A successful year
Sandvik can look back on a successful 2017, when we improved our earnings, met our financial targets ahead of schedule and delivered strong cash flow. Combined with successful divestments, we have created a more focused, consolidated company that is prepared for growth. At the same time, the share price rose by 26 percent.
Since the launch of Sandvik’s new strategy in 2015, we have been working intensively to achieve the targets defined. In the first year, we focused on establishing the new decentralized structure and created a clear governance framework, the Sandvik Way. We moved decision-making closer to customers, meaning to the product areas. They now have the character of independent companies with full accountability for their own performance and a focus on continuous improvements. During the year, we began to see the result of our efforts, with improved profitability, reduced working capital, strong cash flow and a reduction in the debt/equity ratio.
Employees have supported the new strategy and have worked hard to implement it, even if it has included organizational changes. This has yielded results. We have also been helped by a favorable market and strong demand.
Focus on core operations
During the year, we successfully divested Sandvik Mining Systems and Sandvik Process Systems and also signed an agreement for the divestment of the welding wire operations at Sandvik Materials Technology and for Sandvik Hyperion. The aim is to also divest the stainless wire business. Our strategy states that we are to be number one or two in the markets in which we operate and after completion of these divestments we have largely achieved this. Overall, we have divested approximately 10 percent of the Group, which has resulted in a more focused, stronger company.
Stability and profitability before growth
The stable foundation we have built offers us scope to focus on growth. I see three ways to grow. First, through organic growth, where Sandvik can create customer value through its strong innovation and the launch of thousands of new products each year.
Digitalization is a strong industrial trend where we invest and mobilize expertise to be competitive and where we can see substantial growth opportunities. We digitalize and automate our own products, processes and manufacturing and strengthen our offering to our customers through digitalization, which not only makes our customers more efficient but also more sustainable.
There are excellent growth opportunities in mining operations with automated solutions, and in metal cutting where digitalized tools and processes can enhance customer productivity. Growth is also possible through acquisitions, which is primarily a consideration for Sandvik Machining Solutions in the fields of round tools, additive manufacturing (3D printing), software solutions and metrology (measurement technology).
Sandvik Machining Solutions
The Sandvik Machining Solutions business area is the star of our portfolio and continues to deliver strong results. Earnings increased from an already high level, all product areas improved and cash flow was very strong. The business area successfully launched a range of innovations, including the revolutionary PrimeTurning™ technology, which enables turning in all directions in a far more efficient and productive manner than conventional turning. Klas Forsström was appointed new business area president in April 2017.
Sandvik Mining and Rock Technology
The Sandvik Mining and Rock Technology business area noted a significant improvement in earnings, driven by strong demand early in the year, though from low levels. This strong demand meant it was sometimes difficult to keep up with deliveries, but the situation stabilized during the second half of the year. We can see great opportunities in automation, where we are market leaders, and in our aftermarket business.
Sandvik Materials Technology
The Sandvik Materials Technology business area has failed to reverse the negative trend that has prevailed since 2014, resulting from low oil prices and fierce competition from low-cost players. During the year, we carried out a number of measures, including comprehensive cost mitigation programs and staff reductions. We will continue working for improved profitability under the leadership of the new business area president as of 1 November 2017, Göran Björkman. Order intake and volume improved during the second half of the year.
Accountability and decisions close to customers
Decentralized decision-making close to customers is key to the success of our company. However, coordination is necessary in some areas and I often say that clever managers cooperate. In a decentralized world, we need clear and precise rules and we have created a shared framework that we call the Sandvik Way. This includes our Code of Conduct, our whistleblower system Speak Up, our performance management system and our joint leadership model, as well as policies and procedures in key areas.
We view sustainability from two perspectives – how we can make our customers more productive and sustainable, and how we can become more sustainable in our own operations. We are ambitious and can, as a leading company, drive progress by producing more effective and more sustainable solutions for our customers, such as products that are more energy efficient, safer or that are made from recycled materials.
Examples include battery-powered mining equipment and components for solar panels and fuel cells. If we are to remain at the forefront, we must understand global market trends and requirements on issues such as energy supply and safe and sustainable solutions. We must also understand the challenges that we, our customers and our customers’ customers have, such as the implications of a transition to a reduction in the use of fossil fuels or the risks associated with operating in less developed countries.
In our own operations, we must ensure that we work systematically to reduce environmental impact and carbon emissions. However, anti-corruption, diversity and inclusion, supplier controls and regulatory compliance are equally important components. Occupational safety is a top priority, and it is gratifying that our lost time injury frequency rate in 2017 was the lowest in the company’s history.
Sustainability has also become an increasingly important component when young people decide on an employer and may be crucial in attracting top talent. Our commitment is manifested in our support for, and our intention to continue supporting, the principles of the United Nations' Global Compact. I am convinced that our solutions will contribute toward fulfilling the UN’s Sustainable Development Goals. It is encouraging that we have once again qualified for the prestigious Dow Jones Sustainability Index and also for the 2018 Global 100 Most Sustainable Corporations in the World index. During the year, we began an exciting collaboration with Engineers Without Borders, from which I expect great things.
When I travel around the company, I meet incredibly positive, committed employees who love Sandvik and what we do. Without our employees we would not have achieved the earnings improvements nor the structural changes we have implemented in recent years. I would like to convey my sincere thanks to everyone who has contributed. We have laid a solid foundation for a stable company that is capable of delivering results, even when market conditions are difficult. This means I feel great confidence moving forward and that Sandvik will continue to be successful.
Stockholm, February 2018
President and CEO