Sandvik AB (publ)

Welcome to Sandvik's Presentation of the Second Quarter Results 2021. My name is Louise Tjeder, Head of Investor Relations.

And beside me, and also presenting the quarterly highlights today is our CEO, Stefan Widing; and our CFO, Tomas Eliasson. So, yes, we will start with a presentation and then we move on to the Q&A session when you have the chance to ask your questions to both Stefan and Tomas.

With this short introduction, I hand over the word now to you Stefan.

Thank you, Louise. And also I would like to welcome you to the second quarter report for Sandvik in 2021.

We kick things off with a short summary here. We believe this has been a quarter where we show strong execution in what we believe is a high demand environment.

We have an order intake in growth of 43% year-on-year in the quarter. We have a strong underlying demand in both the mining and the construction segments where the intake levels are now continuing well above pre-COVID levels.

We also see robust demand in automotive and general engineering and also now some positive signs of improvement in the aerospace and energy segments. Revenues grew by 22% organically versus last year on the back of strong backlogs despite some of the supply chain issues that we have managed throughout the quarter.

We have a solid earnings performance, a margin of 19.1%, and the third consecutive quarter with margins above 19%. On a rolling 12 months basis we are now at 18.7%.

We had permanent savings in the quarter of 190 million. That was more than offset by reversals of the temporary savings from the same period in last year and that had a negative impact of 765 million.

If we look at this, altogether, we can see that the approach and strategy we have had is working. We now are rolling back significantly the temporary savings versus last year.

We replaced them with some permanent savings and volume growth leading to what is essentially record high EBIT margins. We also continue to shift growth.

In the month of June, we had a record month for order intake for battery electric mining vehicles of about SEK 140 million. We also had success with a business model related to battery as a service.

So, it's not only the equipment that is moving also the business model is gradually being validated, which is very positive. Rock Processing has launched a new digital service called SAM by Sandvik, which I will come back to, and we have of course also been very active on the M&A front.

We have closed the DSI Underground acquisition on July 7. So from here on it will be reported in our numbers.

And we have announced another five acquisitions within or just after the ending of the quarter. So, very good progress on that front.

If we focus a little bit on some of these acquisitions, we are definitely stepping up also the digital shifts. Two acquisitions in Sandvik Manufacturing Solutions: first one being DWFritz Automation.

This is a company with a leading position within the niche of high speed, in-line contactless metrology. It will give us – it's a platform acquisition for us in that sense, it will, in a very good way compliment our metrology software company and it will give us access to this high growth niche area.

This is a niche with an addressable market of around SEK 6 billion, growing at around 15% CAGR. So, it essentially doubles our addressable market in the metrology space.

And then we have the Cambrio acquisition; one of the leading players within CAM software. They have three different product offerings addressing different segments of that market.

So, a very good entry position for us to fill this strategic gap in our portfolio, and also get into the high-single-digit growing business of the CAM market. These two acquisitions in total sum up to about SEK 1.3 billion of revenue in 2020 numbers.

It will take manufacturing solutions north of 2 billion on the run rate basis this year; that means we're well on track to execute on the target to grow manufacturing solutions to 4 billion in 2025. I mentioned Sam by Sandvik.

This is an exciting new product launched by Rock Processing Solutions, is basically an industry for the [auto type product] targeted at the people working in the field with our products using the connectivity that we have in our products in the Rock Processing field. We'll give our customers access to data and analytics of the product and the ability to for example, order spare parts through an e-commerce solution, so another step on the digital shift.

If we looked at the market development, year-over-year everything is more or less up of course. Europe up 63%, North America up 49%, Asia a little bit weaker up 34% simply because China had recovered significantly already in the second quarter of last year.

If you look at the sequential development, you can see that most of the regions are also up. On the segment's mining is staying at a very high level, that's how you should read that sequential trend of being flat.

General engineering continues to improve sequentially, especially in North America, which is continuing to pick up. Automotive has been sequentially flattish between Q1 and q2.

Here we had a strong Q1. We enter Q2 in a strong way then it flattened out due to the component shortages among our customers, but it has picked up again towards the end of the quarter and going into July.

We will see if that is due to restocking for holidays or if it's a more permanent uptick, but at least positive trend towards the end of the quarter. In energy, we now see a sequential uptick.

It was a step up in Q2, especially driven by North America. It's still at low levels, but we saw clear signs of improvement at least.

If you take the SMT perspective here, they continue to see improved order intake also on the umbilical side. And then aerospace, which we still show sequentially flat; we do however see continued increased activity.

It doesn’t impact our business that much yet, but if this would be a picture on Europe only we would say that sequentially it is now improving in Europe, which seems to be leading the other regions in the aerospace recovery. So, relatively positive there, however, we don't expect the recovery to be fast in any way.

Going down to order intake in revenues, again 43% up on orders, over 25 billion or 25.8, so tracking on the run rate basis over 100 billion, 22% up in revenues. This is a book-to-bill of 110%.

So, we continue to build order backlog and of course are looking forward to seeing that backlog convert into revenues here going forward. The EBIT development is strong, up 58% and adjusted margin on 19.1, and close to SEK 4.5 billion in terms of money.

This is a leverage of 50%. We are happy with this leverage.

It should be seen in the light of the good mitigation with the quarter, the same quarter of last year. And it is a better leverage going up than the leverage we had going down last year.

So, that's good. And we are happy with this considering the significant effects and a reversal of temporary savings that we saw compared to last year.

Tomas will talk more about the savings as well in his section. Going into the business areas then, we start with Mining and Rock Solutions, another quarter with very high order intake, the second one in a row with order intake of over 10 billion.

Organically up 31%, equipment up 44, aftermarket up 22%, so strong performance. One major order, we had more major orders actually last year so this would have been 38%, up if we take away the major orders.

We also see the battery electric order here that I mentioned prior. I have to correct myself a little bit here from Q1.

I said then that we didn't expect the Q1 order intake levels to be sustainable. And it was due to some catch ups and so on.

Now, we have another quarter at this level and we are now more confident that this is actually an order level that we should see going forward for some time. So, good underlying demand, and I think good also execution in the field from our team here.

The margins are slightly down versus last year. That is quite easy to explain.

It's essentially fully explained by reversals of the temporary savings last year, as well as currency. That's essentially the two main or more or less the only explanation points here for that leverage number.

Sequentially, we had higher revenues than Q1; still the margin is on par slightly down with a couple of 20 basis points. This can be explained by mix.

First of all, we have a positive development on the equipment side that is growing fast. So, we get the negative mix impact with more equipment and less aftermarket, of course, very positive for the future, since that equipment will eventually or immediately once it's delivered start to drive the aftermarket business instead.

Then we also have some ramp up costs. We are now more confident in the outlook, more permanent, strong order intake.

So, we are ramping the organization to be able to deliver on the backlog and avoid extensively times for our customers. We are also now investing even more in some of the technology areas such as electrification and automation.

Then we also have some logistics challenges that we had to manage in the quarter. In particular, important services in some occasions, we had to fly spare parts to customers to be able to serve them, which increases our cost base and there is a general inflationary pressure here as well.

If you take these three, they will explain about a SEK 100 million or over 100 basis points on the margin in the quarter sequentially. We have in a good way offset most of the general inflationary pressure, but that would be the fourth explanation point there.

But it's in the order of magnitude of SEK 20 million. So, good handling there, still a little bit to do, which has been addressed also with some price increases as late as June of this year.

Some of these things will remain, as long as we grow equipment, it will remain we think logistics for example, and ramp up costs will gradually go down as we fill in this new larger costume with revenues. We are positioned to continue to grow this business again with the closure of the DSI Underground acquisition in July and also the announced acquisition of the smaller, but still important Australian rock tools company, Tricon that we did in the quarter.

Rock Processing Solutions, super strong, order intake up 61%. Equipment orders up 92, 32 on the aftermarket side.

We believe that is driven, at least early in the quarter by some continued catch up effects, but that it is also now driven by simply by strong underlying demand. Revenues of 29%, very well executed by the supply chain team here.

We have inventories at record low levels. So, they are working hard to deliver to customers in this environment, but good execution in the quarter and then strong margin, 17%.

They have handled the district's challenges, they have handled the price inflation or the cost inflation through price increases, but then they have also positive mix impact from more spare parts and more highly profitable products in the portfolio that they have sold in the quarter. So, very strong margin at 17% from them.

Also here we had an acquisition Kwatani in May that will increase their product portfolio with large screens and feeders and they are based out of South Africa. Sandvik Manufacturing and Machining Solution's, I would say, good order intake, very good order intake at plus 44% organically.

Revenue is up 33% year-over-year. This corresponds to approximately a 3% sequential improvement versus Q1 on the revenue side.

We saw automotive staying at good levels, but flattening out from a growth perspective versus Q1. As I mentioned, good start of the quarter there, good ending of the quarter there, but quite flattish throughout the quarter, you could say.

General engineering has continued to improve and is now on robust levels actually back to pre-pandemic levels. The daily order intake in July started with plus 20% in the first couple of weeks.

We are shifting back now to year-over-year commentary on this, because we think that's what is the most relevant, that's how we measure our own business internally. If this would have been a sequential comment, you could say that sequentially, we are continuing on the improvement path that we have been earlier in the year.

So, roughly a 3% sequential improvement. I want to emphasize as I do every time, we're giving you a data point here, not the forecast.

And as you know, Q3 is seasonally very different from other quarters as well. So, please bear that in mind.

Very good margin levels in SMM. 23.1% leverage of over [63, or at 63%], which considering the very good mitigation they did in the same year of last year means that they have also structurally done improvements.

And you can see that 100 million in – over 100 million in permanent saving coming into this quarter. This gives me very good confidence in what they will achieve going forward, considering we have quite a few segments where there is growth still to come.

And with this margin levels already I think we will see some good performance from this business going forward. We have accelerated our M&A journey here, three acquisitions.

I have talked about two of them, and then yesterday, we also signed the acquisition of Fanar, Polish round tools company of almost SEK 200 million [in revenue] based out of Poland. And then finally, SMT.

Order intake of very high 64 – sorry 74%. Of course, [we compare], but an order intake level of 4 billion in the quarter, in absolute terms is a very high level.

Also historically, especially given that they have no major orders in the quarter. They had umbilical orders of around 200 million.

So, if you compare that to the [140 in Q1], you can see that it's continuing to pick up, but still at lower levels. Here we can see most other segments going very strong.

Medical wire, heating systems, application to being to name a few strip as well, with our consumer business, giving very good order numbers overall. Also, here they see some signs of improvements in the aerospace segments, which is good, but also here still on low levels.

Revenues are still down minus 4% versus last year. The main shortfall versus last year is that we essentially are not shipping any umbilicals right now.

There are some, but it's less than 100 million. So, what you see here is essentially SMT without umbilicals.

And I think that's a pretty impressive performance then on the margin side at 10.4%, excluding metal price effects. They show here that there are other businesses [Kanthal] in particular strict now as well.

The other parts of tube application to being and tube specialized that can deliver really strong margins also without umbilicals. We have a 200 basis point improvement year-on-year based on the inventory build-up.

I want to emphasize though that this is a bridge effect. They have built inventory in the way they normally do before the summer.

And it was just that we didn't do it last year because of the COVID impact. So, the margin here is not really boosted by production levels.

It's the normal production levels they should have in this season. And then you might have seen also that [Kanthal] made progress on the renewables strategy, having signed an agreement to provide heating elements for hybrid here in Sweden.

With that, I'll hand over to you Tomas.

Thank you, Stefan. So, let's jump into the numbers.

The income statement and the balance sheet and we will, as usual, start with the summary. And if you look at the upper right hand corner, we have the components of the top line for the total group.

As you've heard, order is plus 43%, and revenue is plus 22%. That's big numbers, really big numbers, but we must remember that we are comparing now with a quarter a year ago, where we had minus 23 for orders and minus 20 for revenues.

So, a big downturn and then a big upturn here as well. In order to understand a little bit more on where we are, we can compare with the second quarter in 2019.

Instead, which was like a more normal quarter, pre-COVID, even though we were in a little bit of a listing cycle downturn on the short cycle business. And if you look at those numbers, we are year-on-year, slightly positive on order.

So, we're actually above and slightly negative on revenues, but no big numbers, just single digit numbers for both orders and revenues. Currency, minus 6%, I'll come back to that.

And structure turns positive now plus 1% in the quarter, that's CGTech and Miranda Tools. And of course, for the second half of the year, there is much more to come, as we know how closed DSI and then we have a number of other acquisitions, which will close during the next six months.

So, if we look at the income statement then, earnings close to 4.5 billion, 58% increase and a 19.1% margin. And we will look at the bridge in just a little bit.

The interest net is performing according to plan, and we'll talk about that as well. Tax rate within the range 22.8% and working capital is picking up, but still below 25% and cash flow on the improve.

So, let's go then to the bridge and look at the organic development here. With 22% in revenue increase year-over-year we have a leverage of 50%, which gave an accretion of 640 basis points and we are satisfied with that leverage.

Of course, we have to, as Stefan mentioned here, we have to remember that we had a good mitigation in the second quarter last year. We had minus 37% on a 20% downturn.

And now we have a 50% leverage on a 22% upturn here. So, of course, when you mitigate then you don't get these, let's say peaks and troughs in the same way, it becomes more controlled, just the way we want to have it going forward.

Currency had a negative impact of 659 million on the EBIT line and we'll talk a little bit more about that when we come to the guidance. So, all in all from 14% to 19.1% in the quarter.

Savings. This is the slide on savings that we have presented to you at every closing or every quarterly call for the last eight quarters.

And we have the same setup here on this slide as we always have. So, on the first line, we have the 2019 program that we launched in May 2019.

That is all done now. There are no P&L impacts in the bridge, but the cost level is, of course SEK 1.7 billion down compared to what it was before we started this program.

So, we just put it in here for reference. On the next line, you have the permanent savings program that we launched during last year.

We have 190 million in the quarter in positive impact here. And you can see the split by business area as well.

And the annualized run rate on the savings are 760 million that is 58% to be exact delivered. The majority of what remains up to 1.3 billion will happen during the second half of the year and there will be a little bit of a spill over to 2022 as planned.

And then of course there will be year-over-year effect in 2022 as well just like the tail before it fades out completely. Then the little bit more, let's say a little bit more complicated part here is the temporary savings here now.

And let me start by saying that for the total group we have when it comes to work time reduction in the quarter, in quarter not a bridge, little bit more than 40 million in savings. So that program is basically coming to an end by mid-2021 now.

But as we had 600 million a year ago, in work time reduction savings, you get a negative bridge effect of 560 million. The next line is other temporary savings or discretionary spend, travel, fares, trade shows, and so on.

That is 300 million still in the quarter, in quarter, but we had 500 million in the second quarter a year ago. So that gives you a negative effect of 205 million.

So, those two adds up to the minus 765 million in the bridge. But there are still savings in quarter of 350 million.

Of course, at some point in time, within later this year, we have to let's say draw a line in the sand here and stop comparing this band level here to what we had in pre-COVID on the pre-COVID situation here, because we will not go back to the same spend level as we had before COVID broke out. Because we're still comparing this with what kind of spend we had before the pandemic before, say April, before March, April 2020.

So, the total and anyway in the bridge is minus 575 million. Next slide here, net financials, the interesting line here is the first one, the interest net 88 million in the quarter.

We're on track to deliver or to have 400 million in interest net for the quarter and maybe less. Tax rate, we have a reported tax rate of 24.5.

There were some impacts from items affecting comparability, mainly related to the SMT separation and the creation of an SMT subgroup, which is now done legally. So, if you adjust for that, we have 22.8% in tax rate, which is well within the guidance for 2021 22% to 24%.

Working capital is increasing as it should when the business is up. If you sell more, you need to invest more in working capital to cater for the future deliveries, but also to safeguard stock availability as well.

And you can see that on the right hand side that the relative numbers are on the improve for what at least two of the business areas, but we will see increases in all four business areas going forward. This can be seen clearly also in the cash flow chart here on the left hand side.

If you look at the blue line, and the red line here, the blue line, which is the rolling 12-month EBITDA is now surpassing the 12-month rolling cash flow line just the way it should be. We grow, we need to invest more in working capital.

So, there would be more earnings than the cash flow, but we will continue to fight for a good cash conversion. It's right now sitting at 80%, but we expect that to increase quite a bit during the second half of the year.

You can also see on the right hand side, when I look at the components of the cash flow that we have an increase in earnings, which is quite substantial, but also investments in working capital and CapEx is basically on the same level. And then net debt by the end of the second quarter, June 30, we have now moved from a net cash position to a net debt position.

We are on 3.9 billion in net debt and there is not much acquisition spend in this development. This is only really the dividend of 8.2 billion, which was paid in May, but there will be more acquisition spent during the second half of the year.

In these numbers, we don't have the payment for DSI, for example that actually happened last week, but it ends up in Q3. And then we have Cambrio and we have DWFritz and we have Fanar, and hopefully more coming during the second half of the year.

But from a gearing point of view, we have everything under control. We will be nowhere near our financial target of 0.5 and we will be nowhere near the rating target of being below 1.5 when it comes to net debt over EBITDA.

So, it all works out well. Balance sheet continues to be strong and can help us to continue our – will help us to continue our M&A agenda.

Let's look at the guidance, what we said and what we delivered. And maybe the first line is the most interesting one here.

We guided on 350 million on underlying currency effect and that is translation effect and transaction effect. And we ended with 632, that's quite a difference.

And the difference is not translation the difference is transactional currency flows. If you look at the opening and the closing exchange rate between the Swedish krona and mainly the U.S.

dollar doesn't look that much, but what has happened during the quarter is that the krona has been quite strong before it weakened again, and transactional currency effects happens as it goes. So, I would say, you would have to more look at the average exchange rate during the quarters in Q2 and this is exactly what has happened and you have the whole explanation sitting and that transaction effects for U.S.

dollars in April, May, and June. Total currency effect was 659, not many revaluations of derivatives and working capital and metal prices came in on guidance.

CapEx and interest net continuous as previous, just below 1 billion for CapEx and 100 – just below 100 million on the interest net. And the tax rates as I mentioned, on 22.8%.

So, if we finish off then with the guidance, the CapEx guidance is full-year guidance and we have said less than 4 billion that is still valid. Currency impact for the third quarter, given the exchange rate by the end of June, we estimate to be around zero.

The metal price effect, we estimated 200 million positive. Interest net, we don't change that 400 million and the tax rate we keep on 22% to 24%.

And as we have discussed previously on these calls, we have lowered the tax rate guidance, basically every year since 2016, but we don't see any – let’s say more room for a lowering of that guidance, the tax rate would most likely sit on this level for the coming years. So, 22% to 24% will stay.

And with that, I'll hand back to Stefan for conclusions and summary.

Thank you, Tomas. Yeah, so we are continuing our shift to growth.

That's both a market and business comment, as well as a strategy comment. The overall demand is solid.

We see a strong and broad based demand for products and services. Order intake levels in, especially mining and construction or above pre-COVID levels.

We expect them to remain robust. And we also see a good demand from most of our short cycle businesses.

We have global supply chain challenges that we have managed well in the quarter, although it have had some impact on our operations as I explained. We have solid profitability levels and now three consecutive quarters with margins about 19%.

We continue to see and believe in economic recovery and a high market activity. The commodity metal prices are staying at a high level, and the global industry production is on a positive trajectory.

We do see signs of improvements in the energy and aerospace segments. And again, we will continue to live with some uncertainties in the global supply chain under constraints, but we believe they will be handled.

We will continue to execute on our strategy. We have accelerated our M&A activities with five signed acquisitions during and after the quarter.

We have a good pipeline. I expect this to continue in a strong way.

And we are continuing to take important steps in expanding our digital offering. And we continue to have a high pace in innovation on the mining side with accelerated interest from our, especially then our battery electric mining vehicles.

So, overall, we believe this has been a good quarter and we're looking forward for this to continue. Thank you.

And let's take some questions.

Thank you, Stefan and Tomas. We don't have any questions yet at least online here.

So, we will open up for questions on the conference call. Operator, please.

Thank you. Hi, Stefan and Tomas.

Klas at Citi. I’ll be squeezing one quickly, we have other companies reporting right now.

First on autos, I actually thought it would be worse. I mean, [came in] better than I expected in SMM, flat to sequentially despite bottlenecks at the OEMs and with battery penetration surprising positively in Europe, which is a big market for you.

Did you outperform autos production adjusted for geographical exposure do you think? And I was also surprised Stefan that we didn’t see more of a negative impact from battery or is that yet to come, because the penetration numbers coming out are actually quite, quite high?

Thank you.

We – you're probably right that we are, our numbers are stronger than expected if you correlate to the production numbers, but I think I've commented this before, I think the correlation seems to be a little bit more out of sync than maybe historically. We were trailing a bit in the fall.

I think we were overachieving in Q1 and maybe we have seen less of an impact now from the various parameters you mentioned. We are not seeing really any impact from the – that is beyond what we have calculated with sort of say from the EV aspects that you mentioned either, so we are quite happy with those numbers.

That's very good. Okay.

Thank you. Thank you.

So, do we have any more questions operator?

Oh, hey, hi, thanks. Good morning, Stefan.

If I can follow up on that question, and then also ask a second question on mining? Can you sort of frame for us what the message is around China, specifically for SMM on short cycle?

Sounds like you're talking about a slowdown on the media call earlier. I wonder whether that sort of sequential reacceleration you're talking about as you exited the second quarter also goes for automotive and also includes China.

And then I just wonder whether that sort of low single digit up sequentially so far in July? Is that how you see the quarter pan out?

I know you don't give a guidance, obviously, but it's above normal seasonality was typically as down, sort of mid single digit versus the second quarter, obviously, August, the slower month. But do you see if auto does re accelerate or is included in that sort of view on July or numbers in July?

Do you see Q3 overall track in line with sort of what you've seen month to date? Sorry to be a bit long winded, but I’d be keen on some color there please.

If we start with China, China year-over-year is actually in SMM slightly down minus 2%. But that is because they were at the high level last year and in sort of a catch up mode after their pandemic lockdown.

Sequentially, yes, you could say we have seen a – when we see a slowdown it really that it has stopped sequentially growing, so it has flattened out. And it is definitely driven by that same trend in automotive in China.

When we say we saw the, sort of, we saw things picking up a bit again now in the end of the quarter, it is related partly to automotive, but more to North America than China from a graphical perspective. In terms of the commentary for the start of the month, I don't have that much more to add other than we just tell you what we see, so to say, and the start of the month has been a slight sequential uptick that includes auto, where the things will continue beyond the holiday period and so on, is very difficult to predict.

This is the most, I would say for us the most difficult period, because it all depends on how September comes out. And it's very difficult to say at this point in time.

Understood. Secondly, if I can ask to mining margins in the quarter, I wonder whether you're able to give us some numbers around the impact from the key items that you flag, including mix, ramp up cost, and logistics.

And then perhaps more importantly, as we look into the second half mean delivery times are expanding, price increase is being put through now I guess will hit you, sort of next year, there won't be a huge amount of impact on the equipment business, I would have thought second half. So, wonder whether you can talk a little about price cost and the cadence into the second half, and maybe talk a little about the margin trajectory from the levels you've seen in the first half?

Thank you.

Yeah. If you start with the points we explained regarding the margin in mining, the first one is mix.

As I said, more equipment, less aftermarket, a good thing I think. We're growing equipment strongly.

It will lead to aftermarket. We have the ramp up costs.

We have the logistics challenges. Those three are the main…

Numbers of those.

Yeah, those three together are roughly SEK 100 million in the quarter. So, you could say 120 basis points, roughly.

And then you have slightly on top of that and some cost inflation that we didn't manage to offset in particular on the – more on the Rock tool side. So that's what we see and some of that will stay, some of that will fade away as we grow into that higher volume.

And I believe personally that the logistics things will remain to some extent, but also that we will be able to manage it even better going forward.

And when from a P&L standpoint, sorry, go on.

Yeah, then on the pricing side, and so on, I think, on the consumable side, or spare parts and so on, we have done a good job, I think to mitigate that. As I said, slightly behind on the Rock tool side.

On the equipment side, we have done price adjustments already, as you say there is lead times here. And it's always difficult to fully predict when you set the price for something you will deliver nine months in advance, but there has been price adjustments down on also on the equipment side to anticipate this going forward.

Whether we are perfect, whether we are overdoing it or under doing it slightly is difficult to predict, but we are trying to mitigate that fully. I would say we have done that in Rock Processing on the crushers side already.

They have shorter lead times and they have done a good job there.

Do you think – sorry, finally, in the conclusion, can you lift margin sequentially in SMR in the second half versus first half do you think?

Yeah, without giving too much of a guidance so to say, I mean, historically, if you look at our margin profile, it is like a sawtooth shape. It goes up sequentially across the year because volumes tends to go up towards the second half of the year.

And I guess some of the disappointment now was that it didn't do that this quarter for the reason I explained. But we should be able to go back to more normal performance eventually, I think.

Understood. Thank you.

Thank you for taking my question. Just on your M&A strategy, you've had a high level of activity recently and you mentioned as most to come in, in the second half, what is exactly the strategy going forward?

Should we expect a similar space or what is the amount of deals you're planning to do in the second half? In what areas mainly and are you still comfortable paying software multiples in the full SMM specifically?

We cannot – as I’m sure you know, we cannot plan when the activities, M&A activities actually land and now we had five coming in a short time span, it's a little bit of a catch up effect. We have a continued I would say strong activity level and then we will see when things will actually land if it's now second half of the year or – and how much.

But this is the level we expect going forward, but maybe, I mean, we will not buy software/technology companies in the way we have done now every quarter, of course, but the pace in general, I think is where we want to be, if you take a year to date perspective, I think. In terms of multiples, for a company like Cambrio or CGTech last year, the multiples are at the high level.

We believe they are worth it based on what we can do with the companies, how they fit into our strategy, the synergies we can extract and it will be value creating if you have a five-year horizon. So – and these are not major companies either in the sense, so we think we can handle this and it will be value adding to our business.

And maybe if I can add a little bit here and we, let's say from a funding point of view, we don't just buy by random, we of course have a plan. We have a long-term planning scenario where we look at what kind of companies do we want to buy, what kind of multiples can we afford, and how much firepower do we have in the balance sheet and it all works out in the end to support the growth strategy that we have and we are tracking according to that plan.

Thank you.

Hi Stefan, Tomas, Louise, Magnus here from UBS. A couple of questions from my end I want to start with SMS.

And I think just between your comments earlier, the incremental margins, they were quite good and a big step up from the prior quarters. I think actually, if you adjust for the savings and the reversals, I think the incremental monitoring are closer to 80%.

And I just wanted to get your thoughts on why they're so much higher than what you're typically guided for, and sort of how you think they would sort of gradually revert to what should be considered normal?

I think one of the reasons as you say, if you take away the offset from the temporary things, and it is because they have now for two years, been working with our cost base, not on a temporary level, but with structural activities. They have taken out a lot of costs.

I mean, if you look at the amount of people they have, it's a big difference. And this goes for production.

So, gross profit supporting activities, it goes for SG&A cost type of activities as well. So, I think the answer is simply that they are a leaner and more efficient organization today than they were two years ago.

Got it. Is there any sort of structural shifts in the fixed versus variable costs here?

No.

Not really. No structural shifts.

Just driving efficiency, productivity, consolidating production units and support staff and backup, back line and stuff like that.

Got it. Thank you very much.

And secondly, could you comment a bit on how you see your production levels into Q3 in SMS compared to sales and you expect to follow normal seasonal patterns here in Q3 or does the marketing activity want something different this year?

We will – we expect normal seasonality. We will have the units closed as per normal year so to say.

They managed to increase their inventories reasonably well in Q2. So, they are in all divisions except one, I should say they are confident that they can handle the vacation period and meet demand in September.

One of them are slightly behind, but they're working through to try to mitigate that because they were hit more in by COVID closures and so on in Brazil and the Czech Republic earlier in the year. But I would expect normal seasonal patterns on the production levels.

Brilliant. And then on the pricing side, I think you commented [indiscernible] some 1% in Q1, do you see something similar in Q2 and if you can say anything about Q3, obviously that would be helpful?

We don't see any difference on the pricing activity throughout the year. I mean, most of the adjustments are done early in the year.

So, I think it will continue as it has, so to say.

Perfect, thank you very much. Can I ask one last one on automotive?

Could you help us a bit, what organic sales growth was in SMS automotive in Q2?

Oh, you mean versus prior year?

Yes, exactly. I think [indiscernible].

I don’t have that figure, maybe Louise can get back to you on that. I'm sure it was a huge number considering the state, but I don't have it.

We'll get back to you.

Thank you so much. Brilliant, [pretty much].

Thank you.

Thank you. Good afternoon.

Could I just ask on the, how you're seeing temporary versus permanent savings going into Q3. Is it reasonable to assume that we'll have a, sort of similar dynamic with the headwind from temporary cost savings and then the level of permanent savings as we go into next quarter or do you see any reason that would be kind of markedly different in Q3?

I think you can, basically – if you look at the temporary savings we had last year in Q3, you can more or less do that analysis because we will have a little bit more permanent savings in Q3 as some additional programs kick in versus this quarter. And then, I will guess that it will be a little bit higher spend next quarter.

I'm sure some travel will come back in September. We had less permanent savings in Q3 last year than in Q2, on the other hand, so the bridge effect – yeah, I don't have a straight answer.

But with those sorts of directions you can, I think you can do a pretty good model on that.

Yeah. The temporary savings were quite similar in Q2 and Q3, but in Q4, it started to unwind.

Okay. And just my second question is on the battery electric vehicles orders that you mentioned, could you give a little bit more color on whether these, sort of retrofits go – or whether these are retrofits, whether it's new equipment?

Is it going into an existing mine? Is it a sort of fully electric Greenfield mine?

And also maybe talk a little bit around? I think this is one of the, sort of first times we've heard you talk about battery as a service.

So, maybe if you could talk a little bit about how that contract is structured and exactly what you're providing that would be great? Thank you.

Yeah, it's not a new mine. It's not the Greenfield, it's an existing mine.

I honestly don't know if they will be classified as replacements or if it's an expansion order. But it's brand new vehicles.

We don't do retrofits so to say. These are our – as Z50 battery electric trucks out of Artisan and then it was the – I think it was the 518B truck out of [indiscernible] or loader out of [indiscernible].

And these are pure BV's purpose built to be BV’s, we usually talk about. We build Tesla's while others are still doing the old type of electric vehicles where you take a diesel car and put in a electric engine.

So, yeah, that's that for the equipment. The battery as a service, yeah, we are probably not as good in marketing as some others.

We tend to do things. First, instead, we – this is not our first battery as a service, you know contract, but this is the first major one.

So, all this equipment is supported by battery as a service contracts, and is typically a three to five year contract where we essentially provide, you could say, we provide the energy to the customer. So, we own the battery, we own the replacement batteries, its charging equipment, and some other things needed in the mine.

We do maintenance and repairs and so on, on that battery. So, the customer essentially buys the equipment, excluding energy, we make sure the equipment has energy.

So it's not – it's energy as a service almost. That's how the business model works.

And for that they pay a yearly fee.

Okay, great. That's helpful.

Thank you very much.

Good afternoon, everyone and thank you for taking the question. Stefan sorry to [labor the point], but carrying on, I think from Lars’ question earlier, I wanted to make sure I, you know, we properly understood what you were saying about China.

My impression having written it down is that the China business, which was down 2% year-over-year, and when I looked at the APAC orders, the minus 6% sequentially was significantly impacted by automotive. Can you – is it all auto or is it a bit more broad based?

And then finally, I didn't understand the point on whether China was reaccelerating or not during the quarter. So, can you just clarify those points, please?

On the final question, the answer is no. When we talk about an uptick at the end of the quarter is primarily a comment related to North America from a regional basis and automotive from a segment basis.

And yeah, if there is one intersection between the geographies and segments where we see a clear or more clear downturn sequentially, it is automotive in China, that was sequentially down.

Understood. Maybe I can just step back and ask your, kind of opinion, and certainly not a forecast or anything like that.

But the question we're trying to figure out is, look, China was first-in and first-out and we're beginning to see this leveling off in a number of the China businesses not Sandvik or auto, whatever. I guess my question is, do you see an acceleration in Europe and North America?

That's clearly different from what's happening in China at the moment. Can you just bridge between those two, why do you feel so confident that we're not simply one quarter behind the same trend as we're seeing in China?

What are the indications that mean that Europe and North America are going to be accelerating in the second half? What do we see on the ground?

I mean, we are, of course, looking at this from a Sandvik business perspective. And then what makes us confident going forward is, in many of our or in our long cycle businesses, we have a strong order backlog.

And we will ramp up and deliver on that into next year. So that's great, that's one basis for this optimism, if you will.

And then we look at – if you take the more short cycle, if we look at the various segments, we see in automotive, that the industry is hit by the component shortages, we see the underlying demand being higher than production levels. So, my read of that is that we will have another step-up eventually when these imbalances are corrected, whether that's in 2022, or earlier, I don't know.

But that's at least makes me more optimistic there. Aerospace and oil and gas is not going to get any worse.

I'm pretty confident in that. So, we have sort of adjusted to the level we are at and from here on, I just see things improving in those segments.

So, I guess my answer then becomes I don't really see what will go down from our business perspective. But of course, anything can happen.

But that's a reason for our optimism, I think.

Yeah, that's super helpful. Thank you for the clarification.

I appreciate that.

Thank you. We will end with a question online, if you could, briefly just comment on the progress of the SMT separation?

Sure. Continues as planned, I would say, full activities.

As Tomas mentioned, we have for example, and you can see it in the report, if you read the notes carefully that we have now put in place the full legal structure in terms of a new group, essentially, that is wholly-owned currently by Sandvik. And the plan is now that Q4 will be a dry run for them as basically operating as their own entity.

If that works, well, we hope to run Q1 as an audit quarter. And then we'll come back with a formal decision, but the plan is that we will continue to watch the listing next year.

Okay, thank you, Stefan. So we close the Q&A session now.

And if you have any further questions, don't hesitate to contact IR at any time. We wish you a very nice summer and thank you for calling in.

Thank you.

Thank you.