Sandvik AB (publ) (SAND) Earnings Call Transcript & Summary

Good afternoon, and welcome to this conference call that Sandvik is hosting in the light of the morning's news, The attention to acquire U.S.-based company, CAMBRIO. Speaking is Louise Tjeder, Head of IR. And present in the room is, of course, our Stefan Widing; our CFO, Tomas Eliasson. We also have Mathias Johansson who is the President of the division, the design and planning automation within Sandvik Manufacturing Solutions. We will spend this hour with listening in to Stefan and Tomas and Mathias, taking you through some key facts and figures and rationale for this acquisition. And after that, we will open up for questions. And you can ask your questions on the conference call as per instructions from the operator. Next slide, please. Before handing over the word to Stefan, just shortly on safety first being priority, of course. So we hope that you are aware of the safety regulations to follow wherever you are at this moment. So with this, it's time for Stefan to kick off the presentation. Next slide, please.

Thank you, Louise, and hello, everyone. Thank you for joining the call, allowing us to give you some more information, context and also answer some questions related to the announcement from this morning. So I would like to start then by going back to our Capital Markets Day in November of last year, where we showed this slide. So with SMT in the process of being spun out, next year, Sandvik will then comprise of four main businesses: Mining Rock Solutions, Rock Processing Solutions, Machining Solutions and Sandvik Manufacturing Solutions with the two latter still then being reported as one business area, Sandvik Manufacturing and Machining Solutions. Overall, we expect then a growth of over 5% through the cycle. And in Sandvik Manufacturing Solutions, we have a market growth in the double digits, which is, of course, one of the reasons we are focusing on that business. And this acquisition will be part of Sandvik Manufacturing Solutions. Next slide, please. This is a summary slide of Sandvik Manufacturing Solutions as it looks today, meaning prior to this acquisition. As you know, it is still a small business. It's less than SEK 1 billion in 2020. It was around SEK 800 million. Around 600 employees, but there is an addressable market of, in total, SEK 120 billion. So there is plenty of potential here. We have structured this segment into three divisions: Design and planning automation, additive manufacturing and metrology. And again then CAMBRIO will be part of the design and planning automation division when this deal is closing. And then we will also add, of course, the [ under ] product offerings, a key offering around CAM that we will get through this acquisition. The geography split will also change a bit with more emphasis on North America after this acquisition. Overall, this is a sizable acquisition in the software space, I would say, for us at least. And for SMF, it means that we get closer to about SEK 1.5 billion in revenues of close to 1,000 employees. So it's a very good step towards the ambition then to grow this into a SEK 4 billion business no later than 2025. Next slide, please. This is also taken from the Capital Markets Day, when we talked more about the split we have done into manufacturing solutions and machining solutions. This we did to ensure more focus on each of these two segments. And if I look back now, we announced it about a year ago. The implementation started really October 1 and fully implemented January 1. I'm very happy with what this split has given us so far. We have much more focus on the core business in Machining Solutions to drive growth and achieve the 4% CAGR that we are targeting between '19 and 2025 in Machining Solutions. And also here, good progress in terms of pipeline development on the M&A front. In Manufacturing Solutions, we now have a dedicated team that is sort of waking up every morning, living and breathing and succeeding with this business. And I think the announcement this morning is a testament to that. This was not a simple transaction in some ways. And I think only 9 months ago, I question if we would have managed to across the finish line. So I think we have learned a lot also on how to do these transactions in the past year. And with a dedicated team, we managed to pull it off. Take the next slide, please. You have seen the workshop picture as well. And here, just to remind you where these three divisions are operating. Design and planning automation is focusing on the value chain steps prior to the component manufacturing step. So CAM tool, data management and software logistics, in particular. Additive manufacturing, of course, a substitute or complement to machining and then metrology coming after an increasingly or starting to go into the workshop with more in line metrology as well. If we take the next -- if we do a click, yes, thanks. This acquisition, again, will be part of design and planning automation. This is a SEK 26 billion addressable market. And even more important, I think, through this acquisition with CAMBRIO having 3 distinct offerings, not only in CAM but also die and mold and metal sheet manufacturing, we can really service the whole part of this addressable market as well. So it's a good entry point for us. And this is a market that is -- is expected to continue to grow around 7% CAGR over time. Next slide, please. So we formed the design and Planning automation division, October 1st of last year. And we have talked about the strategy we have here a bit. But of course, we have continued to refine the strategy, make it more concrete and more actionable as we go. And we have now -- the mission for this division is really the first bullet point here, which I think is the most important statement here to automate the manufacturing value chain for small and mid-sized manufacturing companies. And then deliver competitive point solution for large OEMs. What we're saying with this is that Sandvik today had over 100,000 customers in the component manufacturing space. Many of them -- most of them are relatively small manufacturing companies and workshops. Most of them are -- have a very low level of digitalization and automation. We see a great opportunity to be a solution provider to them in terms of the component manufacturing value chain. For larger OEMs, we do not intend to try to compete with the larger integrators. Here, we rather want to provide point solutions such as CAM or as we have in Metrologic with a hardware agnostic metrology software solution. Then, of course, we also want to deliver products here that are open and agnostic because we know there is a large installed base, and you need to be able to interact and integrate with overall ecosystem. And the third mission here is to increase our recurring revenue base through the position in CAM, designed for manufacturing and production logistics. This is, of course, to ensure that we do not only have modular resilience, but we gradually also shift towards more top line resilience in the business. The strategy for DPA is to build an offering around CAM, defined for manufacturability and production logistics in the metal -- in primarily metal component manufacturing, but also now, to some extent, injection molding. We have seen the CAM market as the most important of this to enter. That's been our focus, and the outcome today is because of this. This is a market with attractive growth rates. It is very close to our core business in Machining Solutions as well. It has relevance for additive manufacturing as well. It is also a market that is relatively sizable, but not huge, which means we still have an opportunity that we can see that is actionable to take us to a #1 or #2 position in this market. And CAM, is, for us, the most important step in terms of building an automated solution suite from component design to machining. So CAM has been our focus, and that's why this step is so important for us. I will now hand over to Mathias. You're welcome to take us through this in a bit more detail, but before I let him start, just a brief introduction of Mathias. Mathias has been with Sandvik for about 15 years in Sandvik Machining Solutions. He came to this role in October 1. And prior to that, he was the CIO of Sandvik Machining Solutions. So good both digital and IT background and long history and knowledge about Sandvik and Machining solutions.

Thank you very much, Stefan. So if we then look at CAM, as I said, building a little bit on what Stefan said earlier, why is this important to us breaking it down in 3 different steps? Well, first of all, we think it's a great complement to our premium tooling business. We think the tool selections and productivity improvements are made here, and that's a trend that will only increase. We also see that the market is consolidated at pace. So taking a position for us is important. And of course, all of this means that cross-selling tools through a CAM position will be something that will be increasingly important moving forward. Entering the software space, I mean, both in terms of growth rates, it gives us the opportunity of having more attractive share of recurring revenue and growth rates. We think that there is a very good leverage on a strong software position, giving our footprint in the tooling market. And we also think in able to automate and offer to small, midsized enterprises, CAM is vital. If you look at step 3, CAM is also an extremely important position for us to be able to enrich with the knowledge and data that we have around tool and cutting data and tool data. So I think that is a center piece, both in data capture and data use. And as Stefan also talked about, we think it's a really good way of growing into a broader segment, being able to address both productivity and quality gains for our customers. So next slide, please. If we then look at CAMBRIO as such, and we can go over to the next slide, they have a company profile of -- headquartered in Ohio U.S., The President is Robert Payne and current revenues for 2020, roughly USD 68 million. And as we talked about earlier, employees around 375, that gives us a really global footprint. Regional sales America being the strongest one, closely followed by EMEA, but also a footprint in APAC, which we also think is very important. If we look at the product portfolio as such, it entails three product offerings: The first one gives CAM for production milling, turning and mill turn operations, particularly competitive in the Swiss machining space. Which is mostly into the 5 Axis machining, which we think is an area that will have quite a healthy growth moving forward. Cimatron for mold and die, and mold and die is heavily used by the automotive industry. So that's also a position which we think is very strong. And SigmaNEST for sheet metal fabrication. SigmaNEST also actually has a material requisition planning into it. So it is a broader suite of solutions that provides more of an end-to-end portfolio, which we think is essentially very good. So moving on to the next slide then. If you look at the CAMBRIO value proposition. As I talked about, we think it's comprehensive, fully integrated solution suite. We're able to address a growing addressable market, and it gives us a loyal customer base. The financial model is obviously compelling, recurring revenues and very strong retention. We also get the largest independent solution provider of agnostic solutions that is capable of interfacing all major machine types and brands. So the agnostic system is also very important. Because that gives us the opportunity of creating a larger manufacturing ecosystem, and it gives us the opportunity for further organic, inorganic expansions. Next slide, please. And just to sort of summarize what we've said. We think it's a great strategic fit. Number one, gives us access to the CAM market through a single acquisition. Gives us the global reach within the market. It's a good complement to our current know-how in the machining process, gives us also a healthy, profitable customer base. And gives us the opportunity to use the CAM position to improve further offerings. So we think, in essence, that's a perfect strategic fit. Next slide, please. And I hand over to you, Tomas.

Thank you, Mathias. So next slide, please. So let's take a quick look at some of the transaction highlights here, starting with some of the basics. As you have seen in the press release, we are not disclosing the enterprise value. The seller is Battery Ventures. And closing is expected to be during the second half of 2021, subject to customary regulatory approvals, which basically means antitrust processes. If we then move over to the financial impact, the financial profile. The margin will be slightly dilutive to Sandvik manufacturing and machining solutions. But we should also say here that if you would take out the PPA amortization, it would be slightly accretive. Earnings per share impact on the full group is neutral. And then, of course, if we look at the group balance sheet and talk a little bit about capital allocation. I mean, this is a software acquisition, and it comes with software multiples. So of course, it will have some impact on the debt. But if we go back to the latest published information, which is by March 31, the group gearing was actually minus 0.02, meaning a net cash position and net debt over EBITDA was not measurable. This is 100% cash deal. And we'll, of course, have some impact on the net debt KPIs, talking about the gearing and the net debt over EBITDA, but they will remain well under control after the closure of this transaction. If we look at what has happened during the second quarter, we've also had a dividend of SEK 8 billion, and we will soon pay for the DSI acquisition as well as we close that transaction. But even including all of these, the net debt will be well below the financial target -- gearing target of 0.5 or 50%. And we will not be anywhere near the net debt EBITDA level of 1.5. So with that, I'll hand back to Stefan.

Thank you so much. Take next slide here, yes. Just to summarize then. This is our first step into the CAM space, and it's a very strategic acquisition for us. The strategic feat is strong. It gives us a decent market share in the CAM market through a single acquisition. And I would say, in terms of our strategy execution, this is sort of the -- gives us the minimum level that we needed to be able to execute on our strategy. And it doesn't mean that we will stop here, but it means that the risk in our strategy execution has gone down considerably through this acquisition. And the product portfolio of CAMBRIO is broader than just CAM. So it gives us a good additional step then in terms of our broadening -- broadened offering within industry for that all type solutions. And again, just reemphasizing how important CAM is for us in terms of building out our offering from component assigned to machining. It's really the key part that we were missing. So thank you. And with that, I hand over back to you, Louise, to open up the Q&A.

Yes. Thank you. So we can open up for the first question, operator, please.

[Operator Instructions] Our first question comes from the line of Klas Bergelind of Citi.

Great to see that you're accelerating and are building presence on the CAM side. Still, I wanted to ask you, Steve, if you look at further opportunities in the space, considering your target SMF at around 10% of revenues in the medium term. How quickly can you close the other gaps now, both through M&A in CAM, but also in the other areas of SMM. And also separately, if you could update us on the other ambitions, other areas where you can acquire, such as round tools and outside SMM? You obviously did DSI, which was great, but also keen to hear a bit on the progress looking at the broader pipeline. So I'll start there.

Yes, sure. I mean, as you, of course, understand, I cannot really comment on anything that is not announced, so to say, Coming back to my comment in the beginning with the fact that we did this structural change. We split it into two segments with dedicated focus on both machining solutions and manufacturing solutions, then we structured manufacturing solutions into the three divisions. We -- and have put in place a team now driving the strategy in each of the three divisions, and I'm happy with the progress it has given us. I can just say that I'm very confident on our ability to deliver on the 2025 target. And if anything, I think we will be able to show a front-loaded execution profile in basically all the areas you mentioned, including the SMM side and round tools. But it's never over until it's over, so to say, but I'm happy with the progress and confident in our ability to execute.

No, that's good. Yes. Exactly. So my point was, obviously, the previous management decentralized the business from an organic point of view, you can say, but you have focused a lot on getting the organization ready for M&A. So that's good to hear that this is a sign of more to come, basically. Then my second one is on the synergy potential. Obviously, by integrating CAM together with Metrologic and then with CGTech, you're creating -- as far as I can see, it's a bit of a competitive edge versus your peers, which could sort of accelerate market share gains on the broader insert side, looking at the conventional SMS business. With CAMBRIO in the bag, I mean, is this a big step versus your peers? Do you feel that this is really taking the total SMM business, sort of, well ahead of the conventional peers?

We don't have any peers anymore, Klas. No, it was a joke, of course. No, I think, I mean, the reason we have a strategy that is -- I mean, sometimes, we call it, you could call it, premium plus, if you want. Meaning for many years, decades, we have led the industry through first purely hardware innovation. Then maybe 10, 15, 20 years ago, we led the industry through service offerings, overnight delivery, et cetera. I think this is the next step. The value creation and the differentiation will continue to come, of course, from hardware, from high service levels, but this is the next step to differentiate through also software. And it starts with the design with CAM with the ability to -- when you want to -- when you're going to decide how to machine or print a part, incorporate all our knowledge around the tool, tool performance, tool data and optimize the process even further. And I think you will get gradually more and more gains in that step than you will get from the actual tool selection itself. Then you do simulation, optimization, which we have through, for example, CGTech, where you ensure that you will have a maximum productivity. No broken tools, no collisions in the machine, optimize the path even further based on the actual machine. And then still a little bit further out from a time line and vision perspective, you want to measure every part and see what actually happened, how can we optimize further where do we have tolerance issues, et cetera. So I think this is the next evolution of the industry. And I think quite happy that we can now -- as I said, this was the final piece that we had to have to fulfill this loop. There are still plenty of other things with tool logistics and so on that we also have, and that is good, but this was a requirement to have to tie everything together. And as Mathias said, the industry has been consolidating already for a while. I think we are a little bit jumping on the last train. The good thing is that it's still a good train to jump on. And as I said, we still have a window of opportunity to become #1 and #2. I don't think there that many other opportunities. If you wake up and start now or next year or 2 years from now, I think the window is closed. So clearly, our ambition is to create some distance here and allow that to be a competitive edge for so long time in the future.

Yes. Very clear. One quick final one for you, Tomas. On the multiples. I mean these deals used to be 5x sales then over 10x sales. And I guess there was a lot of competition for CAMBRIO. I guess -- I don't know if you can answer this. But I guess, yes, the upper end then over 10x sales. Is there anything you can say on the potential outflow? Or is it just no comment?

Maybe I'll let Stefan say something about this.

We cannot -- as we said, we have agreed with each other to not disclose anything. But we can say a couple of comments. First of all, if you look at the multiples, you, of course, have both -- there's a sales multiple and then an EBITDA multiple. And in this case, this is a very profitable company, which means that the sales multiple is sort of in the higher end of the range, but the EBITDA multiple is actually at the lower end of the range. So I think at the end of the day, with all the benchmarks and everything we can do, I think we paid a fair price. It's not -- we didn't get it for cheap, but I don't think we overpaid. I think it was a fair price.

Our next question comes from the line of Max Yates at Crédit Suisse.

Just my first question is around the customer crossover. And I just wanted to understand sort of the sales that CAMBRIO have today, how many customers does that span over? And what is the customer crossover that you have, i.e., what percentage of your customer base do you think use their software? And how applicable and, kind of, where can that number go to? Is this software relevant for the majority of your customers? Is it half of your customers? Kind of, how do you see that penetration within your own customer base of the software evolving? That's my first question.

Do you want to give it a try Mathias?

Yes, I can give it a try for sure. I think if you look at the portfolio and look -- break it down and look particularly at Cimatron and [ Gibb ]. I mean if you're using Gibbs and, you're using some type of tooling. So that, I would say, is a general rule of thumb. Then if you look at the SME space and look at our customer base that we have, there is still a number of workshops that are programming their machines through consoles. So i.e., not using CAM software. So -- but in general, I mean, if you're using a CAM software, that means that you're tuning up your machine. Then what type of inserts you're using? I think that's the thing to look deeper into, but I think that gives an indication of the overlay.

So in theory, it's 100%. In practice it's, of course, it's definitely much lower than that.

Okay. And just then, if I think about sort of future acquisitions, I think you mentioned SMS today is about [ SEK 1.5 billion. ] You want to get it to [ SEK 4 billion. ] I would assume with a bit of organic growth, you probably need another [ SEK 2 billion ] of acquisitions. When I look at the split that you gave of SMS, so design and planning, automation, additive manufacturing and metrology. Do you think that additional SEK 2 billion of acquisitions will be particularly geared into one of those areas? Or do you think we should think about it as sort of the next couple -- 2, 3 acquisitions will be, sort of, evenly split across those. Just wondering if there's one area in particular where you think you need to build up?

I think you're a bit conservative on the OG, if you say SEK 2 billion, I mean if you -- if we assume double-digit growth or high single digit, we can -- with a SEK 3 billion base, you add SEK 300 million per year. So I think maybe SEK 1.5 billion is a more reasonable additional acquired growth need, assuming we don't everything in December of [ 2015 ]. So that's my first comment. The other one is, I would say probably a bit more emphasis on DPA and metrology and slightly less on additive would be my comment. So hopefully equally split in terms of the acquired growth focus.

And next question comes from the line of Maddy Singh of Bank of America.

So the first question is just understanding in terms of disclosure requirements, is there a limit in terms of the size of being like a dollar number or Krona number, above which you have to disclose the price of the transaction or there is no such requirement? That's the first question. Secondly, in terms of the strategy going forward, I understand that you have looked at the additive manufacturing risks, but you don't think that's really an immediate crit as such. But what all are you thinking in terms of preparing yourself, if at all, that becomes a major risk, let's say, 3, 5 years down the line? Because what we have seen generally is that when technology does -- do take off, they may take a very steep path upwards.

Yes. I think we'll have to get back to you on the first question. All we can say here is that it's, of course, below that number. But no one in the room here has the number when we have to disclose. So we'll get back to you on that. In terms of additive, no, I mean, additive is growing quite quickly, as you could see on one of the slides we had, but it's still from a very, very low base. And there are still a number of things that we can see that is a barrier for using it really in more mass production environment. It's still very much prototypes. It's advanced aerospace, defense components, has been -- some automotive companies have started a little bit, but not really for any significant mass production. Medical is another application. But there are many barriers, primarily costs, the time it takes to print, quality, to get a consistent quality between the material -- sort of the material and powder mix and the process itself is very hard, for the quality components that you typically use it for. And a number of others. The process steps are typically still quite disconnected. There are companies like [indiscernible] trying to pull this together more, but it's still far away from being a consistent, seamless process. So there are a lot of barriers. We have, in our additive strategy, the ambition to try to overcome a number of these through knowledge, through software, through process knowledge that we have. We are trying to overcome some of these. This is why I've said that I don't really see it as a big threat at the moment because we are in a broader part of the value chain in additive than in machining. So if we lose a dollar on machining, we have the potential to gain two on additive. And that was just -- that was not a true example, that was just to illustrate. So if it starts to take off a little bit more, I think it's an opportunity for us, not a threat.

And maybe to add on, I mean, if you look at the future workshop where you have additive, you're also going to have subtractive. You're going to have machining to perfect the pot. And the post processing. So I think that's also an important thing to remember.

And if I look at the profile of the couple of acquisitions you have done so far, CGTech as well as this one, would it be fair to think that you are trying to get more and more exposure towards software side? And whether that means you can become more of a software and solutions provider in future at all? Or these are just the tools, which are just going to help you in your current equipment and services strategy?

Yes. I understand since we have done CGTech and now this one. It might look like that's all we're looking at the software companies. And I just want to emphasize, that's not the case. But this is a space where there has been a certain scarcity of targets and ongoing consolidation. So we have put some priority on these targets to make sure that we don't lose the window opportunity to enter this part of the market. Even with the ambition we have for Manufacturing Solutions, I would still say that for a long time, this is more complementary to the core than equal to the core. I mean, the target, as I said here is it will be around 10% of SMS in 2025. So obviously, from there on, it will continue to grow at a higher pace. But I think we're quite far out from saying that we have become software and solutions company first.

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

Two questions from my side. Firstly, is there any sort of cannibalization on your core tool investors from an acquisition like this, [indiscernible], for example. Or is it so broadly used already that we should just view it as an opportunity given the broader value proposition you can now offer? And then secondly, if you can just say anything about historical growth rates pre-2020?

Yes. The historical growth rates are basically in line with markets. So high single-digit type growth. In terms of cannibalization, no, I don't really expect any cannibalization. I think there might be the odd case where someone refrained from sourcing the CAM and our tools because they have competitive solutions as well. But no, I think that's the rare case because I think the industry is used to mixing and matching these solutions anyway. And it's ultimately the end customer that will decide on their -- what they want to buy the most productive solution for them. Now our aim is, of course, to make sure that they will see that our software and our tools are the most productive combination, but I don't think anyone will deselect us for that reason. Sorry, before we go into the next question, we have now the answer to the disclosure numbers.

Yes. Just a quick one to the previous question here from Bank of America. And when it comes to disclosure obligations in the transaction, there are no specific rules on the consideration of the price for the shares as such. What we are obliged to do is to inform the market how this transaction impacts us. And we're doing that by giving you a number on the impact on the EBIT margin, with and without PPA. We're telling you about the impact on earnings per share, and we're telling you the impact on the balance sheet and the debt ratios and how we move forward and whether it's a problem or not for us. So that is what we do.

[Operator Instructions] And that question comes from the line of [indiscernible] of Deutsche Bank.

The first question is about the margin profile. Could you just clarify the comment according to which the margin is lower than that of SMM SMS. So is it really after PPA? I'm just checking this. And if that's the case, so I suppose we are talking about a 30% type of EBIT margin business? Or is it even higher on an underlying basis? And then the second question is about the share of the recurring business, how much is it for CAMBRIO? And maybe perhaps more broadly speaking, how much is it now if you put together Metrologic, CGTech and CAMBRIO. And how do you envisage the transition to SaaS? Where are you in this respect? Because, I guess, by focusing on -- by rather focusing on small and mid-sized companies, you will have to offer them SaaS, right, in the future, if you really want to grow that business.

Tomas as can start on that.

Yes. On the first question on the margins, now we have not disclosed the margin as such, specifically on this transaction, on CAMBRIO. But the answer to your first question is yes, it's dilutive. If you include PPA and it's accretive, if you exclude the PPA and to SMM. And SMM, as you know, is running 23-ish, or something like that, percent EBIT margin.

Yes. And now I don't remember all the questions, but I guess the source transformation was one of them that you picked up. And I think, obviously, that's a good one. I think what we're seeing in the space is bundling. So I think that's the first step of bundling licenses and maintenance together doing a soft transition into SaaS modeling. You're absolutely right that, that's going to be part of the journey in the next coming years. And I think that's something we've also sort of modeled into the case. I think that goes hand-in-hand with a cloud transformation as well. Now we know that going full-on cloud into the manufacturing space is going to take a couple of years. So it's definitely something we have on our radar. We're going to do it, but we need to move at pace with the market. I think that's the important signal to make.

With a couple of years, we don't mean 2.

No, a more likely well over 5 to 10.

Do you want to ask any more questions. Go ahead. Quite some questions on the list.

Yes. So the other part of the question was to understand the share of the business, which is recurring today. For CAMBRIO, but also overall for your various software businesses, if you put them together?

I know for CAMBRIO, it's somewhere around 65%. And it's pretty consistent across the board. I guess that's about where you end up with -- if you have service or maintenance that is around 20% of new license sales and then you sell some new licenses and some services every year. So it's fairly in line with both CGTech and Metrologic.

So no more questions on the line?

No. No more questions from the phones at this time.

Good. So that concludes this conference call. Thank you all for listening in and stay safe and have a good rest of the day.

Thanks, everyone.

Thanks. Bye-bye.