Warm welcome to Sandvik's presentation of the third quarter results 2021. My name is Louise Tjeder, Head of Investor Relations, and beside me I have, of course, our CEO, Stefan Widing, and our CFO, Tomas Eliasson. Stefan and Tomas will, as usual, start with the presentation and take you through the highlights of this quarter, then we will spend approximately half an hour on the Q&A session. The questions you can ask on the conference call as per instructions from the operator or online in written. With this, it's time for the presentation, and I hand over the word to you, Stefan.
Thank you, Louise. Also I would like to welcome you to our third quarter report in 2021. We will for sure return to this picture here of our beautiful electric 50-ton truck later in the presentation. I'll start with the summary of the quarter, which was a quarter we would say had a 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. 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 EBITDA margin of 19.1% versus 17.7%. 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 million, but this was more than offset by reversals of temporary savings, especially short time work weeks of in total SEK 615 million. Tomas will break this down further in his part of the presentation. We also saw a successful execution of our Shift to Growth strategy. Seven 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 billion in 2025, with an EBITDA margin of at least 20%. 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-ton battery electric truck in the beginning. This is the second 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 MINExpo 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 enable through our patented AutoSwap and AutoConnect technology..
Below the range of 22%-24%. 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 22.2%, well within the range of 22%-24%. Some of you might ask what happens now going forward with the tax rate. Let me preempt that question and answer it right now. There's been two major discussions on the regulatory area lately here. One of them is a possible increase in the corporate income tax rate in the U.S.
If that happens, we estimate the impact on the tax rate to be 30 basis points. Then we have the OECD initiative, which is gaining momentum globally, with a minimum corporate tax rate of 15%. That will impact the tax rate with another 30 basis points max. That's 60 basis points. From that point of view, everything else equal, there is no need to change the guidance for the tax rate upwards. If that's the only thing that happens, the 22%-24% stays. You will hear more about that in January at the Q4 closing. 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.
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 move to a 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. 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. 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. You can also see that net working capital change has quite a negative impact on the cash flow. CapEx is basically stable.
That explains the difference between SEK 3.9 billion and SEK 4.8 billion a year ago in free operating cash flow. Let's look at the net debt. In Q3, we have paid for quite a few acquisitions, DSI, Mastercam, and a few others. The financial net debt has now turned into a net debt. It has been a financial net cash position for quite some while now, but now we're up in debt territory, SEK 7.4 billion in financial net debt. There are no excess cash anymore. The total net debt is on SEK 18 billion, and the gearing is on 0.25. We have started to borrow money in the third quarter on the short-term market commercial papers. Of course, it has went well. Moving forward, of course, we'll see what happens. Depends on the pace of acquisitions.
Some of that short-term borrowing will be turned into bonds, and some of it will be rolled forward in new commercial papers. Depends on what happens. We'll see, but well under control. 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, plus 2. We guided zero, spot on. The total effect was 108. That includes revaluation and hedges, realized and unrealized and all that. 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 190 compared to 200. At the bottom part of the table, CapEx moving steady ahead, SEK 800 million in the quarter. Interest net SEK 100 million. The tax rate, as I explained, 22.2%.
The guidance for the fourth quarter and the full year 2021. A normalized CapEx level for Sandvik is around SEK 4 billion or a little bit above SEK 4 billion, and we have said that it will be a little bit below SEK 4 billion 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. We will not reach or go beyond SEK 4 billion for this year. Currency underlying transaction translation probably SEK 150 for the fourth quarter. Metal price effects in quarter +SEK 50. Interest net, we keep the guidance on the SEK 400 million. Tax rate, we stick to the guidance of 22%-24%. With that, I'll hand over to you, Stefan, for summary and conclusions.
Thank you, Tomas. Again, this was a quarter with a 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 with good contribution from our acquisitive growth. We have had a successful execution of our Shift to Growth strategy with seven acquisitions in and after the quarter. We have also continued to show resilient margins, strong margins with an EBITA margin of 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 cost, 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 timeline for the planned spin of SMT. We have so far this year already added over SEK 8 billion in revenues from acquisitions, we will have strong contribution from acquired growth in the upcoming periods. 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. Thank you for listening, and I guess we hand over now to M&A. Oh, sorry, to Q&A to see what's top of my mind.
Thank you, Stefan and Tomas. Yes, we open up the Q&A session, and I know there's a lineup of questions on the call, we start with these right away. 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.
Hi, Stefan, Tomas, 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 the automotive business grew there, as well as if you could narrow the range a little bit on the aerospace side from double digits. What specifically level are we talking about here?
Yeah. 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. Thank you so much. On the savings side, Tomas, you already commented a little bit on this, and maybe if you could help us a little bit how to think about the other temporary savings come Q4 and into 2022. Will the headwind gradually taper off from the level we saw in Q3, or how should we think about the new structural levels of these costs into next year?
We don't really have any guidance on that. It depends. The world has not yet gone back to normal. It depends very much on that. 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.
No. Again, as Tomas 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 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 it.
No. 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.
Yeah.
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%. If you take away the large orders, is it 20? I would be very careful with adjustments around large orders, because sometimes we get a large order, sometimes we get three medium ones three months in a row for a customer, and then it doesn't count as a large order. Sometimes you get one that is 5 million below the threshold. It's relevant. We show it because we want you to be able to look at that perspective. I don't discount it in terms of the order levels.
No, understood. Thank you so much.
Thanks.
Thank you. Our next question comes from the line of Klas Bergelind of Citi. Please go ahead.
Thank you. Hi, Stefan and Tomas. It's Klas at Citi. A couple of questions, please. First of all, I'm trying to understand the monthly year-over-year comparatives a bit better in SMM, and if I got this right. It looks like 10% growth in September and perhaps 5%-7% growth at the start of October. The question is really, are the comparatives considerably tougher for the rest of the quarter? I hear you, Stefan, are saying sequentially now look better end of September, now October, but I'm trying to understand the year-over-year growth here in September and October. That would be very helpful.
If I talk quarters first, for sure, Q4 of last year, we had tougher compares in Q4. That's absolutely true. You can see that in the numbers, of course, from last year. I don't want to mention any specific numbers because we have done it in the past. How did the quarter start? I'd almost call it disinformation, because if you look at how the weeks vary, the first couple of weeks and give a specific percentage point, it doesn't correlate with how the quarter then evolves. That's why we have been, this time, a little bit more vague and just say that it continued in October at a good pace, but not giving a specific percentage.
Okay.
In general, I think your reasoning makes a lot of sense.
That's very good. We get a lot of questions from investors this morning on this, so I just wanted to clarify. My second question is on North America, and saw an uptick through the quarter last time. 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 related to automotive. As you know, some of general engineering goes into automotive as well. Then it's fair to assume that the general bottleneck situation is also having an impact. Yeah. 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? 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 JP Morgan. Please go ahead. Your line is open.
Hi. Good afternoon. Thanks for taking my question. I've just got two. I'll start with you with 1 on the mining side. I'm just interested in what seems to be a different message on the supply challenges and the invoicing, between SMR and SRP. It clearly seems a lot more difficult in SRP. Appreciating the businesses are different. Just, I guess, how concerned do we need to be that we might see an impact in SMR in terms of the Q4? Are things 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 about the impact in SRP, is simply a matter of size. SMR is a bigger business. They are present in more locations. They have more factories, et cetera, 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, they have no way to really offset it. 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. I think that's more of the reason. As for going forward, we don't think that the situation will get worse.
We think we will have to live with the situation we have, also for the rest of the year. Exactly when it will improve, I guess your information is as good as mine on that.
That's helpful. Just on the, and apologies, coming back to the auto side within SMM. I guess I'm interested in the talking about flat development year-on-year, which would seem much better than where the IHS forecasts have pitched production volumes. Thinking about that number and also thinking about the future quarters, I guess simply, how good a guide should we think IHS numbers are likely to be for your auto business, or do we need to think about supply chain and stocking it and aspects like that? Just looking for a little bit of, I guess, help in terms of pitching where that auto business might be.
I think historically, it has been a good guide when the numbers have moved much slower, so to say, or with 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 have seen historically, simply because of the bigger changes. Over time, I think we clearly must correlate with production data. From a specific quarter perspective, it can vary.
Perfect. Thank you very much, Stefan.
Thank you. Our next question comes from the line of Mattias Holmberg 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. Will the acquisitions that you've made so far be enough to offset that headwind? Perhaps rather, how dependent will SMM be of 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?
There are really three 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. That was not really your question, but I want to emphasize that there is 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. To your question, I would split the answer in two. We have a target in SMF, as we have said now, to be at SEK 6 billion by 2025. 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 four without further acquisitions really.
Up until 2025, just the growth up until the SEK 6 billion, organic and through acquisitions, will 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. SMF being at SEK 6 billion, growing at high single digits organically, because that's where we should be 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.
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. We feel quite confident.
Interesting. Thank you so much. One more question from 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? In particular, have you seen any such behavior in SMM?
That was not really an SMM comment. It was more on the spare parts side, especially in SRP. After market 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 the situation globally. 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. Not a backlash, but a slowdown in the order growth is 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. My first question was on the comment that you made about now being the CAM market leader. I just wanted to understand a little bit around the sort of market structure there and what you think your market share is to make you leader, who the maybe two and three would be in that market, whether they're larger companies with a smaller presence in this market, or it would be smaller niche players that we're maybe perhaps not aware of. Just a little bit of detail around the market structure there would be helpful.
Yeah. 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 three, we choose to measure it in a way that makes us the market leader. It's very even between the top three, top four. A little bit how you measure, you will get different positions. Market leader in number of installed seats, top three if you take revenue.
Who do you take as the others? Yeah.
The top four players are Dassault, Siemens, Autodesk, Hexagon, and us. I realize that was five, so top five players.
Okay.
Yeah.
That's helpful. Just a quick follow-up. You mentioned the round tools strategy, and buying into round tools was a defense against the challenges on the traditional auto business. Could you talk a little bit more around that? The reason I ask is just when I look at some of the larger round tool manufacturers in Asia, they still seem to have quite high auto exposure. Is it just they're exposed to different parts of manufacturing, which isn't affected by the EV transition, or is it actually that the businesses that you're buying have less auto exposure relative to your own? Just to understand that comment a little bit better.
The growth in round tools is higher than in inserts, in general. It started from our perspective, really with aerospace. Round tools is more important in aerospace. You have a better reach with round tools to machine complex parts. 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. If you want to be successful in auto going forward, we need to shift and extend our product range also more into round tools. It's a little bit similar reasoning, when you want to do more fine components, reach further into the components your machine, round tools is more suitable than inserts, which is a little bit more clumsy in that sense.
I don't know whether you would have this kind of figure in mind, but I think we've quite helpfully before been given effectively if an electric car has about a third of the sort of cutting tool needs of a traditional vehicle. Do you have a figure in mind for 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? Is it pretty similar? Is it less? I presume it's less negative, as you said, than 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 round tools, 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. Our next question comes from the line of Gael De Bray of Deutsche Bank. Please go ahead. Your line is open.
Good afternoon, everybody. 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. The second question is, 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? Is this something that is on your mind or not really?
Yeah. Thank you. If we look at the sequential or 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. 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?
Yep.
Yeah. Correct. It came primarily from auto. I don't have the numbers with and without automotive, but that was the main driver.
Okay.
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, a very nice acquisition in round tools in China. Over SEK 400 million 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 of the reasons our Dormer Pramet brand is growing very nicely in India. Absolutely. Increased exposure outside of Europe is a key strategy for SMS going forward.
Apart from acquisitions, is there any possibility to invest more organically in some specific geographies?
Yeah, 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 that's super hard for us to build organically. I don't think we really could do that. It's much better to go with an acquisition strategy. You also get a company that, from a cost perspective and speed perspective, is geared for the local market and have the right products at the right cost level and so on.
Okay. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Gustaf Schwerin of Handelsbanken. Please go ahead. Your line is open.
Yes, thank you very much. Two quick ones on the mining side. Firstly, if you could give us the replacement greenfield, brownfield split for equipment orders in Q3. 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.
Yeah. Strong development on brownfield. About two-thirds of the business was brownfield. Let's say a quarter-ish replacement, and the rest is greenfield. Greenfield is still a relatively small, or it's the smallest part of the development. It's extensions, new investments in existing mines and replacements, really that's driving most of it. Haven't gotten 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.
Yeah. Hi, everyone. I have two for Stefan and one for Tomas, 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 are flat in the quarter, production, I guess, was down 15% or more globally. Nice to hear about your positive momentum into October.
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. 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 transitory slowdown and it will come back in a reasonable time, it's more likely that they will use this as an opportunity to secure their own supply chain. I think it's all a matter of how long these issues will persist on the component shortages.
Thanks. Could I ask about SMS? If you were to look inside the deals in the existing business, what sort of speed of growth are we seeing across CAM, 3D printing, metrology? Are you broadly growing in line with your strategic targets, or are we running ahead or a bit behind? How's that looking?
Yeah, I want to be a bit careful since, as you have seen, one of these acquisitions we even closed today. We don't have them in our books yet, so to say. The trading is good in these companies. I don't have a strong view as of yet on growth versus market growth. At least, current trading is at or above the business cases we put forward when we did the acquisition. I would say a good momentum in the businesses at least. Which is a positive start. 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. Tomas, 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, 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. I think it's better that you answer that question, Stefan.
As Tomas said, the current program we have will run into Q1, Q2 next year-ish, before most of the activities have been completed. We are busy executing on that. Yeah, as you say, we always have something going on, we will have to come back to that. At some point, there will be another program. Exactly when and how much and so on, that we will have to come back to when we have done our plans.
Thank you very much.
Thank you. Now we have to close the Q&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. Thank you very much for calling in, and have a nice day.