Good morning, everyone, and welcome to the SKF Third Quarter 2021 Results Call. My name is Emily, and I will be coordinating your call today. To register a question at Q&A, please press star followed by one on your telephone keypad if you've joined the conference call or type your question into the tab above the slides if you have joined on the webcast. I will now hand the call over to Patrik Stenberg, Director of Investor Relations. Patrik, please go ahead.
Good morning to you all and welcome to the conference call on the third quarter results. As usual, we will start with a presentation by our CEO, Rickard Gustafson, followed by a presentation by Niclas Rosenlew, our CFO. Following the initial presentations, we will be ready to take on your questions. For that session, please make use of the dial-in number provided in the invite. If you prefer, you can also use the chat function. With that brief introduction, I'll leave the word to Rickard.
Thank you, Patrik, and good morning, everyone. The third quarter saw continued solid demand. Our industrial business, which represents approximately 75% of sales, maintained its strong momentum despite supply chain challenges exceeding our expectations. In addition, our automotive business was also significantly impacted by reduced production amongst key car manufacturers, especially in September. Through diligent efforts and effective actions, we have been able to mitigate supply chain headwinds to a large extent, especially within our industrial business. Organic growth in the quarter came in at 8%, with industrial growing by a very strong 13% and automotive down by 5%. Net sales were SEK 20.1 billion compared to SEK 18.6 billion the same quarter last year. We saw double-digit growth in EMEA and Latin America. North America saw continued strong growth.
Asia is still growing, but at a lower, slightly lower rate than before. The adjusted operating profit ended at SEK 2.7 billion versus SEK 2.5 billion last year, corresponding to an adjusted operating margin of 13.3%, which is roughly flat versus last year. Our industrial business delivered a strong result, further increasing its adjusted operating margin to 17%. This is especially satisfying given a challenging quarter in terms of cost inflation in raw material, transportation, and energy. Our automotive business was impacted by reduced production at key customers, often with short notice, resulting in lower sales, reduced productivity, and a buildup of inventories. These delays intensified during the quarter with a sales drop of more than 15% in September only.
As a consequence, the adjusted automotive operating margin was negatively impacted and came in at 4% compared to 8% in Q3 last year. Cash flow generation in the quarter was SEK 1.5 billion compared to SEK 2.3 billion last year. The drop versus last year is driven by a higher footprint and efficiency investments and increased inventories caused by the constrained supply chain situation. All in all, continued strong industrial performance in a volatile quarter with automotive challenges. Speaking about supply chain challenges, this is an area that has caused significant headwinds in the quarter, impacting both cost and availability of raw materials, components, logistics, and energy costs. However, through effective measures, we have been able to mitigate approximately 2/3 of these cost increase.
Throughout the third quarter, demand within our industrial business maintained strong, but due to logistical bottlenecks, we have struggled to fill the demand and therefore missed out on some additional growth opportunities. As illustrated by the chart on freight rates, these costs have continued to increase at a very rapid pace. At the end of the quarter, rates were 4.6 x higher than the same quarter last year and 1.7 x higher than the previous quarter. We are currently managing a moving target where mitigating actions have a somewhat longer lead time than the direct cost inflation, but we remain diligent and confident in our efforts going forward. Within our automotive business, we have also faced an additional challenge derived from the global shortage of components. The component shortage has caused several of our automotive OEM customers to reduce or postpone production, often at short notice.
Naturally, this has had a direct negative impact on our automotive sales and margin figures in the quarter. In addition, it has increased our inventories. Taking a deeper look into our two segments, starting with Industrial, which I highlighted before, represent approximately 75% of our sales and 85% of our profits. We recorded an organic growth of 13% at a solid adjusted operating margin of almost 17%. Latin America growing some 27%, EMEA growing by 18%, and North America growing by 14%. Growth in Asia was approximately 4%, a moderation from previously high levels due to the development in China. Demand in China continues to be high in many segments, but as expected, overall growth is held back by weaker demand in the wind industry. In contrast, sales in India are showing strong growth.
Organic sales in EMEA, Asia, and Latin America are now at the level above what we saw before the pandemic. All in all, net sales reached almost SEK 15 billion. From an industry perspective, we are seeing particularly strong growth in industrial drives, industrial distribution, and off-highway applications. One win in the quarter is a contract signed with the Berlin Underground. We have entered into a long-term agreement to equip and service rolling stock for the U-Bahn in Germany. The contract includes a number of SKF solutions, ranging from wheel set bearings and axleboxes to lubrication systems. Turning to the automotive business, representing some 25% of sales and some 15% of our profits, automotive was significantly challenged by the customer closedowns, which were driven by logistics bottlenecks and component shortages. As discussed, sales for car manufacturers across all regions were affected by these disruptions.
We note the negative sales development across all regions, with North America most impacted with a decline of 12% compared to last year, followed by Asia-Pacific, down 6%, and EMEA and Latin America down at 3% respectively. However, as a contrast, we see continued growth in the vehicle aftermarkets across all regions. On the positive side, we are well-positioned within the electric vehicles market, and currently more than 2/3 of our powertrain bearing orders are for fully electric cars. SKF's business within electric vehicles is growing, and for 2021, sales are expected to reach approximately SEK 800 million, an increase by more than 8% versus last year at acceptable margins. Looking ahead, we continue to see an accelerated momentum with orders outperforming sales.
We have a strong collaboration with OEM customers all over the world, and we have recently been selected by GM as their partner for the Hummer EV. All in all, organic sales were down by 5%, and the adjusted operating margin was 4%. Even though we are far from satisfied with automotive results, it has been difficult to fully mitigate an extremely challenging and volatile supply chain situation in the global automotive industry. However, we are naturally taking specific actions to manage the situation to the best of our ability. To illustrate the volatility in the current market conditions, a growth within global light vehicle production of almost 50% at the previous quarter has quickly turned into 18% decline in the quarter. Unfortunately, there are yet no signs that the situation will improve in the fourth quarter.
To safeguard our business, we have initiated several measures to mitigate situation. Production adjustment across our entire automotive footprint to reduce variable costs. We are reassessing our commercial terms and conditions in our contracts, and finally, we are aggressively pursuing purchasing opportunities. In addition, in general terms, we must also continue to drive our manufacturing footprint and agenda forward at a high pace. We are maintaining a high pace of investments and a consolidation of our manufacturing footprint. The last time we met, we had closed six sites since 2019, and at year-end, we will have permanently closed 12 manufacturing units. Some of these initiatives have, regretfully, a negative impact on some employees, but they are absolutely necessary to align our manufacturing footprint with customer demand to increase automation levels and secure growth opportunities.
We continue to invest in our factories, and investments are expected to reach SEK 3.8 billion for the full year. These investments make us more flexible and efficient, as well as being an important foundation for winning more business from customers in fast-growing segments and regions. So far, these investments and consolidation efforts have realized SEK 1.2 billion of the SEK 5 billion in annual savings that we expect to generate by the end of 2025. Last year, we announced the goal to achieve net zero emissions by 2030 for all our operations, which include Scope 1 and Scope 2. As you can see from this chart, we have already made significant progress on reducing emissions from our own operations.
It is absolutely important to highlight that we've been able to decouple business growth from emissions caused by our production activities. By driving energy efficiency, waste elimination, and increasing use of renewable energy. We cannot focus on Scope 1 and Scope 2 and ignore Scope 3, i.e. we need to focus on our entire value chain. Last week, we announced an even more ambitious goal to take our entire value chain to net zero greenhouse gas emissions by 2050. There are already several customers that require net zero products, especially within segments such as renewables and automotive. This demand has increased during the last couple of years, and we expect it to continue to increase going forward.
We estimate SKF Scope 1, Scope 2, and Scope 3, and that is upstream emissions from approximately 1.8 million tons of CO2 per year, of which Scope 1 and Scope 2 represents around 1/4. The largest part of our emission is caused by sourcing direct material, primarily steel and steel components, followed by emissions from our own operations and logistics. To reach this very ambitious goal, we need to collaborate broadly with customers, partners, and suppliers. As one example, to accelerate the availability of green steel, we have joined forces with organizations such as SteelZero, ResponsibleSteel, and Luleå University. By committing to this goal, we are also strengthening our position as a leading company within the industry in technology development and sustainability, and thereby also strengthening our leading position in the bearing industry.
At our Q2 presentation in July, I informed you that I intend to initiate a strategic review project to unlock our full potential. This work is now being conducted at high pace and involving a large number of colleagues across all parts of SKF. We are looking at our business from many angles and perspectives. From an outside-in point of view, we are assessing how global mega trends such as sustainability, digitalization, regionalization, and a shift towards the East will impact our customers and then ultimately us. We are scrutinizing our current portfolio performance, assessing additional growth opportunities, challenging our cost competitiveness, and how we can best align our global footprint and future investments plans to stay relevant and win. Furthermore, we are taking a deep look into our operating model, digital capabilities, and ways of working to further accelerate speed, agility, accountability, and customer centricity.
By the end of this year, we aim to have a clear roadmap to accelerate our profitable growth, unlock our full potential, and deliver on our financial operational targets. I am fully convinced of our ability to continue to build on our strong brand and technological leadership. The review will be completed by the turn of the year, and I'm truly looking forward to presenting the outcome in conjunction with our full year results in early 2022. With this, it's time to hand over to our CFO, Mr. Niclas Rosenlew, to take you through some of the more financial details. Over to you, Niclas.
Thank you, Rickard. Before reviewing our results in more detail, I do take the opportunity to comment on the cover picture you see here on the screen. What you see is the sun rising over Gothenburg. The low building to the right is our factory, which recently became CO2 neutral. To the left, you have our warehouse, which has been converted to our headquarters. It has the highest Environmental Platinum LEED Ranking and also the highest WELL Platinum Ranking for Health and Well-Being. These are some concrete measures we are taking to ensure a competitive edge also going forward. With that, let's move on to the results. As Rickard mentioned, we had a strong demand in industrial and a lower demand within automotive in Q3. Compared to last quarter, our net sales increased by 8.3% in the quarter.
Organic sales increased by 7.7% compared to last year, where industrial grew by 13% and automotive declined by 5%. The currency effect on sales has changed to a tailwind at positive 6.6% in the quarter, with the largest positive effects coming from Chinese renminbi, Brazilian real, and the Swedish krona. In Q3, we had a strong operating profit considering the volatile environment. The recent quarters have been very volatile, with significant swings in demand and extremely constrained supply chains.
This has put the whole organization and the whole industry and value chain to a test, and I'm pleased to say that we managed to serve most of our customers well in this situation. While we could have achieved more in sales had it not been for the supply squeeze, our flexibility and lower cost base did contribute to the solid profit and strong margin resilience. In Q3, we continued to experience cost inflation on both components and on transports. Despite that, our adjusted operating profit was SEK 2,672 million, corresponding to a margin of 13.3%. Let's go through the profit bridge. Firstly, we had a currency headwind of -SEK 92 million compared to last year. Material and logistics costs continued to increase, as Rickard mentioned.
The combined headwinds from increased prices on materials, components, and logistics amounted to SEK 964 million compared to Q3 last year. Our organic sales and manufacturing volumes contributed with a positive SEK 1,360 million. To mitigate cost inflation, we've taken a number of measures, including increasing prices. Price mix was positive. However, there is a lag between increasing prices and price realization, and we are not fully able to compensate for the cost inflation. In the quarter, price mix offset approximately two-thirds of the higher material and logistics costs. The work continues, and we do remain confident that we can mitigate current inflation going into 2022. You can also see this in our industrial margins, which increased year-on-year. Costs were SEK 107 million higher last year.
To sum up all of this, despite strong headwinds from our increased material and logistics costs, our operating profit improved to a solid SEK 2,672 million with a 13.3% margin. Moving on to cash flow. Net cash flow after investments before financing in the third quarter was SEK 1,470 million compared to SEK 2,266 last year. The decrease compared to last year is driven by higher working capital and higher investments, partly offset by higher operating profit. In the quarter, inventories increased. We estimate that we have close to SEK 1 billion of excess inventories due to the supply squeeze in the market, with some half of this being within automotive.
Net working capital in percent of annual sales was 30.5% in the quarter, compared to 28.7% in the third quarter, 2020. The increase in the ratio was mainly driven by exchange rate fluctuations. Return on capital employed continued to improve and was 15.6% for the last 12 months, this being good progress towards our target of 16%. We continue to have a strong balance sheet and solid liquidity. Our net financial debt amounted to SEK 2.9 billion, and the net debt to equity ratio, excluding pensions, was 12.9% at the end of the quarter. With that, I hand back to you, Rickard, for closing remarks.
Well, thank you, Niclas. To summarize, the third quarter saw continued solid demand. The industrial business maintained its strong momentum, both in terms of growth and profitability. The automotive business was, however, significantly impacted by the reduced production among key customers. As a group, we report an adjusted operating profit of SEK 2.7 billion at a stable margin above 13%. Our industrial business delivered a strong result, further increasing its adjusted operating margin to 17%, despite very challenging conditions during the quarter, including cost inflation and constrained logistics. On a group level, we continued to consolidate our manufacturing footprint with a further six sites to be closed by the end of the year, taking the total since 2019 to 12. Taking a long-term view, I remain convinced on our ability to continue to build on our strong brand and technological leadership.
We have commenced a strategic review initiative which will help us identify how to maximize the full potential of our current business, as well as prioritize future technology and footprint investments. The review will be completed by the turn of the year and presented in conjunction with our full year results in early 2022. Finally, before we go into the Q&A session, just a few reflections on the short-term future. Looking into fourth quarter, we expect a continued solid demand across all our industrial businesses. Demand development in our automotive business will remain uncertain, with supply constraints and production delays resulting in a very different market conditions than those experienced in the fourth quarter last year. For the SKF group, given the uncertainties in the market, we expect organic sales for the fourth quarter to be in line with what we saw the previous year.
With that, we conclude the formal presentation. I hand back to Patrik to facilitate the Q&A sessions. Over to you, Patrik.
Thank you, Rickard and Niclas for the presentations. We will now move over to the questions part. We will start with the questions you have submitted over the phone. With that, I leave the word to you, operator. Please go ahead.
Thank you very much. If you would like to ask a question, please press star followed by one on your telephone keypad now if you have joined via the conference call. Alternatively, if you've joined on the webcast today, please type your question into the tab above the slides on today's webcast. Our first question today comes from Klas Berglund from Citi. Please go ahead.
Yes. Hi. Hi, Rickard and Niclas. It's Klas at Citi. My first one is on your guidance, and it seems like it's driven mainly by autos uncertainty, but your growth in Asia is slowing as well. We know you have a tough call, particularly on the wind side in China, where you have had very strong growth in onshore in particular, which is now leveling off. I'm also interested to hear, Rickard, what you see outside wind. Do you see any general industrial segment slowing as well towards the end of the quarter? You say that the guidance is for all segments to still be strong in industrial, but it sounds a little bit strange considering what we see in China out there. I will start with that one.
Good morning, Klas. It is correct that we do see some maintained challenges in the fourth quarter for our automotive business, while on the other hand, we see a solid demand development for industrial across all our regions, to be honest. When it comes to China, yes, we have seen somewhat of a slowdown in China, but so far it's primarily within our expectations related to wind, as you refer to, while other segments are maintaining a rather good momentum. Of course, you know, our wind business in China has been rather sizable and has an impact on the totality for us in China. There is no kind of other or general, you know, weaknesses in the markets that we have noticed, besides what we already had talked about.
Okay, very good. My second one is on the specific actions in autos. Could you be more specific perhaps what this means for profitability? It's a pretty big volume decline here for autos into the fourth quarter as implied by your guide, considering that your guide for organic and then you have price mix. Underlying volumes needs to be down at group level somewhat lower, and that would indicate autos down quite a bit. I assume that the autos margin could get even weaker sequentially, quite a lot weaker perhaps before savings kick in. If you could comment on that would be very helpful.
I'd be happy to. I see this a little bit at the moment that we are chasing a moving target within automotive. As we explained during our presentation, we saw a very quick and maybe a bit unexpected drop in sales in the month of September, where the last two weeks were very weak in auto. We have then to initiate, of course, mitigating actions to safeguard our business. We are, you know, attacking this short term and with a broad set of activities, all from further emphasis on procurement, of course. We are definitely taking actions in our own production to align our output with the demand development.
Finally, we are actively pursuing everything that we can relate to our commercial terms of our contract to see what else we can do in order to mitigate some of these negative implications. Going forward, as far as we can tell, you know, we don't dare to guess that it will be less volatile in Q4, but probably, you know, be hopefully a bit more stable once we get into the new year. We are preparing for a rather volatile Q4, and we are taking all the actions that we can in order to mitigate the situation to the extent possible.
It is true also that what you indicate, unfortunately, some of those mitigating actions have some lead time to be, you know, to show up in our P&L while, you know, the cost inflation or the actions taken by some of our customers have a more immediate impact. That's why I say that we're chasing a moving target here.
Maybe just to add, Klas
Thank you.
As you know, I mean, the underlying demand we still see there, so people essentially buying cars. It's also within automotive, it's a bit of a mixed picture where it's really cars, passenger vehicles, which is hit while the aftermarket business is quite strong. Trucks, you know, we can say somewhere in between. It's really cars that we are talking about, and it's our customers, OEMs shutting down their production because they don't have other components. The underlying demand, we still see, you know, being there and being strong.
Yeah. No, that I know. Yeah, very, very quick final one for you, Niclas, on the temporary savings. To what extent did they go back? Did I hear you correctly that you didn't have any temporary savings or sort of COVID-related savings in the P&L anymore? Have they all gone back, interested in?
Yeah. I mean, the temporary savings are, you can say, gone or back, so as a cost. However, the permanent savings that we talked about are to a large degree permanent and still there.
Thank you.
Thank you.
Our next question today comes from Daniela Costa from Goldman Sachs. Daniela, your line is now open.
Hi. Good morning. I will ask the questions, if possible as well. First one, regarding sort of what you said that you couldn't ship all you wanted in Q3, and sounds like in Q4 is the same situation as you've mentioned. Do you think it's reasonable to assume that you will be able to ship those in the first part of 2022, or is there a risk that those orders go to someone else, or just disappear altogether? That's my first question. And then my second question is more regarding, like, you'll have a very limited gearing, financial gearing by the end of the year, it sounds like.
Wondering, like, your thoughts on how the historical capital allocation of SKF has been between dividends, CapEx, M&A, and how you're thinking about that going forward. You know, there are several other Swedish-listed companies that frequently have used, for example, special distributions. Would that be something that you would rule out? Thank you.
Thank you, Daniela. I'll answer the first part of your question, then Niclas will take the second part of your question or your second question. It is correct that we could have sold more if we would be able to ship more during the quarter as we mentioned. We have been forced to do some rather significant prioritization among our customer base on who should get the orders and our shipments. I think that will be. We're gonna be required to continue that in the fourth quarter. However, though, we...
Even though we see some continuing challenges in the fourth quarter, we do not foresee that this is gonna be going on forever and ever, that things will light up again, and we will get back to normality. Underlying demand is still very strong within our industrial business. I think that's really what we think about the future. Of course, we're gonna do everything in our power to fulfill all the orders that we get in Q4, even though we do acknowledge there are some challenges within the global logistics flows at the moment.
Just to add to that, I mean, as far as we know, as far as we see, I mean, it's not about losing to competition. I mean, competition is having, you know, experiencing the same supply squeeze. It's really pretty much adversely affecting everyone. If anything, we feel that we've been doing a relatively good job here, and if anything, taking share rather than losing share. On the kind of strong balance sheet and gearing, I mean, you're right. I mean, it's been a kind of long-term trend, and it's been something that we've been working on and expect it to continue to strengthen obviously over time.
What comes to what to do about it or if there's excess cash, I think for the moment, we are quite happy with the strong balance sheet and have been so in particular during the kind of COVID era. Of course, M&A is absolutely on the agenda going forward. It's part of the strategic review also that Rick had mentioned here. What comes to, you know, special distribution or dividends and so on, it's of course something that the board will then consider. In general, we are quite, you know, happy now with the strong balance sheet, and that will help us going forward.
When it comes to investments, we don't see any major shifts. It's something that will come back as part of the strategic review. We do continue to invest in areas where we see that we can grow long term and then also taking some measures to ensure you know competitiveness, digitalizing our production.
Thank you.
Our next question comes from James Moore from Redburn. James, your line is now open.
Yeah, good morning, everyone, Rickard, Niclas, Patrik. I have three, if I could. Firstly, on raw materials and logistics, could you split the SEK 964 into logistics versus raw materials? And if you also want to split raw mats into pure price versus volume, that would be great. Also, could you give us a feeling for the fourth quarter impact from raw material and logistics if current rates persist? That's my first question. Maybe go one at a time.
Yes. Thank you, James. Thanks, James. The 960, roughly, 2/3 materials, 1/3 logistics, and really the most of it, let's say almost all of it is price rather than volume. When it comes to Q4, we expect, you know, that the inflation, the squeeze continues to have, you know, an effect, but we don't see any kind of major change there.
Thank you. You mentioned the exit rate for automotive. I wondered if you could mention the exit rate for industrial and within the 0% all Q organic sales guidance, could you give us a flavor for automotive versus industrial? I know you don't normally, but we're in strange times.
Yeah. We are in strange times, but I think that we do guide on the holistic perspective of the business. You know, we stick to what we've said. I think that's the best guidance that we can give, that we do see maintained and solid development in our Industrial business, while more volatility will maintain within Automotive. Net/net, we foresee a flat net sales development versus same quarter last year. We will not split it further than that, unfortunately.
Maybe I could try it a different way. Do you think you're aligned with global automotive production trends, or do you think they're lagged? In other words, the pain that we saw globally, mid-teens global auto production decline, do you think you're a bit behind that or you've seen the impact coincidentally in the third quarter?
I think we see that we are hit by this instantly, actually, since what happened is that the car OEMs, primarily car OEMs, but in general within automotive industry, they have canceled their orders with extreme short notice. We're talking a few days maximum. I think, you know, it's an instant impact on our business. However, though, as you heard Niclas also mentioned and what we said in the presentation, the vehicle aftermarket is continuing to develop very, very strongly. In certain specific pockets, such as EVs and so forth, we maintain and we strengthen our position. I think the implication for us in terms of automotive has been an instant hit for us.
That's very helpful. Finally, just on China, would it be possible to quantify what's happening? Because we can see general industrial and auto trends in China, but I'm trying to scale the wind impact. I'm assuming wind could be down as much as 50% given the feed-in tariff. I was wondering if all China is down, say, double digits in the quarter. Anything you can do to help quantify that, and the wind impact would be great.
I think, as Rickard said earlier, I mean, wind has weakened quite a lot compared to last year's levels, and this is not unexpected. This was in the works, and this was, you know, in our plans and quite clear, you know, since some time back, so nothing surprising there. It is a business that follows certain cycles and trends, and we do expect long-term that wind is a very strong business also in China. You mentioned the tariffs there as a reason. In many other segments in China, we actually see very good development and very good demand.
It's a mixed bag, but still a positive one. In terms of growth rates, there is a clear moderation, but again, not unexpected at all.
Thank you very much.
Our next question today comes from Erik Golrang from SEB. Erik, your line is now open.
Thank you. One question left that hasn't been asked, and I'm sorry if that's been asked as well. I've had a bad line on and off. On the strategic review, is there any reason to assume that there won't be a plan to exit material parts from the business in the other end of that?
Well, I don't want to second-guess the outcome of this initiative that we now are undertaking here. As I tried to describe in my presentation, we are looking into our business from a number of different angles and lenses, and of course, both from an outside in and inside out point of view. Yes, we are scrutinizing our portfolio. Yes, we are assessing the profitability and our, you know, competitiveness in certain areas. I also like to stress that we believe there are still significant growth opportunities within our existing business to go after. What we can do to unlock that is something that I think is gonna be an important piece to this as well. I need to ask you to rest your case and give us.
Be a bit patient. We will come back once we're ready with the full analysis, and then we can be more specific. We are looking at all parts of our business, and we don't have any holy cows when we do this work.
Okay, thanks. Appreciate your patience. To follow up, would you think you will prioritize growth over margins instead of sorting out what will remain and what potentially goes?
I'm a big believer in profitable growth. That's what I'm gonna go after.
Sounds good. Thank you. Thank you.
Thank you.
Our next question comes from Alexander Virgo from Bank of America. Alexander, please go ahead.
Morning, thanks for taking the questions. It's just a quick kind of follow-up, really. I suppose the first one just on the benefit you think you may have got temporarily on building of excess inventories, I guess to margins really, is where that's going from. Then the second question, just on price mix. I wondered if you wouldn't mind giving us the rough bit of that as you did on the material and logistics inflation.
If I start with the second one, price mix. I said two thirds of the you know material and logistics inflation is price mix. Positive impact from price mix. You know, we'd rather not break it down because it's always a bit of math behind that what's price and what's mix, and it can also be interpreted in different ways. Overall, we've taken a lot of measures on the pricing side, and we see that it's developing actually in a positive way. It's a long-term kind of job. We continue to do it. It's not a one-off. We have continued to do it and will continue to work on prices and increasing prices.
Two thirds out of the roughly SEK 1 billion was the effect in Q3. Wanna take the
On inventories, as has been discussed, we have built some inventories in the third quarter as we normally do not do due to the logistics congestion we've had and also due to the automotive challenges. In terms of the bridge, we do have a net positive contribution from this. I would say roughly SEK 140 million in the quarter compared to the third quarter of last year.
Very helpful. Thank you.
Our next question comes from Joel Spungin from Berenberg. Joel, your line is now open.
Yeah. Good morning. I just had a question with regards to cash flow. I mean, if we look at the sort of cash flows year to date, obviously, you know, your operating cash generation is down. I understand that's largely due to change in working capital. But actually you've got about SEK 1.5 billion of items that have gone into either the other line or the other non-cash line. So that's pretty significant number. I was wondering if you could just maybe break that out a little bit more, and just if there's anything you can say with regards to, you know, what those numbers might look like, on a full year basis, that would be helpful.
You know, as a sort of more general question with regards to cash generation, I think, you know, you look at the long term performance of the business in terms of cash flow, it has been quite volatile. Within the strategic review, is that something that you'll be giving consideration to how to, you know, to perhaps, you know, get a more stable cash generation performance from the business?
Maybe on the general cash flow, just, you know, we've had an improvement now in cash flow. This year, the cash flow has really, as you said, been impacted by the supply situation in the world. Of course, the growth we had, or the growth that we've had throughout the year. It's quite expected that we, you know, tie up cash or working capital in a growth phase. For Q3 specifically, if I take the opportunity to comment on that, the inventories went up and typically during second half we consume inventories, so they go down. That's purely again related to the supply squeeze.
As I said, SEK 1 billion roughly in excess inventories now that we don't expect to stay there. Eventually it will go out and the situation will normalize. I don't think we see positive development in terms of cash flow long term, but of course, on a quarterly level there will be some volatility. On the other, I would say that if we can come back offline just to make sure that we don't consume all the time on that. We'll come back offline just to explain what that includes.
Your question regarding how we will look at the cash in the strategic review. I would say that what we primarily are after there is that we're trying to assess our capital allocation to scrutinize how we've done that in the past and how we wanna deploy the capital going forward.
Again, you know, I'm not drawing any pre-conclusions here and say that there might be any changes, but it's definitely on the agenda, and we're looking into it to ensure that we have the best capital allocation that supports our future growth objectives.
Still to add, I mean, of course, we do see significant opportunities, a bit like Rickard said here, in more effective working capital. As you know, I mean, we do have a long-term goal, you know, to get to around 25% instead of 30%, as a percentage of sales. That absolutely still remains and we believe is within reach also.
Okay. Thank you very much.
At this time, we have no further questions on the telephone lines. I'll now hand back to Patrik to take your webcast questions.
From Ben at Morgan Stanley. Please, Rickard, can you give us some first impressions as CEO, and be honest? What do you think SKF does well, and what does the company do less well?
First and foremost, I think this company has a great foundation to build upon. We have a strong global footprint. We have a well-recognized brand. We have deep expertise and skills within our industry. I also think that we have proven that we have an ability also to execute and drive efficiencies in the organization, which we need to build upon. Areas where I still think that we can improve, I still think we are not as customer-centric as I wish us to be. I still believe that we can do a further job and a better job in maybe identifying tangible growth opportunities and put a robust action plan behind those opportunities to realize them. I think that's an area where we can strengthen our capabilities. Quite honestly, our
When I speak to my colleagues, and I've done a number of, you know, interviews and dialogues with colleagues and also some formal surveys, it's a clear message coming back that we are perceived to be a bit too bureaucratic and maybe that decisions are not where, you know, decision power is not allocated out close to the markets and close to the customer to the extent that people wish it to be, which makes us a bit slow and maybe less agile and slow down our clock speed. I think there are a number of things that we need to do. Again, you know, I'll save my fire until we have concluded the work.
Thank you. Second question, also from Ben. In terms of the strategic review, is this more focused on capital allocation and growth M&A, or could it involve divestments of entire business lines?
As I mentioned, we are scrutinizing our business from different angles and really looking into how can we unlock the full potential of what we're doing. Again, you know, to me, it's a premier question on how can we really capture a lot of that growth opportunity that still exists out there that we have not yet fully tapped into. I think that's gonna be a major theme as we move forward.
Thank you. Moving on to a question from Andreas Koski. Good morning. Could you help us better understand your outlook of flat organic growth by giving some indication of what organic growth you expect for your divisions?
Well, I think we had that question, as we said, you know, we are not breaking it down to that level. We stay on a rather high level, holistic perspective, where we see a solid demand maintained within our industrial business, while automotive will continue to be volatile in Q4. All in all, we see a rather flattish development of our net sales versus the same quarter last year. We don't break it down further into further details than that.
Thank you. Question from Daniela at Goldman. Is the shift towards the East still as relevant today as before, given the pandemic? Several companies' customers are reconsidering long supply chains and refocusing more on localization rather than moving to the East.
Yeah, I think it's a very relevant question. The way we see it is that we continue with our regionalization. We want to make sure that we are close to our customers, and we need to strengthen our footprint in the East. At the same time, we also need to continue to strengthen our footprint in the Americas, for example. I think that journey is ongoing. When I think about the move to the East, it's also clear that in some industries, what I call the center of gravity, where R&D and the leading minds will be in certain industries, will most likely be, you know, in parts of China or in Asia going forward.
That means that we also need to consider what that means for us and any potential, you know, changes on how we deploy our resources and where we build our center of excellence, so to say. I think the theme of move to the East is still relevant, but maybe, you know, with a different tonality to it than in the past.
Thank you. One question from Andrew at JP Morgan. Can you please help us understand your expectations on cost development in the fourth quarter, including any additional cost-saving actions, given some of the challenges you've seen currently?
Well, firstly, of course, as Rickard mentioned, in automotive, we are, you know, taking specific special actions, and including cost actions, as Rickard mentioned. In general, on a general level, I think the big picture still remains that, I mean, over time, we see that we can make SKF more efficient, and that includes, of course, taking some cost out, but it also includes, you know, ensuring that we invest in product competitiveness, including product cost, and so on and so on. That's definitely a journey which will continue long term.
Thank you, Niclas. Now we're running out of questions, so I think we use the last two minutes for some summing up from Rickard. Some final words from your side, and other than that, we thank you all for listening in.
Well, thank you for your attention and much appreciated. I just can reconfirm what we have said that, you know, we closed the third quarter, which we believe reports a stable development in terms of growth with the organic growth of around 8%. You know, it's a mixed bag that we present with very, very strong development in our industrial business, and I like to reinforce that it's approximately 75% of our business is classified as industrial, where we see, you know, double-digit growth of 13% and further improved margins to 17% in an environment that has been very, very challenging. I think we demonstrate that some of our mitigating actions are actually working, and they are moving forward and developing our business in the right direction.
Automotive is a different story where we have had a very, very troublesome and volatile situation with significant customers that have, with short notice, closed down their operations thereby actually do not honor the orders that they have with us that had a significant impact on our growth in automotive. We turn into negative growth in the quarter while also moving our margins in the wrong direction. More work to be done there, but we believe that this will be managed through and the underlying demand within automotive is still strong and will come back. We're pleased that we also strengthen our position in the electric vehicle markets, which we believe will be a pocket of growth going forward.
The work continues with the driving cost efficiency in our business, and we are pleased to see that we can report progress on our footprint initiative, where we are closing down some additional six production units in our business while we continue to invest in growth opportunities in other parts of the world and also strengthening our automation and digitalization efforts in our remaining European footprint. I think we're making still progress, and we are looking into further opportunities. As I said a couple of times, once we have concluded our own assessments, we will come back to you and share how we see the future and how we believe that we can unlock the full potential of this great company called SKF.
With that, thank you so much for your attention today, and we wish you a continued good day.