Good afternoon, everyone, and thanks for calling in to Sandvik's Conference Call related to this, the news this morning, the acquisition of the mining business of Schenck Process Group, expected to close in Q4 2022. My name is Louise Tjeder, Head of Investor Relations. With me, I have our CEO, Stefan Widing, CFO, Cecilia Felton, and President of Sandvik Rock Processing Solutions, Anders Svensson. We will, as usual, start with a short presentation and take you through company facts, financials, and strategic rationale. After that, we will open up for your questions, where you have the possibility to ask your questions, of course, to Stefan, Cecilia, and Anders. With this, I hand over the word to you, Stefan.
Thanks, Louise. We can take the next slide, please. I think this is actually quite straightforward. We are just doing what we said we were gonna do. We focus on growth through both organic and acquisitive means. When it comes to our acquisition growth, we are focusing in two main areas. One is to enhance our core offerings. You have seen this in the past, for example, through our round tools acquisitions. We want to also, in some cases, expand into adjacent areas of our current value chains. Examples of that is the DSI acquisition, where we took a market leading position in ground support. Schenck Process, the mining part, is enhancing our core offering.
We are present in the crushing and screening business, but our position in mining screens, especially prior to the Kwatani acquisition, has been very limited. In a sense, this is also about expanding a little bit in the value chain. Anders will take you through this business more shortly, and as he will explain, crushers and screens are very much bundled as one when it comes to providing a product to the customer. We see strong value in that. This business is also very much in line with our overall business model that all our divisions are working with. It's a B2B business where we want to drive digitalization, sustainability, and productivity in our customers' value chain. If we take the next slide, please.
Where are we in the mining value chain? Well, as you know, we have two business areas addressing the mining value chain. We have Sandvik Mining and Rock Solutions, which address the rock extraction or rock excavation part, or we can call upstream mining. Here we have a position starting from mine planning, going through drilling, blasting, with our drill rigs and rock tools, going into rock support through DSI, and then materials haulage through our load and haul business. Then we go over into downstream mining, where Sandvik Rock Processing is operating. Here we have a strong position in crushing and now also screening. Just reminding you why we have split this into two different business areas. First of all, this is how our customers are organized, so it follows the customer's logic.
It's also why the rest of the industry essentially is also structured in this way. We also wanted focus. We want Mining and Rock Solutions to focus on digitalization, automation, and electrification of, in particular, the underground mining space. We want the Rock Processing team to focus on downstream mining and the growth opportunities we have seen here. The rock extraction or upstream mining is very much a consolidated place, while downstream mining is still quite fragmented. We have here seen a strategic opportunity to add businesses that we find attractive in new niches. When we say attractive, we are looking for higher margins and strong aftermarket content. This is very much where Schenck Process Mining is.
Close to our core, strengthening really our core, and an attractive business in itself with strong synergies. Let's go through the business in a little bit more detail. To do that, I will hand over to Anders. Next slide, please. Anders, the floor is yours.
Thank you, Stefan. Now we will dive into this business a bit more, and we will also cover the strategic logic behind the acquisition. If we take the next slide then. This business is a leading provider of high-capacity screening and feeding solutions for the mining business. The main R&D hubs and production sites are located in Australia, that's Perth and Melbourne, with additional production sites in South Africa, Brazil, and China. The estimated top line of the business for 2022 is EUR 200 million. The geographical exposure is global, but with the heaviest exposure in Asia-Pacific. The EBITDA margin is accretive to SRP's margin, and this is supported by a resilient top line, which consists of approximately 70% aftermarket. The aftermarket consists of application support, screen refurbs, product engineering, design and manufacturing, as well as digital support services.
The circa 630 employees that will transfer to SRP with this acquisition supports top-tier mining customers today. Next slide. On this slide, we showcase some of the main mining offerings of the company. As I said, 30% is equipment with main focus on vibrating screens and vibrating feeders for high capacity mining applications. The 70% of aftermarket then, mainly focused on screening media, refurbishment and service and spare parts. This is to ensure that the customer gets the highest productivity through the life cycle of the equipment sales. Next slide. Strategic fit. This is a Tier 1 supplier of both equipment and aftermarket solutions that are very complementary to the existing SRP offering. They have digital services with clear opportunities to leverage within the existing SRP digital platform that we call SAM by Sandvik.
There is a minimum customer and application and geographical coverage overlap between the two companies with clear opportunities to strengthen footprint and market position. The customer value thinking and profit logic are also driven by the same principles as currently in SRP. Next slide. On this slide, we illustrate how this acquisition will then strengthen our customer value add within especially large mining, crushing, screening applications. If we start on the left-hand side, we see the current state of SRP with a very solid offering of primary crushers with our gyratories, hybrid crushers, and jaw crushers. We rate our position in the secondary to quaternary crushing steps as very strong with our cone crusher range. We have a somewhat weaker position within high capacity screening for mining applications, as Stefan already mentioned.
With the Kwatani acquisition, we started to create a bit of a foundation here. The Kwatani business is very centered in Africa. Within the screening solutions, there are regional differentiations, but also that there are huge benefits of being local in terms of lead time, service, and logistics. We actually rated our market position as still being weak today. Screening media has also been a weaker performing part of our offering, with fairly low market shares. If we then pass on to the right-hand side of the slide, we can see with this acquisition how we strengthen those weaker parts of our offering, within especially then high capacity screening and screening media solutions. We will, by adding these two together, become a global full solutions provider within crushing and screening solutions for the mining applications. Next slide.
There's a strong strategic M&A rationale behind this acquisition. If we start with the first one, it fills the gap, expanding our mining offering, becoming a full solutions provider for mining, crushing, and screening applications, as I mentioned. It also expands our geographical footprint and coverage, and the coverage is very complementary to the existing SRP one. The second one is that the company is financially sound with a relatively higher profitability than both peers and the current SRP business. The third one, on growing recurring revenues. With a significant aftermarket business, as stated around 70%, it will improve SRP's resilience further and increase our aftermarket share from about 52% of sales to about 56%-57% of sales. The fourth, they hold a strong market position in Asia-Pacific, and especially then within iron ore.
They are very well-positioned to capture further growth, both within other minerals like gold and copper, but also to take further market shares outside Asia-Pacific. The fifth on technology leadership, they have high quality of products supported by digital services that are geared towards providing customers with safe, sustainable, and high productivity solutions. We can go to the next slide. With that, I leave over to Cecilia Felton.
Thanks, Anders. Let's have a look at the financials then if we move to the next slide, please. The EV/EBITDA multiple is around 10, and that includes the expected five-year run rate synergy. We expect closing to take place during the fourth quarter, subject as usual to relevant regulatory approval. As Anders mentioned, Schenck will be accretive to SRP's EBITDA margin, and it will have a neutral impact on Sandvik's EPS initially. At the end of the first quarter, our gearing for the group was at 9.31, including SMT. That additional Schenck will have an impact on the debt KPIs as this is a 100% cash deal. However, the credit metrics will be within the requirements of our current rating.
With that, brief overview, I will hand back over to Louise again.
Yes. Thank you all. We can now take the first questions, operator.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it answered before it's your turn to speak, you can dial zero two to cancel. There'll be a brief pause now while we register your questions. Our first question comes from the line of Klas Bergelind of Citi. Please go ahead. Your line is open.
Thank you. Hi, still from Citi. Klas, Citi. A couple of questions, please. The first on the growth ambition. Could you talk through roughly how much the aftermarket versus equipment has grown for SP Mining in the past, and to what extent the addition of screening media and the refurbs will boost the aftermarket growth versus the current aftermarket growth in SRP? It will obviously be higher share of sales, but keen to understand the different growth rates. I'll start here. Thanks.
I think I'd refer to Anders on that. It was a multi-pronged question, but I hope you got it, Anders.
Yeah. Thanks. If we start with the screening media and refurb growth in relation to other growth. I mean, when we see that we have synergies, we expect to be able to utilize, especially screening media, across a larger installed base than existing today, within Schenck Process Group. That will then enable us to have a faster growth than the average of the market growth within SRP for that part of the offering. Similar to refurbs can be done across other brands as well. There is then an additional opportunity with synergies to leverage that growth more than the average growth.
If we look at the first question, which if I remember correctly, was how equipment versus after market have performed within the Schenck Process Group historically, I would say that from the figures that I have seen, there has been quite strong after market growth on the installed base. As the installed base have increased, of course, they've been able to capture more of the after market. They have a similar strategy as SRP to increase the after market capture rate on installed base. Providing more digital services, et cetera, that will then increase customer loyalty. Klas, did that answer your question?
Yeah. No, very clear. Thank you. My second one is on the commodity mix. It looks like quite a lot of iron ore to begin with, but you obviously want to grow this business globally. Have you thought about what kind of mix you're looking at going forward? Would be interested in a pro forma commodity mix as you take SP towards more markets exposed to copper and gold.
Do you wanna answer that, Anders?
Yeah, I guess I'm most suited for that. Our ambition is, of course, to grow the commodity mix in Asia-Pacific, where we are very strong in iron ore, to more go into diversifying into both copper and gold. See great opportunities as copper is also one of the electrification minerals that are growing above average growth. When we look at the commodity mix going outside of Asia-Pacific, I still see huge potential to grow within iron ore, even though iron ore doesn't have the same annual growth as copper or gold. This is a high wear application normally in iron ore, and it generates a high after market generation from that point of view.
Yeah. No, I appreciate it. It's good to give a.
I don't think.
Thank you.
Klas, we do not have or can disclose a, you know, what will the mix looks like in five years at this point.
No, I get it. My very final one is on Kwatani and SP Mining in terms of filling the product gaps, and you had that Slide eight. I mean, this seems like a good deal, but do you think it marks a pause, Stefan, in the M&A activity in SRP, clearly part of your strategy to do M&A in this division, as you said during the CMD in 2020? I'm just keen to understand. It is a fragmented market, more so than upstream, but it looks like you filled a big gap. I'm just interested in if there are any other gaps to fill, basically.
No. What I can say is, I mean, this is. This is a big acquisition for the SRP organization. It's roughly 25% growth for them in one go. They will spend energy and time now to digest this and start to work on both bringing them on board and extracting the synergies we see. I think it's something that will generate benefits for us for quite a few years now working through this. In that sense, Anders and his team have sort of their hands full. It's not like we are immediately now setting our sights on the next one. We will give them now some time to digest this and create value out of this. As you say, this was, I think, well, it's a really good one because it's so close to the core business.
If you take mid to long term, I don't see that we couldn't do more in SRP, of course. It's not sort of an immediate priority right now. Now let's focus on creating value out of this one. I say that with always the caveat that you never know what will happen, and of course, smaller ones can always be considered in the pipeline. As a general statement, yeah.
Of course. Thank you.
Thank you.
Thank you. Our next question comes from the line of Bhavin Thakkar of Barclays. Please go ahead. Your line is open.
Hi, good afternoon. May I ask, at EBITDA level, would you please be able to share the amount of synergies you have factored into your EBITDA calculation? Do these synergies include the synergies at cost level, if there are any?
First of all, very few cost synergies in this one. It's more about complementary, geographically, product-wise, et cetera. There's always a few things you can do, but primarily this is about revenue and growth synergies. No, we cannot disclose the exact number we have put into the run rate synergies because then we would effectively give sort of the purchase price. We have agreed with the seller not to disclose it because, as you can understand, this is a carve-out or a spin-out from Schenck, and the rest of the company is still owned by private equity and it's a bit sensitive considering where they are with the rest of the business.
The reason we provided the multiple in sort of the way we did it, since we couldn't provide the purchase price, we still wanted to give you a feel for how we see it from a value creation perspective. If we take the current EBITDA and add five-year run rate synergies and arrive at around 10x, it should give you an understanding that we expect it to give returns of over 10% five years down the line, which is one of the sort of hurdles we have to when we do evaluations of M&A to make sure it exceeds the cost of capital.
That is helpful. Thank you. Second question would be like EPS impact is initially seen neutral from this deal, despite the SP Mining's EBITDA margin being accretive to your SRP division. May I know, like, what is causing this? Is this because of higher PPA that you expect or higher transaction costs or any reason?
Yeah, it's PPA, and it's a year one comment, of course. Yes, it's PPA.
Any estimate of the PPA?
No, we don't have an estimate as of yet.
Okay.
Well, of course, we have an internal estimate, but I cannot share it yet.
That's helpful. Thank you.
Thank you.
Thank you. Our next question comes from the line of Sebastian Kuenne of RBC. Please go ahead. Your line is open.
Yeah. Hi, gentlemen. Just basically an add-on to the questions that have already been asked. Can you give us an idea of the current exposure, gold, copper, iron, coal, and I think limestone is also a business for Schenck, what the current exposure is? The second question, yeah, again, on valuation, the way I understand it is that you include the top line growth, you have operational gearing, positive gearing in that business for five years, and you have synergies with the group overall. If you put this all together and you calculate the EBITDA, you then say, okay, we pay 10x EBITDA five years out, which would then imply a very high current multiple.
When I look at your competitors like Metso or FLSmidth, they all trade below 10x . I would like to understand why you are so optimistic on those growth outlooks. Is it really just the synergies or is there something behind maybe IT, software, or other things? Thank you very much.
Thanks. I can take the valuation question, but Anders, do you have the current ore breakdown to provide?
No. What we have agreed to say is that it is strongest in iron ore in Asia-Pacific and potential to grow within other minerals.
Oh, okay. On the valuation, I saw your report that you came out with a few hours ago, and the math there is not correct. We are not saying we have paid 10x the profit of the company or the EBITDA of the company from five years from now.
Mm-hmm.
It's based on the current EBITDA, and then we have added our expected synergy portion five years out. Of course, the business itself will also grow without us, so to say. And that's not included in that.
Okay
You arrive at a much too high multiple.
It's today's EBITDA, so 222 EBITDA plus the synergies you expect in five years' time for.
Yes, exactly.
including, but then including the growth synergies that you mentioned earlier, right? You talked about-
Yes
growth and revenue synergies.
Yes. Yes. Yes. Yes. Correct. Yes.
It is in a way the future EBITDA? I'm a bit confused.
No, because the business itself, without synergies, expects good growth as well.
Okay. Thank you very much. That's helpful. Thank you.
Yeah. I will tell you will still arrive at a number, of course, above 10x EBITDA, if that's your reference point. We believe, again, as I mentioned, we believe when we look at this case, we see it as very value creative based on the returns we can see, and it's coming from the good, very good margin profile combined with good underlying growth and strong synergies.
Okay. Thank you very much.
Thank you. Take the next one.
Thank you. Thank you. The next question comes from the line of Gael de-Bray at Deutsche Bank. Please go ahead. Your line is open.
Yeah. Good afternoon, everybody. Can I ask first about, you know, you mentioned that SP Mining has obviously high quality products and comes with pretty high margins. So can I ask about SP Mining's key differentiating factors versus the competition, so on the product side? Also I think you mentioned that it was supported by digital offerings, so I'd like to hear a bit more details around what's exactly their digital offering. Maybe the second question would be around the profitability. Can you give us an idea of the historical trough and peak margins for the business? Maybe comment on whether the business model and the share of outsourcing is quite comparable to that of SRP. Thanks very much.
Anders, do you wanna start with the, digital and also their sort of differentiating factors?
Yes, I can do that. You know, the differentiation is that they have a very strong or durable design of their products, which keep a relatively, compared to many competitors, longer life, and also performs with a higher productivity than other solutions. I won't go through any more details, of course, in terms of technical design, et cetera. When it comes to their digital offering, they have a lot of measurements going through their CONiQ service platform, you can call it, or digital platform, where they have condition monitoring, et cetera. This is very suitable to connect into together then with our SAM service platform, because what the customer is looking for is not of course to optimize one equipment by itself, it's more to optimize the system.
That would then be very beneficial for both parties to combine that offering into one digital service platform.
Anders, can you also comment on their sort of outsource versus insource manufacturing base, et cetera? What we can say around that?
They mainly run an assembly type of operation in several sites, but there's also a couple of sites that runs together with steel cutting, fabrication, and welding, et cetera. Those are the sites in China, and I believe it also is what they do in Taubaté in Brazil. Otherwise, it's mainly assembly business, so it's quite flexible and also vertically integrated. That's basically the same operating model as used in SRP, if you exclude the foundry that we have in Sveg, Sweden.
Okay.
I don't think we can share any trough or peak margins since we're not sharing the margin either overall.
Okay. Understood. All right. Thanks very much.
Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. We've had one further person join the queue. It's a follow-up from Bhavin Thakkar at Barclays. Please go ahead. Your line is open.
Hi. The follow-up from me is with regards to your assessment of mining CapEx activity or pipeline that you see going forward into 2023 and further. Given that we are making such a sizable acquisition at SRP level, could you please share any thoughts about the pipeline and the CapEx activity?
Oh, well, as we have said on our report calls, I mean, we have a positive outlook on mining CapEx, and I think that's what the sort of more, let's call it public, data is saying as well. We had a step up going into from 2021 and then a gradual increase going forward. That's also what we see currently sort of as expectations in the market. We have our own proprietary data where we collect the CapEx projections from customers that have published them, and I think it's a positive outlook currently. Which, of course, also underlines what we said. We believe there is good fundamentals in the market, which helps this company to grow.
on top of that, they can also take advantage of some of the tailwinds from some of the faster growing minerals.
That is helpful. Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. Okay, there seems to be no further questions coming through the phones at this time, so I'll hand back to our speakers.
Okay, thank you. This concludes then this session. Again, thank you for calling in and for your questions, and we wish you a nice rest of the day.
Thanks, everyone.