Sandvik AB (publ)

Good afternoon, everyone, and a warm welcome to Sandvik's presentation of the first quarter results 2022. I am Louise Cheddar, Head of Investor Relations, and beside me, I have our CEO, Stefan Widing, and our CFO, Cecilia Felton. We will start with the presentation, where Stefan and Cecilia will take you through the highlights of the quarter and some deep dive into the financials. And then we will move on to the Q&A sessions. Here you have the possibility to ask your questions in written while we are prioritizing the questions on the conference call. Enough from me, and over to you, Stefan.

Thanks, Louise, and also I would like to welcome you again to the first quarter report for 2022. To summarize the quarter, it was a very strong performance, fifth consecutive quarter with double-digit growth in orders for us. At fixed exchange rates, the order growth was 30%. And we really see a solid broad-based demand across the business with strong contribution also from our acquisitions. The organic order intake was 13%. Revenues grew dramatically by 6% and total at fixed exchange rate was plus 27%. We also show resilience in earnings despite that we have some cost inflation headwinds. EBITDA margin of 20.2%. 27% in terms of money versus prior year. The adjusted profit improved by 21% in the period. We are now sitting at a gearing of 0.31 after a free cash flow generation in the quarter of 2.3 billion. More about that later. We also continue to execute on our strategy of making the shift. We see good pace in launching new innovations. and also pleasing to see good customer traction with our new digital and sustainable solutions. You have of course seen that the board of directors has now proposed to the AGM next week to approve a split and a distribution of SMT by the end of August of this year. And then we are continuing also to work on continuing to mitigating the cost inflation impacts that we have seen throughout the period. Talking about innovation, the first one I want to mention is a new Osprey additive manufacturing powder. This one in particular is world first where we can 3D print super duplex stainless steel, which is a key application for some very demanding type of industries. We have also showcased our new battery electric truck. This is also first, it's the industry's largest battery electric truck, a 65 ton payload capacity. This is a sibling to our best selling 63 ton diesel truck that we have in the market. As always with our electric equipment, it has a drive train that's fully designed for being battery electric from the start. This one in particular has four electric motors, one at each wheel, which is unique. And it also gives us 20 to 30% faster movement of the material compared to the class-leading diesel machine, translating to higher productivity of our customers. And of course, it has our patented self-swapping battery feature as well. So looking forward to seeing this in operation during this year. Going into the market development, starting with the geographical performance, we can see it's up in all markets. Particular highlight is North America, which is very strong. Some of the difference between Europe and North America is related to that Europe were ahead in the recovery from COVID last year, but it also because North America has been very strong throughout this quarter. If you look at an SMM perspective, we can see that Europe is strong at 6% up. North America is very strong at 17% up. Asia, however, is a bit weaker at minus 6%, primarily driven by weakness in China. Looking at the various segments, mining is, of course, strong across the board, as you have seen in the numbers. General engineering is also very solid. continued improvements there. Automotive is down year over year, but we should say that it continues to improve sequentially from Q4. So I would say quite okay considering the component shortages and the challenges there. Energy is strong, up in the double digits again. Here we also saw a noticeable step up in North America in March, given by investments, I guess, considering the geopolitical situation. Infrastructure is also strong up across the board, and aerospace is very strong up in the above 20% range as the industry continues to recover from COVID. If we look at the total picture here with order intake and revenues, you can clearly see that order intake is and continues to be very strong. it's really at levels way above pre-COVID times even. Of course, there is some structure here now that helps us, but that's part of the growth strategy as well. Revenues are trailing, meaning we have a very good book to build ratio currently and continues to build order backlog. But revenues is also trending upward in a very good way, reaching almost 25 billion in the quarter, excluding SMT. If we look at this from a growth perspective, you can see on the bar graphs here that we came out, we had the COVID period with negative organic growth. We had a recovery in prior year that continues with solid organic growth, but now also complemented with strong structural growth from acquisitions. And that is something we will continue to enjoy for some time going forward. Margin development also, I would say, solid considering the cost inflation pressures, 20.2%, up 27% versus same period last year. And if you look at the bars here, you can see that Q1 held up really well, even sequentially versus Q4, which is not always the case. And we are at levels that we haven't seen even pre-COVID. We have a weak leverage, though. That has to be said at 5%. In most businesses, this is primarily due to cost inflation pressures. In SMM, however, it's more related to costs coming back from still a very low cost base in prior year. We have dilution from acquisitions, but that is offset by currency. So in a way, the development in this sense is mainly related to the organic development. Going into the business areas and starting with mining and rock solutions, exceptional order intake of around 16 billion sec. I have to say, I will sound like crying wolf here, but this is not the level we can expect every quarter going forward. You cannot multiply that number by four to get our expected order intake for the year. We have a little bit of seasonal effect sometimes in Q1. We are seeing maybe some signs of some customers ordering a bit earlier than normal, but that shouldn't take away from the fact that underlying the market is exceptionally strong. Both aftermarket and the consumables business are an all-time high, and our major equipment divisions also record order levels. Particularly here, I would say our surface division, I want to highlight, they are now at order levels that we have not been even near before. So we see that also as an indication that we are taking market share in that part of the business. We also noted four major orders in the period of in total 1.3 billion SEC. On the margin side, we are at 20.1. Higher volumes, of course, contribute positively. As you know, we have some dilution from DSI, although that was a business that performed extremely well in this quarter. We are lagging a bit with price increases contra cost inflation and freight here. We have an order backlog, and when we have things that are coming now with higher steel costs and so on, it takes a while for us to catch up. But we are continuing to mitigate this as we go forward. Also noticeable here is that we did close the desk week acquisition earlier in April. So not in Q1, but it's a noticeable event here. beginning of this quarter. Rock Processing Solutions also very strong order intake. I was actually surprised that they managed to match prior year order level in Q1. As you might remember, that was then a bit boosted by a catch-up effect after COVID. Still, they came in at plus one organically, which I think is really strong. And also on the revenue side, despite the supply chain issues, they managed to to deliver a bit more also in the quarter. Margin-wise, we have said before that they have been struggling a bit more than the other BAs with cost inflation. That continues to be the case, but they also continue to raise prices and are hanging in there, I would say, even though they still have some catching up to do on this side. Also positive here, we closed the Kuatani acquisition end of last year, and that's a business down in South Africa that has performed very strongly since they joined the group. Sandvik Manufacturing Machining Solutions, very strong demand here as well. Order intake up 19% at fixed exchange rates, up 6% organically. Already mentioned, driven by general engineering, aerospace, and we should also mention, I think, energy here. So solid demand. All segments improved sequentially versus Q4. I think that's a strong signal. We have also seen a positive trajectory continuing into April. And we say that we mean compared to the average of Q1 growth. but it's a positive momentum also into April. Margin was 22%. Here it's well done by this organization to fully mitigate cost inflation by price. However, they were still in the low cost mode in Q1 of last year with work time reductions and so on. So they have had more costs coming back than the other BAs and that has negatively impacted their leverage in the month. They also enjoy some benefits from the savings program that we launched in 2020 of about 100 million as a bridge effect in in this quarter i also want to highlight here we see very good traction in the new cam businesses very good growth strong margins and we can see especially the mastercam brand performing exceptionally well clearly taking market share in terms of new license sales And then finally, materials technology, SMT, which is now reported as discontinued operations. Exceptionally strong quarter from an order perspective, in close to 6 billion second order intake. Strong underlying demand across the board, complemented by several large orders in the energy segment of in total 1.3 billion. Also here, the umbilicals business that you know is important for us here. showed very good order intake, well over 400 million sec, which is a run rate that would take us close to full capacity at that level. So very positive. The revenues for umbilicals, though, is still not at that level. So I think it's therefore very strong by SMT to deliver a margin then of 9.4%. Good volume, good mix, and also help from currency. Here we should say that the metal price impact in this case, because they are so extreme, have a diluting effect on our margin by 80 basis points when we exclude them from the calculation. So over 10% margin without that impact. I think they have done a good job mitigating a lot of the raw material and energy cost increases, but they are not fully effective. there yet, but they are also working on that. And then again, the board has now proposed to the AGM that we will decide to list SMT by the end of August of this year. I also want to comment on some of the media reporting that has been here in Sweden regarding Sandvik potentially having sold products to the military industry in Russia. When we got this information through media, we initiated our own investigation supported by external legal advisors. The findings are that we have not identified any violations of sanctions. These companies that are mentioned have both civil and military businesses. What we have to ensure in this case is that the products we sell are for civil use only. Here we have identified that prior to 2018, in 2018, we did a significant improvement of some of our compliance programs. So prior to 2018, we have identified that we are not in all cases having the sufficient documentation needed to prove that it is for civil land use only. So that is a weakness. Again, most of it was corrected then in 2018, but it is something we We will continue to work on and improving further as we go forward. With that, I hand over to you, Cecilia, for some more financials.

Thank you. So let's go straight into the numbers then. And if we start with the box on the top right-hand corner, you can see that excluding currency, orders were up by 30% and revenues by 27%. Earnings increased from 4 to 5 billion, an increase of 27%. The EBITDA margin came in at 20.2. And net financial items increased slightly sequentially to 299 million. Tax rate came in at 23.2% in line with guidance. And net working capital at 24% below our informal threshold target of 25%. Free operating cash flow, 2.3 billion returns at 17.9. And adjusted EPS increased year-on-year driven by the higher earnings. So if we continue with the bridge then and start with the organic column here, you can see that revenues increased by 1.6 billion, 9%. And that gave an adjusted EBITDA of 75 million, which corresponds to a leverage of 5% for the reasons that Stefan mentioned. And that's a dilution of 1.4 percentage points. Currency impacted revenues by 1.5 billion and adjusted EBITDA with 541 million. And that's an accretion of 1.3 percentage points. Structure contributed significantly to revenues, 3.3 billion and adjusted EBITDA of 466 million. And that's a dilution of 1.1 percentage points. And that moves us from the adjusted EBITDA margin last year of 21.4% to 20.2% this year. Net financial items then. And here, you know, the most interesting line to look at is the interest net at the top. It increased slightly sequentially, and that's due to higher interest on our currency hedges. At the bottom here, you also see a big item, FX and other asset classes. minus 113 million, and those are the temporary revaluation effects on our hedges. Eventually, these will net out to zero. The reported tax rate came in at 23.4%. If we exclude items affecting comparability, it was slightly lower, 23.2%. And as you can see in the table here, the tax rate was relatively low last year, and that was due to a correction in the parent company for an earlier period. If we exclude that correction, the normalized tax rate was 23.6%, largely in line with that 23.2% this year. And that's also right in the middle of our guidance for the year. If we continue with the balance sheet then and networking capital, you can see in the bars on the left-hand side that networking capital in absolute terms continue to increase in the first quarter sequentially. And that's largely driven by higher inventory volumes, both to ramp up for future deliveries, but also in response to the supply chain and the logistics challenges that we've had. In relative terms, though, you can see in the orange line that we came in at 24%. On the right-hand side, you have the relative networking capital development by business area. And here you can see that both SMR and SRP increased sequentially, whereas SMM was relatively flat. And that's in line with normal seasonality. If we continue with the cash flow then, and starting with the graph, you can see that the blue line, the EBITDA, continued to overtake free operating cash flow as we invest in inventories as we are growing the business. You can also see this translated into the table on the right-hand side, where there was a significant increase in earnings. However, here you can see the negative impact of the networking capital build-up. CapEx was a bit lower than last year. And that brings us to a free operating cash flow of 2.3 billion compared to 2.8 billion last year. Financial net debt came in at 16.5 billion. And here, interest-bearing liabilities increased somewhat sequentially. We had a euro bond that matured in the quarter. But then we also issued commercial papers and two three-year bonds. And the cash position also increased somewhat sequentially. Leases increased slightly, whereas the pension liability decreased significantly due to higher discount rates. And that brings us to a net debt position of 26.4 billion euro. and a gearing of 0.31. And this is for the group total, so including SMT. This is the outcome for the items that we've provided guidance for. And here you can see that both currency and metal price effects for SMT came out higher than what we anticipated. And then capex came in at 0.8, interest net 0.1, and the tax rate, as I mentioned, within guidance. Looking ahead then, we've kept capex, interest net, and the tax rate guidance unchanged. We expect the positive currency effects to continue, plus 600 million for the second quarter. of which 50 million is estimated to be attributable to SMT. We also expect the Metro price effects for SMT to be positive, plus 700. And with that, I will hand over to you, Stefan, for summary and conclusions.