Sandvik AB (publ)

Hello everyone and a warm welcome to Sandvik's presentation of the fourth quarter results 2020. My name is Louise Cheddar, new head of investor relations and beside me we have our CEO Stefan Widing and our CFO Thomas Eliasson. We will as usual start with the presentation where Stefan and Thomas will take you through the quarterly highlights and after that we will open up for questions and those you can ask either via online or via the conference call. So with this said, I hand over the word to you, Stefan, please.

Thank you, Louise. And also, I would like to welcome you to this fourth quarter result in 2020 for Sandvik. I think it's clear when we summarize the quarter that we are now gradually shifting back to growth. This was actually the first quarter that we saw a positive order intake of plus 3%, excluding major orders since quarter one of 2019. We had record order intake in SMRT. We saw a good sequential improvement in SMM, especially driven by automotive. We also had good development in several of SMT segments, such as medical industrial heating and the consumer related segments. And of course, we also saw the announcement that we intend to acquire DSI underground by the end of the quarter, something that we expect to close then around mid-year. We also saw margins at record levels. The adjusted operating profit came in at 20.1% versus 19.1 last year. And this is the first time, at least in modern times, that we are able to deliver a margin of over 20% in a quarter. Also, the rolling 12-month result or the annual result, so to say, came in at 17.1%, excluding metal prices, which is how we have defined then our financial target. This is well above our trough margin target of 16%. And I think you agree with me that 2020 was definitely a trough year. This is, of course, driven partly by the recovery in the business, but also by very strong savings that we continue to deliver in the quarter. This quarter we had 920 million of savings that we delivered. This also means that we continue to strengthen our balance sheet. We had a cash flow in the period of 5.9 billion SEC, which drove our gearing down to a low 0.04. This includes then three acquisitions also that we closed in the quarter and paid for. Not to forget then the strategic one of CG Tech, which also had the biggest financial impact from that perspective. Based on this and looking at where we are with the balance sheet and our business, the board has decided to recommend to the AGM in April to give a dividend of 4.5 SEC. as well as an additional dividend of two SEC for this year. Last quarter, I showed you our SMRT AutoMine concept loader, fully automated, fully electric. This quarter, I would like to show a smaller product, but that will have maybe a much greater financial impact in the next couple of years. This is Coromant that have launched a completely new generation of their steel turning grades, the GC4425 and the GC4415. As you know, Coromant is the market leader, the market leading brand in the tooling industry and also by far the biggest brand we have in our portfolio. They are clear market leaders in turning and it's about 50% of their revenue. So substantial financial impact for the group as a whole. Launching a completely new generation. Here we have new coating technology. The overall tool life is increasing by an average of 25%. This is exactly what we have done for decades and that we will continue doing to ensure we can continue to be market leaders and price leaders in this industry. And turning is really big in automotive. So the fact that we launched this in October, just when automotive were recovering and also looking for productivity improvements was very good timing for us. If we look at the market development overall, we have now, if you look at the arrows to the bottom and to the right, we have now gone back to showing the sequential development as this quarter versus prior quarter and not the in-quarter development. This is a good sign. It means that the volatility is not as big anymore. So we can we can compare the quarters instead. And as you can see on the regional development, all regions are up sequentially. If we look at the segment view, mining, engineering and automotive are up sequentially, while energy construction aerospace, we continue to really see no No improving development at all. If we look at the year-over-year performance instead and take it from a regional perspective, we see Europe being at minus two. Here it's notable that general engineering and automotive are flat, meaning they are back to the levels they were in the prior year. Of course, aerospace continues to be down, which is hitting, for example, France and the UK in particular in Europe. North America down 23%. This is where we had the major order in SMT last year. So if you take that out, it's down minus six, so less dramatic than it might look here. Here also automotive is flat, so back to the same levels as last year, while general engineering is still down. So the recovery in general engineering is lagging a bit in North America compared to Europe. Also here, we should remember that oil and gas and aerospace is a higher portion of our revenues compared to Europe, so the fact that they are down, of course, also contributes negatively for North America as a whole. If you look at Asia, we are up 4%. China is actually down 3%, but SMS in China is up 6%, driven in particular then by, for example, automotive and general engineering. So the negative number in China is driven by projects in SMT and SMRT. So not a factor in the underlying development there. Then you can see high growth in Africa, Middle East and South America. And that is, of course, driven by good mid-sized order intake in SMRT. In particular, happy with an automation order in South America. then excluding the the big order in smt in december last year revenues trailing a bit at minus six percent despite revenues being at minus six we deliver an ebit of 4.5 billion sec or a margin of 20.1 percent versus 19.1 last year this would have been 19 and a half versus 18.4 then excluding the metal price effect so you can see that the improvements is is basically the same regardless if we look at metal prices or not. It's also worth noting that the decline of 11% in the absolute EBIT figure is essentially entirely driven by currency. It's a little bit of structure as well, but entirely driven by currency. So if we normalize for currency, the EBIT would have been the same. In fact, the organic EBIT development was positive. in the quarter. That's why the group leverage is not applicable since we have a drop in top line and improvement in EBIT. Going into the business areas, Sandvik Mining & Rock Technology, again, plus 15% order intake, an all-time high, driven by equipment orders up 23%, aftermarket up 8%, so strong performance in both areas there. Revenues minus one, This is against very, very high comparison Q4 of last year. So we are happy to see that number actually a little bit better than we had expected ourselves. They also deliver a record margin, 21.7% in the quarter, 10 basis points higher than last year. We note here that we have also taken the cost now for the DSI acquisition. But there were other positive year-end effects that offset that. So it doesn't impact the margin, but it could just be good to know that we have put that behind us as well. Of course, the acquisition of DSI was a big event for SMRT in Q4. DSI being the world's leader in safety solutions for underground mining and the tunneling industries, a very good complement for the SMR business going forward. It's actually one of the largest acquisitions in Sandvik's history, the second or third largest depending on how we rank SECO in that context. We expect this deal to close around mid-year, a little bit dependent on how the regulatory processes evolve here going forward. Then we have Sandvik Manufacturing and Machining Solutions down minus 7% then on the organic side. I think I've talked about most of the regional development already. We note as well that in December the order intake were down single digits and now in January it has started in the negative low single digits. I want to urge you again, though, to be very careful in how you interpret them the first couple of weeks, especially now in January with a lot of holiday days and so on. So we continue to see the recovery, but we are in the middle of the second wave of the pandemic. So we will have to see how things continue to evolve now in quarter one. Positive to note as well is the strong order development in our tungsten powder business, Wolfram. This is typically a leading indicator, which means that companies are stocking up on powder because they expect a higher demand of products going forward. And this is also one of the reasons why we have the differential here between order intake and revenues, because they book orders and they will deliver them now going into this year. Despite being down 11% on the top line, SMM is delivering a better margin than last year, 21.4% versus 20.3% in prior year. This is, of course, driven both by the savings as well as the recovery in the business, but over half a billion sec of savings in the quarter alone. They also closed two acquisitions in the quarter, then Miranda Tools, a round tools company in India, as well as a software company, CG Tech. We also took a minority stake, as you have seen, in a manufacturing technology company called Octon based out of the US. And then if we take SMT, a big drop in the orders of 31% in the period, excluding for the major order, this would have been minus 7%. And actually the underlying volume is minus four if we also take away the alloy surcharges we have in that number. Now, of course, we cannot for a full year continue to exclude the material orders because it's supposed to be excluded because it's supposed to be a timing effect. But if we don't have them for a full year, then of course it will impact the business. But the minus seven or minus four is really how the underlying short cycle business is doing. And I think that's important to note. We do see continued weakness in oil and gas and aerospace, of course. And we do, however, note in a positive sense, some very strong development in some of the short cycle business. Medical, industrial heating and consumer are all up in the double digits. And those are early cycle businesses in SMT, so that's positive. Also, SMT delivers strong margins in the context of their top line of minus 10, an underlying margin of 11.6% versus 12.1% last year. So they basically keep their margin level despite double-digit decline on the top line, so very strong margins. delivery from SMT in this quarter. And of course you know early in the quarter we also announced the intention to continue with the separation process of SMT. With that, I'll hand over to you, Thomas, to take us deeper into the numbers.

Thank you, Stefan. And let's move into the numbers now and start with the financial summary, as we always do. And let's start with the top line in the upper right-hand corner. The organic growth, as you heard, was minus 2 for revenues and minus 6 for orders. Oh, sorry, the other way around, minus 2 for orders and minus 6 for revenues. Currency is a headwind, of course, for us now, both on the top line and in the earnings. Minus 9 for both orders and revenues. And structure was minus 2. Structure is mainly the divestment of Varel oil and gas, which happened at the end of the first quarter in 2020. So we'll have that effect for another quarter before it turns around. Total was minus 12 and minus 16. If we then walk down the income statement, the earnings came in at 4.5 billion compared to 5.1 a year ago, minus 11. But currency had a major impact on this one. And I'll get back to the bridge in just a little bit here now. Margin 20.1 versus 19.1, so 100 bps in margin accretion. Net financials, we'll come to a specification on that as well in just a little bit. Underlying tax rate came in at 24.1, full year 22.8. Cash flow was really good, and the full year cash flow, free operating cash flow, was 15.4 billion compared to 17 billion a year ago. A really good cash flow year. So if we move to the bridge then. And look at the margin development here, 19.1 to 20.1, and start with the organic part. The minus 9 percent, sorry, the minus 6 percent on revenues is corresponding to 1.5 billion on the top line. But as you can see here in the bridge, basically no impact at all on earnings, actually a little plus, plus 35 billion. And, of course, if you lose 1.5 billion on the top line and the profit stays the same, it has a massive accretive effect on the margins of 130 bps up. This is of course very much a result of all the savings initiatives and efficiency initiatives that we have launched and executed on during 2020. Currency minus 2 billion on the top line, half a billion on the EBIT line, 20 bps dilution, metal prices 0.1 dilution, structure plus 0.1. So all in all 100 bps up during the fourth quarter. 21% in the fourth quarter is really, really strong. We've never been on that level before, and especially not in the fourth quarter. Let's then move to the savings programs. And you're familiar with this slide here. have on the first line the program that we kicked off mid-2019. The full impact is 1.7 billion annualized and we finished deliveries on this program mid-2020. But as this is a bridge analysis, we still have sort of tail of this program in Q3, Q4. And we will also have a little bit in Q1 next year as well. So 180 million in the fourth quarter. The next line is the work time reduction program. This is part of the temporary savings. 200 or 205 million in the fourth quarter. And this is coming down now. It's now less than half of what it was when it started. This will continue a little bit into 2021 as well, but eventually it will go away. The third line here is the discretionary spend or other temporary savings, flying, exhibitions, meetings, and what have you. The majority of us are still working from home or working at the sites where we are. So, of course, that gives a profound impact on the income statement, on the cost levels, 500 million in the fourth quarter in savings. This will continue. At what level, we can't say today, but it will have a decent impact in the first quarter as well until we can start traveling normally again. At the fourth line here, we will start to see now effects from the 2020 program, and we see effects from the 2020 program starting to sort of trickle in here a little bit. This would mainly have an effect on 2021 and then into 2022 and onwards, but there are some of these initiatives that are now already now in the income statement 35 million all in all so the full impact of all these four programs for the fourth quarter was 920 million if you recall q2 and q3 we had 1.5 in in q2 we have 1.4 in q3 we have 900 million now in in this quarter so this is 3.8 billion for for the full year which of course has helped. I mean, if you take off 3.8 billion from the 15 billion in earnings we had, I mean, we would have had a completely different operating margin in the group. At the very bottom, we have also just repeated the information that you saw in the press release from December, the savings program that will give 1.3 billion annualized, the new one, How is the spread between the business areas? And you can see here that half of it is in SMM, 125 in SMRT and the remainder mainly in SMT, sorry SMRT, 125 SMT, half a billion. So if we then move forward into what's below the operating earnings, net financials, the interest net came in just below 100 million, 96 million. That's 400 million full year 2020, and we'll come to the guidance later here now, but we believe that this will be around the same level in 2021, 400 million. Tax rates, the reported tax rate, 22.7, but it was impacted by one-offs and items affecting comparability. So the real underlying tax rate was 24.1. The full year underlying tax rate was 22.8, so just below the range of 23 to 25 percent. We'll come back to the guidance for 2021 in just a little bit here. Into the balance sheet now, working capital, very strong finish of the year, below 25%. And you can see on the right-hand side, all three business areas are delivering very well. The cash flow is strong in the fourth quarter. If you look at the right-hand side, you can see that we, of course, we have a bit of a reduction in earnings, but we still have good releases from working capital. We are careful with CapEx, so 5.9 billion compared to 6.5 a year ago. We're very happy with these results. And that, of course, has a good impact on the balance sheet. You can see that the gearing now is down to 0.04%. The financial net cash position is 8.8 billion. The total net debt is a little bit over 2 billion SEC. Of course, as Stefan mentioned here now, in these numbers, we have three acquisitions that we paid for, but we still managed to improve the situation, the net debt situation for the group. So a very healthy and strong balance sheet. Let's look at some of the guidance that we had. We said 350 million on negative currency effects underlying that translation transaction effects. We came in at 536. Swedish krona continues to strengthen. The total currency effect was 494. Metal prices 129 plus instead of plus 50. Cap ex 1.1 interest that we've talked about 96 million and tax rate 24.1. So to finish, sorry, not to finish off, let's look at the dividend proposal here as well. We, as you have read in the report, have a proposal from the board to give a total dividend of 650. It's one decision, one dividend, 650, but it should be seen. as an ordinary dividend of 450 and then an extra or additional of two krona. That would mean an adjusted payout ratio of 75% going forward. The target remains that over time, over a business cycle, we intend to have a payout ratio of 50% on adjusted earnings per share or adjusted net income. So to finish off with the guidance for 2021, new year, new guidance, CapEx. CapEx came down in 2020. We normally are around $4 billion. It came down to $3.2 billion for the full year 2020. But as we are in a gradual recovery, we will see CapEx coming back now. Maybe not to $4 billion, but something below or just below $4 billion. So that's our new guidance for 2021. Currency has a negative impact on the earnings. $500 million in the fourth quarter, and we expect $750 million, quite a big number, for the first quarter 2021. Metal prices, we believe, will be plus 60 in quarter for the first quarter, and the interest net, as I mentioned, we believe will be $400 million for the full year 2021. Now, tax rate. We have taken down the guidance for the tax rate gradually over the last five, six years. starting on 27% or in the neighborhood. We have had up until now a guidance of 23 to 25%. We ended the year on 22.8, so just below that range. We will now take down the guidance to 22 to 24%. And this is driven by the fact that in the countries where we are big, the tax rates tend to sort of... consolidate around 20% right now, like in India, Czechia, Finland, Sweden, the United States. And, of course, if we have that kind of tax rate in the countries where we are big and have big earnings, of course, it takes the tax rate down. And then there are always a bunch of adjustments, of course, non-deductible expenses, et cetera, et cetera, which picks it up. But 22% to 24%, we believe, is a sustainable level on the tax rate, not just for 2021. We believe that will stay for the next, like, two or three years going forward. And with that, I'll hand back to you again, Stefan, for conclusions and summary.