we do some smart rebalancing of our global production, leverage our global footprint to its optimum. And those activities is also tactical movements is ongoing, helping to mitigate some of the tariff impacts.

And then we have really scrutinized all our different flows across our global footprint. And we can conclude that the flows between China and the U.S. are limited and those that exist, we are working hard to mitigate. And to give you some color on my last comment there, I'd like to draw your attention to the right-hand side of this chart, where we present the sales for 2024 in the U.S. As you can see, roughly 50% of what we sell in the U.S. is also manufactured in the U.S. and 50% is imported from our entire global footprint.

Below the pie chart, you see how that breaks out by region. Some 20% comes from Europe, some 15% from Mexico, the region that we are rapidly ramping up to support the America sales. And there, you can see that the vast majority is also USMCA compliant. And only 10% of the flows actually come from China and that's why I say that the flows between China and U.S. are limited. So based on these mitigating activities, I think that in Q1, we have effectively managed to navigate through this rather volatile environment and the tariffs have not had any significant impact on our financials in Q1. And based on what we know right now and the tariff levels that we navigate and live with as we speak, we expect that, that should be the case also for Q2.

The main unknown and the question mark that I think we and everybody else is struggling with is to try to assess what will these tariffs do to global demand and global GDP. Are we facing a global recession? And what will that do to global demand? And here, we don't have the answers. I don't think that anyone has the answers, but we are monitoring this very closely and we are -- encounter different scenarios and we will prepare to act swiftly and with agility to make sure that we find a way also depending on what's going to happen to global demand.

But if we leave tariffs aside and go back to our own business and take a look by segment and starting by industrial business. Our industrial business in Q1 represented roughly 70% of our net sales and close to 90% of the adjusted operating profit. As I mentioned, on a global basis, it's a rather soft market and we report negative organic growth of 3.6% in the quarter, primarily driven by EMEA and India and Southeast Asia. But the margin is strong. The margin is very strong at 16.9%, significantly up versus same quarter last year. And the main drivers here is that, as I mentioned before, is our ability to drive price, work with portfolio management, cost effectiveness and also some help from FX in the quarter.

Turning to automotive, representing some 30% of sales and 10% of net adjusted operating profit. As I mentioned, a challenging market, negative 3% in the quarter. Here, we see, in general terms, a very soft demand for commercial vehicles, while on a global basis, light vehicles and aftermarket is somewhat flat, while we see on the positive side, a very, very strong and healthy growth in automotive, light vehicles in China, primarily in EVs. That is growing a solid double-digit organically in the quarter.

We report a margin of 5.2%, somewhat shy of the same quarter last year, but the strong development in EV in China has provided a positive mix effect for the automotive business, helping to offset some of the negative headwinds coming from low volumes and fixed cost absorption. When it comes to the margin, we still believe that we can do better and we still believe that the 8% operating margin target that we set for this business by 2025, the 8% is still something that we believe is a reasonable level to reach to, but we do acknowledge that it will extend beyond 2025 to reach that number given current market conditions.

If I now leave the quarter aside and then turn the focus to some of the strategic initiatives that we are working on. And this time, I would like to bring to your attention 2 items. One, on our progress on driving and developing 2 fit-for-purpose businesses. And then also, I'd like to share some light on some exciting innovation that we brought to market recently. But let's start with our 2 fit-for-purpose businesses. We are working at a very high pace with this separation. It is a massive task that we have said to you before. As you're probably aware, we have identified a unique organizational unit that is working with this and the rest of the business is all focused on our day-to-day activities, but we have a dedicated set of people working with this split.

We have reached a number of important milestones in the quarter. For example, we now have set the operating model and organizational design for our future automotive business. Furthermore, we have concluded on how we're going to develop or split our manufacturing footprint and the starting base for our automotive business will be 16 global factories spread across the globe, as you can see on this chart. We are, at the moment, tracking towards our overall time plan, but we do acknowledge as we dig deeper and deeper into the material, we realize that there are thousands and thousands of activities and many of them are on a critical path with limited headroom for delays. So therefore, we think it's prudent to say that there are a risk for -- that the time line may stretch. This risk has not materialized yet. And if it will materialize, we will, of course, inform the market accordingly. This is more to say it is a rather massive task ahead of us. A number of things need to go actually follow a very critical path and we want to be prudent to say that clearly, there are risks into the overall time plan. But so far, we are tracking towards the time plan.

If you also recall, in Q4, I mentioned that we also had initiated an initiative to look into the rightsizing of the future automotive and industrial business to create strong foundations for the future. And this work is now near completion and we conclude that as we become less complex in our future setup, there are opportunities to design leaner organizational structures. We can push even more accountability out to our business areas. We can reduce some overlapping accountabilities or duties and we can reduce the need for a large corporate head office. All in all, this will result in a sizable reduction of staff positions globally, but not at least within Europe. As of now, we are now working with all our jurisdictions and our countries to assess how we can manage and the impact for each restriction and how much of this that can be done through natural attrition and what that at the end will be real redundancy. And as we conclude this work, we intend to come back to you with more information of the entire size of this program when we report back to you in the second quarter.

Then finally, before I hand over to Susanne, I wanted to bring your attention to some exciting new innovation that we brought to market. And this is important to us. Innovation is a vital part of our strategic work, where we work very, very closely with our customers and help them to solve their pain points, but also to support them in their sustainability journeys through sustainable innovation. And this makes a lot of commercial sense for us. And to bring some light to it, I'd like to highlight 3 areas or 3 industrial verticals where we have recently launched some rather impressive new products. It's adding a lot of value to our customers.

As you can see, the first example is from our railway industry, where our new bearings there, they are capable of reducing friction with some 20%, clearly has a financial value to the operators, but also reduces their CO2 footprint. Another example comes from the mining industry, where our sensor bearings are enabling the grinding mills to operate more effectively and closer to their full potential. And in this case, has enabled our customers to increase their fill rates with some 20%. Clearly, again, a significant financial value for our customers, but also a very important step in their sustainability journey.

And finally, I'd like to draw your attention to our ceramic bearings. And most often, we talk ceramic bearings, we provide examples from the EV space, which is a very exciting application for our ceramic bearings, but it's not the only application. Here's another example for industrial electrical motors, where our bearings they actually can cope with 25% higher speed and up to 50% reduced friction compared to the same type of bearings based on steel rolling elements. Again, a significant value created supporting the sustainable innovation. And sustainability and innovation is key to us, as I mentioned. And the reason I bring this forward is that I truly believe that our leading-edge technology and our innovation capacity is a clear market differentiator and a competitive edge for us, a little bit of the secret sauce of SKF.

So with that, I'd like to hand over to our new CFO. Susanne, warm welcome to SKF and I'm sure you're keen to present yourself. So over to you.

Thank you, Rickard, and good morning, everyone. And I'm super pleased to be back and I've been at SKF now for the last 2 months. But before that, I've spent 10 years outside. And before that, I actually spent 20 years with SKF in various finance, business control and strategic change management initiatives. So I know the company well even if a lot of things have happened over the last 10 years. And these last 10 years then, I have held up 2 CFO positions. First, I was the CFO for Gunnebo Securities, back then a listed company. And the last 5 years, I've been the CFO at Molnlycke Health Care, a fully owned company by Investor AB. So I'm very pleased to be back. Let's jump into the quarter 1 financials.

So this is an overview. And we can see and you have heard already Rickard talking about net sales coming down. We have a negative organic growth, again, minus 3.5% for the seventh consecutive quarter and I will elaborate a little bit more on the coming pages. Our gross profit and gross profit margins improved and it's close to 30%. And I think this is truly illustrating our ongoing cost management initiatives, ensuring that we have a variable cost cake linked to the volume. The adjusted operating margin is also resilient, somewhat better even than last year, 13.5% and it comes from industrial, 16.9% and automotive, 5.2%. This quarter, we recorded items affecting comparability of SEK 348 million and that is represented by some SEK 380 million of ongoing restructuring and the automotive separation costs. We have also taken an impairment charge of SEK 192 million and that is partly then offset because as we have closed out our Luton manufacturing facility, we have now sold that facility and recorded a profit of SEK 224 million. And net-net, this ends up with an operating margin of 12%.

So let's look into the bridge instead. We talk about the sales and the profit on this one. So again, our organic net sales grew negatively 3.5% and it is certainly caused then by a weak demand across our industries, partly then offset by strong price and mix management. FX was negligible, while the structure that we see here is derived from the acquisition we did from John Sample Group that we closed in October last year. The adjusted operating margin remained resilient. And while volumes were down, the result impact was very much compensated by positive price/mix. And you can also see the cost is almost flat year-over-year and that certainly demonstrated good cost management procedure across our businesses. Finally, then FX was positive year-over-year. So quarter 1 over quarter 1 last year, we had a strong dollar vis-a-vis the SEK and that gave us the SEK 90 million you see here.

Moving into cash flow. As Rickard said, it's a slightly disappointing, operating cash flow ending at SEK 1 billion compared to the SEK 1.8 billion we had quarter 1 last year. We can explain that a lot in increase of the working capital, realized negative FX effect and change in provisions. Talking about the net working capital, the accounts receivable have contributed negatively as a result of a strong quarter end then increasing our sales sitting then in the accounts receivable by the quarter end. Inventories also increased. And as Rickard said again, it remains a key focus for us.

We have a lot of actions ongoing and it's a focus on this from management all the way down into all our entities. So we are certainly following this through. When it comes to the operating profit, that is again then impacted by the gain of the sales of the Luton facilities, the SEK 224 million. So that is later then deducted in the noncash items and other to instead be included net in the investing activities. So if you look at the cash flow after investment, that ended for the quarter at SEK 374 million.

Balance sheet then. We see a net debt, excluding pensions, that has decreased further. By year-end, we had EUR 8.7 billion and now we have a EUR 7.8 billion. That reduction is mainly explained by translation effects of currency. Our net debt divided by equity ended at 13.1% and that is certainly well below the target. Net debt in relation to adjusted EBITDA remained low at 0.9. Our adjusted return on capital employed amounted to 14% by the end of the quarter, where we can see a capital employed that has remained on the same level as last year -- sorry, at year-end, while the result in absolute amounts have come down.

So my last slide here, the outlook. So while we have seen signs of markets bottoming out, we plan for another quarter with negative volume development and we do that a lot considering the macro environment we operate within. So for the quarter 2 now, we assume the organic sales to be weakening somewhat year-over-year. If we look into quarter 2 and the currency impact, we anticipate that to be some negative SEK 400 million compared to quarter 2 last year. And we say that based on the rates that existed by the end of March last month. And the full year guidance around tax and investments remain the same.

So by that, I hand it over to you, Rickard.

Thank you very much, Susanne. And let's wrap this up then before we go into the Q&A session. And I think these are the key messages I'd like to leave you with today. Yes, we do operate in a continued weak demand. There are tough market conditions and we are navigating in a very volatile geopolitical world. But with that said, though, we have seen signs and especially in Europe of markets bottoming out. We continue to demonstrate strong resilience in our performance. And I think due to a good execution of our strategy, we have improved our commercial and operational capabilities.

We continue with our automotive separation at high pace and we have now achieved some critical and important milestones in the quarter, as I mentioned, especially related to future automotive setup in terms of manufacturing, organizational design and operating model. And we are, during the second quarter, going to finalize our organizational review to ensure that we build 2 strong competitive fit-for-purpose businesses; one for industrial and one for automotive and that are based on a lean and effective organizational structure.

So with this, I hand over to Sophie to manage Q&A.

So we will now open up for your questions. [Operator Instructions] So let's start with a question from the telephone line and it comes from Daniela Costa at Goldman Sachs.

If I may, I want to ask 2 things, if possible. The first one, just in terms of any color you can give how since tariffs been announced, I guess, since the beginning of April, things have evolved. I note you mentioned on your receivable comments that activity has been strong towards the end of 1Q, whether that has continued and there was any sort of sense of customers pre-buying? That's the first question. And then I have a second question. I can ask it right after is on free cash flow, but I'll let you answer this one first.

Okay. Thank you. Well, Clearly, the Liberation Day happened on April 2. And so that was not really reflected in March, as you know, and that's also part of your question. So maybe some of the effects that we talked about that had the strong end of last quarter, I think they are two-fold. One is that the magnitude of Liberation Day was not known. And we should not also forget that we have a little bit of an Easter effect, that Easter happened early -- a little bit earlier last year and had a larger impact in March than it had this year. So I think we should be a bit balanced in how we see the strength of the end of that quarter.

To try to answer your question after Liberation Day, I think we have all experienced significant turmoil. I do believe that we see a lot of signs that many of our customers, they take a sit-and-wait approach, trying to assess what is the firm ground here before they dare to make decision. So that has actually maybe have a little bit negative impact in that regard. But we have not seen a lot of activities that people are pre-buying or trying to circumvent tariffs by pushing orders or stocking up or anything like that. Very limited of that type of activity that we have noticed. So I think that's the best answer I can give to you, Daniela.

Perfect. Very clear. And then just thinking about this year in terms of free cash flow, I guess, given all that's going on, you have the spin and the expenses related and the cash out, I guess, related to the restructuring. You also have -- I wonder if you have to build up inventories yourself given all the turmoil and not knowing what -- how tariffs are going to end and the regional mismatches. So do you think this year is fundamentally like a year where cash conversion is disturbed versus normalized? Or how shall we think about the remaining of the year given you normally have a very high seasonality to the second half? Is this still going to be the case and should we think it just -- yes, how we think about cash.

Susanne, do you want comment on that?

Daniela, nice to talk to you. I would say that we typically have a seasonal cash flow and I think that's what you can expect again. I think, as you might know, we will actually have some extra cash in, in the quarter 2 as a consequence of our divestment on our aero business. So that will provide both profits and cash to us. But I think that we will have slightly more of restructuring costs this year, considering that we are running the separation initiatives followed also by a sizable restructuring initiatives coming through as a rightsizing of our businesses. But I think that we have a good underlying cash generation. And on top of that, we have very strong finances.

We will continue with a question from Magnus Kruber at Nordea.

It's Magnus at Nordea. When you plan to push prices through in the U.S. in particular, do you expect to increase prices across the entire portfolio to compensate for tariff? Or do you do selectively on the imports?

Rickard, please.

It's a little bit mix of both. For part of the assortment, actually, we are pushing up prices generally. But for other parts of assortment, it's more surcharges that we put through. And they are then very specific in nature. So I think you will find a little bit of both that's going on. And as I said, we -- the main issue is the flows that we have from China to the U.S. And as I presented, they are limited, but they are still there and we're working hard to mitigate those. And there, we're pushing hard using price and primarily surcharges. But with tariffs touching 200%, there will be probably parts of the assortment that will cease to exist that would be impossible to sell. So that would also be part of the equation. But that is a minority and won't have impact on the group's numbers as such. But clearly, it's a difficult environment to navigate in.

Got it. That's very clear. And can you also help us a little bit with the timing effect of the tariff compared to the phasing of the surcharges and the price hikes? Should we expect any sort of gap there, particularly on the OEM part of the portfolio where pricing might lag the surcharges -- price -- the tariffs, sorry, the tariffs?

Yes. When it comes to surcharges, I don't foresee a significant lag there. They are more instant. You're right when it comes to prices, though, there might be some lag there. Clearly, it depends on when customers place their order. If they place the order before we raise the prices or after and so forth and when they replenish. So these things happen. So we know there's some delay. But if -- but that said, though, I think that we demonstrated our ability to navigate in this territory and this volatility in Q1 because this had a very limited impact on our financials in Q1. And given again, with the caveat, what we know right now, I think we all have to say that, we expect that, that will be the case also in Q2, as I mentioned.

Thank you, Magnus. Unfortunately, we will need to take the next question from the next person in line here. We have a long queue, I can see. So let's limit ourselves to one question per person. And then of course, if time allows you to enter the question queue again.

So we will continue with a question then from James Moore at Redburn.

Nice to meet you, Susanne. Thanks for all the tariff details, really helpful. I estimate you need a 20% price hike in the U.S. to be margin neutral. And my question is how much of that have you done? And have you put the full 145% Chinese fully through? And if I could tag it for that, it's part of the same question. how much of the 10% of China imports will you, one, reroute; two, continue with; and three, will cease to exist. If you could help with any of that, it would be great.

Yes. Rickard, please support James here.

Yes, James, I'm afraid I'm going to be a little bit of a disappointment to you today, even though it's always good to hear you. I can't provide those details. I'm going to stay with what we now provided. I'm happy to hear that you found it helpful because that was actually the intention. We are constantly working with prices in Americas to make sure that we are compensating ourselves. And again, my best proof point is the Q1 result, where I say that had a limited impact.

To your question about what part of the assortment of the 10% that inflow from China to North America. Again, I can't be very specific, but we are working on pieces or parts of the assortment that we do see an opportunity to maybe move around in our global footprint and that could be done in a fairly quick way that we're talking maybe a couple of months to navigate and move assortment around. And then there are other parts of the assortment that's going to take us longer to mitigate given that we may not have that capacity for that particular assortment anywhere else at the moment and need to build it up elsewhere. And if that's the case, then it's going to be a little bit of a longer journey. So it's -- I have to be vague here and I can't give you any exact percentages. But I think the important message today is that it's a limited flow between China and the U.S. in our kind of value chain setup.

And we will continue with a question from Andre Kukhnin at UBS.

I could ask one more on tariffs, but I think I'll just move on to the rightsizing program. I think that's quite an interesting development this morning. Could you help us with any numbers on this? Could you help us maybe put in the context of maybe total addressable size of headcount that this presents the opportunity in? Are we talking about hundreds, thousands or more?

Yes, Rickard.

Right. We deliberately took the decision not to give a number today, but talk about sizable due to the fact that the discussions are ongoing and we need to get our arms around by country, how much of this can be natural attrition, how much is real redundancy. And we will come back to you with the accurate numbers once we have them and that is when we present Q2. But I can give you the base though. We have roughly 13,000 employees classified as staff across SKF globally. So that's the base that when we say from that, we're going to have a sizable reduction.

And the next question will come from the line of Andreas Koski at Exane BNP Paribas.

My questions were also about tariffs and the rightsizing program. On the tariffs, could you just comment on Q2, you don't comment on Q3 and onwards. And I guess that the 145% tariffs from China and the other tariffs will not start to impact your P&L until the second half of this year as you have inventories that should last for at least 1 quarter. So how are you viewing the impact from the tariffs in the second half of 2025 and going forward, if they stand as they are today?

Rickard, do you want to continue on the theme tariffs here?

I'd be delighted. Right. It is a very tricky question. And we don't really guide for more than the next quarter. So I'm going to stick there and don't try to open up that. But we all know it is hard to predict because what happened on Liberation Day, a couple of weeks later, they were paused and paused for 90 days. And what will they actually be in the second half of the year? I'm not sure. We also hear now, at least I read in the news that there are discussions both from China and from the U.S. that they talk about maybe relaxing some of the tariffs that are now in force between China and the U.S. If that is for real or if it's just noise, I don't know. So again, it's very hard to predict. I can't give any specifics for the second half. And as I said, since we don't guide for it, I have to refrain from provide any further details.

Okay. But yes, okay. Then I read that as you might not -- that you might be more impacted than in Q1 and Q2 at least. The second question on prices because you mentioned...

Sorry, Andreas. I will be tough here and just say one question per person because there is a long queue of people that wants to ask a question. But hopefully, we can answer your additional questions from IR later today.

So we will continue with a question from Erik Golrang at SEB.

I'd like to talk about tariffs, but I'll stay away from that topic. I just wanted to understand what you talked about there in terms of the complexity with the separation, the infrastructure risk for a delay here. What's the magnitude we're talking about? Is it a month that it could be pushed? Or is it 6 months? How much of a delay should we be thinking about?

Rickard, please?

Right now, I don't think you should think about the delay at all. As I try to describe that we are tracking towards our overall project plan. But it is a very large program that we run. We're talking of thousands and thousands of activities where many of them, especially related to IT structure are on a critical path. And if one of them for one reason would enter into some issues or would be delayed, that will have a domino effect on a number of other activities in this program. So what I'm trying to say here that we run this program and it actually contains some risks in terms of timing. And I wanted to be transparent and share that. Because if that risk materializes, we would then naturally come back and explain and provide you with the information. But I don't want you if that happens to be surprised. So that's the reason why we brought it up because we do see that this critical path is really a critical path.

Thank you. Let's continue with a question from Tore Fangmann at Bank of America.

You were commenting that you've seen some signs of the markets bottoming out, especially in industrial. Could you give us any color on what markets and a little bit on the timing around this?

Rickard, you made that comment, would you like to clarify a little bit?

Yes, to the extent that I can. It's true. When we look into our EMEA business, industrial business, for example, we have seen that the order book, even though we don't disclose it into the market, but when we look into it internally, we've seen that, that has shown a positive trajectory for a number of months in a row. And that to us is a positive sign and indicates that maybe we are seeing some that the markets have bottomed out. And also before, I must stress that before Liberation Day, we also sense that in many of the geographies in the North America, in Europe and to some extent, also in India and other regions, the activity level were rather high. And what I mean by activity level is not actually orders and sales, but customer inquiries, customers talking about new projects, new initiatives where they seek our guidance, our engineering capacity to support them.

And that is also a sign of things starting to kind of -- the wheels are starting to turn again. So that is what we saw during Q1 and that is also why we made this comment. But after Liberation Day and up until now, I don't say that everything has changed. I think we still have roughly the same situation. But we also hear a number of our customers saying, you know what, that initiative that we talked to you about a couple of weeks ago, it's still here, but we're going to sit and wait for a while and see where things are going to move before we take the final decision. So we hear a little bit of that as well. So it's hard to read the tea leaves at the moment.

Yes. Understood. But which end markets within industrial are the ones that are working good for you?

Well, we do have a couple of ones that are highly -- we see already now high activity and strong growth. And I mentioned a few already during this call, aerospace being one, EVs in China being a very particular one. We do see in certain geographies that we continue to see good momentum in rail, for example. On a smaller niche product, our magnetic bearings, they are growing massively. So there are a lot of good pockets and signs. And also in many other industrial verticals, the activity levels is starting to ramp up.

Thank you. Let's continue with a question from Rory Smith at Oxcap.

It's Rory from Oxcap. I just wanted to come back to the auto separation and really that today, given what you see, is the IT complexity part of the project, the only thing that would cause you to delay the time line for automotive separation. And I ask that because you've talked about the outlook for margins in automotive and the sort of the I guess, unknown impact from automotive. But you've got a war room set up for tariff that's all great. That's fantastic. Are there any outcomes, any scenarios that you're currently war gaming that would ultimately cause you to delay that separation? That's my question.

Rickard?

I think I got your question. There was a little bit of a bad line, but I think I got it. If not, you have to correct me. But right now, all my comments related to timing and the projects all project related, pure practical project management. We see all of these thousands and thousands of activities that need to happen. Many of them have dependencies. They are on a critical path and we're trying to manage this. And clearly, as in any large project, there are some risks to it.

My comments has nothing to do with what we believe might the market conditions be at the point of departure. I can't guess, and I don't really spend a lot of time and effort at the moment trying to second guess that. I think when we get to that point, when we're getting closer to the time when we may do the spin, I'm sure that the Board and management at that time will carefully consider what is the optimal timing to do the launch. But right now, I have no comments or can give no other color to this. All my comments related to the timing was just pure kind of project management based.

Very good. Let's continue with a question from John Kim at Deutsche Bank.

I hear what you're saying on tariff surcharges and the rest of it. Can you put that in the context of your automotive contracts, which tend to be multiyear? Are there any provisions in place? Are you having to go back and renegotiate these? What is more true for the division?

Rickard, please.

Right. Clearly, the automotive space, as always, is a tough market to navigate in and we have strong customers. But I think the situation is so unique and so special. So our sense is that we have engaged with all of our customers in a constructive and productive dialogue. And they all see that there's a kind of understanding that we have to do something to compensate for these things. So sometimes, we open up discussions. Sometimes we have the right to do it in the contracts. Otherwise, it's a little bit kind of force majeure type of discussion that is also happening. But in general terms, I do believe that there is a constructive and productive dialogue. Clearly, it's not a walk in the park and it's a lot of hard work, but it's based on a constructive dialogue.

Very good. We will continue with a question from Tim Lee at Barclays.

Actually, I just want to come back a little bit on tariff. You mentioned in last year, you have around 50% of your U.S. sales being local for local. And do you have a timetable for further localization of your U.S. business? And what percentage do you think you'll be able to achieve and targeting the time line for that? I think previously, you also mentioned it will not be 100% localized for the U.S. business or in the other regions. So any color that you can help us on the time frame that you will be achieving a further localization effort that will be super helpful.

Yes, Rickard let's talk about the regionalization here.

Right. Let's try to start by reminding ourselves about our regionalization journey. And when we talk about regionalization in Americas, we talk about Americas as the 2 continents in America, i.e., including Mexico in that as well, supporting both South and North America. And there, we have -- I think it was in the last quarter, we shared with you our journey there and we're now at roughly close to 70% regionalization, i.e., 70% or 69% there or thereabout of what we sell in Americas is also manufactured in Americas.

Today, I gave you a little bit of insight to the U.S. and the market there. And as I mentioned, right now, some 50% of what is sold in Americas comes from imports from Mexico, where the vast majority of our products there are USMCA compliant. And that's the whole intention. We have this project where we're building up capacity in Monterrey and the main ambition has always been trying to move as much of the current assortment in China over to Monterrey. And that journey will continue. So over time, and I can't give you a hard time line here, but over time, the intention is that, that 10% that is imported from China will diminish.

Thank you. And we have received a question from the webcast here on currency impact for the full year. And I should just say that we don't really guide on that. So we have it for Q2 and it's more of a calculation based on the end rates of March.

So with that, let's continue with a question from the telephone line. And that's also our final question before we wrap up here. And it comes from the line of Rizk Maidi at Jefferies.

Just perhaps a quick one on whether this net working capital build or inventory build had any impact on the EBIT in Q2 and how are you expecting to manage inventories now in the second quarter given the tariffs?

Susanne, would you like to comment on that?

Yes. So I think we have a negative development, as you said, in the cash flow. So we have built some inventory from year-end then. And that we are now -- I mean, it's not finished goods. So it's coming in as raw material and work-in-process. So that's where we have that addition. And as we also talked about, we have a strong focus on managing down our inventory level and have a lot of activities in each of the business area ongoing. I don't see that there is a significant impact in the EBIT at all around these matters on inventory in the quarter we just left behind.

Thank you. And that was the last question we had time for. And of course, if you have more questions, you can dial into the Investor Relations department. With that, Rickard, would you like to sum up the quarter here?

I would love to. Thank you so much. And again, thank you for your attention and for your insightful questions. Again, as I said, I think we have once again demonstrated that we are on a journey, creating an even stronger and more competitive SKF, capable of managing also in a rather difficult market conditions. Yes, it is painful to report 7 consecutive quarters of negative organic growth and guide for another one in Q2. And we are working extremely hard across our organization to change this, to find growth opportunities and hunt for profitable growth. So even though we may not talk that much about that in our discussions today, we should not forget that clearly, that is high on our radar as well.

And -- but with that said, though, all the activities that we've done during this downturn in improving our commercial and operational capabilities, investing into our future, dare to stick to our strategic intent and also drive a rather exciting project forward by creating 2 independent and globally leading business units. I'm convinced will create a fantastic platform for SKF longer term and we are well positioned to take advantage of profitable growth once demand turns back up again.

So with this, I thank you so much for your attention and wish you a wonderful weekend once you get to it. Thank you so much.