Sandvik AB (publ)

Welcome to Sandvik's presentation of the second quarter results 2021. My name is Louise Cheddar, head of investor relations and beside me and also presenting the quarterly highlights today is our CEO Stefan Widing and our CFO Thomas Eliasson. So yes, we will start with the presentation and then we move on to the Q&A session when you have the chance to ask your questions to both Stefan and Thomas. With this short introduction, I hand over the word now to you, Stefan.

Thank you, Louise. And also I would like to welcome you to the second quarter report for Sandvik in 2021. We kick things off with a short summary here. We believe this has been a quarter where we show strong execution in what we believe is a high demand environment. We have an order intake growth of 43% year on year in the quarter. We have a strong underlying demand in both the mining and the construction segments where order intake levels are now continuing well above pre-COVID levels. We also see a robust demand in automotive and general engineering, and also now some positive signs of improvement in the aerospace and energy segments. Revenues grew by 22% organically versus last year, on the back of strong backlogs and despite some of the supply chain issues that we have managed throughout the quarter. We have a solid earnings performance, a margin of 19.1%, and the third consecutive quarter with margins above 19%. On a rolling 12 months basis, we are now at 18.7%, yeah. We had permanent savings in the quarter of 190 million. That was more than offset by reversals of the temporary savings from the same period in last year, and that had a negative impact of 765 million. If we look at this all together, we can see that the approach and strategy we have had is working. We now are rolling back significantly the temporary savings versus last year. We replaced them with some permanent savings and volume growth leading to what is essentially record high EBIT margins. We also continue the shift to growth. In the month of June, we had a record month for order intake for battery electric mining vehicles of about 140 million SEK. We also had success with the business model related to battery as a service. So it's not only the equipment that is moving, also the business model is gradually being validated, which is very positive. Rock Processing has launched a new digital service called SAN by Sandvik, which I will come back to. And we have, of course, also been very active on the M&A front. We have closed the DSI underground acquisition on July 7th. So from here on, it will be reported in our numbers. And we have announced another five acquisitions within or just after the ending of the quarter. So very good progress on that front. If we focus a little bit on some of these acquisitions, we are definitely stepping up also the digital shifts. Two acquisitions in Sandvik Manufacturing Solutions. First one being DW Fritz Automation. This is a company with a leading position within the niche of high-speed, in-line, contactless metrology. It's a platform acquisition for us in that sense. in a very good way, complement our metrology software company, and it will give us access to this high-growth niche area. This is a niche with an addressable market of around 6 billion SEC, growing at around 15% CAGR. So it essentially doubles our addressable market in the metrology space. And then we have the Cambria acquisition, one of the leading players within CAM software. They have three different product offerings addressing different segments of that market. So a very good entry position for us to fill this strategic gap in our portfolio and also get into the high single-digit growing business of the CAM market. These two acquisitions in total sum up to about 1.3 billion SEC of revenue in 2020 numbers. It will take manufacturing solutions north of 2 billion on a run rate basis this year and means we are well on track to execute on the target to grow manufacturing solutions to 4 billion in 2025. I mentioned SAM by Sandvik. This is an exciting new product launched by Rock Processing Solutions. It's basically an industry 4.0 type product. targeted at the people working in the field with our products, using the connectivity that we have in our products in the rock processing field. We'll give our customers access to data and analytics of the product and the ability to, for example, order spare parts through an e-commerce solution. So another step on the digital shift. If we look then at the market development, year over year, everything is more or less up, of course. Europe up 63%, North America up 49%. Asia a little bit weaker, up 34%, simply because China had recovered significantly already in the second quarter of last year. If you look at the sequential development, you can see that most of the regions are also up. On the segments, mining is staying at a very high level. That's how you should read that sequential trend of being flat. General engineering continues to improve sequentially, especially in North America, which is continuing to pick up. Automotive has been sequentially flattish between Q1 and Q2. Here we had a strong Q1. We entered Q2 in a strong way. Then it flattened out due to the component shortages among our customers. But it has picked up again towards the end of the quarter and going into July. We will see if that is due to restocking for holidays or if it's a more permanent uptick, but at least a positive trend towards the end of the quarter. In energy, we now see a sequential uptick. It was a step up in Q2, especially driven by North America. It's still at low levels, but we saw clear signs of improvement at least. If you take the SMT perspective here, they continue to see improved order intake also on the umbilical side. And then aerospace, which we still show sequentially flat. We do, however, see continued increased activity. It doesn't impact our business that much yet. But if this would be a picture on Europe only, we would say that sequentially it is now improving in Europe, which seems to be leading the other regions in the aerospace recovery. So relatively positive there. However, we don't expect the recovery to be fast in any way. Going then to order intake and revenues, again, 43% up on orders, over 25 billion or 25.8, so tracking. on a run rate basis over 100 billion. 22% up in revenues. This is a book to bill of 110%. So we continue to build order backlog. And of course, are looking forward to seeing that backlog convert into revenues here going forward. The EBIT development is strong, up 58%. an adjusted margin of 19.1 and close to four and a half billion SEC in terms of money. This is a leverage of 50%. We are happy with this leverage. It should be seen in the light of the good mitigation we did a quarter, the same quarter of last year, and it is a better leverage going up than the leverage we had going down last year. That's good, and we are happy with this, considering the significant effects and reversal of temporary savings that we saw compared to last year. Thomas will talk more about the savings as well in his section. Going into the business areas then, we start with mining and rock solutions. Another quarter with very high order intake, the second one in a row with order intake of over 10 billion. Organically up 31%, equipment up 44%, aftermarket up 22%, so strong performance. One major order. We had more major orders actually last year, so this would have been 38% up if we take away the major orders. We also see the battery electric order here that I mentioned prior. I have to correct myself a little bit here from Q1. I said then that we didn't expect the Q1 order intake levels to be sustainable. It was due to some catch-ups and so on. Now we have another quarter at this level and we are now more confident that this is actually an order level that we should see going forward for some time. So good underlying demand and I think good also execution in the field from our team here. The margins are slightly down versus last year. That is quite easy to explain. It's essentially fully explained by reversals of the temporary savings last year, as well as currency. That's essentially the two main, or more or less the only explanation points here for that leverage number. Sequentially, we had higher revenues than Q1. Still, the margin is on par, slightly down with a couple of 20 basis points. This can be explained by mix. First of all, we have a positive development on the equipment side that is growing fast. So we get the negative mix impact with more equipment and less aftermarket. Of course, very positive for the future since that equipment will eventually or immediately once it's delivered, start to drive the aftermarket business instead. Then we also have some ramp-up costs. We are now more confident in the outlook, more permanent, strong order intake. So we are ramping the organization to be able to deliver on the backlog and avoid extensive lead times for our customers. We are also now investing even more in some of the technology areas, such as electrification and automation. Then we also have some logistics challenges that we had to manage in the quarter. In particular, in parts and services, in some occasions, we had to fly spare parts to customers to be able to serve them, which increases our cost base. And there is a general inflationary pressure here as well. If you take these three they will explain about 100 million SEC or over 100 basis points on the margin in the quarter sequentially. We have in a good way offset most of the general inflationary pressure, but that would be the fourth explanation point here. But it's in the order of magnitude of 20 million SEC. So good handling there, still a little bit to do. which has been addressed also with some price increases as late as June of this year. Some of these things will remain as long as we grow equipment. It will remain, we think, logistics, for example, and ramp-up costs will gradually go down as we fill in this new larger costume with revenues. We are positioned to continue to grow this business, again, with the closure of the DSI Underground acquisition in July. and also the announced acquisition of the smaller but still important Australian rock tools company, Tricon, that we did in the quarter. Rock processing solutions, super strong. Order intake up 61%. Equipment orders up 92. 32 on the aftermarket side. We believe that is driven at least early in the quarter by some continued catch up effects, but that it is also now driven by simply by strong underlying demand. Revenues up 29 percent, very well executed by the supply chain team here. We have inventories at record low levels, so they are working hard to deliver to customers in this environment, but good execution in the quarter. And then the strong margin, 17%. They have handled the logistics challenges. They have handled the price inflation or the cost inflation through price increases. But then they have also a positive mix impact from more spare parts and more highly profitable products in the portfolio that they have sold in the quarter. So very strong margin at 17% from them. Also here we had an acquisition, Kuatani in May, that will increase their product portfolio with large screens and feeders, and they are based out of South Africa. Sandvik Manufacturing and Machining Solutions, I would say good order intake, very good order intake at plus 44% organically. Revenues up 33% year over year. This corresponds to approximately a 3% sequential improvement versus Q1 on the revenue side. We saw automotive staying at good levels, but flattening out from a growth perspective versus Q1. As I mentioned, good start of the quarter there, good ending of the quarter there, but quite flattish throughout the quarter, you could say. General engineering has continued to improve and is now on robust levels, actually back to pre-pandemic levels. The daily order intake in July started with plus 20% in the first couple of weeks. We are shifting back now to year-over-year commentary on this because we think that's what is the most relevant. That's how we measure our own business internally. If this would have been a sequential comment, You could say that sequentially we are continuing on the improvement path that we have been earlier in the year, so roughly a 3% sequential improvement. I want to emphasize, as I do every time, that we're giving you a data point here, not a forecast. And as you know, Q3 is seasonally very different from other quarters as well, so please bear that in mind. Very good margin levels in SMM, 23.1%, a leverage of over 63 or up to 63%, which considering the very good mitigation they did in the same year of last year, means that they have also structurally done improvements. And you can see that 100 million or over 100 million in permanent saving coming into this quarter. This gives me very good confidence in what they will achieve going forward, considering we have quite a few segments where there is growth still to come. And with these margin levels already, I think we will see some good performance from this business going forward. We have accelerated our M&A journey here, three acquisitions. I have talked about two of them. And then yesterday, we also signed the acquisition of Fanar, a Polish round tools company of almost 200 million second revenue based out of Poland. And then finally, SMT. Order intake of very high 74%. Of course, weak compares, but an order intake level of 4 billion in the quarter in absolute terms is a very high level. also historically, especially given that they had no major orders in the quarter. They had umbilical orders of around 200 million. So if you compare that to the 114 Q1, you can see that it's continuing to pick up, but still at low levels. Here we can see most other segments going very strong. Medical wire, heating systems, application tubing, to name a few, Strip as well, with their consumer business, giving very good order numbers overall. Also here, they see some signs of improvements in the aerospace segments, which is good, but also here still on low levels. Revenues are still down, minus 4% versus last year. The main shortfall versus last year is that we essentially are not shipping any umbilicals right now. There are some, but it's less than 100 million. So what you see here is essentially SMT without umbilicals, and I think that's a pretty impressive performance on the margin side at 10.4%, excluding metal price effects. They show here that there are other businesses, Cantal in particular, StripNow as well. The other parts of Tube, Application tubing and tube specialized, that can deliver really strong margins also without umbilicals. We have a 200 basis point improvement year on year based on the inventory buildup. I want to emphasize, though, that this is a bridge effect. They have built inventory in the way they normally do before the summer. And it was just that we didn't do it last year because of the COVID impact. So the margin here is not really boosted by production levels. It's the normal production levels they should have in this season. And then you might have seen also that Cantal has made progress on the renewables strategy, having signed an agreement to provide heating elements for hybrid here in Sweden. With that, I'll hand over to you, Thomas.

Thank you, Stefan. So let's jump into the numbers. the income statement and the balance sheet. And we will, as usual, start with the summary. And if you look at the upper right-hand corner, we have the components of the top line for the total group. As you've heard, orders plus 43% and revenues plus 22%. That's big numbers, really big numbers. But we must remember that we are comparing now with a quarter a year ago, where we had minus 23 for orders and minus 20 for... for revenues. So a big downturn and then a big upturn here as well. In order to understand a little bit more on where we are, we can compare with the second quarter in 2019 instead, which was like a more normal quarter pre COVID, even though we were in a little bit of a business cycle downturn on the short cycle business. And if you look at those numbers, we are year on year slightly positive on orders. So we're actually above And slightly negative on revenues, but no big numbers, just single digit numbers for both orders and revenues. Currency minus 6%. We'll come back to that and structure turns positive now plus 1% in the quarter. That's CG Tech and Miranda Tools. And of course, for the second half of the year, there is much more to come as we now have closed DSI and then we have a number of other acquisitions which will close during the next six months. So if we look at the income statement then, earnings close to 4.5 billion, 58% increase and a 19.1% margin. And we will look at the bridge in just a little bit. The interest net is performing according to plan, and we'll talk about that as well. Tax rate within the range, 22.8%, and working capital is picking up, but still below 25%, and cash flow on the improve. So let's go then to the bridge and look at the organic development here. with 22% in revenue increase year over year, we have a leverage of 50%, which gave an accretion of 640 basis points, and we are satisfied with that leverage. Of course, we have to, as Stefan mentioned here, we have to remember that we had a good mitigation in the second quarter last year. We had minus 37% on a on a 20% downturn. And now we have a 50% leverage on a 22% upturn here. So, of course, when you mitigate, then you don't get these, let's say, peaks and troughs in the same way. It becomes more controlled, just the way we want to have it going forward. Currency had a negative impact of 659 million on the EBIT line, and I will talk a little bit more about that when we come to the guidance. So all in all, from 14% to 19.1% in the quarter. Savings. This is the slide on savings that we have presented to you at every closing or every quarterly call for the last eight quarters. And we have the same setup here on this slide as we always have. So on the first line, we have the 2019 program that we launched in mid 2019. That is all done now. There are no P&L impacts in the bridge, but the cost level is, of course, 1.7 billion krona down compared to what it was before we started this program. So we just put it in here for reference. On the next line, you have the permanent savings program that we launched during last year. We have 190 million in the quarter in positive impact here, and you can see the split by business area as well. And the annualized run rate on the savings are 760 million. That is 58 percent, to be exact, delivered. the majority of what remains up to 1.3 billion will happen during the second half of the year and there will be a little bit of a spillover to 2022 as planned and then of course there will be year-over-year effects in 2022 as well just like the tail before it fades out completely then the little bit more let's say a little bit more complicated part here is the temporary savings here now and Let me start by saying that for the total group we have when it comes to work time reduction in the quarter, in quarter, not a bridge, a little bit more than 40 million in savings. So that program is basically coming to an end by mid 2021 now. But as we had 600 million a year ago in work time reduction savings, you get a negative bridge effect of 560 million. The next line is other temporary savings or discretionary spend, travel, fairs, trade shows and so on. That is 300 million still in the quarter, in quarter, but we had 500 million in the second quarter a year ago. So that gives you a negative effect of 205 million. So those two adds up to the minus 765 million in the bridge. But there are still savings in quarter of 350 million. Of course, at some point in time, later this year, we have to, let's say, draw a line in the sand here and stop comparing the spend level here to what we had on the pre-COVID situation here, because we will not go back. to the same spend level as we had before COVID broke out. Because we're still comparing this, what kind of spend we had before the pandemic, before March, April 2020. So the total anyway in the bridge is minus 575 million. Next slide here, net financials. The interesting line here is the first one, the interest net, 88 million in the quarter. We're on track to deliver or to have 400 million in interest net for the quarter and maybe less. Tax rate, we have a reported tax rate of 24.5. There were some impacts from items affecting comparability, mainly related to the SMT separation and the creation of an SMT subgroup, which is now done legally. So if you adjust for that, we have 22.8% in tax rate, which is well within the guidance for 2021, 22 to 24%. Working capital is increasing as it should when the business is up. If you sell more, you need to invest more in working capital to cater for the future deliveries, but also to safeguard business. stock availability as well. And you can see that on the right hand side that the relative numbers are on the improve for at least two of the business areas. But we will see increases in all four business areas going forward. This can be seen clearly also in the cash flow chart here on the left hand side. If you look at the blue line and the red line here, the blue line, which is the rolling 12 month EBITDA, is now surpassing the 12-month rolling cash flow line, just the way it should be. We grow. We need to invest more in working capital, so there will be more earnings than cash flow, but we will continue to fight for a good cash conversion. It's right now sitting at 80%, but we expect that to increase quite a bit during the second half of the year. You can also see on the right-hand side, when you look at the components of the cash flow, that we have an increase in earnings, which is quite substantial. but also investments in working capital and capex is basically on the same level. And then net debt, by the end of the second quarter, June 30, we have now moved from a net cash position to a net debt position. We are on 3.9 billion in net debt and there is not much acquisition spend in this development. This is only really the dividend of 8.2 billion, which was paid in May. But there will be more acquisitions spent during the second half of the year. In these numbers, we don't have the payment for DSI, for example. That actually happened last week, but it ends up in Q3. And then we have Cambrio and we have DW Fritz and we have Fanar and hopefully more coming during the second half of the year. But from a gearing point of view, we have everything under control. We will be nowhere near our financial target of 0.5 and we will be nowhere near the rating target of being below 1.5 when it comes to net debt over EBITDA. It all works out well. Balance sheet continues to be strong and can help us to continue our, will help us to continue our M&A agenda. Let's look at the guidance, what we said and what we delivered. And maybe the first line is the most interesting one here. We guided on 350 million on underlying currency effect, and that is translation effect and transaction effect. And we ended with 632. That's quite a difference. And the difference is, it's not translation. The difference is transactional currency flows. If you look at the opening and the closing exchange rate between the Swedish krona and mainly the U.S. dollar, it doesn't look that much. But what has happened during the quarter is that the krona has been quite strong before it weakened again. And transactional currency effects happens as it goes, so to say. So you would have to more look at the average exchange rate during the quarters in Q2. And this is exactly what has happened. And you have the whole explanation sitting in that. Transactional effects for US dollars in April, May and June. Total currency effect was 6, 5, 9. Not many revaluations of derivatives and working capital. And metal prices came in on guidance. CAPEX and interest net continues as previous, just below 1 billion for CAPEX and just below 100 million on the interest net. And the tax rate, as I mentioned, on 22.8%. So if we finish off then with the guidance, the CAPEX guidance is a full year guidance and we have said less than 4 billion, that is still valid. Currency impact for the third quarter, given the exchange rate by the end of June, we estimate to be around zero. The metal price effect, we estimate to 200 million positive interest net. We don't change that 400 million, and the tax rate we keep on 22 to 24 percent. And as we have discussed previously on these calls, We have lowered the tax rate guidance basically every year since 2016, but we don't see any, let's say, more room for a lowering of that guidance. The tax rate will most likely sit on this level for the coming years. So 22 to 24 percent will stay. And with that, I'll hand back to you, Stefan, for conclusions and summary.