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

Good afternoon, everyone, and thanks for calling in to Sandvik's conference call related to the news this morning, the acquisition of the mining business of Schenck Process Group expected to close in Q4 2022. My name is Louise Tjeder, Head of Investor Relations. And with me, I have our CEO, Stefan Widing; CFO, Cecilia Felton; and President of Sandvik Rock Processing Solutions, Anders Svensson. We will, as usual, start with a short presentation and take you through company facts, financials and strategic rationale. And after that, we will open up for your questions, where you have the possibility to ask your questions, of course, to Stefan, Cecilia and Anders. And with this, I hand over the word to you, Stefan.

Thanks, Louise. I can take the next slide, please. So I think this is actually quite straightforward. We are just doing what we said we were going to do. We focus on growth for both organic and acquisitive means. When it comes to our acquisition growth, we are focusing in 2 main areas. One is to enhance our core offerings. As you have seen this in the past, for example, through our Rock Tools acquisitions. And we want to also, in some cases, expand into adjacent areas of our current value chains. And examples of that is the DSI acquisition, where we took a market-leading position in ground support. Schenck Process, the mining part is enhancing our core offering. We are at present in the crushing and screening business. But our position in mining screens especially prior to the Kwatani acquisition has been very, very limited. So in a sense, this is also about expanding a little bit in the value chain. Anders will take you through this business more shortly and as he will explain crushers and screens are very much bundle as 1 when it comes to providing a product to the customer, so we see strong value in that. Then this business is also very much in line with our overall business model that all our divisions are working with. It's a B2B business where we want to drive digitalization, sustainability and productivity in our customers' value chain. So if we take the next slide, please. And where are we in the mining value chain. Well, as you know, we have 2 business areas addressing the mining value chain. We have Sandvik Mining and Rock Solutions, which address the rock extraction or rock excavation part or we can call upstreams mining. Here, we have a position, starting from mine planning, going to drill, drilling, blasting with our drill rigs and rock tools, going into rock support through DSI and then materials haulage through our Load and Haul business. Then we go over into downstream's mining where Sandvik Rock Processing is operating. And here, we have a strong position in crushing and now also screening. Just reminding you why we have split this into 2 different business areas. First of all, this is how our customers are organized. So it follows the customers' logic. It's also why the rest of the industry essentially is also structured in this way. We also wanted to focus. We want Mining and Rock Solutions to focus on digitalization, automation and electrification of -- in particular, the underground mining space. And we want the Rock Processing team to focus on downstream's mining and the growth opportunities we have seen here. The rock extraction or upstream's mining is very much a consolidated place, while downstream's mining is still quite fragmented. So we have here seen a strategic opportunity to add businesses that we find attractive in new niches. And when we say attractive, we are looking for higher margins and strong aftermarket content. And this is very much where Schenck Process Mining is close to our core, strengthening really our core and an attractive business in itself with strong synergies. So let's go through the business in a little bit more detail. And to do that, I will hand over to Anders. So next slide, please. And Anders, the floor is yours.

Thank you, Stefan. So now we will then dive into this business a bit more, and we will also cover the strategic logic behind the acquisition. So if we take the next slide then. So this business is a leading provider of high-capacity screening and feeding solutions for the mining business. The main R&D hubs and production sites are located in Australia, that's Perth and Melbourne, with additional production sites in South Africa, Brazil and China. The estimated top line of the business for 2022 is EUR 200 million. Geographical exposure is global but with the heaviest exposure in Asia Pacific. The EBITDA margin is accretive to SRP's margin, and this is supported by a resilient top line, which consists of approximately 70% aftermarket. The aftermarket consists of application support, screen refurbs, product engineering, design and manufacturing as well as digital support services. And circa 630 employees that would transfer to SRP with its acquisition, supports top-tier mining customers today. Next slide. So on this slide, we showcase some of the main mining offerings of the company. As I said, 30% is equipment with main focus on vibrating screens and vibrating feeders or high-capacity mining applications. And the 70% of aftermarket then are mainly focused on screening media, refurbishment and service and spare parts. And this is to ensure that the customer gets the highest productivity through the life cycle of the equipment sales. Next slide. On strategic fit. This is a Tier 1 supplier of both equipment and aftermarket solutions that are very complementary to the existing SRP offering. They have digital services with clear opportunities to leverage within the existing SRP digital platform that we call SAM by Sandvik. And there is a minimum customer application and geographical coverage overlap between the 2 companies with clear opportunities to strengthen footprint and market position. The customer value thinking and profit logic are also driven by the same principles as currently in SRP. Next slide. So on this slide, we illustrate how this acquisition will then strengthen our customer value add within especially large mining, crushing, screening applications. So if we start on the left-hand side, we see the current state of SRP with a very solid offering of primary crushers with our gyratory, hybrid crushers and [ roll ] crushers, and we rate our position in the secondary to ordinary crushing steps as very strong with cone crusher range. We have a somewhat weaker position within high-capacity screening for mining applications, as Stefan already mentioned. But with the Kwatani acquisition, we started to create a bit of a foundation here. But the Kwatani business is very centered in Africa. And within the screening solutions, there are regional differentiations. But also that there are huge benefits of being local in terms of lead time, service and logistics. So we actually rated our market position as still been weak today. Screening media has also been a weaker performing part of our offering with fairly low market shares. So if we then pass on to the right-hand side of the slide, we can see with this acquisition, how we strengthen those weaker parts of our offering within especially the high-capacity screening and screening media solutions. And we will by adding these 2 together, become a global full solutions provider within crushing and screening solutions for the mining applications. Next slide. So there's a strong strategic M&A rationale behind this acquisition. If we start with the first one, it fills a gap expanding our mining offering, becoming a full solutions provider for mining, crushing and screening applications, as I mentioned. And it also expands our geographical footprint and coverage very -- and the coverage is very complementary to the existing SRP one. The second one is that the company is financially sound with a relatively higher profitability than both peers and the current SRP business. And the third one on growing recurring revenues. With a significant aftermarket business, as stated around 70%, it will improve SRP's resilience further and increase our aftermarket share from about 52% of sales to about 56% to 57% of sales. And the fourth, they hold a strong market position in Asia Pacific and especially then within iron ore, but they are very well positioned to capture further growth, both within other minerals like gold and copper, but also to take further market shares outside Asia Pacific. And the fifth on technology leadership. They have high-quality products, supported by digital services that are geared towards providing customers with safe, sustainable and high productivity solutions. And then we can go to the next slide. And with that, I leave over to Cecilia Felton.

Thanks, Anders. So let's have a look at the financials and if we move to the next slide, please. So the EV/EBITDA multiple is around 10, and that includes the expected 5-year run rate synergy. We expect closing to take place during the fourth quarter, subject, as usual, to relevant regulatory approvals. And as Anders mentioned, Schenck will be accretive to SRP's EBITA margin, and it will have a neutral impact on Sandvik's EPS initially. At the end of the first quarter, our gearing was -- for the group was at 0.31, including SMT. And that positional Schenck will have an impact on the debt KPIs, as this is a 100% cash deal. However, the credit metrices will be within the requirements of our current rating. And with that brief overview, I will hand back over to Louise again.

Yes. Thank you all. We can now take the first question, operator.

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

So a couple of questions, please. So first on the growth ambition. Could you talk through roughly how much the aftermarket versus equipment that's grown for SP Mining in the past? And to what extent the addition of screening media and the refurbs will boost the aftermarket growth versus the current aftermarket growth in SRP. It will obviously be a higher share of sales, but keen to understand the different growth rates. I'll start here then.

I think I'd refer to Anders on that. It was a multipronged question, but I hope you got it, Anders.

Yes, thanks. Yes. So if we start with the screening media and refurb growth in relation to other growth. So I mean, when we see that we have synergies, we expect to be able to utilize specialty screening media across a larger installed base and existing today within Schenck Process Group. So that will then enable us to have a faster growth than the average aftermarket growth within SRP for that part of the offering. Similar to refurbs, refurbs can be done across other brands as well. And there is then an additional opportunity with synergies to leverage that growth more than the average growth. If we then look at the first question, which if I remember correct, was that how equipment versus aftermarket have performed within the Schenck Group historically. Then I would say that from the figures that I have seen, there has been a quite strong aftermarket growth on the installed base. And as the installed base have increased, of course, they have been able to capture more of the aftermarket. And they have a similar strategy as SRP to increase the aftermarket capture rate on installed base, providing more digital services, et cetera, that will then increase customer loyalty. Did that answer your question?

Perfect, yes. No. Very clear. My second one is on the commodity mix. So it looks like quite a lot of iron ore to begin with, but you obviously want to grow this business globally. Have you thought about what kind of mix you're looking at going forward, I would be interested in the pro forma commodity mix as you take SRP towards more markets exposed to copper and gold?

Do you want to answer that, Anders?

Yes, I guess, I'm most suited for that. So our ambition is, of course, to grow the commodity mix in Asia Pacific, where we are very strong in iron ore to more go into diversifying to both copper and gold, see great opportunities as copper is also one of the electrification minerals growing above average growth. But then when we look at the commodity mix going outside of Asia Pacific, I still see a huge potential to grow within iron ore, even though iron ore doesn't have the same annual growth at copper or gold. This is a high wear application normally in iron ore, and it generates a high aftermarket generation from that point of view.

Yes. No, I appreciate to give...

And I don't think -- Klas, I don't -- we have -- we do not have or can disclose what will the mix look like in 5 years at this point.

I get it. My very final one is on Kwatani and SB Mining in terms of filling the product gaps and -- you had at Slide 8. I mean this is -- it seems like a good deal. But do you think it makes a positive in the M&A activity in SRP truly part of your strategy to do M&A in this division, as you said, during the CMD in 2020. When we just keen to understand, it is a fragmented market more so than upstream. But it looks like you fill the big gaps that you interested in if there are other gaps to fill basically.

What I can say is, I mean, this is a big acquisition for the SRP organization. It's roughly 25% growth for them in one go. So clearly, they will spend energy and time now to digest this and start to work on or bringing them on board and extracting the synergies we see. And it's -- I think it's something that will generate benefits for us for quite a few years now working through this. So in that sense, Anders and his team has sort of his hands full. And it's not like we are immediately now setting our sights on the next one. We will give them now some time to digest this and create value out of this. And as you say, this was, I think -- well, it's a really good one because it's so close to the core business. If you take mid to long term, I don't see that we couldn't do more in SRP, of course, but it's not sort of an immediate priority right now. Now let's focus on creating value out of this one. I say that with always the caveat that you never know what will happen. And of course, smaller ones can always be considered in the pipeline, but as a general statement.

And our next question comes from the line of [indiscernible] of Barclays.

May I ask, at EBITDA level, would you be pleased able to share the amount of synergies you have factored into EV/EBITDA calculation? And do these synergies include the synergies at cost level, if there are any?

On -- first of all, very, very few cost synergies in this one. It's more about complementary geographically, product-wise, et cetera. There's always a few things you can do, but primarily, this is about revenue and growth synergies. And no, we cannot disclose the exact number we have put into the run rate synergies because then we would effectively give sort of the purchase price. And we have agreed with the seller not to disclose it because as you can understand from this is a carve-out or spin-out from Schenck and the rest of the company is still owned by private equity and it's a bit sensitive considering where they are with the rest of the business. The reason we provide the multiple in sort of the way we did it, since we couldn't provide the purchase price, we still wanted to give you a feel for how we see it from a value creation perspective. And if we take then the current EBITDA and add 5-year run rate synergies and arrive at around 10x, it should give you an understanding that we expect it to be -- to give returns of over 10% 5 years down the line, which is one of the sort of hurdles we have to when we do evaluations of M&A to make sure it exceeds the cost of capital.

That is helpful. Second question would be like EPS impact has initially seen neutral from this deal despite the SP Mining's EBITA margin being accretive to your SRP division? And may I know like what is causing this? Is this because of higher PPA that you expect, a higher transaction costs or any reason?

Yes, it's PPA. And it's a year 1 comment, of course -- yes, it's PPA.

Any estimate of the PPA?

No, we don't have an estimate as of yet. Well, of course, we have an internal estimate, but I cannot share it yet.

Next question comes from the line of Sebastian Kuenne of RBC.

Just basically an add on to the questions that have already been asked. So can you give us an idea of the current exposure, gold, copper, iron, coal, and I think limestone is also a business for Schenck with the current exporters. The second question, yes, again, on valuation. The way I understand it is that you include the top line growth, you have operational gearing -- positive gearing in that business for 5 years and you have synergies with the group overall. If you put this all together and you calculate the EBITDA, you then say, okay, we pay 10x EV/EBITDA 5 years out which would then imply a very high current multiple. And when I look at your competitors like Metso or FLSmidth, the whole trade below 10x. So I would like to understand why we're so optimistic on those growth outlook? Is it really just the synergies? Or is there something behind maybe IT, software, other things?

I can take the valuation question. But Anders, do you have the current ore breakdown to provide?

What we have agreed to say is that it is strongest in iron ore in Asia Pacific and potential to grow within other minerals.

And on the valuation, I saw your report that you came out with a few hours ago, and the math there is not correct. We have -- we are not saying we have paid 10x the profit of the company or the EBITDA of the company from 5 years from now. It's based on the current EBITDA and then we have added our expected synergy portion 5 years out. But of course, the business itself will also grow without us, so to say. And that's not included in that. So you arrive at a much too high multiple.

So today's EBITDA -- so 2022 EBITDA plus the synergies you expect in 5 years' time for earnings, including -- but then including the growth synergies that you mentioned earlier, right? You talked about growth and revenues synergies.

Yes, yes. Yes, correct. Yes.

So it is, in a way, the future EBITDA. I'm a little bit confused.

No, because the business itself without synergies expect good growth as well.

Okay. Okay. Okay.

I would tell you will still arrive at the number, of course, about 10x EBITDA, if that's your reference point. But we believe -- again, as I mentioned, we believe when we look at this case, we see it as very value creative based on the returns we can see. And it's coming from the good -- very good margin profile combined with good underlying growth and strong synergies.

The next question comes from the line of Gael de-Bray at Deutsche Bank.

Can I ask first about -- you mentioned that SP Mining has obviously high-quality products and comes pretty high margins. So can I ask about SP Mining's keep differentiating factors versus the competition on the product side? And also, I think you mentioned that it was supported by digital offerings. So I'd like to hear a bit more details around what's exactly their digital offering. And maybe the second question would be around the profitability. Can you give us an idea of the historical trough and peak margins for the business? And maybe comment on whether the business model and the share of outsourcing is quite comparable to that of SRP?

Anders, do you want to start with the digital and also their sort of differentiating factors.

Yes, I can do that. So the differentiation is that they have a very strong or durable design of their products, which keep relatively compared to many competitors longer life and also performs with a higher productivity than other solutions. And I won't go through any more details, of course, in terms of technical design, et cetera. And then when it comes to the digital offering, so they have a lot of measurements going through there CON IQ service platform, you can call it or digital platform, where they have condition monitoring, et cetera. And this is very suitable to connect into -- together then with our SAM service platform. Because what the customer is looking for is not, of course, to optimize 1 equipment by itself, it's more to optimize the system. And that would then be very beneficial for both parties to combine that offering into 1 digital service platform.

Anders, can you also comment on the sort of outsource versus in-source manufacturing base, et cetera, what we can say around that.

Yes. They mainly run an assembly type of operation in several sites, but there is also a couple of sites that runs together with steel cutting, fabrication and welding, et cetera. And those are the sites in China. And I believe it also is what they do in Taubate in Brazil. But otherwise, it's mainly assembly business. So it's quite flexible and also vertically integrated. And that's basically the same operating model as using in SRP. If you exclude the foundry that we have in Svedala, Sweden.

And I don't think we can share any trough for peak margins as we're not sharing the margin either overall.

[Operator Instructions] And we've had 1 further question joining the queue. It's a follow-up from at [indiscernible] Barclays.

The follow-up from me is with regards to your assessment of mining CapEx activity or pipeline that you see going forward into 2023 and further, given that we are making such a sizable acquisition at SRP level. Could you please share any thoughts about the pipeline and the CapEx activity?

As we have said on our report calls, I mean, we have a positive outlook on mining CapEx, and I think that's what the sort of more, let's call it, public data saying as well. We had a step-up going into -- from 2021 and then the gradual increase going forward. That's what we -- and that's also what we see currently sort of as expectations in the market. But if you -- we have our own proprietary data where we collect the CapEx projections from customers that have publish them. And it's -- I think it's a positive outlook currently which is, of course, also underlines what we said, we believe there is good fundamentals in the market, which helps this company to grow. And then on top of that, they can also take advantage of some of the tailwinds from some of the faster-growing minerals.

[Operator Instructions] There seems to be no further questions coming through the phones at this time. So I'll hand back to our speakers.

Okay. Thank you. This concludes then the session. And again, thank you for calling in and for your questions, and we wish you a nice rest of the day.

Thanks, everyone.