Status Update

May 6, 2019

So good afternoon, everybody, and welcome to this press conference. My name is Bjorn Rosgen. I'm the President and CEO of Sandvik. And with me here today, I have Bjorn Bjorn that is the Business Area President for SMT. We are here today to talk about a decision made by the Sandvik Board, and that is to start an initiated separation of SMT within Sandvik, but also to explore the possibility to make SMT a stand alone unit and to be initiated and then listing on the Nasdaq Stock Exchange. We are planning to do following. I will talk a little bit about the background and what has made us take this decision. And then Joran will spend a little bit time of talking about SMT as a business and the opportunities and why we feel that SMT is a great business within its peers. Starting with the Sandvik history. It has a long history and an exciting history background. And we can see that Sandvik have, during the years, developed and changed many times during the years. And I think we can also conclude that many companies are successful because they can handle change in the market and to develop further. The history will remain, but we are now looking at the future. Starting up a little bit to talk about the Sandvik Group. We have, during the last 3.5 years, worked by decentralizing Sandvik. That means moving the responsibility out closer to our customers. We have created the 3 business areas, which are focused on their in their segments and with their customers. For Sandvik, it is important for us that we are the best owners for all our businesses to give them the opportunity to develop and grow and deliver value in the market. And when we're talking about value, the most important for all our businesses, of course, to create customer value. That is the most important to the business. And by that, we need to create employee value. It has to be an attractive business that attracts the most competent employees. But it also has to create shareholder value. And let's say the strategic agenda for Sandvik is that each of our businesses need to be stable and profitable before we focus on growth. During the years, Sandvik Material Technology has developed well during the last years. And we can say that the business is leading within its segments and within its offering. It has, during the last years, developed a strong performance, and we saw here during the Q1 that business area delivered over 10% underlying profit. And we do believe it's well positioned in the market. And here, Joran will go more into the details and talk a little bit more about the strengths and the opportunity and possibility to develop the business area further. When we look at the group, it is a little bit unbalanced. And when I say unbalanced is that when we look at the 3 business areas, 2 of the business areas are delivering strong returns. That means over return on capital deployed over 30%. And SMT is delivering return on capital of around 10%. That doesn't mean that, that is a bad business. It means that within its peers and within its business, S and T, it's a quite good and well performing business. And the important is that Sandvik will give the opportunity to SMT in the future to further develop. And we believe by focusing on the SMT as a separate business within Sandvik at the first stage, it will get the right focus to further develop and create value for that business. Sorry, it was the wrong one here. So we think that it is the right time for the next step. And what do I mean? First, I think S and T has, during the last two years, developed well according to the tough targets that we have set. And this year, it will deliver the 10% underlying profit. And I think that's done by a very strong management team that has organized the business area and restructured it in a good way. It is also generating good profit, as I said, but also cash flow. The decentralization that we have created within Sandvik, that means that we have moved out a lot of the central resources back into the businesses, which mean today that the business area is self sufficient. When we look at also the group is that Sandvik is today very strong financially, and we have, during the last 3 years, gone from quite a heavy balance sheet into almost a debt free environment, which gives us opportunity also if we one day decides to do a listing. So by being a separate company first within Sandvik, we think it will strengthen the opportunities and get the focus on improving the business well. It will be evaluated on its own merits, and we will have a strong focus for further growth and further development. So what happens now? First, I would say that it is, of course, important that all our businesses continue as business as usual. That means focusing on creating customer value out in the business. We have now formed an internal team that is now looking into what it means to separate the businesses and what kind of activities is needed. It will be a lot of hard work, but and it will take a little bit of time to make the finish. At the same time, we will, of course, follow-up the business very carefully and treat it as a separate business to secure that it managed to stand on its own legs and develop well under its own merits. I would like to say first is that we have only taken the decision to make the separation internal separation within Sandvik, and that is the first decision. And we will also then, of course, explore the possibilities for a listing going forward. So a summary and conclusion conclusions here. Yes, we think this is a good timing. We think SMT is today a well functioning performing unit today, And we do believe it will stand well on its own merits. And we think it's the right time to do this separation also because Sandvik has the financial strength which is necessary. And we will also then start exploring the opportunities for separate listings of which calls which is so called Lexasia. I think that's what I would like to first present, and I think we go over to SMT and let Jorgen talk a little bit about what is SMT today and what are the opportunities going forward? Thank you, Bjorn. First, I'd like to say that I view this as a fantastic opportunity for SMT. I think we will finally have the focus and the priority that I think SMT deserves. I will now shortly go through my view on sort of the short term development we've had the last years. I will look into my view in SMT, our divisions, our capabilities, market position and also look into how we are positioned towards some global trends and in the end, come into sort of the possibilities or opportunities I see for profitable growth in SMT. So we'll look I mean, you see the financial development on this slide. And I think we have managed to turn the curve from a declining profit to a good profit last year and that was 7.6% EBIT margin. We did 10.4% in Q1. And if I look at what's behind this, sure, we have had also some market tailwind. The world's seamless tubular market recovery is clear. This year, we see a good development in the oil and gas business, but I need to stress that last year 2018, oil and gas was rather poor, so that we see this year coming in. Also gas selected a trend that sort of helping Cantal to grow in a good way is also clear. If I look at what we have done, I think we have both driven execution in a good way with some initiatives, but also tried to change the sort of execution culture in SMT. That is, of course, very much helped by the decentralized organization and the governance. We have now managed in a pretty simple and straightforward way to build both strong commitments on delivering on plans from the divisions, simplify performance management where we're not only focusing sort of the numbers, also the initiatives, what have we promised to do and secure that. We do what we promised and that gives the results that we have anticipated. However, with the times we have, surely we're also all the time updating our continuous plans if they would be needed. To summarize some of the improvements, I think we have optimized the portfolio with the divestments of both wire stainless wire and welding wire. Also our shares in Faragista Stainless, components within Cantal. I think we are, from that point of view, a more healthy company today. The cost adjustment programs that has been performed in mainly in Sandviken, late they've also taken some pretty big foot print decisions. They have not yet given any result. I don't foresee any results from those until maybe 2020, 2021. But now we are taking decisions in situation where we're not forced to take decision and that is new, I think, for I think really good companies, they take decisions before they need to. We have also more flexible manning today than we had previously. And also we have adjusted our CapEx plans, so they are more adapted to our own sort of financial situation. So if I summarize my view on SMT, I think we are a world leading manufacturer of advanced stainless steels and special alloys for the most demanding industries. We are an extreme niche player. If I look at sort of our part of the global steel manufacturing, we are I think we are 0.2% no, not percent per 1,000,000 in Swedish of the total steel industry in the world. We are less than 0.5% of the global stainless steel world. But where we act, we are big and we have very strong market positions. I think we're the true innovation leaders in Materials Technology and we have world class capabilities. And I look into the division, I will soon come to that. I think our industry position across our end markets are very strong. We are number 1 and number 2 in most of our products and most of our markets. And wherever I travel and meet customers, it's so clear the way we work close with key customers. There are decades of cooperation, partnering, also in some cases developing solutions together. And I think we're also very well positioned to capitalize sort of on the trends on energy efficiency and also sustainability. So if I look into the divisions, all 3 of them, Tube, Cantal and Strip are market leaders in their industries. If I look into Tube, they have had some rough years. Market is coming back, but as I mentioned, they are also taking sort of long term important decisions now both to secure cost leadership, but also to improve capabilities, especially in Asia, but also in Americas. It's been a long time since I saw such an interesting portfolio of new products and interesting sort of new product projects as I see in Tubes today. Cantal, I think we, for some years, managed to mess up Cantal a little bit. We put it together with DRIP, with wire and God knows what. And sort of if you manage something and you have problems, you always focus on the problems. And I think Cantal was not treated the way it deserves. Cantal is a fantastic company with very good capabilities and also very good market development plans. Strip, short term, we're focusing a lot in Strip now to run its production in a different way. They start to be more stable and the productivity improvements is quite amazing. Strip with its market position has not been driving prices as they maybe should have, and I think that's an area where we are improving. Long term, it will be key for Strip also to put more efforts into new product development and application development, and we have all those capabilities within S and T. So if I look at the capabilities, I think we have world class capabilities. Looking into the supply chain where we have full control of our value chain from melt to finer product. Sometimes I get questions from people like people in this room, wouldn't be easy if you didn't have this heavy back end with melt shop and hardworking. To me, it's the opposite. I think that is so important from a premium player to be in full control of the value chain where we have our independence, we control the quality. And most important, if you want to be the innovation leaders, you need to have your own metallurgy. So from my point of view, that's one of probably our most important competitive advantage. Another fantastic capability is our global footprint, where together with the decentralized organization now which is especially in Tube, also regionalization. I see a lot of positive energy coming out both in Asia and Americas where they also have their own production, creating energy, creating business opportunities. With the changes we do, it's also clear that we will improve cost position, improve capabilities in some of the production units in Asia and in Americas. And last but not least, we have our own and very competent R and D, both when it comes to sort of materials design as when it comes to product development. We have unique expertise in advanced stainless steel and special alloys. And I think we have very good knowledge both into our own products, but also in the customer applications. And very often, we work in close partnership with customers developing new products together. And I see going forward, so we have the ability and I think we are probably the one with the best ability to develop Materials Evolution, contribute into making industry more safe, more efficient and more sustainable. And if we look into our products, nickel and superalloys is the area where we're putting a lot of efforts into right now. That has not been our strength. What we have managed to do only just last one, one and a half year is to prove that we have more capabilities than we previously thought, meaning that we don't need that much investments the powder business. We are focusing a lot on powder technology, but into our applications in Cantal and in Tubane and Strip. And last but not least, if we look into advanced stainless and Duplex, there we are the clear world leader. So looking into SMT from a sort of more outside in perspective, I mean, you know the global trends. And the global trends, they mean that we'll the world will need more energy. The world will also need more energy efficiency and more sustainable energy. That calls for lighter and stronger materials and very often also more corrosion tough corrosion properties. And I think that's perfect for a materials design company. These are just a few examples on initiatives where we are driving to meet those trends. We are full focused on growing our Aerospace business. Future solar energy is one area where they would need extreme corrosion properties, and I think that is perfect for us. We have also not only put efforts into develop materials, also new business models like we have a way to put to move part of the production to customer sites with some mobile solutions, also digital support that where we take care of the customers' stock replenishing. Sensor based tube systems is another area. That's just a startup where we, SMT, also can sort of work with creating data at our customer. So let's try to summarize a little bit. I know the strategy SMT has now is both for growth and for profitability. And the main enabler, most important for SMT is that we are and we will continue to be the number 1 in Materials Technology Innovations. With our products, our capabilities, people, I see no reason why we should not be a leading financial performer in our industry. Materials and Steel has sort of is a volatile business and that we need to understand. I think there's a lot of opportunities for us to actually reduce the volatility, both from sort of cost flexibility point of view, which we are addressing, I think also from broaden our portfolio point of view. And just a few comments on sort of the areas where we focus customer. I mean, Black in Sport, you should develop your talent. So we will continue to put even more effort into working close with key customers. Also see opportunities on making customer interaction more efficient and fast with digital solutions. We are, as I said already, I think, the material science leader. But also here, I can see opportunities for improvement like improve increase the pace of commercialization and industrialization. Ability to industrialize, that's the area where we have sort of a lot of our short term focus, and I think we are doing very well. The interesting thing is every time I see sort of progress, I see even more opportunities. So here, sort of I see a lot of opportunities to continue to improve SMT a lot. The last two ones, expand our segment portfolio and our geographic position. I think there are 2 parts in that. One is that there are market shares to grasp, mainly both East and West from Europe. There is also good opportunities in some of the segments like Aerospace, Medical, Renewable Energy, a lot of opportunities for S and T with our capabilities to grow and take market shares. So my summary on this is, I think we have had and we continue to have a good and strong development creating a solid platform to build from. I think we have world leading capabilities, and I think we have a world leading market position, and we are well positioned for profitable growth. I think this is a great opportunity for SMT. Thank you, Johan. I think you explained it very well, how well positioned SMT is and the opportunities for further development and value creation going forward. So I think this is very exciting. You will have a lot of time going times going forward to talk more about this and what will be the real developing and the possibilities for SMT. And of course, every quarter, we will be following S and T very carefully and make sure that the result is developing according to the plan and further. But I think by that, we stop our presentation, and I think we go over to some questions and answers, both from the room here but also on the line. So please, any questions from the room here? Do we have any questions on the line? Our first question comes from Gael De Bruy from Deutsche Bank. Please go ahead. Thanks very much and good afternoon everybody. I have probably three questions. The first one is about the competitive landscape. I mean, could you talk a bit more about how you fit into the competitive landscape? What's the pricing environment right now? And how you benchmark yourselves versus peers in terms of margins, capital intensity, working capital growth, etcetera? And maybe discuss the sort of potential for margins you see or you continue to see in the Strip segment in particular? So that's, I would say, a big question number 1. And then the second question I have is about the size of SMT today. If it becomes standalone, I mean, do you think the business will indeed have the critical size to operate successfully in both the tube and strip markets in particular? And the final question I have is about the breakdown of employees, if you could give us a bit more details about that for your key geographies, Sweden, the rest of Europe and Americas and Asia Pac. Thanks very much. Okay. So I'll start with the capital the competitive landscape. I need to do them 1 by 1 then. If we start with Tube, I mean, there are obviously some big players in Tube where we compete a little bit different with different competitors depending on the segment. But of course, a lot of the big competitors are also into oil and gas. And I think there we have an outstanding position today, both from a performance point of view and from a market position point of view. As I mentioned in my presentation, clearly, when you look at tube growth, it's also recovery. It I mean, the global tube market went down heavily between 2014 and 2015 and now we are climbing back again. Strip, obviously, a smaller player, very nice position, few competitors. I think there is a matter of sort of in a better way utilize the position we have from, for instance, from a sort of price management point of view. And if I then go into Cantal, Cantal, I mean, there are some global competitors when we look into the back end of Cantal wire producers. But looking to the sort of front end of Cantal, there are no real global competitors. There's a lot of small players in different regions. So from that point of view, I think the Cantal position is actually unique. If we look at margins, I mean, margins comes both from sort of the income side and from the cost side. I think we are in all three divisions focusing a lot on cost efficiency. For instance, with the decisions in Tube to change their partly change their footprint where we are today now, we have announced both the closure of a Canadian unit moving into Americas. We also announced a couple of months ago the closing of 2 tube mills in Sweden, in Sandviken and move that operation into Czech Republic. That will sort of improve and also defend our cost position in the more standardized assortment. Other areas where we have focused a lot in order to sort of improve our margins is mix management and mix strategy. I mean, I know when sort of business goes up and down, but I think we have had a tendency to focus too much on just fill the mill. I think we need to work also with our cost flexibility, which we are doing and drive mix in a more business oriented way. And I see a lot of opportunities. And also some of that is the reason why we are improving as we are. Size wise, but we are a SEK 15,000,000,000 company today. Many of our competitors also listed companies are smaller than that. So that's the only reason why we should not be able to run our business in a separated way. And when it comes to our people footprint, I mean, I have no I don't have those details in front of me, but we are roughly half of S and T is today working in Sandvik in our main site. And obviously, the other half not. The 2nd biggest site we have is in Czech Republic. That's around 600 people. We have another unit in Sweden, Halstajama, which is the menu of Cantal. They are between 3.50 400 people. And we have big footprint in U. S, in China and also in Germany. Okay. Thank you. And hopefully that answers the questions. Yes, sure it does. Thanks very much. Our next question comes from Andrei Oskowski from Nordea. Please go ahead. Thank you very much. Hi, Ihoram. Hi, Bjorn. So firstly, when you're saying that you will explore the possibilities to separately list S and T, What kind of things do you need to explore to find out if SMT can be separately listed or not? First, I think what we the decision we have taken is actually to separate SMT within Sandvik. That is the first step. So there is a lot of administrative things. There are costs around that we have to make sure that it will be standing by itself. And that's how we will be measuring the business. Then we will, of course, also look into is I mean, SMT has to prove itself. I mean, these are the normal rules. When you do a listing, you have to show a number of quarters that you can deliver the right results. And in the end, the company need to be well prepared for a listing. That can take time. We have said that it takes at least 1 year, but it can take also longer than that. And we will give the time that is needed for SMT to be able to be well fitted before we take the next decision. And in the end, as you all know, this is actually an AGM decision. The shareholders have to make the final decision if we should list business within Sandvik. So that there's a lot of decision being taken. But the important thing is today we have just decided to do the separation within Sandvik and prepare SMT. Yes. But it sounds like you the Board wants to list it separately if it's if the performance is good enough and the AGM approves it. Yes, of course. That is what we are exploring exactly. And that is the direction we would like to take it. But we but it is a little bit of preparation work and it takes a bit of time before we get there. So we are taking the first decision now. And then, of course, the stars have to be right and S and T need to perform well at that time And then we have to take the final decision at the later stage, and that will actually be done by the AGM. Yes. And if there would be an industrial competitor or a private equity company approaching you now wanting to buy SMT during this period. Do you think we should rule that out? Or could that be an option as well? I mean, we only take a decision to separate the company parts. So that is where the focus will be. We don't have any other intention at this moment. So that will not be that will be not taken in consideration at this moment. And then maybe two questions for Jorgen as well. Because a fairly large part of S and T's business comes from the oil and gas industry, And how should we view this? Do you think this is a risk in the midterm as we are heading towards more and more renewables? I mean, I guess that depends on how you define midterm. I think for the next coming years, 2, 3, 4, 5 years, I think oil and gas will be a fantastic business and that's what sort of what we see. Then of course, it's important for SMT to sort of invest money we make in the oil and gas into new product development versus other energy forms. And I think we have a portfolio of good IDs and projects going into that. Could you remind us how large part of SMT is oil and gas? I think 40% roughly is energy and the majority of that is oil and gas. Okay. And then lastly, you mentioned when you answered the Gail's question that many of your competitors or many of your listed competitors are smaller than you are. So could you help us what kind of competitors are you looking at that are listed? I look at Tubas X, of course, Haines. Then there are others that are bigger than us as well, of course. Okay. Thank you very much. Our next question comes from Alexander Berglund from Bank of America Merrill Lynch. Please go ahead. Hi, afternoon everybody. It's Alex Virgo from Bank of America Merrill Lynch. Just a quick one. I wondered, have you thought or can you give us any indication as to what sort of leverage you think SMT needs to have as a stand alone basis or what the balance sheet needs to look like for the business to be sustainable on a stand alone basis? Just as we think of that return on capital metric, strength being split or shared? Yes. It's the that strength being split or shared? Thank you. Yes. It's a little bit early yet to discuss that. But of course, you know that we'll be debt free this year for Sandvik. And if we at one time would make the decision then to do leasing, of course, we will make sure that it would be a debt free or even have some cash available in that case. So that's the, of course, the objective. Okay. Thank you. Our next question comes from Andrew Wilson from JPMorgan. Please go ahead. Hi, good afternoon, everyone. Just a quick one actually for me. On the structure of SMT as we see it today and kind of within the Sandvik Group, are there going to be any changes that you'll make kind of between now and potential separation? Or kind of is the SMT asset as we as you reported to and as we see it today, is that going to be the business that's separated out? Just want to check if there's any changes at this stage. We can say number 1 with that. I think we made the changes within SMT where we think SMT now is well focused. As Joran explained, we are number 1 in more or less all the businesses that we are operating. And the businesses that were not really there, we have actually sold off. And we think that SMT is today good shaped to be able to handle its independence as a company. And that, of course, needed to be proven. But at the same time, I think it's up to Joran and to the 3 divisions that they need to continue to deliver good result and prove that we can continue to create value from that business. But we feel very comfortable about that. And we think, as Joran has said, is that we are very nicely positioned within these areas and not least when it comes to the sustainability business going forward. So we believe that this would be a very exciting business on a stand alone basis. Great. Thank you, Bjorn. Our next question comes from Markus Almerud from Kepler Cheuvreux. Please go ahead. Yes. Hello. Hi, good afternoon. Just a quick one for me as well. On the map of the stability, profitability growth map that you have and you plot the different businesses. I think last time we saw that picture, you had Cantal and the specialized offering within 2 being in the growth phase. And you had strip being just gotten out of the stability phase and you had the standardized offering being in the stability phase. Can you just update us where you are in the journey of the different businesses? So which one has kind of moved up and which one is on the growth phase? And are there still a standardized offering still in the stability phase? I mean, since we have improved the whole business area, in average, everything has moved up then. But if I should elaborate a little bit on your question. I think, first of all, the biggest contributor in sort of money wise last year to the improvement is actually sort of the application to part of what we used to call the standardized. It's not that really standardized. That's a wrong answer. But so that has been the main contributor. Then I can see that strip, at least over the last half year, in a way, it feels like I have a new strip since the autumn. They are really performing well. So if I should sort of make that decision today, they are actually on the growth mode today. That's the development they've had. They moved very fast up that S curve. And also Cantal is And Cantal is already there, and we are focusing growth. I mean, you saw we made a small acquisition in North America last year, and hopefully that was not the last one. I think there's a lot of opportunities there. And of course, what you're saying that within the tubing, there are a number of businesses there which are of course The Energy segment is already up there. The specialized part of Tube is up in the growth mode. But once again, the biggest improvement was sort of the what we used to call core standard. I don't call it that anymore because this is not that standardized. That has made the biggest journey and especially in Americas and Asia. And I think here the regionalization and decentralization is helping out in a very good way. So it's about accountability for the different businesses driven. I think this is following very much that we have seen in all of our business units within Sandvik, Continuous improvement and good focus and hard work and being close to the customers, we've been able to grow the businesses. The important is to be number 1 and then number 2 within the businesses. And I think that is proven. You saw the slide here from your end that we are really number 1 and number 2 in all your main businesses. And I think that is the guarantee that we will both invest in these areas, but also grow these businesses. And then I assume also that most of the mix work that you were talking about has been performed in while not the standards, what do you call the application part of what was called standard before, that's where you've done most of the mix work as well, I would assume? Yes. I mean, in percentage, I don't know, but the size of that, of course, that has been the main contributor, but also into Cantal. I mean, in Cantal, we, I would say, almost changed the mix strategy, selling much less of the primary part in Cantal. And you can also say, of course, that oil and gas was a little bit weaker during last year. But otherwise, I mean, you are you have never been in a better situation. I mean, with that going forward. We were standing idle almost in sort of the biggest oil and gas unit in Czech Republic during the summer last year, we had a very poor load. And now since Q4 and especially Q1, it's actually continued now into Q2, the order intake in oil and gas is extremely strong. And the order book we have, I think, is sort of the best for many, many years. It's very exciting. Excellent. Thank you very much. Thank you. Okay. It seems to be the last question. So maybe we set the dot here. We will as you understand, we will be at the Capital Market Day and that's only a couple of weeks from now. And we will, of course, talk much more, and Joran will go more into detail for the different businesses and actually show. I'm enthusiastic about it. I think this will be an exciting journey for SMT. I think this is the right focus. And I think you will prove yourself that you can stand well on your own legs. I mean, I think this is an excellent decision for S and T. As I said in EBITDA, we will now receive the focus and the priority that I think this fantastic business deserves. And rest of Sandvik also, the other 2 businesses, also need to focus to make sure that we are positioned well into all the challenges in the different businesses, everything from automation, electrification and so that we are meeting. And it's important that each of our businesses are meeting up to that. And we'll talk much more about that on the Capital Market Day, and we're really looking forward to see many of you there. It will be an exciting meeting just in a couple of weeks. So once again, thank you very much for taking the time. And any questions, you know where to call and we'll be happy to give you these answers. Thanks a lot. Thank you.