Sandvik AB (publ)

Good afternoon everyone and welcome to Sandvik's presentation of the first quarter results 2023. I am Louise Tjeder, Head of Investor Relations here at Sandvik and beside me I have our CEO Stefan Widing and CFO Cecilia Felton. We will do as usual, we start with the presentation where Stefan and Cecilia will take you through the highlights of the quarter and after that we open up for the Q&A. With this I hand over the word to you Stefan.

Thank you, Louise. And also from my side, welcome to the first quarter report in 2023. If we summarize the quarter, it was a quarter where we saw continued robust performance from the group. We have good momentum. We saw solid execution and strong revenue growth and order levels at a record level. On the order side, we had order growth of 6% at fixed exchange rates, and of that, 2% was organic. Revenues up 18% at fixed exchange rates and 13% organic. If we exclude the impact from Russia, organic orders and revenues grew 5% and 16%, respectively. And happy to say it's the last quarter we should have to make that comment since we will have rushed out of our compares going forward. We also see a healthy underlying margin and happy to say that we can now say that all our business areas are fully offsetting cost inflation by their own pricing, including them at group level. The adjusted EBITDA increased by 21%. This corresponds to a margin of 19.8% versus 20.2% last year. This, of course, we are not fully happy with. We want to be within our target range. It has a very specific explanation. We'll come back to that later on the call. The adjusted profit improved by 13% to 3.9 billion SEK. If we focus on our shift to growth priorities, we had a number of highlights in the quarter. First of all, of course, the very strong both organic and acquisitive growth in the quarter. Very pleased to see. We also see very positive momentum in some of our focus areas, such as our automation solutions and battery electric vehicle solutions on the mining side. We also completed two acquisitions. I will come back to those as well later in this presentation. But I always start with a slide on our latest innovations. This time I've selected an innovation from Sandvik Coromant called Y-axis turning. Turning is typically a relatively static process, so to say, but with this method we can use multi-axis machines and take advantage of their capabilities to also do turning. This gives the possibility to do several machining steps with one tool. It reduces tool change times, and there are also various aspects to the cutting process and the stability of the process that gives additional productivity improvements and also reduced wear time. Explaining exactly what it is is very technical, so there I refer you to our website. Another interesting aspect with this innovation is that this is a fairly novel machining method, which means that operators typically don't have the experience to program it. It can be complex, so you need software support. So here Coromant has worked with our GibbsCAM Sandvik CAM solution to ensure support for this machining method in the latest version of GibbsCAM. So this gives, it facilitates faster market uptake from Sandvik Coromant and it gives GIBSCAM a unique feature and a differentiator in the market or at least an early mover advantage. So it's a good synergy between our cutting tool divisions and our software offerings. Going into then the market development, and if I start with a geographical perspective, Europe up 21%. We can say more or less across the board that Europe has surprised on the upside in the quarter. The only segment where we see more negative development is in infrastructure, and that we have said for a couple of quarters already. North America, more stable development. Basically, aerospace being the segment we would highlight as up. If you look at our reported order figures for North America in SMM, you might see it as slightly negative. We want to emphasize that we don't see that as an indication of the underlying market. We have in general engineering and aerospace some timing issues or timing impacts of orders being placed either in Q4 or that will come in Q2 instead, related to large distributors and also some key accounts on the aerospace side. So the underlying market development in North America for SMM we would consider to be stable. Asia, a bit weaker, minus 6%. Here, we definitely see an impact from a weaker China in January and February, while on the machining side, we did see a good uptick in China in March. March was positive in China, and that has also continued into the second quarter, into April. Other parts of Asia, such as India, has been positive in the quarter. Then we have the mining markets following and generally positive. Australia, you see down. Not too much to read into that. It's related to timing and some big orders that they took in the same period of last year. If I go through this from a segment point of view as well a little bit, mining, we see continued very robust and good demand at a high level. The fact that some markets are up and some down, I wouldn't read too much into it. It's more related to when we get specific orders in specific regions. So underlying very positive sentiment, I would say. General engineering, from an underlying volume point of view, more flattish, but with a strong Europe. Europe is up in the double digits and also up in volume. More stable North America and then more of a decline in Asia, driven then by the slow start in China that I mentioned. We see very similar development in automotive, as we saw in general engineering, but maybe slightly more negative in China, but otherwise similar in the other regions. Energy is positive across the board, maybe slightly more flattish in North America. Infrastructure, we could say, has maybe weakened a little bit more. We used to more comment on a weak Europe. Now we also see that in Asia, while North America is still on a more stable level. But overall, we indicate that as a softening market in infrastructure. Aerospace, strong, double-digit growth, strong across the board, and still not back to pre-COVID levels, we should say. I think they are about 20% below where they were in 2019. So there is more to get in aerospace as well in the future. you look at that order intake and revenues overall we have an order intake of 34.4 billion revenues of 31 billion so a positive book to bill which is really good to see and in particular good to see this order intake in the light of the high compare we had in the same period of last year so that we can continue to grow the order intake in relation to that compare we think is very positive and it sets us up in a good way also for the rest of the year. Looking at this from a slightly different take, looking at the growth organically and through structure, we can see, if we look at the revenue graph, that it's actually our eighth consecutive quarter of double digit revenue growth at fixed exchange rate, which we think is a good achievement and a testament to the execution of our shift to growth strategy. Coming then to the EBITDA development, we see an absolute EBITDA of 6.1 billion, up from 5 billion last year. It's an uptick of 21%. The margin at 19.8 versus 20.2, as I said, it's not where we want to be. Let's be clear on that. We expect ourselves to deliver a better margin than that. But we did see an impact from revaluation of unhedged balance sheet items that had 100 basis points negative impact in the quarter. This is related to currencies, and Cecilia will explain that a little bit more going forward. On the leverage side, as I said, price is now fully mitigating cost inflation in all BAs. So that's also very positive as we go forward. Going then deeper into each business area, starting with mining and rock solutions. What can we say on the top line? Fantastic achievements, all time high order intake level. Particularly strong growth in load and haul, in parts and services, and in our digital mining business, which is really good to see. Total order growth at fixed exchanges was 2%, organic 1%. If we exclude Russia, it's up 6%, which we think is a solid number given the compare we were working against. A margin of 20%, it's decent. It could have been better if we didn't have the 150 basis point dilution done from these balance sheet items. We should say that it's in quarter, it's 120 basis point impact, so slightly less than the bridge effect. And for the first quarter, we can also say that SMR is fully offsetting cost inflation with pricing also, so they have now caught up with that. On our shift to growth priorities, you have seen the press releases, two new major orders on our BEV equipment, one to Rana Gruber in Norway and one to Torex in Mexico, which we are, of course, really happy to see. We closed the Polymation acquisition and we also announced the acquisition of DESWIC Brazil. This was a joint venture that came with DESWIC where we had a minority stake. We have now acquired that full entity, which means that we now have a platform for expanding our mining software business into the Latin American market. So not a big acquisition, but a highly strategic one for the future. If you look at the EBITDA development in the graph as well, you can see the very seasonal nature of the EBITDA development in SMR, where we tend to start low in Q1 and it grows throughout the year. It's been like that for the past four quarters. Going into SRP, here we see strong contribution from acquisitions, 25% on the growth side, on the order side. We also see positive aftermarket development. If you look at the order intake at fixed exchange rates, it's up 15%, but it's an organic decline of 9%. Excluding Russia, it's an organic decline of 6%, and this is driven by a decline on the equipment side by negative 16%, while the aftermarket is up 5%. We see strong revenue growth, up 43%, both in the organic growth, but also the addition of the Schenck business. If you look at these numbers, I hope you appreciate the enormous task it is for SRP to do this integration of Schenck. It basically grows their business by 25%. On the margin side, 14.5 versus 59. Clearly below normal expectations for them, but then impacted quite significantly by integration and carve-out costs for Schenck of 120 basis points. This was not a surprise. This is something that is aligned with our plans. In hindsight, we should probably have been better at explaining this when we closed the acquisition. We expect for the full year a cost of 110 million for the integration of Schenck, about 30 million then in Q1, 30 million in Q2, and then around 25 per quarter in the second half of the year. Quite high cost, but it relates to the fact that shank mining is a carve-out, so we basically need to rebuild a number of systems that we currently get as a service from the selling entity. Also, SRP had some impact from these hedge revaluations, but not as big as SMR. Another highlight for SRP was that they, for the first time in a long time, they launched a new range of hammers in the attachment tools business at Conexpo in the US this quarter. A successful launch with good innovative products that are also more efficient to produce for us in the smaller hammer range. So that was very positive. Then going into manufacturing and machining solutions, I have to say a really good quarter from them in Q1. We see positive development in all customer segments, really, and especially driven by very solid demand in Europe. Overall, we see double-digit growth in both aerospace and energy. At fixed exchange rate, the growth was 9%. Organically, it was 5%. And then if we exclude Russia from the organic order intake, we grew by 7%. In the first two weeks of April, we see daily order intake being slightly up compared to the average of the first quarter. This is in particular driven by China. As I've said, we saw a slow start in Q1 from China. We saw an uptick in March. That uptick has continued into April, so we expect China to be a positive contributor then into Q2 and going forward. Margin 22.4%, up from 22. We see solid leverage for our cutting tool divisions due to both pricing and good cost control. And on the acquisitive front, those were neutral to the margin. We also did an acquisition here, Seco Tools, that acquired Premier Machine Tools on Ireland. A small acquisition, but strategically very relevant. They give us a capability to deliver more full solutions on the machining side for medical applications, which is a strategic growth area for us and something we expect to be able to scale globally. With that, I will hand over to Cecilia and then we'll come back with the Q&A.

Thank you, Stefan. So let's take a closer look at the numbers then. And as you can see here in the main table, also as Stefan mentioned, order intake was higher than revenues in absolute terms, meaning a positive book-to-bill ratio. If we then look at the box on the top right-hand corner, you can see that order intake grew organically by 2% and revenues by 13%. Our acquisitions contributed with 4% growth and currency by 7% and 6%. So in total, orders grew by 13% and revenues by 24%. Earnings were up 21%, reaching 6.1 billion. Margin 19.8, and we will look at the bridge in a couple of minutes. Net financial items increased year over year, driven by the higher interest net. Tax rate 24.5%, in line with guidance. Networking capital 27.8%, also an increase compared to last year. driven by the higher inventory volumes. And free operating cash flow at 3.7 billion, corresponding to a cash conversion of 63% in the quarter. Returns 16.6% and adjusted EPS increased to 3.07 SEC. If we look at the bridge then and start with the organic column, here you can see that revenues grew by 3.2 billion, 13%, and that gave an EBITDA of 234 million, corresponding then to a leverage of 7% and a dilution of 1.5 percentage points. And here, as Stefan mentioned, we had a negative currency effect coming from revaluations of hedges and accounts receivables and accounts payables. This was unexpected, and we had too many open position or a mismatch in terms of timing of our hedges due to the complexity that we are seeing on the logistics side. And that in combination with movements in the currency rates then gave this negative effect. And in terms of dilution, it was minus 100 bps and the in quarter effect was minus 90. Currency still accretive, 1.1 percentage point. And our acquisitions contributed with 1 billion of revenue, and they were almost margin neutral this quarter, slightly dilutive. And all in all, that brings us from a margin last year of 20.2% to 19.8% this year. If we continue down the P&L, then looking at the finance net and starting with the first row, the interest net, you can see the increase year over year here, and that's due to both higher borrowed volumes, but also higher interest rates. Then at the bottom you have FX and other asset classes minus 74 million and that's due to temporary revaluations over electricity hedges as sequentially energy prices have come down. The reported tax rate came in at 24.6%. If we exclude items affecting comparability related to M&A costs, we're at 24.5%. And then we had a transfer price adjustment related to a prior year. And if we exclude that, the normalized tax rate was 23.6%, so in line with guidance for the year. Looking then at networking capital and starting with a graph on the left hand side, you can see that both absolute and relative networking capital increased year over year and also sequentially, mainly driven by the higher inventory levels. On the right hand side, you can see the development by business area and compared to a year ago, all business areas are at higher levels. Sequentially, SMR and SRP increased, whereas SMM came down slightly. If we continue then with cash flow and starting with the table on the right hand side, you can see that earnings were up compared to last year. The net working capital build up of around 2 billion was slightly lower than what we had last year and investment levels were higher. And that gives us then a free operating cash flow of 3.7 billion. And as I mentioned, that corresponds to a cash conversion ratio of 63%. In the graph on the left-hand side, if you look at the orange trend line, you can see that our 12-month rolling cash conversion is at 57%. Financial net debt decreased slightly sequentially to 36.2 billion. And our balance sheet target financial net debt over 12 months rolling EBITDA came in at 1.3. So below our target of 1.5. Capitalized leases were largely unchanged in the quarter. The pension liability decreased a little bit, driven by higher discount rates. And that gives us a net debt of 43.4 billion. Then looking at outcome versus guidance, the currency effect came out at 660 million. Here we guided 600. And capex levels were at 1.2 billion, interest net 0.4 and the normalized tax rate also in line with guidance. And if we look ahead then the coming quarter and for the full year, we've left the CapEx guidance unchanged at 4.5 billion. We still expect positive currency effects of 200 million for the second quarter. And we've also left the guidance for the interest net and tax rate unchanged at 1.7 billion and 23 to 25%. And with that, I will hand over back to you, Stefan, for summary and conclusions.