Sandvik lays out CAM ambitions

May 24, 2022 | Hot Topics

I am seriously behind on posting earnings writeups but for now, know that most companies reported good results for the March quarter and that our corner of the IT vendor space has little exposure to Russia and Belarus, so won’t see a significant revenue decline due to exiting businesses there — but getting out of facilities contracts and furloughing staff is more complicated and will take most of the year to flow through financial statements. And Autodesk reports later this week, so we’re not done yet!

In the meantime, Sandvik held an investor event where it laid out its ambitions to change the world of manufacturing in a bit more detail. It says the market is looking for greater automation and integration and is interested in exploring advanced topics like generative design and artificial intelligence. Sandvik, of course, sells a lot more than the CAM solutions it has been acquiring since 2019, so check out the bigger picture from the Capital Markets Day here. All of the images below are from the CMD presentation, which you can see here.

The CAM offerings sit under the Sandvik Manufacturing Solutions (SMS) umbrella, alongside the metrology and additive businesses.SMS is a big business overall, with pro format revenue in 2021 (meaning, as if all acquisitions had closed on 1 January 2021) of $320 million or so at today’s exchange rates. 45% of that total is software, or about $145 million. Not bad for a company that had very little software presence just two years ago.

Sandvik told investors that it sees the manufacturing supply chain as ready for higher degrees of automation and connection. Part of this is driven by end customers who demand even more complex parts, which puts pressure on manufacturers to up their game by increasing capability, working in new materials, and doing all of that more collaboratively via solutions that Sandvik aims to supply. It believes CAM is a solid, though not rocketing, market with a 7% annual growth rate from 2019 to 2025.

The company has acquired 19 companies (in CAM and otherwise) since 2019 and has a three-step plan to maximize the value of these deals. First, let the companies do their thing –keeping the status quo and maintaining or attaining a leadership position within their niches. Then, use Sandvik’s big-company sales and marketing channels and investment capacity to grow the offer and revenue — still within the niche. And only then, in phase 3, start looking at ways the companies can work together, bringing joint products to market and cross-selling into one another’s accounts. By 2025, Sandvik expects the Manufacturing Solutions business to have revenue of 6 billion SEK (double what it is today, or about $600 million), with a more significant proportion of revenue from software.

Take a look at Sandvik’s vision for the manufacturing floor of the future:

That vision includes a lot of technology Sandvik already has, but leaves a lot of scope for development or acquisition: generative design to optimize the production process (and not necessarily the part, via topology optimization), creating a digital twin of the manufacturing process (the machines, but perhaps also how they are connected to optimize the whole line), shop floor logistics, and what appears to be optimization of additive and subtractive in concert. In essence, the company wants to build closed-loop manufacturing solutions.

That’s the aspiration — now take a look at this map for another view:

Sandvik says it is not looking for a “transformative” deal (meaning big enough to move the needle, perhaps because there’s not much big stuff left to acquire in CAM) but will consider opportunities if they come up. That means the pace of acquisitions will slow, and the companies can focus on integration and scaling up what they have.

And here’s one metric I had never heard of, but that’s important to monitor as the world shifts to electric vehicles. Sandvik presented data showing that passenger/light vehicle volumes will grow, but the mix will shift to 28% combustion, 35% hybrid, and 37% electric by 2030 (from 92% combustion in 2019). That mix shift flows down to manufacturing with redesign, lightweighting via new materials and production techniques, and the complexities of a hybrid powertrain changing how cars are made. That’s quantified by something called “cutting tool potential” or CTP. For combustion engines, CTP is 1.0 — but for electric vehicles, CTP is 0.5, meaning an electric vehicle needs only half the cutting tool time/capability/machinery of a combustion engine. But it’s 1.1 for hybrid vehicles — my guess, because of the challenges of integrating combustion and eclectic in one constrained space and, said Sandvik, because buyers want more four-wheel-drive hybrids than expected. Why does CTP matter? Because automotive suppliers that are tooled for a CTP of 1.0 will struggle to change machines, processes, and supply chains for 0.5 and 1.1 – and have to bounce between the two as consumer demand for electric vehicles shakes out. Sandvik says that the CTP data means its potential in automotive is flat — that the shift to electric will offset growth in vehicle numbers. But there is another angle: These SMS customers will look to Sandvik and others to optimize for this new reality, which might mean new end-markets, materials, and optimizations. We’ll have to watch this –and not just for Sandvik.

There was much more to Sandvik’s CMD than the manufacturing/CAM presentations — the company is spinning off parts of the business and integrating acquisitions simultaneously. It operates in mining, materials, and other areas that are not-CAM … it’s a complex overall picture. It’s fascinating to watch this evolution.