Sandvik AB (publ)

A warm welcome to Sandvik's presentation of the third quarter results 2023. My name is Louise Cheddar, Head of Investor Relations. And beside me, I have our CEO Stefan Widing and CFO Cecilia Felton. Stefan and Cecilia will start with the presentation and take you through the highlights of this quarter. And then we will, as usual, open up for questions. And with this, I hand over the word to you, Stefan.

Thank you, Louise. And also, I would like to welcome you to this third quarter report in 2023. We start with the summary of the quarter, and when we summarize the quarter, we definitely see a mixed demand picture this quarter. We do see moderating volumes in our general engineering and infrastructure segments, but we still have a very positive momentum in aerospace, and the underlying demand in mining is continuing to hold up well. Total order intake declined by 1% and organically we declined by 7% in the quarter. Total revenue growth was 8% and organic growth was 1% in the quarter. We do believe in this context that we show strong resilience in the quarter. Adjusted EBITDA is up by 7%, corresponding to a margin of 20.1%, which is the same as we had in prior year. We also see good execution of the structural savings program that we announced in May of last year. And we are now at 40% of the annualized run rate savings that we expected, which is according to plan. Adjusted profit for the period amounted to 3.9 billion. We also continue to execute on our shift to growth strategy. Great to see momentum in some of our strategic focus areas. We, for example, continue to have double digit growth in our digital mining technologies division, driven by our automation and software solutions. We did another Bolton acquisition on the manufacturing software space with Postability, which is an acquisition that was done by Mastercam, one of our business units. We also continue to see good pace on innovation and launched several new exciting products in the quarter. One of them we always highlight and this time we choose this one. It's a heavy yaw crusher and it's a fully electric crusher. It can also be driven by, for example, green diesel or hydro vegetable oil. But it can also be run fully electric and we normally talk about electrification in underground mining. So we wanted to highlight this as an example that the same transition is actually happening also on the surface and also our mobile crushing fleet. Just like when it comes to electrification in underground, the electrification here has other benefits than just sustainability. For example, it leads to increased productivity for our customers. So an important step in the journey of electrifying also our mobile crushing fleet. Looking then at the market development, first starting a little bit with a regional view. Europe, minus 8%. And to highlight where we are on the cutting tool side, since I know that's of particular interest, Europe was down in the mid single digits from a cutting tool point of view. North America, minus 11. And on the cutting tool side here, we are down 2%. So North America holding up a bit better than Europe. Asia, minus 13. Here, the two major markets, China down 10% on the cutting tool side, and India is flattish. Then we have the mining markets, which, as you know, can vary quite a bit between the quarters. Taking a segment view, mining, we continue with all the arrows sideways, so we continue to be stable at a high level. In this particular quarter, we did report a negative organic order intake on the mining side due to very tough comparison in some parts of the business, but also due to timing of orders. But we continue to believe that the demand here is holding up as it did in the first half of the year. General engineering is negative, and this is maybe the weakest part of the business right now. It was down in the low double digits overall, and it's down in all the regions. This is maybe not surprising. General engineering is typically correlating very well with PMI, for example, which has been down now in many parts of the world for over a year. So in a way, we have been expecting this to happen sooner or later. On the automotive side, it is flattish development, but volume development is a bit down. It's a mixed picture. North America actually holding up very well with growth in the low double digits, so also volume growth. Europe is up in the low single digits, which means slightly down on a volume level. Asia or China is negative in the quarter, however. Energy, smaller segment, mixed picture, down overall, up in Europe, quite a lot down in North America because we had a really big order in energy in Q3 of last year, and Asia also down. In energy, since it's a fairly small segment, it can vary a bit between the quarters. So we shouldn't read too much into these figures, but the overall downwards trend is more correct. Infrastructure continues to be weak. It's been weak now for quite some time. The main difference here is that we now see Europe as being flattish. That is mainly because we are now meeting easier comps where Europe was down already a year ago. Whether this is a sign that we now have bottomed out here remains to be seen, but at least it's a small step in that direction. Aerospace, very positive, as I mentioned already, with good growth, both in Europe and North America, and a bit more flattish development in Asia. The other segments follow quite closely to general engineering at this point, so not so much to add to that comment. Maybe we should also mention that in general engineering, besides the underlying demand, we are also seeing some level of destocking, in particular in Europe. So that might also eventually become more of a positive when we reach more of the underlying demand in that segment. Looking then at order intake and revenues, we have a book to build below one in the quarter, in particular driven by the mining business already mentioned. We are of course, if we look at this graph, you see the black trend line well above the blue line for over two years. That's another way of saying that we of course have a significant backlog in the mining business. So that's also why we are not so concerned about the weaker order intake we had in this particular quarter. We have also said now for a few quarters that mining is stable at the high level. It means that we are now starting to meet the high levels from previous periods. And with the lumpy order intake that we can have in this business, it also means that some quarters will be negative while others will be positive. So maybe it looks a little bit more dramatic than we think it is. This is another way of looking at it, orders and revenues, where we see the order intake now, then a negative organic order intake in the quarter. Unfortunately, our nine quarter streak of double digit revenue growth has come to an end. So now we will continue to focus on the 11 quarter streak of organic growth that we've still had. Let's hope that that can continue. So still, I think overall a good performance when it comes to growing the business during this period. Coming to EBITDA and the development, we are happy with the result this quarter. EBITDA is up 7% versus prior period. Margin of 20.1%. Absolute number 6.3 billion. We see strong resilience, positive impact coming from pricing, the savings program, as we mentioned, also general sort of cost cautiousness initiatives across the business. We also see freight costs starting to come down, which is helping us. We did have 60 basis points dilution from FX and 10 basis point dilution from structure. So if we combine this with maintaining the margin at the same level as last year, you have an underlying very solid operational leverage, which Cecilia will talk more about in her session. Rolling 12 months EBITDA is at 20.2%. all numbers here point to being within our target range coming to the various business areas starting then with mining and rock solutions demand as already mentioned held up well driven in particular by the aftermarket we do report minus three on the aftermarket driven primarily by two things one is a very high comparison we had 20 growth in the prior period driven by some very good aftermarket deals that we had. On top of that, we have a negative impact this quarter from alloy effects or metal prices, in particular in ground support. If we normalise for this, the aftermarket business continues to trend at a growth rate, albeit at a lower growth rate than we have had in the past. Order intake declined by 5%, of which organically 7%. We had no major orders in the quarter, which is fairly rare that we don't have, but the timing is always a bit uncertain with us. On the margin side, we had very good development, 21.3%, up by one percentage point, especially good considering we had 100 basis points dilution from FX effects. Pricing contributed positively, reduced freight cost as well, and of course, a volume leverage as well coming from the increased sales. Some effect also coming through from the savings programs of 10 million SEC. Also here, we have done some important product launches. I want to highlight here the new rotary drill rig, DR613i, which is a new size class for us for an automated rotary drill rig, in particular suited for high altitude open pit mining, which is part of our strategy to grow market share in surface mining. Rock processing. Also here we see demand holding up well on the mining side, but offset by a very negative picture on the infrastructure side, really across all the major regions. Here we're also seeing negative dynamics coming from, for example, overstocked dealers in North America as one example, something we're working through. Total order intake growth was 29%, even though the organic intake declined by 8%. This is, of course, the dynamics coming from the Schenke acquisition. Schenke is performing really, really well and is, of course, 100% mining business. If we would add the organic, and they of course reported now fully in structure. If we add the organic growth of Schenck to the organic growth of the rest of the business, overall SRP has organic growth on the other side in the quarter. And that says a little bit on the dynamics between mining and infrastructure, as well as how well Schenck is performing in the quarter. We also booked a major order in Schenk of 150 million that we count as a synergy order, meaning it's an order that neither Schenk nor Sandvik would have gotten unless we had joined forces. So it's a good validation of the strategy there. The margin in SRP was on the weaker side. It was slightly better than Q2 at 14.1%, but lower than last year and lower than where we want them to be. Of course, lower volumes is impacting, but also as we have talked about now for a few quarters, both integration costs and IT investments are impacting the margin negatively. IT investments should now be over in that sense, and we are nearing the end of the integration costs headwind. So we expect this to continue to improve. So we really believe that Q2 was the trough and we should improve, continue to improve here from here. Also here we have restructuring program benefits of 13 million, but we had a negative impact coming from currency of 50 basis points. And we have already talked about the electric jaw crusher. Manufacturing and machining solutions finally talked a bit about that dynamic with general engineering being weak down in the low double digits overall, stable in automotive and strong in aerospace. Total order intake declined by 2%, organically we're down 8%. Behind that number though, cutting tools declined in the mid single digits. So that's more the underlying performance of the cutting tool piece. That also includes the 1% negative from working days. But if we take out the price effect, it means that the volumes in cutting tools are down around 10% in that neighborhood. So it's a significant volume decline. Software, though, increased high single digits. Unfortunately, not yet big enough as part of the business to have a material positive impact. Then we also continue to see a very negative impact from the powder business. Powder, just to explain that a bit more, is very early in the supply chain for our customers. So they usually see bullwhip effects when demand pictures change in both directions. We come from a situation last year and in Q1 of this year where customers played large orders to secure supply. Now this has reversed fully. So customers are in some cases both overstocked and have already placed orders for future demand. So we see a very low demand picture on the powder side currently. And that's usually what we see at this phase in the cycle. But that pulls down the overall SMM number. So that's why we want to highlight where the cutting tools and the software is more specifically. The daily order intake first part of October has been stable compared to the third quarter. I want to qualify that a bit more. The third quarter is seasonally a lower quarter because of vacation periods. So this comment is taking that into account, meaning the underlying market is stable versus Q3, which in reality means that it's slightly better than Q3 if you take the seasonality into account. Of course, also Q4 has seasonality. So if you want to try to model this in, you need to take also seasonality into account for Q4. But this is as much as we can say currently about where the demand is here and now. Given the volume drop we have in the business, we are really happy and proud about the way they have protected the margin, 20.9%. A bit down from prior year, but a leverage that is, I would say, better than we had said that they should have if they perform well. So very solid margin resilience on these lower volumes. Of course, the structural savings program that we announced is now starting to come through with a very good timing. So with 56 million in the quarter, that is part of helping this performance in a good way. So even if that was not driven by volume, the timing of the effects are coming in with a very good timing. Also 30 bps dilution from FX here. I mentioned the postability acquisition already. Also want to highlight some new products here. Coromant launched the Corocut 2 product. These are new inserts for parting and grooving applications. It's an area where some of our main competitors, or at least specifically one of them, have had a stronghold. And releasing new good products in this area is a way for us to not only defend, but also hopefully gain some market share in that particular application. I will come back with conclusions and some Q&A, but first I'll let Cecilia take you through the details.

Yeah, thank you, Stefan. All right, so let's take a look at the numbers in a bit more detail. And as usual, let's start with the table at the top right-hand corner. Here you can see that organically, orders were down 7%, revenues up 1%. Structure and currency contributed with 3% on both orders and revenue. And that brings total order intake growth to minus 1% and revenues were up 8%. Adjusted EBITDA, as Stefan mentioned, increased 7% to 6.3 billion. We're very pleased to see the good margin resilience demonstrated in the quarter and the EBITDA margin coming in at 20.1%, so within our target corridor. Net financial items increased to 760 million, and I will go through the year-over-year developments in a bit more detail in a few minutes. Tax rates excluding items affecting comparability came in at 21.9%. Normalized tax rates was 23.9%, so in line with guidance. Networking capital in relative terms 30.5% and cash flow was strong in the quarter at 5.8 billion corresponding to a cash conversion of 95%. Returns 16.5% and adjusted EPS increased slightly to 3.14 SEC. If we continue with the bridge then and starting with the organic column, you can see that revenues grew by 341 million and EBITDA by 242 million. And that gives a leverage of 71% for the group. And here we're very pleased to see that the SMM leverage was minus 29%, so demonstrating very good margin resilience. And we were also pleased to see that the SMR leverage was also very good at 45%. That gives an accretion of 0.6 percentage points, so offsetting the dilution from currency of minus 0.6. And structure, as Stefan mentioned, was slightly dilutive, almost neutral to the margin. And that brings us to an EBITDA margin of 20.1%. We also see good progress in realizing the savings from the restructuring program announced last year. Here, as you know, the total targeted savings are 785 million. And in this quarter, we realized 79 million, and that corresponds to an annualized run rate of 40%. And here we've previously communicated that we will reach around 50% by the end of this year and full run rate savings towards the end of next year. So we are tracking according to plan. If we continue down in the P&L then and looking at the net financials and starting with the interest net, which is also where we provide guidance. Here you can see that on a year-over-year basis, it increased to 374 million. That's driven by the higher interest rates. Sequentially, however, so Q2 this year into Q3, the interest net came down, slightly driven by lower borrowed volumes. Then at the bottom here, you have FX and other asset classes, and that is the temporary revaluation of our hedges, both for electricity hedges and also currency hedges on orders that we have not yet invoiced. And eventually these will net out to zero. In this quarter the impact was minus 300 million and last year we had a positive impact of 112 million. Then looking at the tax rates, reported tax rates was 22.1%. If we exclude items affecting comparability, so basically the M&A costs, it was 21.9%, so still relatively low. And this is driven by a tax refund that we received in India relating to a prior year. excluding that the normalized tax rate was 23.9%. So in line with guidance for the year. If we continue then with net working capital, you can see that in relative terms net working capital increased to 30.5%. In absolute numbers, you can see in the graph on the left, net working capital came down slightly. And we had an inventory volume reduction of 400 million in the quarter. And we now have four consecutive months of inventory levels slowly and gradually starting to come down. Free operating cash flow, as you can see in the graph here, it was a strong quarter, 5.8 billion, 95% cash conversion. And on a 12-month rolling basis, we are continuing to trending upwards. We're now at 80%. And then if we look at the year over year development, you can see that earnings were up. We had a much higher networking capital impact last year, whereas CapEx levels were slightly higher this year. And net debt then and financial net debt came down sequentially to 38.4 billion driven by the strong cash flow. And as a result, financial net debt over 12 months rolling EBITDA also came down to 1.3%. Capitalized leases increased slightly sequentially in the quarter, whereas the pension liability was reduced somewhat driven by the discount rates. And as a consequence, net debt landed at 46.2 billion. Looking at outcome versus guidance, the currency effect came in at plus 31 million capex, 1.3 interest net minus 0.4 and normalized tax rate also in line with guidance. Looking ahead then, both at the fourth quarter and the full year, here we've revised our CAPEX guidance and there are two reasons for this. Firstly, SRP has acquired a foundry in India. And to be compliant with IFRS accounting rules, that will be treated as capex as opposed to an acquisition. And then on top of that, we have some additional costs related to the ERP rollouts. Currency, we expect at minus 150 million for the fourth quarter. The interest net, we revised downwards slightly. We're now guiding 1.6 for the full year. And the tax rate, we left unchanged. And with that, I will hand back over to you, Stefan.