Sandvik AB (publ)

A warm welcome to Summit's presentation of the third quarter results 2021. My name is Louise Cheddar, Head of Investor Relations, and beside me I have of course our CEO Stefan Widing and our CFO Thomas Eliasson. Stefan and Thomas will, as usual, start with the presentation and take you through the highlights of this quarter. And then we will spend approximately half an hour on the Q&A session. And the questions you can ask on the conference call as per instructions from the operator or online in written. And with this, it's time for the presentation. And I hand over the word to you, Stefan.

Thank you Louise and also I would like to welcome you to our third quarter report in 2021. We will for sure return to this picture here of our beautiful electric 50 ton truck later in the presentation. But I'll start with the summary of the quarter which was a quarter we would say have solid demand and solid performance. Organic order intake were up 21% organically and a full 31% total growth adjusted for currency. We saw a continued strong underlying demand in the mining and infrastructure businesses where in many areas we saw record high order intake levels. Also, demand in automotive and general engineering was robust, and we saw positive development in aerospace this quarter. Revenues, they grew by 13% organically, and this is then despite the supply chain bottlenecks that we did see a little bit in the quarter. Our invoicing could have been slightly higher if it were not for some of these issues. We also see an improved profitability. The adjusted EBIT margin was 17.6% versus 17.3% last year. And even more importantly, adjusted EBITDA margin of 19.1% versus 17.7%. I will comment a little bit more related to this divergence later in the presentation. Our rolling 12-month adjusted EBIT, excluding metal prices, are sitting at 18.4%. We saw permanent savings in the quarter of 230 million, but this was more than offset by reversals of temporary savings, especially short-time work weeks of in total 615 million. And Thomas will break this down further in his part of the presentation. We also saw a successful execution of our shift to growth strategy. Seven strategically important acquisitions were signed or closed within and after the quarter. This also meant that we, during the quarter, have updated our financial target for Sandvik Manufacturing Solutions to 6 billion in 2025, with an EBITDA margin of at least 20%. And I would say these acquisitions means that we have taken vital steps in becoming a more digitally focused and more growth-oriented company. I mentioned the 50-ton battery electric truck in the beginning. This is the second product we launched that is a result of a combination of Sandvik's knowledge in underground mining equipment and Artisan's knowledge in state-of-the-art electrical drive trains and battery technology. We launched this earlier this quarter at Mine Expo in Las Vegas. this follows our philosophy which is that we should rethink the equipment not the mine which will help mines deploy battery electric vehicles in their existing mining infrastructure this we enable through our patented auto swap and auto connect technology which means that the big battery you see at the front of the truck can automatically while the operator is in the cabin be put on the ground and disconnected. There is a secondary battery in the truck, so it can go to another already charged battery, which can then be reconnected and off you go. So in a seamless way, you can switch to a fresh battery, avoiding a lot of infrastructure investments in fast-charging infrastructure in the mines. So very positive and another great innovation in terms of battery electric mining equipment. Going into the market development overall, we can see our main regions all see strong underlying demand. Europe up 16%, North America up 25% and Asia up 23%. We can say that North America is up more than Europe driven by strong order intake in SRP and SMT. If you look at the more underlying business in the bigger business areas, the development is fairly similar. Africa, Middle East, South America, of course, driven by strong mining demand. Australia being negative is simply because we had a major order in Australia in the same period last year, otherwise the demand is underlying at a strong level. You can see mining segment up across the board, very strong demand, same goes for infrastructure. Gel engineering, strong demand up. Automotive, more flattish year over year. Automotive had started to come back quite a lot in Q3 of last year. And we now see that we are more on par from a year over year perspective. Energy has started to come back further, which is positive. And I think for me, the most positive signal in this quarter was that we now see growth again in aerospace, not only science, but actual order intake growth in aerospace in the quarter. So if we summarize this, an order intake at a very high level at 26.3 billion, up 21%. And as I said, 31% total order growth in the quarter. Revenues trailing a little bit, but if you look at the bars there, you can see that revenue is step-by-step also ramping up. Just shy of 25 billion in the quarter, up 13%, 23% total growth. And as I said, this could have been a bit higher, probably closer to the 25 billion had it not been for some supply chain and logistics issues, especially in SRP, also a little bit in SMR. Looking at the profitability development, profits were up 25% versus prior year. Adjusted EBITDA of 4.37 billion SEC, which is a margin of 17.6%. Adjusted EBITDA margin of 19.1%. And you can see also on the graph that these two are starting to diverge a bit because of the acquisitions coming in. The only difference is amortization of surplus values. We had a bigger impact in the quarter in SMR because of some inventory treatment in DSI. So the difference will not be this big going forward, but they will still diverge, which is why we will focus a little bit more on EBITDA going forward since it represents the underlying business performance in a better way. You can also see we had M&A costs, transactional M&A costs, and the 33 million in write times of overlapping assets in SMM that had an impact of 100 basis points on the group level. So add that back here if you want to take away the effect from those transactional one-time costs. Group level of 32% we are happy with, considering we are measuring against a quarter where we were on full effect of temporary savings, including work time reductions in Q3 of last year. And again, we'll comment a little bit more on that going forward. Going into the BAs then, starting with mining and rock solutions, very strong order intake, the highest ever at 12.1 billion. This is up 21% organically and 41% in total growth. We had strong contribution from all divisions in the quarter. We can also say that revenues 11.1 are ramping up sequentially and this quarter then a growth of 12%. Margins were solid, adjusted EBITDA of 21%, adjusted EBITDA of 18.5%. Here again, strong dilution from DSI as we had communicated before, just over 400 basis points. If you would take away the DSI impact in the quarter and look at SMR as it was in Q2, their margin was actually at an all-time high at 22.6%. The little bit issues we saw in Q2, they have recovered nicely from them and are now delivering very strong margins again. Then we can also say that we have seen a very good start of DSI in the group, very strong performance from DSI in the quarter, which was really great to see as well. Rock Processing Solutions also had strong order intake growth, up 26%. Very strong, actually, all-time high order intake on the aftermarket, up 38%. This is a little bit driven by pre-buys because of another price increase coming into effect October 1st, and also some customers doing pre-buys because of simply longer lead times. So 38% is not the underlying demand, but the underlying demand is still very strong. As I said, SRP were a bit impacted by supply chain issues. The revenue of 1 billion 790 could have been more around 1.9 if it were not for supply chain and logistics issues. So hit their top line a little bit there. That also had a little bit of drop through effect on their margin, but still a solid margin of 16.8% from them in the quarter. SRP has strong delivery on price, but they are also the one most impacted by raw material. They have offset the raw material. They are still trailing a little bit on offsetting also all the increased freight costs, but they are working on that as well as we go forward. Also new innovation here with a new crusher, the QI353, and I think you will see that while I'm talking right now. Then if we go into SMM, also here solid underlying demand ordering take up 16% and revenues up 18%. Here we also start to see some impact from the structural growth. So revenue total growth in the period was actually 21% as some of the acquisitions start to contribute positively to the growth in SMM. We did note some production cuts in automotive, of course, and I think that's well known. So the quarter in automotive was slightly slower than we could have expected prior to these production cuts. Again, positive development in aerospace. We saw double-digit growth in aerospace in the quarter, which is nice to see it coming back. It is from low levels, but the fact that it's starting to come back means that even though it will be a long recovery phase means we should see aerospace helping us on the growth front for quite some time now going forward, which is good. We have also noted that September actually started a bit slower coming back from the holiday period, but then in the second half of September, we saw a very good uptake. That has continued now into the first weeks of October. And that's a sequential comment comparing them to Q3 overall. Good margin improvements here, 21.2% on EBITDA versus 19.4. And here we have close to 200 million then of these transaction M&A costs and the write-downs. So this has a dilutive effect of around 230 basis points. So if we compensate for that, I think it's a very good margin development from SMM in general in the period. And you can also see that they have done a very good job with the permanent savings overall, very good structural initiatives ongoing there. And then we took some very important steps in terms of growth in SMM in the quarter. We have two strategic growth areas. One is in digital and one is in round tools. And in both of these areas, we did good acquisitions in the quarter. Two round tools companies, one in Poland and one in China. Two CAM companies and one company strengthening our metrology offering. And we have gone in the quarter from no presence in CAM to being the market leader in terms of installed seats, which I think is a great achievement by the team. Then going into SMT, also here strong organic intake growth, 29%. This is really driven by strength across the board in the business. We see oil and gas continuing a sequential improvement. In the quarter, we had around 300 million of umbilical orders. And we start to become quite comfortable with order intake level there if we look forward into what it means for the business going into next year. Revenues more flattish, up 1%, as we are battling strong backlog deliveries on the umbilical side in the same period last year. Still, SMT delivers a good margin in the quarter. You know Q3 is seasonally usually, or it is always weak because of the under-absorption when we close for holidays in the quarter. Still, they delivered 4% versus 4.9% last year, and we should again emphasize they had strong umbilical deliveries in the period last year, very little deliveries this year. So this is the other parts of the business in Cantal, in application tubing, and in strip that is delivering solid performance in the quarter. Then you have seen earlier today the board has again confirmed the decision to list SMT next year. A little bit more firm now. Mid next year is the plan, provided that we get shareholder approval during next year. Then also SMT did an acquisition, not very big, but strategically important for them with Acratech Group, which is a medical wire company. That means they can expand their medical business from outside of North America to also Europe and Asia. And this is an important growth business with very good margins for SMT.

So with that, Thomas, I hand over to you. Thank you, Stefan. And let's jump straight into the numbers as usual and start in the upper right-hand corner. As you heard, organic growth was strong in the quarter, 21% for orders and 13% for revenues. Currency, finally, around zero after two tough quarters at the start of the year. Structure is now 10% both for orders and for revenues. And as you might recall, this number has mostly been negative over the last five years when we have sold off parts of the company which didn't fit. From now on and going forward, this will be a strong positive number. We have also added alloys here, alloy surcharges, which relates to SMT 1%. So all in all, 32% growth for orders and 23% growth for revenues. If we look at the income statement, earnings came in at 4.4 billion compared to 3.5, so 25% up. despite the fact that we had a lot of M&A costs and transactional accounting effects and so on in the third quarter. Margin 17.6% and we'll go to the bridge in just a few seconds. I will spend some time also in the presentation explaining why the finance net looks a bit strange and also the reasons behind the very low reported tax rate. Cash flow, 3.9 billion. Returns finally coming back, approaching the 20% level here, driven of course by the improved margin, but mostly about a higher capital turnover rate. And then also earnings per share, a nice increase up to 3.03 krona, driven by the increased earnings, of course, but also by the lower tax rate this quarter. So let's move to the bridge. And we can start with the organic part, 13% organic growth. That's 2.5 billion or 2.6 billion really in increased revenues. 823 million in added EBITs. That gave us a leverage of 32%. And we are satisfied with that level. As Stefan mentioned, we are comparing here with a quarter where we had huge temporary savings running through the income statement in the company. But 32% is good. Of course, SMM had the best leverage. Sorry, SMR was good, too. SRP a little bit lower. And SMT, of course, suffering a little bit from the lack of big oil and gas orders, which we still had last year, and we have nothing of that right now. Adjusting for that, SMT was also pretty good in terms of leverage. so 32 percent leverage margin accretion of 170 basis points currency close to zero on the top line ebit plus 112 in a bridge effect but this is a bridge effect so the majority of these of this number is actually a negative revaluation last year which didn't happen this year so it's just a year-over-year effect the in-quarter effect is pretty low Metal prices had a positive effect both on the top line as well as on the EBIT line. And structure, 1.9 billion. That's the 10% in structural growth in the quarter. And you might wonder, do you only buy loss-making entities? No, we don't. This is because we have a lot of M&A costs, transaction accounting, and what have you in the numbers this quarter. This will look different as we move forward. But this had, of course, a negative impact on the margin. So that's the journey from 17.3 to 17.6%. Now let's look at the savings table and exactly the same table as we have looked at over the last two years. And the first line is the 2019 program. We just keep it in here for reference. The second line is the program we started last year, and we are right now at an annual run rate of 900 million, 230 million this quarter in a breach effect. The full impact or the effect of this program will be 1.3 billion as it's done. The deliveries are mainly in 2021, but also a chunk in 2022. And then after that, there will be like a fourth quarter tail effect, of course, just mathematically in the bridge as such. But good progress, 70% done. And the rest will be done in Q4 and Q1 within the next six months. So in total, plus 230 million in the quarter. And as you can see here, mainly SMM and SMT. Then we come to the short-term savings or the temporary savings, and the work-time reduction, which helped a lot last year, is now more or less gone. We had an in-quarter effect, just in-quarter of 10 million. So that means that the bridge effect is minus 460 because we had 470 in Q3 last year. The in-quarter effect on other temporary savings, however, is better. The in-quarter effect is 475 million. It was higher in Q3 a year ago. So the negative effect is minus 155. And 475 million in quarter, of course, is a good number. And it shows that we are prudent, we're careful. Travel is not free all over the world yet, and so on. And people are careful with the income statements and with the costs. So total temporary savings is minus 615. Now, this table or this, let's say, presentation of temporary savings will probably stop after the fourth quarter. Probably, I say, because we are still comparing with the spend level pre-COVID. And as we move forward here, it becomes more and more clear that we will not go back to the pre-COVID spend level in all our businesses and all our divisions. So it becomes gradually more and more irrelevant to do this comparison. But probably one more quarter and then it's over. So let's move to the next slide here, the finance net. The interest net on the top line is really the interesting part here, the most important part, and you can see it went down despite the fact that the debt went up. But this is because we have a very big mixed change in the debt now. We have nearly half of it in short-term commercial papers, and the interest rate is very, very, very low. So lower interest net despite that we have more debt. In the middle of this chart, you can see what is called here of the financial income and cost. You see in Q3 a year ago, a big plus of 589 million. That was a big divestment we did in China. a year ago, and it was accounted for as a financial asset. So that's why the capital gain out of that ended up in the finance net. So that's the reason why the Q3 finance net was plus 529, and this quarter it's only within brackets plus 66. So let's move to the tax rate. And of course, this looks, let's say, a bit strange or a little bit different this time as well. There were some items affecting comparability. So adjusting for that, it was 14%, but it's still very low, way below the range of 22 to 24%. But there were some few things happened in the quarter. We had some tax reimbursements from tax authorities in the world, tax disputes which were finally settled, some of them in our favor, which gave us a refund, basically. If you adjust for that, the underlying or normalized, I should say, normalized tax rate was 22.2%, well within the range of 22% to 24%. And some of you might ask what happens now going forward with the tax rate. So let me preempt that question and answer it right now. There has been discussions. There's been two major discussions on the regulatory area lately here. One of them is a possible increase in the corporate income tax rate in the United States. If that happens, we estimate the impact on the tax rate to be 30 basis points. And then we have the OECD initiative, which is gaining momentum globally with a minimum corporate tax rate of 15%. That will impact the tax rate with another 30 basis points max. So that's 60 basis points. So from that point of view, everything else equal, there is no need to change the guidance for the tax rate upwards. So if that's the only thing that happens, they're 22% to 24%. But you will hear more about that in January at the Q4 closing. So let's move on to the balance sheet then. Working capital, if you look at the left-hand side, working capital is going up, of course, as we build inventory. But if you see the red line on the left-hand side, the relative number is still under control, below 25%, which is a kind of an unofficial target that we have for ourselves. On the right-hand side, you can see the business areas building inventory, but the relative number is still under control. If we then move to a cash flow, if you look at the left-hand side here, you can see the blue line and the red line. The blue line is the earnings, the red line is the cash flow, and you can see now that the blue line is overtaking the orange line, which is just the way it should behave. Of course, when you grow, when you build inventories, you have to invest in working capital. So that means that earnings will be a bit ahead of cash flow now for the build-up period. Probably more on par in 2022 compared to 2021. If you look on the right-hand side, you can see this in numbers. You can see how earnings are increasing quite good, but you can also see that networking capital change has quite a negative impact on the cash flow. CapEx is basically stable. So that explains the difference between the 3.9 billion and the 4.8 billion a year ago in free operating cash flow. so let's look at the net debt now in q3 we have paid for quite a few acquisitions dsi mastercam and a few others and and the financial net debt has now turned into a net that is it has been a financial net cash position for quite some while now But now we're up in debt territory, 7.4 billion in financial net debt. There are no excess cash anymore. The total net debt is on 18 billion and the gearing is on 0.25. We have started to borrow money in the third quarter. on the short-term market, commercial papers. And, of course, it has went well. And moving forward, of course, we'll see what happens. Depends on the pace of acquisitions, but some of that short-term borrowing will be turned into bonds. And some of it will be rolled forward in new commercial papers. So it depends on what happens. So we'll see, but well under control. So let's look at the outcome here on some of the items we guide for. The underlying currency effect, meaning transaction and translation effects, was two, plus two. We guided zero, so spot on. The total effect was 108. That includes revaluation. And hedges, realized and unrealized and all that. But as I mentioned before, this was mainly a bridge effect coming from last year and not from this year. The metal prices in the quarter basically came in at guidance, 190 compared to 200. At the bottom part of the table, CAPEX moving steady ahead, 800 million in the quarter, interest net 100 million, and the tax rate, as I explained, 22.2%. Finally, the guidance for the fourth quarter and the full year 2021. CAPEX, normalized CAPEX level for Sandvik is around 4 billion or a little bit above 4 billion, and we have said that it will be a little bit below 4 billion in 2021. That guidance still holds. We were quite down during 2020 during the COVID pandemic and in 2021 we have started to pick up but we will not reach or go beyond 4 billion for this year. Currency underlying transaction translation probably 150 for the fourth quarter. Metal price effects in quarter plus 50. Interest net, we keep the guidance on 400 million. And tax rate, we stick to the guidance of 22 to 24%. And with that, I'll hand over to you, Stefan, for summary and conclusions.