Shaping our future through stability and growth
2016 was a positive and eventful year for Sandvik with several significant changes. We took considerable actions to move accountability closer to the business. These measures are important to strengthen our entrepreneurial way of working, ensure continuous improvements and promote agility in responding to customer needs. For me, it is important that Sandvik is a great company to work for and to own. We shall be leading in the industries in which we operate and we strengthened our core businesses during the year.
The new strategic direction that we established during the year focuses on decentralization and that decisions are made closer to customers. We moved the profit and loss responsibility to the product areas, i.e. to our different businesses, and established new management teams for many of these. This is the foundation for Sandvik to drive performance and become faster in the response to changing customer demand.
We also altered our business area structure in order to ensure focus on our core operations. The merger of Sandvik Mining and Sandvik Construction into the new business area Sandvik Mining and Rock Technology was an important undertaking that required a great deal of the many people involved. The divestment process of Mining Systems, Sandvik Hyperion and Sandvik Process Systems continued during the year.
The new organizational structure and the adjusted ways of working will certainly contribute to securing a stable and profitable business moving forward. This, in turn, will allow us to invest and make new acquisitions more in line with our core businesses.
Business progress – continuous improvements
Sandvik has a solid foundation to build upon as many of our business units are world leaders in the areas they operate. We have highly competent people and extensive technical expertise. Together with our ability to industrialize and enhance customer value, we are now building on our over 150-year heritage. We are focusing on our core capabilities, such as material and application knowledge and close customer cooperation.
Some of our customer segments continued to be affected by a challenging macroeconomic situation during the year, particularly the oil and gas and the engineering segments. In the mining segment however, order intake improved as a consequence of increased commodity prices towards the later part of the year and the outlook became increasingly positive. The aerospace segment continued to develop well and demand in the automotive segment remained stable. Many of our geographical markets continued to grow, although at a slower pace. We saw Asia pick up in the second half of the year and I believe there are exciting opportunities for us also in other emerging markets.
"I believe that strong performance is about small improvements every day."
Aftermarket developed positively and continues to be an important part of our business. For example, spare parts and service, account for 65% of Sandvik Mining and Rock Technology's business, and approximately 30% of Sandvik Materials Technology's business involves industrial consumables.
Our order intake in 2016 amounted to 81,861 million SEK and revenues to 81,553 million SEK, and operating profit was 11,018 million SEK. We delivered a strong cash flow and good result in a challenging organic growth situation. Although we experienced quite a strained business environment during the year, our earnings developed in the right direction. I am particularly satisfied with the EBIT improvement resulting from our supply chain optimization program and the reduction of administration and sales costs, which have streamlined our operations and contributed toward improving our margins.
I believe that strong performance is about small improvements every day and we are fully committed to deliver in line with the new targets that we have communicated. Together with our new decentralized business model, they will support revenue growth, internal performance improvements and a more cost-efficient organization that is focused on driving profitable growth and ensuring a generous dividend.
At the forefront of technological development
Our vision is to set the industry standard in the eyes of our customers. This involves not only being the number one choice for our customers in our selected segments, but also keeping ahead of other actors on the market.
The prevailing market trends toward greater digitalizatio
n and sustainability, fit well with Sandvik’s business and customer offering as well as with the tradition to focus on research and development. We work close to our customers to lead the technological development, and launch new and leading products and solutions that contribute to improved customer productivity, profitability and sustainability. Efficient time-to-market processes as well as a continuous focus on application knowledge are crucial for our success. During 2016, we introduced many exciting new products. For example, Sandvik Machining Solutions launched groundbreaking technology with intelligent digitally connected tools for use in the metal-cutting industry.
We also initiated work to establish a new product area called Additive Manufacturing, which is in operation as of 1 January 2017. It will fully commercialize our business of metal additive manufacturing. The new product area will have complete profit and loss responsibility and will step-by-step take a position on the market through organic growth as well as acquisitions. In addition, our unit Sandvik Osprey, within the business area Sandvik Materials Technology, is a market leader in metal powder for additive manufacturing.
Sandvik Mining and Rock Technology launched battery-driven loaders, drill rigs and more efficient engines. This will enhance the productivity, environmental performance and safety of customer operations, particularly in remote-controlled mining activities, i.e. our mining automation offering AutoMine®.
Sandvik Materials Technology made good progress together with various fuel cell customers globally. With our unique material, we enable our customers to bring affordable commercially viable fuel cell cars to the mass market. In Sandviken, we opened Sweden’s fourth hydrogen filling station in partnership with the municipality.
Such work will further leverage the value we provide to our customers, while continuing to support growth opportunities.
Responding faster to customer demand
Our product areas work closely with our customers and have full operational and financial responsibility. The responsibility regarding R&D, indirect purchasing and supply chain were moved back into the businesses during the year. We also started to move out other resources, such as Finance and HR. Once completed, I believe this will improve our performance.
We also need to create the best possible conditions for delivering results, and fostering good leaders. By giving greater accountability to the product areas, our leaders will have a deep understanding of how to run successful businesses. This is essential for Sandvik’s leadership development and provides us with opportunities for a solid and well-functioning open, internal job market.
Increased decentralization also means a greater need to ensure a culture of high ethical and responsible behavior. We have therefore revised our governance framework, "The Sandvik Way", in which we have established common principles and values that all our businesses need to adhere to, including our Code of Conduct, our principles regarding an internal job market, and our financial processes.
Sustainable business integrated into our offerings and operations
Sustainability is crucial to our ability to create increased customer value, enabling us to help our customers become safer, more efficient and more productive. Climate change is an increasingly important issue. Our high performing products can meet the growing customer demand for low-carbon and more sustainable solutions.
Circular economy is another important competitive advantage for us. For example, Sandvik Materials Technology uses almost 80% of recovered metal material for its production of stainless steels and special alloys and Sandvik Machining Solutions uses over 50% of recycled material for its tools and inserts – which we believe could reach 80% in the future. In Sandvik Mining and Rock Technology, about 90% of metallic input material used in manufacturing is recovered material. These are concrete examples of how we have turned the circular economy concept into reality.
While promoting our sustainable offering, we are also keen to ensure that our own operations are responsible. This includes areas such as the environment, compliance and anti-corruption, diversity and sustainable supplier management.
Safety is a key focus area for Sandvik. We continue to improve and I am satisfied that we reduced our Lost time injury frequency (LTIFR) to 1.7 (2.2) in 2016. However, despite the fact that we are making progress, we will not be completely satisfied until we achieve zero accidents.
We further improved our performance in the Dow Jones Sustainability Index, performing better than 98% of the companies assessed in our industry. Another part of our commitment to sustainability is that we are and will remain a signatory to the ten principles of the UN Global Compact.
Building for the future
Looking ahead, we have more to do, and I am confident that we are progressing in the right direction. We are on track to fulfill our ambitious targets by making continuous improvements throughout our business to achieve stability, profitability and growth. Our increased decentralization and the changes we are now focusing on are the foundation for our capability to deal with anticipated market trends and variations in the business climate. We will continue to be a market leader, secure even better results and market shares, as well as continue to be an attractive company to work for and to own.
Finally, I would like to thank you, our shareholders, our customers, partners and employees for your continuous engagement and trust. Without you, our success today and tomorrow would not be possible.
Stockholm, February 2017
President and CEO