Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sandvik AB (SDVKF, Financial) reported a stable financial performance despite mixed demand across different sectors.
- Order intake growth was 2% in total, with a 3% positive organic growth.
- Savings from restructuring programs amounted to SEK275 million in the quarter.
- The company expanded its market presence in China with the acquisition of Suzhou Ahno and in the US with PDQ.
- Double-digit growth was observed in the software businesses, particularly in mining and manufacturing solutions.
Negative Points
- Revenues declined by 3% in total, with a negative 2% organic growth.
- Adjusted EBITDA decreased by 7% versus last year, corresponding to a margin of 19.6%.
- General engineering and automotive sectors experienced a decline in demand.
- Infrastructure demand remained weak, with regional variations.
- The margin was impacted by lower volumes and cost inflation, leading to a year-over-year dilution.
Q & A Highlights
Q: Can you provide an update on the revenue recognition for SMR equipment sales?
A: Stefan Widing (CEO): Sales and revenues for SMR in the quarter were solid, up sequentially by SEK1.8 billion or 13% versus Q1. The leverage we're discussing is not driven by the same dynamics as Q1.
Cecilia Felton (CFO): The main reason for low leverage in the quarter is the dynamics around price normalization. Last year, price was overcompensating for inflation, whereas this year, price offsets inflation, resulting in a dilutive impact year-over-year.
Q: What was the impact of pre-buying in China on your growth figures, and do you expect a reversal in Q3?
A: Stefan Widing (CEO): The organic growth in China was 14%, with an underlying growth of mid-single digits, indicating a 10 percentage point impact from pre-buying. We expect a gradual reversal throughout the rest of the year, not all in Q3.
Q: Can you elaborate on the strong performance in the software business and its contribution to SMM?
A: Stefan Widing (CEO): Software business saw double-digit growth, contributing significantly to SMM's overall growth. Powder business also performed well. Software currently represents around 5-6% of SMM's orders and sales, with a target to reach SEK4 billion by the end of next year.
Q: How do you see the demand momentum for your battery electric machines (BEVs) in mining?
A: Stefan Widing (CEO): This year has seen a muted demand for BEVs, with no large fleet orders. The interest remains high, but the industry is in a wait-and-see mode, observing the performance of larger fleet orders currently being delivered. We maintain our target that 50% of our machines will be electric or non-diesel by 2030.
Q: Can you comment on the inventory levels and their optimization across different business lines?
A: Cecilia Felton (CFO): Inventory levels are still elevated, particularly in SMR and some divisions in Rock Processing. We aim to gradually reduce inventory levels, but we won't reach our 25% net working capital target this year. Improvements will continue into next year.
Q: Have you seen any impact from the recent warnings by large aerospace OEMs on your business?
A: Stefan Widing (CEO): We haven't seen any negative impact on our aerospace business momentum. The mid to long-term demand picture remains positive, despite some production ramp-up challenges at OEMs. The timing of orders can cause quarterly fluctuations, but the underlying momentum is strong.
Q: How has the automotive sector performed, and what is your outlook for the second half of the year?
A: Stefan Widing (CEO): Automotive was weak in Europe, down high-single digits, with North America slightly better but still down. China showed some growth. Forecasts indicate a slight decline in auto production levels this year, with softness expected to continue.
Q: Can you explain the year-over-year margin dilution due to price increases and cost inflation?
A: Cecilia Felton (CFO): Last year, price increases were ahead of inflation, resulting in accretive margins. This year, price offsets inflation, causing a dilutive impact year-over-year. We expect this dynamic to normalize by the beginning of next year.
Q: What are your expectations for return on capital employed (ROCE) and free cash flow conversion in the medium term?
A: Cecilia Felton (CFO): ROCE has been impacted by recent acquisitions, which build up goodwill in the balance sheet. We aim for returns higher than WACC within five years for acquisitions. Cash conversion typically ranges between 80-90% over time, with higher figures during downturns.
Q: How do you view the pricing dynamics in the market currently?
A: Stefan Widing (CEO): We are converging towards a normal pricing situation. While there are some pockets of pricing challenges, we maintain our value-based pricing approach, even if it means sacrificing some deals to uphold pricing levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
