Earnings Call: Q3 2021

Oct 18, 2021

Warm welcome to Sandvik's presentation of the 3rd Quarter Results 2021. My name is Louise Cheddar, Head of Investor Relations. Beside me, I have, of course, our CEO, Stefan Welting and our CFO, Thomas Ildegasz. Stefan and Thomas will, as usual, start with the presentation and take you through the highlights of this quarter, and then we will spend approximately half an hour on the Q and A session. And the questions, you can ask on the conference call as per instructions from the operator or online in written. And with this, it's time for the presentation. And I hand over the word to you, Stefan. Thank you, Louise. And also I would like to welcome you to our Q3 report in 2021. We will for sure return to this picture here of our beautiful electric 50 tonne truck later in the presentation. But I'll start with a summary of the quarter, which was a quarter we would say have solid demand and solid performance. Organic order intake were up 21% organically and a full 31% Total growth adjusted for currency. We saw a continued strong underlying demand in the Mining and Infrastructure businesses, where in many areas we saw record high order intake levels. Also demand in Automotive and General Engineering was robust, And we saw a positive development in Aerospace this quarter. Revenues, they grew by 13% organically, And this is done despite the supply chain bottlenecks that we did see a little bit in the quarter. Our invoicing could have been slightly higher if it were not for some of these issues. We also see an improved profitability. The adjusted EBIT margin was 17.6% versus 17.3% last year. And even more importantly, adjusted EBITA margin of 19 €100,000,000 versus €17,700,000,000 I will comment a little bit more related to this divergence later in the presentation. Our rolling 12 months adjusted EBIT, excluding metal prices, are sitting at 18.4%. We saw permanent savings in the quarter of SEK 230,000,000, but this was more than offset by reversals of temporary savings, especially short time work weeks of in total SEK 615,000,000. And Thomas will break this down further in his part of the presentation. We also saw a successful execution of our shift to growth strategy. 7 strategically important acquisitions were Signed or closed within and after the quarter. This also meant that we, during the quarter, have updated our financial target for Sandvik Manufacturing Solutions to SEK 6 SEK 1,000,000,000 in 2025, with an EBITA margin of at least 20%. And I would say these acquisitions means that we have taken vital steps in becoming a more digitally focused and more growth oriented company. I mentioned the 50 tonne battery electric Truck in the beginning. This is the 2nd product we launched that is a result of a combination of Sandvik's Knowledge in underground mining equipment and Artisan's knowledge in state of the art electrical drivetrains and battery technology. We launched this earlier this quarter at Mine Expo in Las Vegas. This follows our philosophy, which is that we should rethink the equipment, Not the Mine, which will help mines deploy battery electric vehicles in their existing mining infrastructure. This we enabled through our patented AutoSwap and AutoConnect technology, which means that the big battery you see at the Below the range of 22% to 24%. But there were some few things happened in the quarter. We had some tax reimbursements from tax authorities in the world, tax disputes, which were finally settled, some of them in our favor, which gave us a refund basically. If you adjust for that, the underlying or normalized, I should say, normalized tax rate was 22 point Now going forward with the tax rate. So let me preempt that question and answer it right now. There has been discussions there's been 2 major discussions on the regulatory area lately here. One of them is A possible increase in the corporate income tax rate in the United States. If that happens, we estimate the impact on the tax rate to be 30 basis points. And then we have the OECD initiative, which is gaining momentum globally With a minimum tax rate corporate tax rate of 15%, that will impact the tax rate with another 30 basis points max. So that's 60 basis points. So from that point of view, everything else equal, there is no need to change the guidance for the Tax rate upwards. So if that's the only thing that happens, the 22% to 24% stays. But you will hear more about that in January at the Q4 closing. So let's move on to the balance sheet then. Working capital, if you look at the left hand side, working capital is Going up, of course, as we build inventory. But if you see the red line on the left hand side, the relative number is still under control, Below 25%, which is a kind of an unofficial target that we have for ourselves. On the right hand side, you can see the business areas, Building inventory, but the relative number is still under control. If we then move to cash flow, If you look at the left hand side here, you can see the blue line and the red line. The blue line is the earnings. The red line is the cash flow. And You can see now that the blue line is overtaking the orange line, which is just the way it should behave, Of course, when you grow, when you build inventories, you have to invest in working capital. So that means that earnings will be a bit ahead of cash flow now for the buildup period, probably more on par in 2022 compared to 2021. If you look on the right hand side, you can see this in numbers. You can see how earnings are increasing Quite good. But you can also see that net working capital change has quite a negative impact on the cash flow. CapEx It's basically stable. So that explains the difference between the SEK 3,900,000,000 and the SEK 4,800,000,000 a year So let's look at the net debt. Now in Q3, we have paid for quite a few acquisitions, DSI, Mastercam and a few others. And the financial net debt has now turned Net debt is it has been a financial net cash position for quite some while now, but now we're up in debt territory, SEK 7,400,000,000 in financial net debt. There are no excess cash anymore. The total net debt is on SEK 18,000,000,000 And the gearing is on 0.25. We have started to borrow money in the 3rd quarter on the short term market, Commercial Papers. And of course, it has went well. And moving forward, of course, We'll see what happens. It depends on the pace of acquisitions, but some of that short term borrowing will be turned into bonds and some of it will be rolled forward in new commercial paper. So depends on what happens. So we'll see, but well under control. So let's look at the outcome here on some of the Items we guide for, the underlying currency effect, meaning transaction and translation effects, was 2,000,000 plus 2,000,000. We guided 0, So spot on. The total effect was SEK 108,000,000. That includes revaluation And hedges, realized and unrealized and all that. But as I mentioned before, this was mainly a bridge effect coming from last year, not from this year. The metal prices in the quarter basically came in at guidance SEK 190 compared to SEK 200 At the bottom part of the table, CapEx moving steady ahead, SEK 800,000,000 in the quarter interest net, SEK 100,000,000 and the tax rate, As I explained, 22.2%. Finally, the guidance for the Q4 and the full year 2021. CapEx normalized CapEx level for Sandvik is around SEK 4,000,000,000 or a little bit above SEK 4,000,000,000, and we have said that it will be A little bit below SEK 4,000,000,000 in 2021. That guidance still holds. We were quite down during 2020 during the COVID pandemic. And in 2021, we have started to pick up, but we will not reach or go beyond SEK 4,000,000,000 for this year. Currency underlying Section translation, probably SEK 150,000,000 for the 4th quarter. Metal price effects in quarter, plus SEK 50,000,000 Interest rate net, we keep the guidance on SEK 400,000,000 and tax rate, we stick to the guidance of 22% to 24%. And with that, I'll hand over to you, Stefan, for summary and conclusions. Thank you, Thomas. Yes, again, so this was a quarter with solid Performance and overall a strong underlying demands of our products and services. We continue to see strong order intake growth, both organic and now also We have good contribution from our acquisitive growth. We have had a successful execution of our shift to growth strategy with 7 acquisitions in and after the quarter. We have also shown continued to show, I would say, resilient margins, strong margins with an EBITA margin Over 19% in the quarter despite various impacts then from transactional costs that are More of a one off type nature. We do see the global supply chain challenges, and it has certain impacts on our operations, A little bit on the ability to invoice, a little bit on the freight costs, but overall, very well managed by the organization. We continue with our shift to growth strategy. We have now reaffirmed and more firmly announced A time line for the planned spin of SMT. We have, so far this year, already added over SEK 8,000,000,000 In revenues from acquisitions. So we will have strong contribution from acquired growth in the upcoming periods. Then we have also taken important steps to become a more growth and digitally focused companies, in particular, pleased in the quarter That we have built a leading position in CAM for the company. So thank you for listening, and I guess we hand over now To M and A sorry, to Q and A, to see what's top of my mind. Thank you, Stefan and Tomas. And yes, we open up Q and A session, and I know there's a lineup of questions on the call. So we start with these right away. So operator, please, we can take the first question. Thank you. That comes from the line of Magnus Kruber at UBS. Please go ahead. Your line is open. Stefan, Thomas Louise, Magnus here with UBS. A couple of questions from me. Maybe if we start with SMS, if you could give us some guidance To how Fast Out Motte business grew there as well as if you could narrow the range a little bit on the Space side from double digits, what specifically do you what level do we talk about here? Yes. When we say double digits in Aerospace, it's really at the very, let's say, barely double digits. It's in the low teens in the quarter. Automotive, as we showed, it's basically flat year over year in that neighborhood. Perfect. And then on the savings side, Thomas, you already Commented a little bit on this. And maybe if you could sort of help us a little bit how to think about other temporary savings come Q4 and Into 2022, will they sort of gradually will the headwind gradually taper off from the level we saw in Q3? Or how should we think about sort of the new structural level of this cost into next year? We don't really have any guidance on that. And I mean, it depends. The world has not yet gone back to normal. So it depends very much on that. I mean when travel is free all over the world and you can send your service technicians and salespeople and what have you Freely, so to speak, then they will be well, not gone, but then they will start to reduce dramatically. I don't know if you Want to comment on that more? Again, we don't as Thomas says, we don't have any specific guidance. I would say if we look how much of these temporary savings Are actually still there. If we take away the whole work time reduction aspect, I'm quite optimistic that we will see a lower spend level going forward Because yes, we have not started to travel in a, let's call it, new normal yet. I think that's clear. But travel has started a bit. And we are back in the office in most places, which means, yes, considering how much of those Lower spend levels are still there. I think we will see a long term benefit from this, but we don't have a specific number for No, let me exactly, let me correct myself or add. Of course, we will not go back to previous spend levels. If we do that, then we haven't learned anything during this period. Got it. Thank you so much. I guess one final one. On SMR, could you help us with how much equipment grew there adjusted for large orders? Overall, it grew by 28 Present. Then if you take away the large orders, is it 2020? I would be very careful with adjustments So around large orders because sometimes we get a large order, sometimes we get 3 medium ones 3 months in a row for a customer, and then it doesn't count as a large order. And sometimes, you get one that is €5,000,000 below the Threshold. So it's relevant. We show it because we want you to be able to sort of Look at that perspective, but I don't discount it in terms of the order levels. Understood. Thank you so much. Thanks. Thank you. Our next question Comes from the line of Klas Bergelind of Citi. Please go ahead. Your line is open. Thank you. Hi, Spier van den Thomas, it's Claus at Citi. So a couple of questions, please. First of all, I'm trying to understand The monthly year over year comparative is a bit better in SMM and if I got this right. It looks like 10% growth in September and perhaps 5% to 7% growth at the start of October. And the question is really, are the comparatives considerably tougher for the rest of the quarter? Here, you still find the things sequentially now look better end of September, now October. But I'm trying to understand the year over year growth here in September and That would be very helpful. If I talk quarters first, I mean, for sure, Q4 Last year, we had higher yes, tougher compares in Q4. That's absolutely true. I I mean, you can see that in the numbers, of course, from last year. Then I don't want to mention any specific numbers because We have done it in the past. How did the quarter start? It's almost I would almost call it disinformation because If you look at how the weeks vary, the 1st couple of weeks and give a specific percentage points, it doesn't correlate with how the So that's why we have been, this time, a little bit more vague and just It continued in October at a good pace, but not giving a specific percentage. But in general, I think your reasoning Makes a lot of sense. Very good. We get a lot of questions from investors this morning on this. I just wanted to clarify. My second question is on North America. So an uptick through the quarter last time. And now when I checked in With you guys, I checked in with Louise this morning. It seems like North America on the pure general engineering side is slowing a bit, and I'm talking sequentially here. Would you link this to the general bottlenecks in North America that we hear so much about that is weighing on production levels? Or is something else we should think about? It's difficult to pinpoint. We saw a slight Sequential slowdown in general engineering in North America in the quarter. I think some of it or we believe some of it is Automotive, as you know, some of the general engineering goes into automotive as well. And then it's fair to assume that the general And our bottleneck situation is also having an impact. But yes, General Engineering overall is actually we're quite Positive around it. It was just that specific. North America, a little bit slower in the quarter. Okay. Quick very final one is on China. It seems like it's just autos still seeing weakness. Was there anything There in China, Stefan, outside autos at the end of the quarter that got worse, and I'm talking or in early October. No, it's primarily a slowdown in Automotive, I would say. Thank you very much. Thank you. Our next question comes from the line of Andrew Wilson at JPMorgan. Please go ahead. Your line is open. Hi, good afternoon. Thanks for taking my questions. I've just got 2. I'll start actually with 1 on the mining side. I'm just interested in what seems to be a different message on The supply challenges in the invoicing between SMR and SRP, it clearly seems a lot more difficult in SRP and appreciating the businesses are different. But just, I guess, how concerned do we need to be that we might see an impact in SMR in terms of the Q4? Are you thinking it's getting a little bit harder from an invoicing Perspective or do you think that that's under control? I think the main difference between SMR and SRP and that we talk a little bit more The impact in SRP is simply a matter of size. SMR is a bigger business. They have Yes. They are present in more locations. They have more factories, etcetera, etcetera, which means if they have challenges in one area, they Can try to offset it in another in a different way. SRP, if stationary crushers have an issue to deliver A few crushers at the end of the month. There is really no they have no way to really offset it. So I don't think the situation is worse or better for anyone. I just think SMR has a little bit more opportunities To manage the situation due to scale and size. So I think that's more the reason. As for going forward, we don't think that the situation will get worse, but we think we will have to live with the situation we have Also for the rest of the year. And then exactly when it will improve, we I guess your information is as good as mine on that. That's helpful. And then just on the and probably just coming back to the auto side within SMM. I guess I'm interested in you're talking about kind of flat development year on year, which would seem much better than where the IHS forecast will kind of Production volumes and kind of thinking about that number and also thinking about the kind of future quarters. How I guess, simply how Good guide, should we think sort of IHS numbers are likely to be for your auto business? Or do we need to think about kind of Supply Chain and Stocking and Asspects like that. Just looking for a little bit of, I guess, help in terms of pitching where that auto business might be. Yes. I think historically, it has been a good guide when the numbers have moved much slower, so To say all with bigger or smaller changes. I think we have seen all the way from the start of the pandemic that There is more lag in the supply chain, sort of a rubber band than we might I've seen historically simply because of the bigger changes. So over time, I think we clearly must correlate with production data. But from a specific quarter perspective, it can vary. Perfect. Thank you very much, Stefan. Thank you. Our next question comes from the line of Thiers Hombay of DNB. Please go ahead. Your line is open. Hi, everyone. Thanks for the time. You've had a pretty interesting lineup of acquisitions in SMM recently, and I'm curious as to how far along you would say that you've come in Better positioning SMM towards the structural shift away from internal combustion engines. Sort of will Acquisitions that you've made so far be enough to offset that headwind? Or perhaps rather how dependent will SMB Or further acquisitions in metrology and CAM in order to have a business that overall will be able to grow faster than, say, Underlying industrial production in the coming years. I would there are really 3 parts to the answer, I would say. First of all, It's actually the acquisitions done in Round Tools, which is part of the strategy to offset this. But that was not really your question, but I want to emphasize that there's an important part in the core business as well to offset that headwind, which we are very happy with the progress made in the quarter. Then to your question, I would split the answer in 2. We have a target in SMF, as we have said now, to be at SEK 6,000,000,000 by 2025. And we are since we upgraded the target after these acquisitions already in a good position to achieve that. We are clearly already seeing that we will be above the 4% without further acquisitions really. Up until 2025, just the growth up until the SEK 6,000,000,000 organic and through acquisitions We'll be by far offsetting the headwind from this transition because we have an acquisitive component that's fairly aggressive. If you look at the state in 2025 and SMF being at SEK 6,000,000,000 growing at high single digits Organically because that's where we should be with this in these markets. The growth from SMF will More than offset the headwind we will see from that transition in the latter half of the decade. This is, of course, part of the strategy To exactly get into this position, we haven't delivered on all of it yet, but we are in, I would say, very good progress. So From our point of view, I know not all of you are convinced yet, but from our point of view, we are now In a very good position in terms of managing this headwind. So we feel quite confident. Interesting. Thank you so much. One more question for me, if I may. You mentioned some pre ordering or stockpiling from Certain customers or certain segments, do you see any risk of backlash of this going forward? And in particular, have you seen any Such behavior in SMM? No, that was not really an SMM comment. It was more on the sort of spare parts side, Especially in SRP. I mean, also aftermarket in SMR was up 16%. Part of it is because of strong underlying demand, but it might be also there just securing the supply chain since everyone knows I don't foresee a backlash, but I would say if you take SRP, for example, Going into next year, the focus will be to maintain order levels at the level they are. To add another Significant growth number on top of it will probably be challenging. So not a backlash, but a slowdown in the order growth It's probably to be expected in those type of businesses. Thank you so much. Thank you. Thank you. Our next question comes from the line of Max Yates at Credit Suisse. Please go ahead. Your line is open. Thank you. Just my first question was on the comment that you made about now being the CAM market leader. So I just wanted to understand Kind of a little bit around the sort of market structure there and kind of what you think your market share is to make you leader, who the maybe sort of 23 Would be in that market, whether they're kind of larger companies with a smaller presence in this market or it would be kind of smaller niche players that we're maybe Perhaps not aware of. So just a little bit of detail around the market structure there would be helpful. Yes. When we say we are now the market leaders, it is in number of installed seats, which in a way is how present you are with customers. If you would measure it on revenue, We are top 3, but we choose to measure it in a way that makes us the market leader. But it's very even between the top 3, top 4. So a little bit how you measure, you will get to Yes, different positions. But market leader in number of installed seats, top 3 if you take revenue. The other You take us the others, yes. Yes. The top four players are Dassault, Siemens, Autodesk, Hexagon and Nas, I realized that was 5, so top 5 players. Okay. That's helpful. And just a quick follow-up. You mentioned The Randalls strategy and sort of buying that was a defense against or buying into Randalls was a defense against The challenges on the traditional auto business. Could you talk kind of a little bit more around that? And the reason I ask is just when I look at some of The sort of larger round tool manufacturers in Asia, they still seem to have quite high Auto exposure. So is it just they're exposed to different parts of manufacturing, which isn't affected by the EV transition? Or is it actually The businesses that you're buying have less auto exposure relative to your own. So just to understand that comment a little bit better. The growth in round tools is Higher than in inserts in general. And it started from our perspective really with Aerospace. Round tools is more important in aerospace. I mean, you have a better reach with round tools to machine complex parts. And yes, so to get more exposure into aerospace, that has been an important part. Also in auto, the components and parts Needed for EVs are more geared also towards round tools. So if you want to be at the Successful in auto going forward, we need to shift and extend our product range also more into roundtours. And it's a little bit similar reasoning. When you want to do more fine components, reach further into the components you machine, Round tools is more suitable than in such, which is a little bit more, yes, clumsy in that sense. I don't know whether you would have this kind of figure in mind, but I mean, I think we've kind of quite helpfully before been given kind of this effectively if An electric car has about sort of onethree of the sort of cutting tool needs of a traditional vehicle. Do you have a figure in mind for kind of how that would look for round tools if we do see you make a larger acquisition with auto exposure? Whether there would be as many round tool needs in an EV versus a traditional car? Or is it pretty similar? Is it less? I presume it's less negative, as you said, than the kind of the traditional tooling inserts, EVs versus traditional cars. The normal index we use is 40% in EVs and 110% in hybrids and 100% in ICE. I don't have what you asked for in Rantoul's, so I cannot answer that. We will have to look into it and maybe come back. Okay, perfect. Thank you very much. Thanks. Thank you. And our next question comes from the line of Gail Debre of Deutsche Bank. I have two questions, please. Firstly, could you elaborate on the slowdown you're seeing in China this quarter? It would be helpful if you could Put a figure on the revenue development for SMMS in China in Q3, perhaps including autos and excluding autos. And the second question is on well, still about SMMS. From a strategic perspective, Do you think it would make sense to try and balance a bit better the regional exposure of the Machining Solutions business And make it less dependent on Europe. I mean is this something that is on your mind or not really? Yes. Thank you. If we look at the sequential development going into China in Q3, We saw a slowdown, as we said, mainly because of Automotive, and it was in the low single digits coming from Q2 into Q3. So I mean, fairly limited, I would say. But since we usually rely on China for growth, it, of course, Had an impact, but low single digits. If you want to add to that, Louise. Yes. Yes, correct. And it came primarily from auto. I don't have the numbers with and without automotive, but that is what's the main driver. Geographically, SMM, yes, absolutely. It's one of the key initiatives they have is to grow Outside of Europe, outside of mature markets in general, but in particular, outside of Europe since they have about 40% of the revenue in Europe, which is why we have seen some of the acquisitions. We have seen in the quarter here, we had Yongpu, Very nice acquisition in Round Tools in China, over SEK 400,000,000 second in turnover, Good growth, good profitability. FANAR in the quarter, yes, it's in Europe, but it is in the eastern part in Poland, also an area where we want to grow more. We had Miranda Tools end of last year in India. Very good development and one The reasons our Dolby Promet brand is growing very nicely in India. So absolutely, Increased exposure outside of Europe is a key strategy for SMS going forward. And apart from acquisitions, is there any possibility to invest more organically in some specific geographies? Yes. That's an ongoing always something we evaluate as part of the normal business. In some of these regions, though, if you take India, what we can see is an acquisition like Miranda Tools with established Routes to Market and Channels in, let's call it, the fine grain network in India is something it's Super hard for us to build organically. I don't think we really could do that. And it's much better to go with an acquisition strategy. You also get a company that sort of from a cost perspective and speed perspective is geared for the local market and have the right products, The right cost level and so on. Okay. Thanks very much. Thank you. Thank you. Our next question comes from the line of Gustaf Scharlin of Handelsbanken. Please go ahead. Your line is open. Yes. Thank you very Two quick ones on the mining side. Firstly, if you could give us the replacement greenfield brownfield split for equipment orders in Q3, Hesimar? And then secondly, I'm wondering if you're seeing any indications of softening demand from some of the larger miners on the recent development we've seen in iron ore. Thanks. Yes. Strong development on brownfield. About twothree of the business It was Brownfield. Let's say, a quarter ish replacement and the rest Greenfield. So Greenfield is still a relatively small or it's the smallest part of the development. So it's extensions, New investments in existing mines and replacements, really that's driving most of it. Haven't Got any signals of hesitation or slowdown by the larger mining customers at this point? No. Great. Thank you. Thank you. Our next question comes from the line of James Moore at Redburn. Please go ahead. Your line is open. Yes. Hi, everyone. I have 2 for Stefan and one for Thomas, if I can. Maybe I'll go one at a time. Can I come back to Andy's question earlier on SMM and Global Automotive? Great that your sales Flat in the quarter, but production, I guess, was down 15% more or more percent globally. And nice to hear about your positive momentum into October. I just wonder whether, Given your visibility and discussion with your automotive customers, you see a delayed pressure that could come Into your business after it's happened globally, but still lies ahead. In terms of conversations, we have no visibility to that in that sense. But as I said, of course, if the automotive slowdown would persist For a longer period of time, we cannot be at a higher level than the underlying market. That's clear. If it is more of A transitionary slowdown and it will come back in a reasonable time, it's more likely But they will use this as an opportunity to secure their own supply chain. So I think it's all a matter of how long these issues will persist on the component shortages. Thanks. And could I ask about SMS? And if you were to look inside the deals in the existing business, what sort of speed of growth are we seeing across Cam, 3 d Printing, Metrology. Are you sort of broadly growing in line with your strategic targets? Or are we running ahead or a bit behind? How is that looking? Yes, I want to be a bit careful since as you have seen, some of one of these acquisitions we even closed today. So I mean, We don't have in our books yet, so to say, but the trading is good in these companies. And I don't have a strong view as of yet on growth versus market growth, but at least current trading is at or above the business cases we put forward when we did the acquisition. So I would say a Good momentum in the businesses at least, so which is a positive start. But let's come back to the question when we have Had them for a bit longer maybe and can speak a little bit more confidently around the development. Thanks. And Thomas, you mentioned that the savings programs will come to an end in the next couple of quarters. As we look ahead, The company has always had some form of ongoing productivity, but do you see any additional permanent savings potential As another plan going forward after this one. I think it's better that Stefan answers that question. But as you say, There will always be savings programs ongoing. There will always be bigger and smaller activities and productivity and Whatever, combinations and consolidations and what have you. And I think it's better that you ask a question answer that question, Stefan. And as Thomas said, with the current program we have, we'll run into Q1, Q2 next year ish Before most of the activities have been completed. So we are busy executing on that. But yes, as you say, we always have something going on. So we will have to come back to that. But At some point, there will be another program, but exactly when and how much and so on that, we will have to come back to And we have done our plans. Thank you very much. Thank you. And now we have To close the Q and A session, there are many questions. We will come back to you for those that have written questions to us. And For the others, please don't hesitate to call IR. So thank you very much for calling in, and have a nice day.