Deswik Mining Consultants (Australia) Pty Ltd (SAND) Earnings Call Transcript & Summary

Good afternoon, and welcome to this conference call hosted by Sandvik, our CEO, Stefan Widing; President of Sandvik Mining and Rock Solutions; and our Acting CFO, Cecilia Felton. And my name is Louise Tjeder, and I'm Head of Investor Relations. The topic or topics today is, of course, related to the news that we announced this morning, the signed deal to acquire the mine planning software company, Deswik, and also our new division, Digital Mining Technologies. So we will, as usual, start with the presentation, and then we will open up questions. And before I hand over the word to Stefan, next slide, please, just briefly on safety first, encouraging you to be aware of the safety regulations and what to do in case of emergency, wherever you are at this moment. Enough of me, and over to you, Stefan.

Thanks, Louise. Take the next slide. So this is another step in our -- in the execution of our strategy. We have the 6 objectives we are working towards at group level. And today, this acquisition is relevant for all of them, but more so for our shift to growth and the digital shift. In this part of our business, we have a target of growing at least twice as fast as the market, both organically and through acquisitions. Of course, this will contribute to the acquired growth, but Deswik is also a fast-growing company, as you will see and have heard. So going forward, it will also contribute to our increased organic growth. We also have a target of expanding our digital offering at group level to SEK 7.5 billion by 2025. And of course, the whole of Deswik's business will directly address going towards reaching this target. Within SMR specifically, we also have a strategic ambition to lead mining automation, digitalization and electrification. And Deswik will address at least 2 of these targets related to automation and digitalization, but also, to some extent, help us on the electrification journey. And then overall, as a group, we have solutions and products to help drive sustainability and productivity for our customers, and we have a strategic journey that we are on to expand a little bit in our customers' value chain through digital solutions. So far, we have only done this in our industry vertical. But through now this acquisition of Deswik, we also expand the digital solutions and the value chain in our mining business. So we are really excited about this acquisition here today. Take the next slide. This is just to set the scene a little bit before we go into more details. We have, as you know, 2 business areas focused on mining. The biggest one is Sandvik Mining and Rock Solutions, or SMR, which has until today addressed the part of the value chain, which we call upstream mining, from drilling going through blasting, with the DSI acquisition, also rock support and then load and haul. And then, of course, we have the following step in the value chain in comminution addressed by Sandvik Processing Solutions. Now the acquisition of Deswik means that we will also address the step ahead of this in the value chain, which is called mine planning, and that is what we will talk a little bit about today. So I will now hand over to Henrik Ager, President of Sandvik Mining and Rock Solutions, that will talk a little bit about the acquisition and the strategic fit. Henrik?

Thanks, Stefan. If we move to the next slide and the next one again. So we're very excited to be able to sign the deal to acquire Deswik. Deswik is the leading mine planning software company in the world. They have somewhere around a 15% market share. They were established back in 2008. They're based out of Australia -- out of Brisbane, Australia. It's about a little over 300 employees in the company. They provide an integrated software platform that supports mine digitalization. We'll get into it in a second. But it covers all of mine planning, and they've been busy with product development that -- lately that we're also excited about. Subscriptions for them represent a big part of their revenue. So they've got more than 10,000 software licenses with their mining customers. They have very strong profitability, very strong performance, so high margins, but also strong growth. They cover the top mining customers, quite a significant overlap with us, but they are not present at as many mines as Sandvik. So that's an interesting opportunity to explore for us to bring them in to more mining companies around the world. They are present, though, in across 60 countries already, so surprisingly global for a not-so-big company. And when we look at the market for mine planning, it's a rapidly growing market, so double-digit growth in the mine planning software market overall. And Deswik has taken market share over the last 5 years, so they are also on a stronger trajectory than the market itself. They're also very strong underground, which is a good complement to Sandvik because we're also the strongest underground. If we look at the key numbers, you see them here at the bottom right of the page. So if we look at the last 12 months, we've got about AUD 79 million of revenue. The share of recurring revenue is a little less than half at 45% and an EBITA margin of around 30%. We're equally excited about the leadership team of Deswik with the CEO Matt Chilcott. And he is excited to stay on in the company, and we really look forward to having him on board in our new mining technologies, or Digital Mining Technologies division. So we'll get back to the division in a second. If we move to the next page, and we go into a little bit more detail around the products that they provide. So the big products that are established, that generate almost all of their revenue at the moment on the software side is the Deswik.CAD module and then the Deswik.Sched module or scheduling. The CAD model is simply a software that allows you to make a 3D model of the mine, how you want it to be developed around with all the access tunnels to get to the ore body and then into the ore body itself. Once you have that model developed, you need to plan how to develop it and then mine it, and that's where the scheduling module comes in. So simply a quite advanced Gantt Chart for what to do when as you develop the mine, build the shaft or the incline to get down to the ore body, the access tunnels, all the ventilation shafts, et cetera, et cetera. Those 2 bring you down to a granularity of, say, what needs to happen on a weekly basis. Then you need the OPS module to break that down even further, so what needs to happen in a shift and what does each part or each piece of equipment need to do in every shift. And that's the OPS module. So these 3 relief it together. Then there are 2 more modules they're developing: the Geo Tools, which take in, that imports the exploration data into the software; and then finally, the master -- or Master Data Management or Mining Data Management module, which is the last one that they are busy developing, that really puts everything in an easy-to-access format, so easy-to-access database that everybody, who's working in the mine planning and associated departments in the mine, can use. So these 5 modules generate about 70% of the revenue, with most of that coming then from CAD and Sched because they are the 2 established ones. Then they generate about 30% of the revenue from consulting services, and this is primarily when a mine installs the Deswik software. They need help to install it to tailor to their specific situation, to their specific mine, and that's where these consulting services come in. So the majority of consulting is done in combination with installing the Deswik software on the mine. All right. If we then move to the next page and talk a little bit around the strategic fit with Sandvik. First of all, it allows us to cover a bigger part of the value chain, as Stefan alluded to earlier, and drive end-to-end optimization in that mining value chain. So we can not only access information from every step of the value chain, but also create feedback loops. Historically, the mine planning model, it's only a model, it's based on exploration data, but it's clearly not 100% replica of the truth. So if you can feedback what you learn as you're developing the mine and mining the ore body, you can then improve the data accuracy in the model, and that will drive productivity through the mining value chain going forward. Now if we look at the product itself, it's sticky. Once you have a functioning software package in the mine that you're happy with, you tend to keep it, and you buy more and more licenses from it. And Deswik is one that generates a lot of positive feedback from customers. We did quite a bit of work to understand how they're viewed by the mining companies, and they see the Deswik software suite as something that's very easy to use, and their people like it. And some actually, when they get hired from another mining company, demand that they changed the Deswik for them to come and work there. So that's also how they can stay as profitable or be as profitable as they are and they're leading the industry in profitability. They're growing the recurring revenues, which we like. Stable recurring revenue stream is something that we think is very attractive. They have more than 10,000 licenses at the moment, and they're consistently converting more and more customers to the subscription-based model. Deswik is the strongest player in the industry already. And together with Sandvik, with our OptiMine and AutoMine and other new track solutions, we have -- we are an undisputed leader in providing software into the mining industry. And then yes, we -- I already talked about them being an innovator and being perceived as the player with the most attractive product offering. And that's come through all the customer interviews that we've done as part of this process. So if we move to the next page, what you see there is then, obviously, that we take a step back in the value chain. And now with that, we cover every operational step of mining up until you get to comminution, where the Sandvik Rock Processing takes over. Exploration is obviously the first step, but it's a bit disconnected from the regular mining operations, whereas mine planning, every mine has a mine planning department. Every mine operates a mine planning system of some kind and has day-to-day interaction with the rest of the mining operations on the mine. So this is a great complement to the portfolio we already have. We then move then and talk a little bit more about how it fits with SMR and our strategy. So we've -- in light or inspired by Sandvik's group strategic shifts, we've developed the specific strategic shifts that we are pursuing for Sandvik Mining and Rock Solutions. And a number of these are very relevant or connected to the Deswik acquisition. The first one is, for sure, we want to focus on the high growth in upstream hard rock. So we want to be in upstream. We then hand over to SRP at the crusher. And this expands our coverage then of that value chain and makes us a more attractive player in the upstream, so we can be more successful in targeting the hard rock, which is predominantly gold and -- gold, copper, zinc, nickel or the base metals and the platinum group metals. We're more likely to win with the big greenfield and brownfield projects. And obviously, Deswik is 1 of 2 significant acquisitions we made recently to increase our coverage. So Deswik was #2, and DSI was #1. It also gives us a better position to shape the sustainable underground mine of the future. As mines electrify, obviously, the mine planning software needs to be adapted for electrification. All -- how the mines design needs to be adapted because suddenly you need places to swap batteries and charge batteries. You need to adapt the schedule because you have charging and battery swap times to account for. You'll also have machines that are more productive when we go to electrified equipment that they can move faster and be more productive than traditional diesel. So a very clear connection to this one. Deswik is also present on surface and in surface mining. So they will support our ambition in taking a leading position in surface drilling. The complementary aspect here is a little weaker than underground given that our presence is a little bit weaker. It will definitely help us be our customers' first performance partner given that this allows us to drive productivity through the value chain. And these first 4 are really are externally focused strategic shifts. The fifth one is our internally focused. And naturally, with a software company, we'll get a slightly different culture. This is a company that's grown rapidly. They will have an entrepreneurial spirit, and I look forward to bringing that into SMR as well. We then move to the next page. I think this is a little bit of a deep dive when we come to shaping the sustainable underground mine of the future. We try to highlight here the 4 key points in that battle for the mine of the future. So introducing a full range of electric offering for underground load and haul and underground drilling. Now with Deswik, we can also help our customers to plan and simulate electric equipment underground. Introducing automation and unlocking speed efficiency with digital solutions, well, here again, Deswik fits very well with that. And then finally, grow our advanced aftermarket offering through connected equipment, aftermarket artificial intelligence and analytics. I think we can -- we're going to leverage the software suite to allow for this. There is a slightly weaker connection to this particular point, but there is one. If we then shift to our new Digital Mining Technologies division. So what we're doing here is we're putting our 3 key business units into 1 division. So it's our Automation business unit, this is the one that we've had the longest. We started developing our automation system back in 1999. We launched it in 2003. So -- and here, we have a very strong position in underground load and haul. Then our recent acquisition, Newtrax, where the focus is on collision avoidance and our OptiMine production control and optimization. Here, there is a connection to Deswik with Newtrax and the production control and optimization suite. And then finally, Deswik with the mine planning and management software. Now both Deswik and Newtrax are OEM agnostic, so they will both keep operating under their individual brand names, whereas Automation is strongly connected to the Sandvik equipment, even though there is an opportunity to bring other equipment onto the automation platform. This -- with this, I could also mention how we think about integrating Deswik. Deswik will remain an independent business. They will keep their brand name. They will also keep their P&L as an independent business unit. We will run light integration similar to what we've done with Newtrax to ensure that the focus remains on the business and keeping the sales growth going while taking step-by-step integrating with Sandvik and capturing the synergy opportunity that's there from a cross-selling perspective. There are absolutely no cost saving synergies to be had from the Deswik acquisition. So light integration to make sure that we do the necessary things and then keep the focus on growing the Deswik business.

Okay. So let's look at the transaction overview and the financial impact of Deswik. So looking at the transaction considerations, the EBITDA multiple is in the range of 28x to 32x. We expect closing to take place in Q1 next year, of course, subject to customary regulatory approvals. And in terms of the financial impact of Deswik, the underlying EBITA margin is slightly accretive to SMR and neutral to the group. The impact on EPS, excluding PPA, is also accretive to the group. And as this is a cash deal, it will have an impact on the debt KPIs. However, the gearing will remain well below the target of 0.5 after the closure of the transaction.

Good. Thank you very much, Stefan, Cecilia and Henrik. We will now open up for questions. So operator, please, if we have any questions.

[Operator Instructions]. And we have a few questions lined up. The first is from the line of Max Yates at Credit Suisse.

Just I had a couple of questions. Just the first one would be around the current sort of penetration of either Deswik or sort of the generally mine planning software. I think you sort of showed at the Capital Markets Day a couple of years ago a sort of addressable market of 700 mine sites and where you were with things like OptiMine and AutoMine. Could you just give us a feel of using that sort of 700 sites number, what kind of penetration Deswik has or, for that matter, sort of mine planning software, if you have a view on that?

Well, so those 700, or I think we said it was a range between 700 and 1,000 underground mines, where automation would make economic sense, I think that as we develop the automation system, that number will go up. But if we stay with that number, all of those mines will have a mine planning software solution on-site that they're working with. It might be old and archaic or new like the Deswik one, but they'll have one.

Okay. So the point really is it's not so much penetration, it's more that this is just a superior product, which is going to be increasingly used. And is it increasingly used on kind of existing mines? So is a lot of that growth coming from effectively customers changing software kind of once the mine is up and running? Or is it really coming from sort of new mines or expansions sort of being added?

Yes. The -- so we discussed this at length with Deswik as we're going through this process. And there are a number of things that we -- times when the mine might change mine planning software. But one driver is that there are more and more people on the mine that need to access the information. So we're going away from a time when the mine planning team was 5 guys off in a corner, drawing on huge sheets of paper and then feeding reports to the rest of the organization. So we're moving from that to a situation where a lot of departments need access to the mine planning data. And when they see the need to make additional investments, they look at should they now maybe take the opportunity and change to something that is more user-friendly. And that's the feedback around the Deswik software is that it is very user-friendly. So it's easy to learn and much easier than many of their competitors that have been around for a long time, and they have legacy systems that are harder to make user-friendly.

Okay. And just my second question was just if you look at kind of who the competition are, and kind of correct me if I'm wrong, but I mean this looks like the kind of software that would be up against some companies sort of not necessarily equipment companies, but maybe Hexagon, Dassault Systèmes, companies like that. So I guess I just wanted to understand, in terms of thinking about the sort of pull-through for your equipment, do you think this does have an influence, say, if you compare with maybe Epiroc, how they come to the customer with a combined offering, maybe just equipment and not having such a strong position in mine planning software? Do you think this will generate a pull-through of equipment? Or is it just a good and sticky business that you would like to be in? Just understanding kind of who the competition is and how that would work in practice with selling the equipment.

Yes. No, so the competition, if we look at the biggest players, it's the companies are Maptek, [ Geovia ], Datamine, RPM Global and Hexagon, as you pointed out. They account for 50% to 60% of the market.

[ Geovia ] is Dassault.

Right. Yes, thanks. So -- and they each have somewhere between 5% to 15% market share with our assessment is that Dassault is the strongest. We believe there will be some pull-through of equipment with this stronger offering. It's always difficult to quantify. There is an equipment selection component to the Deswik Software. We do, however, -- so the benefit of that is we can make sure that we have the exact right specifications for the Sandvik equipment in their selector to allow us to really show that how our equipment can perform. But obviously, for this to be -- remain competitive, it has to be OEM agnostic. So it has to -- it cannot be a biased equipment selector, that then we disqualify ourselves from a lot of business. So that we're not going to do. However, if you then go into electrification, where the solutions are going to be different, so you're going to have some equipment that is set up for fast charging, some that is set up like ours for changing batteries, the way our equipment is set up is that the equipment can swap its own battery, you don't need a crane, whereas others need a crane. That we can then build in and show the differences in when we simulate electric equipment underground. And we are very convinced that our equipment with self-swapping battery technology is much more productive, and we will be able to show that, and Deswik we'll be able to show that.

This is Stefan, I just want to add that if you have been following or listen to this calls, when we acquired Mastercam and Cambrio on the cutting tool side, you will find that the logic is very, very similar, meaning it's -- you come into the specification stage, and you need to be agnostic, but there is definitely an ability to influence the following decisions in the value chain.

Next question comes from the line of Andreas Koski at BNP Paribas.

I have a question about the sales split, you are saying that 45% of sales is recurring revenues. Is that the software part, and then the consultancy part accounts for 55% of sales? Or how should we look at the split between software and consultancy?

So it's 70% software, 30% consulting. Out of that 70%, 45% is recurring.

Okay. Out of the 70%, okay, so it's less than 45% of the total sales number then.

Yes.

They still have -- there are -- they still have a majority of their business model being license sales and then maintenance. So then you have a majority being nonrecurring. But they are gradually moving over to the customers that want to assess or subscription model. But it's not something they are pushing specifically towards customers that prefer to buy the software through license and maintenance.

And is Deswik particularly strong in any specific minerals? Or how does the mineral exposure look like?

They're predominantly exposed to hard rock, like us. So they have a lower exposure to coal.

Okay. That's good to hear. And...

Which is natural because most underground coal mining happens in China anyway. And they have fairly -- essentially no business in China.

Yes. That's good to hear. The reason for asking that is that they mentioned coal first on their website. That's why I asked it. Can I just ask on your growth outlook as well? Because you are saying that you would like to grow 2x market growth, and I think you have said that the market growth is expected to be 3%, which takes your growth target to 6%. And Epiroc is targeting 8% organic growth -- not organic growth, but revenue growth of 5% to 6% or that should be organic. How should we consider the difference in your growth targets versus Epiroc growth target?

Yes, this is Stefan. I'll take that to begin with. Henrik, you can complement to that. No, I don't think you should read really anything into it other than that maybe we have different ways of sort of expressing the targets. There is no reason why we will organically grow, not at a pace that is slower than the market. In fact, we believe, if anything, we are taking some market share. If you have the acquisitive component of that, clearly, with the acquisitions we have made, if you take just DSI, it depends a little bit how you define the target. If it's sort of more of a perpetual target or a 3- to 5-year target, of course, we are well, well above that target currently with the acquisitions we have made.

Our next question comes from the line of Sebastian Kuenne of RBC.

I have a couple of questions. First of all, the Deswik software, does it already incorporate equipment, electric equipment, battery-driven equipment fleets in software? Or will this be the next step that Sandvik wants to push? Secondly, I wonder if Sandvik found it a little bit difficult or find it difficult to sell battery-driven mining equipment currently because the mines simply use software that is not, let's say, aligned with the battery swapping and all the logistics and more than that, and whether Sandvik was therefore a little bit desperate to get a software player that will drive and will simplify this logistics problem. And thirdly, the -- in the charts, in the pictures you show with the Deswik software, it's a lot of overground mines that are shown there. I wonder what the ratio is of clients of Deswik that's mainly overground and whether Sandvik sees this a little bit as a door opener for overground mining.

Yes. So you're right, they do not have electric equipment as part of the mine planning software at this stage, so a very natural next step. We're not desperate to do this. The reason is, given that it's not in the mine planning software at the moment, you need to model it and simulate it outside of the mine planning software at the moment, so it just makes it a bit more difficult. When it comes to electric equipment at the moment, the excitement and demand and request for electric equipment is far greater than the industry -- the OEM industry can supply at the moment. We are developing this equipment, and we need to prove it out and show that it performs better than diesel. And that takes a bit of time. So we're not demand constrained at the moment, we're supply constrained as an industry. They have more presence underground than surface. They have a stronger market share underground than surface. I actually don't have the exact split at the top of my head at the moment. We rather see them as very complementary, both underground and surface. But when it comes to driving optimization of the value chain, that is easier for us to do underground given that we have a bigger presence there.

And we should also add that the fact that they are just now moving also with solutions on the surface is the way we regard it more an opportunity than anything. It's a growth opportunity. If they can do only half of what they have done underground, it will be a growth engine for many years to come.

And our next question comes from the line of Anders Roslund of Pareto Securities.

Yes. I'm interested in the synergies between the 3 subdivisions, [ Deswik ], automation and Newtrax. And specifically AutoMine and Deswik, how do you see upon that? Is it sales synergies or is it integration? Or...

Well, yes, so the way they are -- where they are connected is, when you go down to short interval control, so you go down from scheduling things that need to happen every -- on a weekly basis down to individual pieces of equipment inside a shift, that's the short interval control. This loader has to go to this draw point, load and come back and unload in this particular place. That instruction needs to go to the automation system. So that is where the integration happens. So when you have a short interval control system that generates that job order and then sends it into the automation system, that then executes on the job order by -- in the future where the equipment is 100% autonomous, then the instruction just gets sent from the short interval control system into the automation system, and the automation system executes.

Okay. Interesting. And I guess Newtrax is more on the machine part or...

Well, Newtrax, you can say currently, it's 3 things. One is telemetry solutions, where we connect equipment and transmit information from the equipment to a central database. Second is the collision avoidance system that they are busy trialing currently in our test mine, where -- and that is the enabler for having autonomous equipment coexist with both people and non-automation-ready equipment. You need a collision avoidance system in there to ensure that these -- the equipment and the people can coexist without running into each other. And then the third one, where we will need to look at exactly how we manage, is when it comes to the short interval control, where both Deswik and the current OptiMine suite has that component. So we'll see if we keep them in parallel or if we, over time, integrate them in some way. But the big thing for Newtrax is telemetry solutions and collision avoidance.

This is Stefan. I think another way of looking at it is, I mean, with automation and Newtrax, we have been, in a way, confined to the equipment and its surroundings and its connectivity. With Deswik, we basically expand our digital universe to the whole mine and the data set and understanding of the whole mine. So I think there are some very concrete things that we have discussed. I think longer term, there's going to be even more interesting things we can do with it once we learn more ourselves as well.

Our next question comes from the line of Andrew Wilson at JPMorgan.

I have just a couple of quick questions, I think. I'm interested a little bit around the sales process, in terms of whether this was an auction, kind of how, I guess, you came to know about the availability and, I guess, why -- or kind of why ended up with Sandvik, I guess, in short. But maybe if we start with that one.

Yes, I can start. I mean this was an auction process. There are 3 founders that decided it was time to sell. The CEO and management is not part of that group, so they are sort of independent from that. And then it's been an auction process. We have known this company for quite some time. It's been something we have been looking into. So when the auction process started, we were quite prepared, I would say, or more than prepared. And -- but it's been a competitive process up until very recently. So that's a little bit how it's been. Henrik, do you want to?

No, I think that's fine.

And the second one was just around -- just around in terms of investments and kind of obviously thinking about the new SMR division, and there's obviously a lot of time and expense going into this. And going forward, sort of how comfortable are you about the sort of the current level of investment that's going into these businesses and how much that might need to increase for you to deliver on some of the targets that you're talking about?

Yes, we are quite confident in the level of investment that they have already put in. And the 3 out of the 5 software modules are new, but they are developed and completed, so we don't see that a significant increase in R&D investment would be required for Deswik. We want to keep investing obviously to stay ahead in the industry, but there's no big investment injection required.

Our next question comes from the line of Gustaf Schwerin of Handelsbanken.

Two quick ones. Firstly, do you typically see mining companies using different planning across different mines? I would guess so when you said that they have different market share on the ground and open pits. But if you can clarify that. And then secondly, when you say that they're installed in some of the mines that you have equipment at this moment, can you quantify that number a bit more?

Yes, for the first one, yes, absolutely, I mean, the mines will -- in the same mining company will have different software solutions, different equipment solutions, different everything, really. As far as the overlap, no, I unfortunately can't quantify how many mines where there's both Sandvik equipment and Deswik software, I don't know.

[Operator Instructions]. Okay. There seems to be no further questions from the phones at this time, so I'll hand back to our speakers.

Okay. Thank you very much, everyone, for calling in and also for your questions. We wish you a good day, rest of the day, and speak soon again.

Thank you.