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Dialogue with analysts
Approximately 25 analysts cover Sandvik on a continuous basis. At year-end 2019, the breakdown of ratings relating to the Sandvik share was: 52 percent buy/increase, 19 percent retain/neutral and 29 percent sell/decrease, according to Factset. Below are some of the most frequent questions discussed in 2019, and our answers.
Q: You have a rather unusual operating margin target that states a trough of ≥16 percent. Please elaborate on, for example, assumed market conditions and how confident you feel about achieving this target.
A: The implementation of a decentralized business model, tangible contingency plans and important changes in Sandvik Mining and Rock Technology with a higher share of outsourcing, gives us the confidence to have a floor margin target. The basis for the calculation is a mining downturn with a 50 percent decrease in equipment sales and a significant (double-digit) downturn for the short-cycle part of the business (machining).
Q: A 5 percent growth target over a business cycle sounds moderate, please elaborate.
A: We want to achieve the target before increasing the ambition. Half of the target is assumed to be driven by acquisitions and half organically. We are assuming a higher share of organic growth in Sandvik Mining and Rock Technology and a higher share of mergers and acquisitions in Sandvik Machining Solutions.
Q: A new CEO was announced during the year, what will be his focus going forward?
A: Our overall strategy remains intact, with a current focus on growth and on protecting the margin in a tougher market. Stefan Widing’s background in acquiring and successfully integrating software companies will be a great asset to Sandvik when developing adjacent digital product offerings, particularly for Sandvik Machining Solutions and its strategy to expand into pre- and post-machining. Furthermore, he has extensive experience from working and leading in a decentralized environment.
Q: Can you elaborate on the new sustainability targets for 2030 and how you will follow-up and report on these? What should we expect in the coming 2-3 years?
A: In 2019, we launched new long-term sustainability goals in four areas: circularity, climate change, safety and fair play. These goals will be integrated in our performance management systems and incentive programs, in order to report and follow-up. Furthermore, we will be introducing short-term goals to ensure we are on track for reaching our 2030 goals. That work has started but has not yet been finalized.
Q: You are in an almost debt-free position; have you considered an extra dividend or share buybacks?
A: Our ambition is to acquire approximately 2.5 percent topline growth per year. Accordingly, the preferred option for capital is to reinvest in our business. We are virtually in a net cash position at year-end 2019 and if we do not manage to spend it on acquisitions, we need to evaluate our options for capital distribution.
Q: After the internal separation has been finalized, what will the next step be for Sandvik Materials Technology and by when?
A: We are working towards finalization of the internal separation by mid 2020. Further decisions on how to proceed will be made by the Board and ultimately by the Annual General Meeting.
Q: Return on Capital Employed (ROCE) and Net Working Capital (NWC) moved in the wrong direction in 2019. What actions are you taking to address this? Additionally, ROCE is no longer included in your financial targets – are you less focused now?
A: We are committed to keeping NWC under control and to delivering solid returns, particularly as we become more active in acquisitions. In 2019, the market conditions for short-cycle segments deteriorated rapidly and significantly, making full control of NWC a challenge. For Sandvik Mining and Rock Technology, record order deliveries have pushed NWC up.
Q: There was a major cost-cutting program in 2019. How much have the savings supported your result in 2019 and how much is still to come? Are these structural savings?
A: Most of the targeted savings of 1.7 billion SEK will be delivered by mid 2020. Approximately 20-30 percent of the measures can be described as structural by nature, for example, the closure of production units/larger restructurings. In 2019, the result was supported by approximately 400 million SEK from the announced program.