Sandvik AB (publ)

Hello, everyone, and a warm welcome to Sandvik's presentation of the second quarter results 2024. My name is Louise Cheddar, Head of Investor Relations here at Sandvik. And beside me, I have our CEO, Stefan Widing, and CFO, Cecilia Felton. We will start with the presentation. Stefan and Cecilia will take you through the highlights of the quarter. And after that, we will move on to the Q&A session. And with this short introduction, I will hand over the word to you, Stefan.

Thank you, Louise. And also from my side, welcome to the second quarter report for Sandvik in 2024. If we summarize the quarter, we saw a stable development in the quarter, but the demand picture was mixed. We saw robust demand in mining and aerospace, while general engineering and automotive declined. And also infrastructure remained weak, but with some regional variations that I will come back to. Order intake growth was 2% in total, of that we had 3% positive organic growth. Revenues declined by 3% in total, and of that organic was a negative 2%. The margin, we believe, is resilient on the current challenging volumes that we have in some parts of our business. Adjusted EBITDA decreased by 7% versus last year, corresponding to a margin of 19.6%. This puts our rolling 12 months at 19.4. Savings from our restructuring programs is starting to come through. They amounted to 275 million in the quarter. And from a bridge point of view versus the same period of last year, they were increasing by 243 million. Adjusted profit for the period came in at 3.9. We also continue to see very good strategic progress. We expanded in the local premium market in China with an acquisition of Shushu Anno. I will come back to that. And also the acquisitions in the US with PDQ that strengthens our offering in the important North American market. We also see good momentum with double digit growth in our software businesses. This applies both on the mining side as well as in manufacturing solutions. And we have also launched several new solutions that is linked to our strategic focus on both digital and sustainability shift. One of these solutions is something I want to highlight as the innovation this quarter. We have collaborated with Microsoft to incorporate the latest AI technologies into several of our software solutions. This is a solution called the Manufacturing Copilot. It's been trained on our proprietary knowledge and is unique also for each of the brands. And we have pre-launched this and it will be available on the market in September for three of our software brands, Simatron, Gibbs Cam and Sigma Nest. And this will help our customers further increase their productivity and efficiency in component manufacturing. Going then to the overall market development, starting with a regional view, we saw a flat growth in Europe, 0% in the quarter. Looking at SMM specifically, we saw plus 1%. Of that, cutting tools were down in the mid single digits, but that was offset by a strong growth in powder in particular, and also some support from software. In North America, we were at minus four. SMM were at plus 2%. Here, cutting tools were down in the low single digits, and this was offset by strong growth than in the software businesses. Asia up 25%. In SMM, China up 14%. But this was partly driven then by pre-buying effects in one of our Chinese brands that increased prices at the end of the quarter. And if we neutralize for that effect, the cutting tool business in China was more in the mid-single digits, so still a positive growth in the country. Then we have the mining regions which as you know can vary quite a lot between the quarters so we'll not comment specifically on them. Overall mining demand remained stable at the high level as you could see also in the numbers. Comment more when we get to that. Looking at general engineering, we saw continued weakness. We had a low single digit decline overall in SMM here. This was driven by a particularly weak Europe with high single digit declines. A bit stronger North America, but still weaker with low single-digit declines, but offset by strong performance in China, double-digit growth. Although part of that then is again related to this pre-buy effect that I talked about. Infrastructure remains weak. Europe is down. North America a bit more stable. We started to see some green shoots there. I'll come back to that. And then if you look at Asia, Asia overall is down. We saw good growth in India, but it was offset by a negative China. automotive weak in the quarter down high single digits here in particular europe was weak down high single digits north america a bit better but down mid single offset a bit by growth in asia with china up low single digits Aerospace continued strong momentum, mid single digit growth, strong Europe with double digit growth. However, North America in our quarter was down mid single digit, but as you can see here, we still consider the market momentum to be strong. This was related to timing of larger orders that we can get in the aerospace sector. Asia flattish here, but aerospace China SMM down low single digits. If you look at the other segments, we have a flattish development, Europe down mid single digits, offset by high single digit growth in both North America and China, and then Asia overall more on the stable side. This sums to an order intake of 32.4 billion SEK. As you can see on the graph, the second highest order intake we have had as a group in a quarter. Revenues 31.4, giving us a book to bill of 103%, which of course we see as a positive. in this time of the year. If you look at this from a different angle, we can see that after three quarters in a row with negative organic order intake, we now turn positive. And we do, however, still have now two quarters in a row with a negative organic revenue decline, even though we improved in this quarter versus Q1. This also leads to an adjusted EBITDA of 19.6%, 6.1 billion approximately, down 7% versus the same period last year. Here we have lower volumes in our businesses, partly offset by savings and good cost control. We also have an effect where from a year-over-year point of view, we have some dilution from cost inflation versus pricing. Overall, we are offsetting and continue to offset inflation, but we were accretive last year. So from a bridge effect, this becomes a negative in this quarter. And then we have a slight support also from currency of 20 basis points. going into the business areas mining and rock solutions continued solid demand here quarter again the second highest order intake we have had in smr which speaks to a good demand situation we have good momentum in automation double digit growth in our digital mining technologies division we also see strong growth in portion services underground drilling and surface drilling If you look at orders, they grew organically by 4%. Here we saw very good performance again in the service business up double digits. That was a bit offset by less growth than in the consumable side. So overall aftermarket up in the high single digits. Equipment down 4%, but some really good major orders in the quarter of in total 1.5 billion. If you look at the margin, it came in at 20.8%. Overall, I would say a solid performance, but a little bit impacted by the lower volumes in the quarter. We do see savings coming in 64 million in the quarter as a bridge effect and also a bit of support here with 40 basis points from the currencies. We have launched two new important features for our AutoMine solutions in this quarter that will further strengthen our position here. We have also started a collaboration with a large customer and this has been press released, so I can mention it's Glencore. which relate to deploying our batteries that we have in our BEVs in a second life application where they are being used as energy storage and a backup energy for the mines. And so this is part of our circularity ambitions and we're looking forward to seeing this collaboration take shape. An important innovation launch in the quarter is also our launch of our first electric rotary blast hole drill rigs. This is part of our ambition to grow our market share on the surface. This is a product offering we have not had. It's only been one supplier for these type of solutions in the market. So this fills a gap for us and allows us to compete in a part of the market that we have not been able to compete in in the past. So a really important product launch. Rock processing solutions also here continued stable demand in mining. Infrastructure, as I mentioned, remained weak, but with some regional variations. Overall organic decline of 8%. But here we saw growth in North America up 3%. It's a mixed picture, though. We do see dealers continue to have high inventory levels, and that's impacting the business. But we have seen the OEM customers with lower inventory levels and have started to place more orders, especially for attachment tools in the quarter. So a bit more positive in North America here. Continued decrease in Europe. Here we see inventory levels have come down, but customers are satisfied with that and have not used that as an opportunity to put more orders yet at least, considering the general uncertainty of the economy. Asia down 4%. We saw really good and strong growth in India, but it was offset then by also a decline in China. Good margin, 15.1% versus 13.7% last year, considering they get no support from the market as of yet. Strong cost control savings coming in 41 million in the quarter and also they had of course some extra cost last year that you are aware of that they did not have this year. Also some headwind from currencies here of 10 basis points. As part of our sustainability ambitions here as well, a new solution, a magnetic drum separator for mobile screens means we can extract metals from demolition materials that is both valuable and helps us reduce our wear and tear of the equipment. So a good launch as well here. Coming then into manufacturing and machining solutions, a highlight was of course strong momentum in the software business that grew double digits in the quarter. Same we can say for the powder business which had a strong development, of course partly on the back of low compares in the prior year, while cutting tools then declined by one percent in the quarter. We see solid demand in aerospace, as I mentioned, while automotive and general engineering were on the weaker side. Total order intake increased 5%, of that the organic increase was 4%. And as mentioned, minus one for cutting tools offset then by good growth in software and powder. We can say if we look at the quarter overall that the demand picture has been stable throughout the quarter month over month and at the same level if we look at daily orders as we saw in Q1. So the first half of the year has been stable from a daily order intake point of view and we see the same thing continuing so far into July. The margin was weaker than last year, 20.5 versus 22.3. Here we have, of course, lower volumes impacting the margin negatively and then the dynamic I mentioned around cost inflation and pricing in the quarter. where we do offset in the quarter, but we have a negative bridge effect from being accretive last year due to the timing of when price increases have occurred. A good effect from restructuring and savings programs here with 139 million as a bridge effect on the positive side in the quarter. And then some headwind from currency as well down, diluting by 20 basis points. Very important strategic progress here in the quarter with the acquisition of Shusho Anno. This is one of the leading players in the Chinese local premium market segment. We have had a strong position in China or have a strong position in the international premium segment. But the bulk of the growth in the Chinese markets in the past years has been in what we define as the local premium segment. And we really have not had a play in that segment. We have had Yongpu since a few years, but that's a smaller company. Now we take a really important step with this acquisition, gives us a play in the local premium segment in China. So super happy with that acquisition. Then we also have a decent acquisition in terms of size in the US with PDQ, which is a fixtures and workholding and tool company, strengthens our position in terms of offering a total product range on the important US market and also strengthens our partnership with the machine tool builders that is working a lot with this company. So good progress here on that front. Now I will hand over to Cecilia and we'll come back for conclusions and Q&A.

Thank you, Stefan. All right, so let's take a closer look at the numbers then together. And as usual, let's start with the growth bridge here on this slide. You can see that organically, order intake grew by 3% while revenues were down by 2%. Structure did not have a material impact in the quarter, whilst currency had a negative impact of 1% on orders. And that brings total order intake growth to 2%, while revenues were down 3%. And as Stefan mentioned, adjusted EBITDA came in at 6.1 billion, corresponding then to a margin of 19.6%. Net financial items improved year over year, and I will show you a more detailed table in a few minutes showing the development there. Tax rates excluding items affecting comparability and also on a normalized basis was in line with guidance, 23.9%. Networking capital on a 12-month rolling basis came in at 30.2%. Free operating cash flow 4.2 billion in the quarter corresponding to a cash conversion of 74%. Returns at 14.1% and adjusted EPS came down year over year driven by the lower earnings. If we continue with the bridge then, and starting with the organic column, here you can see that revenues came down by 775 million, which resulted in a reduction of EBITDA by 485 million. And that gives a leverage of minus 63% and a year-over-year dilution of the margin of one percentage point. Currency was slightly accretive, 0.2 percentage points and structure was neutral to the margin. And that brings us from a margin last year of 20.5% to 19.6% this year. We see good progress on the execution of the restructuring programs. For the 2022 program, we have now realized savings of 139 million. The year-over-year bridge effect is a little bit smaller, as we also had some savings last year. And for this year's program, we have now realized 136 million of savings. And this corresponds to annualized run rates of 71 and 44%. If we continue down in the P&L with the finance net, starting with the interest net here, you can see that it came down slightly year over year. And this is despite the higher yield cost and is driven by lower borrowed volumes. Then at the bottom, you see here in FX and other asset classes, we had a big negative impact last year. And as I think most of you remember, this is due to temporary revelations on orders, currency hedges and orders not yet invoiced. But from 1st of January this year, these temporary revelations are now booked in equity. And that's the main driver of the year over year improvement here. The reported tax rate in the quarter was high at 30.6%, and this was impacted by a provision for a tax audit relating to transfer pricing for the years 2018 and 2019. This is an impact, a one-off impact in this quarter, and we are not expecting any further charges here going forward. Adjusting for this, the tax rate was in line with guidance. Networking capital, if we start with the graph on the left, you can see that in absolute terms it's increased sequentially. This is driven by higher accounts receivables and also a little bit less prepayments from customers. Inventory volumes in the quarter came down a little bit as opposed to the normal seasonal buildup that we have in the second quarter normally. And on a relative basis, you can see on a 12-month rolling basis, we increased sequentially to a little bit just above 30%, whereas on a quarterly basis, we came down slightly versus the first quarter. Free operating cash flow was 4.2 billion in the quarter and corresponding to a cash conversion of 74%. On a 12-month rolling basis, cash conversion was 84%. And if we then look at the year-over-year development, you can see here that EBITDA adjusted for non-cash and other items was largely in line, slightly lower. CapEx was a little bit lower, but the networking capital build-up in volume was higher. And as I mentioned, mainly driven by higher accounts receivables. Financial net debt increased sequentially driven by the dividend payment and reached 41 billion. Capitalized leases and the pension liability was largely unchanged, which brought net debt to 49 billion. And also our balance sheet target financial net debt over EBITDA increased to 1.5. And normally we see a seasonal increase in the second quarter, as I mentioned, as a result of the dividend payment. Looking then at outcome versus guidance, the currency effect came in at 22 million for the second quarter. And then for the items where we provide annual guidance, you can see that CapEx is now at 2.3 billion, interest net at 0.8, and the normalized tax rate is right in the middle of the guided range. And then looking ahead at the third quarter and the full year, here you can see that the currency effect for the third quarter is expected to land at 250 million. We've left capex and tax rate unchanged, but we've increased the interest net a little bit to 1.5 billion. And with that, I will hand over to Stefan for summary and conclusions.