Sandvik AB (publ)

Good afternoon and welcome to Sandvik's presentation of the second quarter results 2022. I am Louise Cheddar, Head of Investor Relations and beside me I have as usual our CEO Stefan Widing and CFO Cecilia Felton. We will spend this hour together and start with the presentation when Stefan and Cecilia will take you through the quarterly highlights and some details on the financials. And then we will open up for the Q&A session. And as you know, you can ask your questions in written or on the conference call. And we are prioritizing the latter. Without further ado, I will hand over the word to you, Stefan.

Thank you, Louise. And also I would like to welcome you to our second quarter report now in 2022. If we summarize the quarter, it's been a quarter where we have continued to deliver on our shift to growth strategy. We have 25% revenue growth at fixed exchange rates in the quarter. Overall, we have seen a solid demand across the businesses, and also we have seen strong contributions from the acquisitions in this quarter. On order intake, we have an increase of 22% at fixed exchange rates, and of that, 4% is organic. And as I mentioned, for revenues, 25%, of which 6% is organic. If we exclude our Russia market, we have had an organic increase for both of 10%. And that's just to show you how the underlying development have been outside of Russia. And this would be our sixth consecutive quarter of double-digit organic growth, which we are really happy with. We haven't increased earnings, but we do have short-term pressure from cost inflation. Adjusted EBITDA increased by 23%, and that's a margin of 19%. As you know, we have some items affecting comparability of 1.1 billion, most of that then related to our wind down in Russia, which we communicated a couple of weeks ago. The adjusted profit for the period improved by 23% to 3.7 billion. of course now we continue to focus on having an agile execution price management is on top of the agenda to continue to catch up and mitigate the cost inflation we'll talk a little bit more about that as well during this presentation you know we have also launched a new savings programs to reduce our footprint that we launched in may We have also announced five acquisitions in the quarter to strengthen our core and also increase our aftermarket business, which we'll come back to as well later in this presentation. I usually highlight a few innovations from the quarter. This first one I think is quite interesting. It's our first real synergy case between the DW Fritz ZeroTouch equipment and our Metrologic software. This combined solution allows us to, in a very fast way, inspect components when they come out of the CNC machine. It's more than 10 times faster than traditional solutions. It allows us to do 3D measurement of the components and addresses an emerging need to measure every part. The more tighter tolerances you have, the more the need is to measure each and every part and not just samples. This is, for example, a need from a specific customer here, a renowned global watchmaker. It's also a need that is emerging, for example, when you manufacture components for an electric drivetrain, because the precisions and tolerances are so tight. So a first, I would say, really important order for this solution during the quarter. We have also showcased our first electric surface drill rig at an exhibition here in the Nordics. We have based this on our Commando product line, which is the smaller type of rigs typically for use in urban areas or even in your own backyard if you have the need to do some drilling. We believe this is the first customer segment on the surface where this will become relevant. And it's both battery-powered as well as can be used via cable, electricity through a cable. If you look at the market development, I want to call your attention to the blue column here with the year-over-year Q2 order intake. Here we have excluded Russia, just so you can get the sense for the development excluding Russia. I will comment also later on what it would look like with Russia. But excluding Russia, then Europe is up 2%. North America is strong, up 21%. Asia is down 4%. This is driven by China. In S&M, China is down 15% in the quarter, primarily driven by weak automotive market. And then the other markets, which is primarily mining, has been strong in the quarter. Having a segment view, mining continues to be strong basically across the board. General engineering also solid performance in the quarter, high single digit growth. Automotive, a bit mixed picture, slightly to the weaker side, but very mixed picture with Europe being stable. North America actually strong, low double-digit growth, while Asia then China weak. Automotive China down 30% in the quarter. Energy continues to be strong for maybe obvious reasons across the board. Infrastructure is flattish, with maybe slightly weaker development flat, but weakening in Europe, otherwise basically stable across the board. Aerospace, strong growth, over 20% in the quarter as aerospace continues to recover. If you look at the European line, even if we add back Russia, you basically get a flattish development across the board and slightly to the weaker side in some segments. Russia impacted primarily energy and aerospace for us in SMM and, of course, mining. Order intake, 28.7 billion, ahead of revenues again. Revenues are 27 billion, so we continue to build order backlog, but the gap has narrowed compared to the big gap we saw in quarter one. So we are ramping up on revenues and orders continues to increase. From a growth perspective, we see continued strong growth, both orders and revenues excluding FX above 20% growth. And you can, though, see that because of tougher comparables, the organic part is declining, while we continue to have very strong inorganic growth component into our numbers, which we will, of course, continue to have based on the already announced acquisitions. If you look at the margin, EBITDA first in absolute numbers up 23%, but the margin of 19%. Important here to just say we are not happy with that. It's outside of our target range of 20 to 22%. And our goal is, of course, to get back within that range as quickly as possible. it is fairly easy to explain though we have a weak leverage mainly because of pricing not just offsetting cost inflation i will say we are now basically offsetting the the cost inflation that we saw prior to to the Russian war. But the new surge of inflation that we have seen in steel prices, energy and so on is something that we now have to again work on offsetting, which we are doing through actions as we speak. We have also continued to see a higher share of air freight in SMR in particular to be able to service our customers. And we, of course, have some impact from the wind down in Russia. At the beginning of the quarter in particular, we still have a full organization in place and no revenues, and that we are gradually taking care of. We had a diluting impact from structure of 110 basis points and accretion from currency of 200 basis points. On the rolling 12-month basis, the EBITDA is still at 20%. We'll come back with some more bridges here and some explanation of what we expect a little bit ahead of us as well. Going into the business areas, mining and rock solutions, solid demand again, particularly strong demand in the aftermarket. Total order intake growth of 46%, at fixed exchange rates 35% and organic 9%. If we exclude Russia, the organic order intake was 17% and 15% on revenues. So, strong continued demand on the mining side. We also continue to see strong interest in our BEV and automation solutions. Two nice BEV orders above 100 million in the quarter and the second largest automation order ever, also received in the quarter at 86 million SEK. The adjusted EBITDA came in at 19.2%. Here we have, of course, structure from the DSI acquisition impacting by about 160 basis points. We also have cost inflation versus pricing. And here we have also the higher share of air freight, which is actually quite significant impact for us in the quarter. uh we did a small acquisition in the quarter of accurate a finnish technology company focused on battery management technology and solutions which fits nicely into our bev strategy rock processing also continued solid demand in the quarter driven by the aftermarket Here, I mean, organic and revenue organically was zero. We should remember that's against very high compares and also excluding Russia. So if you add Russia or exclude Russia from the calculation organically, we're up 7% in the rest of the world against that very high compares. So we're quite pleased with that number. Adjusted EBITDA of 16%, also here impacted by cost inflation, not yet fully mitigated by pricing. Rock processing is the ones that have been the highest impacted by raw materials because of their high portion of castings in the raw material input. We also have here some negative mix impact when we have lost the business in Russia and also because of the lockdowns had to replace some business in China in the quarter with lower margin business. So some negative mix because of that as well. Highlight in the quarter was, of course, the announced acquisition of Schenke Process mining part, which we expect to close later in the year. Earlier today, we also announced that we have a new president for SRP, Richard Harris, which is currently the president of our Walter division. He will take over 1st of October. Anders, as you know, will leave and become the CEO of Kone Cranes. He will stay until mid-October. So we see a good overlap there for Richard and Anders to do a good handover. Manufacturing and machining solutions, also solid underlying demand. Again, if we exclude Russia and look at our core cutting tool brands, the growth has been 5% in the quarter organically, driven then by aerospace and general engineering and also to some extent energy. Total order intake growth at fixed exchange rates were 12%, so solid growth both organically and with acquisitions. The reported organic growth, as you saw, was 1%. We have also seen a stable demand in the first two weeks of July, and that's in relation to June sequentially, and we could also say that June was a fairly representative month for the quarter on average. The margin was 21.5%. Here in quarter one, SMM was on par, cost and inflation, but it's a constant race, I would say, in a dynamic situation. So in Q2, they fell a bit behind again. They were negatively impacted, and they are now, of course, working with mitigating that later in this year. We did three acquisitions in SMM, a smaller round tools company in the US called Peterson Tool Company, and then two highly strategic ones, Precise and Precite, which are both in the area of lightweight materials for automotive. And as you know from our CMD, mastering the automotive shift is one of SMS's six strategic objectives. So really nice to have these companies on board. in terms of strategy execution. And then for the last time, I will comment on materials technology. Extremely strong quarter in Q2 from SMT, really solid demand across all segments, record high order intake levels, especially driven by energy and industrial heating. We can say that in the energy segment, all types of energy is in high demand. And for our important umbilicals, we had order intake of close to 600 million in the quarter, which means that they are getting back to very good levels on the order intake side there. Organic growth, 26% year on year, and that is with very little major orders. You can see we had a small major order of 0.2 billion. So excluding major orders, it was still up 21% organically. Also strong margin, excluding metal prices, the underlying margin was 11.9%, which is solid for SMT, especially since umbilicals invoicing is still trailing the now very good order intake. If we include metal prices, we get almost a bit of a silly number, 26%, because of course we have very high impacts from metal price impacts in this quarter. SMT also have done a really good job on pricing and they are fully on par or have caught up with cost inflation mitigated by pricing. And as you know, the AGM decided to go for a listing of SMT as a LEMA, currently planned for end of August. Now let's go even more into the numbers, so I hand over to you Cecilia.

Yes, thank you, Stefan. All right, so let's start with the box at the top right corner here. You can see organic growth for orders came in at 4%, 6% for revenues. If we exclude the impacts of Russia, both orders and revenues grew by 10%. We also had a positive impact from structure, a quite significant one, as you can see, 18 and 19%. And also currency came in positively, which gave a total order intake growth of 32% and total revenue growth of 34%. Earnings increased from 4.2 billion last year to 5.1 billion this year, an increase of 23%. Margin, as Stefan mentioned, 19%. Net financial items came in positively, 18 million. And that was the result of temporary revaluation effects on our hedges. Tax rate in line with guidance, 23.5%. And networking capital came in higher both compared to last year and also sequentially at 26.2%. That was mainly driven by an inventory build-up that also had a negative impact on free operating cash flow that came in at minus 49 million. Returns 13.4% and adjusted EPS increased to 2.95 SEC. If we continue with the bridge then and starting with the organic column, here you can see that revenues grew by 1.1 billion, an increase of 6%. However, adjusted EBITDA declined by 349 million for the reasons that Stefan previously mentioned. And that gives a dilutive impact of 2.7 percentage points. Currency had an accretive impact of 2% and our acquisitions contributed with 3.8 billion of revenue and 519 millions of EBITDA. And that gives a dilution of 1.1 percentage points. And all in all, that brings us from an EBITDA margin of 20.8% last year to 19% this year. If we continue with the net financials and starting with the interest net at the top here, you can see that it increased from 68 million last year to 154 million this year. And that's mainly due to higher borrowed volumes. Going forward, however, we also expect a bigger impact from the higher interest rates. And I will come back to that in the guidance. Then at the bottom, you can see the impact of FX and other asset classes, plus 236 million. And as I mentioned, this is mainly due to temporary revaluation effects from our hedges, positive effects from both electricity and currency hedges. Eventually though, as you know, this will net out to zero. Reported tax rate came in relatively high at 29.2%. However, if we exclude the one of costs related to Russia primarily, the tax rate was 23.5%. So in line with guidance for the year. Networking capital increased sequentially, both in absolute and also in relative terms. And there are several reasons for this. Firstly, as we mentioned the last few quarters, we are ramping up for growth. On top of that, in the second quarter, we also have a normal seasonality effect as we build up inventory ahead of the summer shutdowns. And then, as you know, there's also an impact from the logistics and the supply chain challenges that we are currently facing. And you can also see in the graph here at the bottom of the page that networking capital increased across all of our business areas. The inventory build-up or the networking capital build-up also had a negative impact on free operating cash flow. In the graph on the left-hand side, you can see cash conversion rates trending downwards to around 50%. And if you look at the table on the left hand side, you can see that EBITDA adjusted for non-cash item was large in line with last year. CapEx came in a bit higher, but then you can also see the big impact from the networking capital buildup. Financial net debt over 12 months rolling EBITDA increased from 0.6 in the first quarter to 1.2 this quarter. And that's primarily due to the dividend payments and also the closing of the desk week acquisition. Financial net debt came in at 32.8 billion. Capitalized leases increased slightly, sequentially. But then we also had quite a drastic decline in the pension liability of 3.5 billion. So all in all, that brings us to a net debt of 39.4 billion. Looking then at outcome compared to guidance, currency came in at 918 million, a bit higher than what we guided. The metal price effect for SMT was a bit lower, 649 million compared to the guided 700. CapEx came in at 0.1 and interest net and the normalized tax rate in line with previous guidance. Looking ahead then, we've updated the capex guidance to around 4 billion for the year. This is now for continuing operations only. And Aleima will provide an update on their guidance for both capex, metro price effects and currency effects at their capital markets day in August. We continue to expect positive currency effects just above a billion for the third quarter. And as I mentioned, now going forward, we also expect a bigger impact from the high interest rates on the interest net. So here we've updated the guidance to below 700 million from the previous 400 million. Guidance for tax rate we've left unchanged. And with that, I will hand back over to Stefan for summary and conclusions.