Dialogue with analysts
Approximately 25 analysts cover Sandvik on a continuous basis. At year-end 2018, the breakdown of recommendations relating to the Sandvik share was as follows: 50 percent buy/increase, 25 percent retain/neutral and 25 percent sell/decrease according to Factset. Below are some of the most frequent questions discussed in 2018 and our answers.
Q: Will the next trough margin be higher than the previous, i.e. reduced volatility?
A: We strive for continuous improvements all the time, and it is our ambition to deliver higher trough margin in the next downturn, whenever it comes. Some examples of changes we have implemented to reduce the volatility is moving towards a more decentralized mandate on business decisions, closer to the customers, which in theory makes us more agile and quicker to respond to market changes. We have also managed the upturn differently compared with history, with Sandvik Mining and Rock Technology utilizing third party assembly to a much greater extent. This means that whenever demand softens, we will be able to reduce produced volumes externally while maintaining the production load in our own facilities.
Q: Increased pace in acquisitions; what will you buy and how much will you spend?
A: The majority of acquisitions will most likely be announced within Sandvik Machining Solutions. Divisions within the business area that are both stable and highly profitable will focus on growth, both within the core cutting tool business and in adjacent areas of the digital/software space as well as additive manufacturing. We want to expand the customer offering to cover a larger part of the total manufacturing value chain, to include also the pre- and post-machining phases. Our balance sheet is strong and allows for fairly sizeable deals. It is however more likely that we make small to mid-sized acquisitions, although we will grasp larger opportunities if it makes strategic sense.
Q: A number of divestments closed during 2018. Can we expect additional consolidation of the business portfolio?
A: Sandvik Drilling and Completions is a business of about 2.3 billion SEK, of which we are in the process of divesting approximately 75 percent (Varel) related to the oil and gas industry. This is not a core business for Sandvik. We constantly review the different businesses in all of our 34 operating entities based on their current and future revenue and returns potential.
A: We clearly prefer to re-invest the capital into the company and generate growth through acquisitions and investments in product research and development. Additionally, we want to reward shareholders with a strong dividend profile.
Q: Give me one tangible example on how Sandvik works with sustainability in its customer offering.
A: Sustainability is a core ingredient in how we run our business every day, both in our productivity offering to customers as well as in how we run our operations. A recognition of this is that we once again were selected as a member of the Dow Jones Sustainability index, which only includes companies ranked in the top 10 percent of each industry in terms of sustainability performance. One example is the recycling business in Sandvik Machining Solutions, where we buy back virtually all inserts from customers. We recycle these inserts in our recycling plant in Austria and re-use the material in our insert manufacturing. More than 50 percent of raw material used in Sandvik Machining Solutions is recycled material.
Q: Sandvik Materials Technology looks likely to achieve the targeted 10 percent EBIT margin in 2019. Will you keep it in the Sandvik Group?
A: It is our ambition that Sandvik Materials Technology achieves a 10 percent EBIT margin for the full year of 2019. We are working to make this business area more efficient and there are opportunities in all its divisions. Like with any of the other businesses in Sandvik, we continuously review the performance trend and any potential strategic decisions will be made based on that analysis.
Q: You have increased the pace of acquisitions. What do you think about the potential adverse impact on ROCE?
A: Yes, the pace increased during the year, and it is our ambition to be active on mergers and acquisitions also going forward. We are looking to make acquisitions also in the digital space where multiples sometimes are elevated. This may adversly impact our return on capital short term, but we would not acquire something if there was not a clear plan on improved returns in the longer perspective, maybe on a five to ten year horizon.