Sandvik's Long-Term EBITA Margin Target Is Achievable; Raising Our Fair Value Slightly

Equity Analyst

Matthew Donen

The short-cycle nature of demand for Sandvik’s metal-cutting tools and mining equipment exposes the group to cyclical swings in industrial manufacturing and commodity prices. A combination of divestments and continuous focus on ways to improve operational efficiency has successfully created a more resilient and profitable business. However, restructuring programs are frequently required to protect profitability once macroeconomic conditions change.

Sandvik is targeting 7% sales growth through the cycle, of which half will be generated from acquisitions. Sandvik’s balance sheet enjoys plenty of capacity to invest, organically and through acquisitions, into growth areas such as additive manufacturing and the digitalization of its equipment to help offset structural headwinds from certain end markets. Acquisitions have served to enhance its product offering and expand into adjacent areas of the value chain, some of which have greater growth prospects than the traditional core business. The shift toward digital and autonomous technologies in the mining sector is a big opportunity for Sandvik to increase its aftermarket offerings that are less cyclical than equipment sales. We believe Sandvik’s mining equipment service capabilities, particularly around battery retrofits, are inferior to Epiroc.

We do not anticipate acquisitions to detract from Sandvik’s investments in product innovation, which contributed to approximately 26% of 2022 revenue being generated from products younger than five years. Management has raised this target to between 30% and 35% by 2025, and thus investments in product innovation are likely to continue. Regular product innovation has supported superior market positions in many of Sandvik’s niche markets. We believe Sandvik’s leading market share across its machining and niche mining segments allows the company to utilize its existing close relationships with customers to gain a greater share of wallet as the group expands into adjacent areas.

Business Strategy & Outlook

We believe Sandvik has been able to carve out an economic moat primarily from its strong market position in niche applications in its mining and rock technology segment. While we are reluctant to award Sandvik’s machining solutions segment with a moat despite its strong presence in the metal cutting market, we think this business does not significantly detract from the company’s attractive returns on invested capital. Recent divestments of low-margin/no-moat businesses that historically formed part of the mining division should raise the segment's profitability closer in line with its most direct competitor, Epiroc. This has helped contribute to Sandvik consistently earning returns on invested capital in the mid to high teens, well above its weighted average cost of capital of 8.2%.

We assign a narrow moat to the mining and rock technology business where the company commands pricing power in many of its niche applications such as hard rock mining. Customers, which include the world’s largest mining companies, are willing to pay a premium for Sandvik’s record of reliability as well as the regular availability of spare parts and services resulting in a lower total cost of ownership. This is achieved through Sandvik’s worldwide service network stretching across 160 countries of its own employees, who are often situated in remote locations, which helps reduce the significant cost of equipment downtime. Sandvik’s on-the-ground presence, often permanently located on its customers' operations, also provides the company with a learning curve advantage for future product innovation. Given that much of Sandvik’s equipment is operated underground and is thus subject to large degrees of wear and tear, customers also place a greater emphasis on quality and safety to protect reputational damage. This record of reliability stretches back many decades with customers, which has resulted in Sandvik and Epiroc enjoying dominant positions in niche applications such as surface drilling, underground drilling, and underground loaders with combined market shares in certain niche segments at approximately 80%.

We think the above-mentioned barriers to entry would deter not only new entrants but also larger mining equipment suppliers that operate in other areas of the mining value chain. We view it to be unlikely for these companies to allocate large sums of capital into R&D and upskilling its existing sales and service network, given the relatively small market size compared with their existing end markets. Sandvik has also followed a direct sales method, which has resulted in intimate client relationships that would be difficult for new entrants to break especially given the risk-averse nature of mining customers.

The business has also increased its proportion of outsourced production, which is expected to allow the company to maintain strong profitability when commodity prices drop and demand for new equipment falls. In addition, aftermarket participation rates of approximately 50% on its installed base indicates characteristics of switching costs helping to protect profitability.

We attribute the historical margin differential between Epiroc and Sandvik to be due to Sandvik’s product mix. Sandvik has had a more extensive product range that includes lower-margin offerings such as crushing and screening. The margin differential has narrowed since Sandvik has divested several noncore operations. We expect this to help contribute to Sandvik’s excess economic returns.

Sandvik’s machining solutions enjoy a leading market position across its products such as round tools and inserts. Cutting tools represents a small share of manufacturing cost for customers but play an important role in improving productivity. Customers are therefore willing to pay a premium for reliability and Sandvik’s vast service network that minimizes production downtime. The company’s record of regular product innovation and R&D through the cycle is impressive, which has supported premium pricing and superior profitability to peers. Sandvik has led its competitor Kennametal in terms of production methods and supply chain optimization, further contributing to industry-leading margins.

Narrow

Economic Moat

Sandvik AB

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Sandvik AB engages in the development, manufacture, and sale of tools, equipment, and tooling systems for the mining and construction industries. It operates through Sandvik Machining Solutions and Sandvik Manufacturing Solutions segments. The Sandvik Machining Solutions segment offers tools, tooling systems, software, and services that optimize machining operations such as turning, milling and drilling as well as tool management solutions. The Sandvik Manufacturing Solutions segment refers to digital manufacturing and software solutions for design and planning automation and industrial metrology. The company was founded by Göran Fredrik Göransson in 1862 and is headquartered in Stockholm, Sweden.

STOCKHOLM , March 28, 2024 /PRNewswire/ -- Sandvik will publish its first quarter results on Monday, April 22, 2024, at approximately 11:30 AM CEST. A combined webcast and conference call for investors, analysts and financial media will be held at 1:00 PM CEST.

Invitation: Presentation of Sandvik's report of the first quarter 2024

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STOCKHOLM , March 13, 2024 /PRNewswire/ -- The Sandvik AB Annual Report 2023 is from today available at our website: https://www.annualreport.sandvik/en/2023 The Annual Report has been printed in a limited edition and will be distributed to shareholders that have ordered the report. The Annual Report is available, and can be ordered, at https://www.home.sandvik/annualreports.

Sandvik AB Annual Report 2023

Sandvik AB (publ) (SDVKF) Q4 2023 Earnings Call Transcript

STOCKHOLM , Jan. 25, 2024 /PRNewswire/ --  Fourth quarter 2023 A good ending to the year Continuing operations Order intake SEK 30,062 million (30,751) Order intake, at fixed exchange rates, declined by 2% Revenues SEK 31,816 million (31,094) Revenue growth, at fixed exchange rates 2% Adjusted EBITA SEK 6,211 million (6,413) Adjusted EBITA margin 19.5% (20.6) Adjusted EBIT SEK 5,738 million (5,977) Adjusted EBIT margin 18.0% (19.2) Adjusted profit before tax SEK 5,107 million (5,587) Profit for the period SEK 4,259 million (3,435) Adjusted profit for the period SEK 4,047 million (4,041) Earnings per share, diluted SEK 3.39 (2.73) Adjusted earnings per share, diluted SEK 3.22 (3.22) Free operating cash flow SEK 5,463 million (6,226) The Board of Directors proposes a dividend of SEK 5.50 per share (5.00) Additional information may be obtained from Sandvik Investor Relations, phone +46 70 782 63 74 (Louise Tjeder). A webcast and conference call will be held on January 25, 2024, at 10:00 AM CET.

Sandvik: Interim report fourth quarter 2023

STOCKHOLM , Jan. 24, 2024 /PRNewswire/ -- The Nomination Committee of Sandvik AB proposes the re-election of the Board members Claes Boustedt, Marika Fredriksson, Johan Molin, Andreas Nordbrandt, Helena Stjernholm, Stefan Widing and Kai Wärn as well as the election of Susanna Schneeberger as new Board member. Jennifer Allerton has declined re-election.

Sandvik AB - Nomination Committee's proposal for Board of Directors for the 2024 Annual General Meeting

STOCKHOLM , Jan. 4, 2024 /PRNewswire/ -- Sandvik will publish its fourth quarter results on Thursday, January 25, 2024, at approximately 08:00 AM CET. A combined webcast and conference call for investors, analysts and financial media will be held at 10:00 AM CET.

Invitation: Presentation of Sandvik's report of the fourth quarter 2023

Sandvik AB (publ) (OTCPK:SDVKF) Q3 2023 Earnings Call Transcript October 23, 2023 7:00 AM ET Company Participants Louise Tjeder - Head of IR Stefan Widing - CEO Cecilia Felton - CFO Conference Call Participants Daniela Costa - Goldman Sachs Klas Bergelind - Citi Andrew Wilson - JP Morgan Magnus Kruber - Nordea Sebastian Kuenne - RBC Capital Max Yates - Morgan Stanley Louise Tjeder A warm welcome to Sandvik's Presentation of the Third Quarter Results 2023. My name is Louise Tjeder, Head of Investor Relations.

Sandvik AB (publ) (SDVKF) Q3 2023 Earnings Call Transcript

Sandvik's shares have performed well over the last year on strength in aerospace, auto, mining, and oil/gas, but short-cycle industrial markets have been showing more signs of weakness lately. Industrial stocks have largely held up despite weak global PMIs, higher rates, and geopolitical risks, but commentary on end-market order and inventory trends will be key in Q3'23 earnings. Sandvik's Mining & Rock business has experienced double-digit growth but new equipment orders are likely to slow in the near term; long-term trends remain positive, particularly with automation/digitalization.

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STOCKHOLM , Oct. 2, 2023 /PRNewswire/ -- Sandvik will publish its third quarter results on Monday, October 23, 2023, at approximately 11:30 AM CEST. A combined webcast and conference call for investors, analysts and financial media will be held at 1:00 PM CEST.

Invitation: Presentation of Sandvik's report of the third quarter 2023

STOCKHOLM , Sept. 14, 2023 /PRNewswire/ -- In 2020 Sandvik AB's Annual General Meeting adopted an instruction regarding the appointment of the Nomination Committee, applicable until the General Meeting resolves otherwise.

Sandvik AB - Nomination Committee for the 2024 Annual General Meeting

Sandvik AB (publ) (OTCPK:SDVKF) Q2 2023 Earnings Conference Call July 19, 2023 7:00 AM ET Company Participants Louise Tjeder - Head, Investor Relations Stefan Widing - Chief Executive Officer Cecilia Felton - Chief Financial Officer Conference Call Participants Gael de-Bray - Deutsche Bank Max Yates - Morgan Stanley Andreas Koski - Exane BNP Paribas Jonathan Day - HSBC Rizk Maidi - Jefferies Christian Hinderaker - Goldman Sachs Operator Good afternoon, everyone, and a warm welcome to Sandvik's Presentation of the Second Quarter Results 2023. I am Louise Tjeder, Head of Investor Relations.

Sandvik AB (publ) (SDVKF) Q2 2023 Earnings Call Transcript

Second quarter 2023 STOCKHOLM , July 19, 2023 /PRNewswire/ -- 9TH CONSECUTIVE QUARTER WITH DOUBLE DIGIT GROWTH Continuing operations           Order intake SEK 31,660 million (28,740)            Order intake growth, at fixed exchange rates 7%            Revenues SEK 32,243 million (27,050)            Revenue growth, at fixed exchange rates 16%            Adjusted EBITA SEK 6,599 million (5,141)            Adjusted EBITA margin 20.5% (19.0)            Adjusted EBIT SEK 6,109 million (4,794)            Adjusted EBIT margin 18.9% (17.7)            Adjusted profit before tax SEK 5,405 million (4,812)            Profit for the period SEK 3,326 million (2,627)            Adjusted profit for the period SEK 4,085 million (3,680)            Earnings per share, diluted SEK 2.65 (2.10)            Adjusted earnings per share, diluted SEK 3.25 (2.95)            Free operating cash flow SEK 4,578 million (-49) Additional information may be obtained from Sandvik Investor Relations, phone +46 70 782 63 74 (Louise Tjeder) or +46 72 506 60 53 (Maria Brandberg). A webcast and conference call will be held on July 19, 2023, at 1:00 PM CEST.

Interim report second quarter 2023

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Sandvik AB (publ) (SDVKF) Q1 2023 Earnings Call Transcript.

Sandvik AB (publ) (SDVKF) Q1 2023 Earnings Call Transcript

CONTINUED ROBUST PERFORMANCE WITH 18% REVENUE GROWTH.

Interim report first quarter 2023: Sandvik

STOCKHOLM, April 4, 2023 /PRNewswire/ -- Sandvik will publish its first quarter results on Friday, April 21, 2023 at approximately 11:30 AM CEST. A combined webcast and conference call for investors, analysts and financial media will be held at 13:00 PM CEST.

Invitation - presentation of Sandvik's report of the first quarter 2023

STOCKHOLM , March 10, 2023 /PRNewswire/ -- The Sandvik AB Annual Report 2022 is from today available on the company website: https://www.annualreport.sandvik/en/2022 The Annual Report has been printed in a limited edition and will be distributed to shareholders that have ordered the report. The Annual Report is available, and can be ordered, at home.sandvik/investors.

Sandvik AB Annual Report 2022

STOCKHOLM , March 10, 2023 /PRNewswire/ -- Sandvik has decided to invest in a new production unit in Malaysia for manufacturing underground loaders and trucks. Equipment production is planned to begin in the fourth quarter of 2023 following factory upgrades and other site improvements.

Sandvik invests in new load and haul factory in Malaysia to support growing mining BEV market

STOCKHOLM , Jan. 26, 2023 /PRNewswire/ -- The Nomination Committee of Sandvik AB proposes the re-election of the Board members Jennifer Allerton, Claes Boustedt, Marika Fredriksson, Johan Molin, Andreas Nordbrandt, Helena Stjernholm, Stefan Widing and Kai Wärn. Johan Molin is proposed to be re-elected Chairman of the Board.

Sandvik AB - Nomination Committee's proposal for Board of Directors for the 2023 Annual General Meeting

Sandvik AB (OTCPK:SDVKF) Q4 2022 Earnings Conference Call January 20, 2023 4:00 AM ET Company Participants Louise Tjeder - Head, IR & VP Stefan Widing - President, CEO, President, Sandvik Manufacturing & Cecilia Felton - EVP & Chief Financial Officer, Machining Solutions and Director Conference Call Participants Gustaf Schwerin - Handelsbanken Klas Bergelind - Citi Daniela Costa - Goldman Sachs Group Lars Brorson - Barclays Bank Andrew Wilson - JPMorgan Chase & Co Sebastian Kuenne - RBC Capital Markets Andre Kukhnin - Crédit Suisse Max Yates - Morgan Stanley Louise Tjeder Good morning, everyone, and welcome to Sandvik's presentation of the Fourth Quarter and Full Year Results 2022. I am Louise Tjeder, Head of Investor Relations here at Sandvik.

Sandvik AB (SDVKF) Q4 2022 Earnings Call Transcript

STOCKHOLM , Jan. 20, 2023 /PRNewswire/ -- Fourth quarter 2022 REVENUE GROWTH OF 11% AND RECORD PROFIT QUARTER Continuing operations Order intake SEK 30,751 million (26,772) Order intake growth, at fixed exchange rates 3% Revenues SEK 31,094 million (25,311) Revenue growth, at fixed exchange rates 11% Adjusted EBITA SEK 6,413 million (5,043) Adjusted EBITA margin 20.6% (19.9) Adjusted EBIT SEK 5,977 million (4,798) Adjusted EBIT margin 19.2% (19.0) Adjusted profit before tax SEK 5,587 million (4,775) Profit for the period SEK 3,435 million (3,436) Adjusted profit for the period SEK 4,041 million (3,464) Earnings per share, diluted SEK 2.73 (2.73) Adjusted earnings per share, diluted SEK 3.22 (2.75) Free operating cash flow SEK 6,226 million (4,474) Proposed dividend per share 5.00 SEK (4.75)

Sandvik Interim report fourth quarter 2022

STOCKHOLM , Jan. 4, 2023 /PRNewswire/ -- Sandvik will publish its fourth quarter results on Friday, January 20, 2023 at approximately 08:00 AM CET. A combined webcast and conference call for investors, analysts and financial media will be held at 10:00 AM CET.

News for Sandvik AB Stock (SDVKY)