Sandvik kicks off PLMish earnings with flair
Sandvik announced its fiscal third quarter earnings today, and the manufacturing solutions business led the way. Recall that the company is both acquiring (adding 5 cutting tool companies in Q3 alone) and divesting at the same time — it spun off of Sandvik Materials Technology (now known as Alleima) in August — which leads to a lot of addition and subtraction, organic and inorganic … but the news, overall, is very very good.
Sandvik’s total revenue in Q3 was SEK 29.2 billion, up 35% as reported and up 22% in constant currencies (cc). On an organic basis (in other words, the same business structure excluding the spinout and additions), revenue was up 13%. (SEK 29.2 billion is roughly US$2.6 billion at today’s exchange rates.)
The company has started using a Hexagon-like arrow chart to show geo and end-market performance. It’s not ideal in that there is no more information that an arrow that may be pointing to 2 o’clock (up), 3 o’clock (flat), or 4 o’clock (down). On that basis, performance was flat to up in mining, up in general engineering, up in automotive and aerospace, up in energy, flat to down in infrastructure. Look here, page 3, for more details.
During the investor call, Sandvik CEO Stefan Widing gave a bit more info for some of the verticals: energy was up 30% to 40%; aero was “more in the 20% range — but that industry is still at only about 80% of pre-COVID levels, so has room to expand. General engineering correlates more with the PMI, so we need to be cautious here, and auto was low double digits, with some easing of component shortages. We still expect auto to be a support for us next year with upside.”
The company said that demand for Sandvik Manufacturing and Machining Solutions was strong, with total revenue of SEK 11.9 billion, up 35% as reported. That momentum appears to continue into Q4, as the company says, “daily order intake in the first two weeks of October was stable compared to the [average daily*] third quarter. The business saw its highest demand in energy and aerospace, while “general engineering and automotive reported double-digit growth rates”. Like many hardware companies, Sandvik focuses on order intake as a metric of future potential. It said that in Q3, ”order intake grew by 34%, and at fixed exchange rates by 25% of which organic was 9%. Excluding Russia, organic order intake grew by 13%.”
Even with the solid Q3 behind them, Mr. Widing told investors that “there are uncertainties ahead. Leading indicators show signs of an upcoming downturn in some market segments, but the timing and scope are difficult to predict at this stage … [While we] are prepared to act in response to any downturn, we are also optimistic about the future. Important segments such as mining, aerospace, energy, and automotive have strong growth fundamentals or are still on a recovery path with continued growth potential.”
Part of that growth path for Sandvik includes a growing reliance on software sales. We PLMish sorts are most familiar with the software assets Sandvik has been adding to its Manufacturing Solutions business, but the company has quietly been adding software in other areas, too. For example, in April, Sandvik Mining and Rock Solutions acquired Deswik, which Sandvik plans to grow into a platform that will support digitalization throughout a mine’s planning, design, and operations lifecycle. That same Sandvik division just launched the AutoMine Concept Underground Drill Rig, a “fully autonomous, battery-electric twin-boom drill rig capable of drilling without human interaction … [It] can plan and execute the entire drilling cycle using data from mine planning software … It uses an AI-guided drill bit changer to identify when bits are worn and changes automatically when needed. Drilling data is continuously reported to optimize the next round.” Dassault Systèmes, Bentley, and Aspen Tech, through the recent deal with Emerson, have all acquired software for mine planning and operations — it’s an area we all need to keep a closer eye on.
During his call with investors, Mr. Widing spoke a bit about the current acquisition environment. He said revenue multiples are coming down a bit, but “there is still a lot of money sitting on the sidelines. We have to be willing to pay a fair price for a quality asset. We will continue to have an active acquisition agenda and are not materially changing it because of the macro environment. We have started to use more balance sheet headroom — going forward will be more about using cash flow [to pay for acquisitions]. That leaves more room if something really strategic comes up.” In other words, expect more small deals — but leave room for a bigger deal if it comes up.
*Mr. Widing is an interesting CEO, being quite open on some data points to help investors understand his complicated business while not giving away any competitive information or making a forecast. The company releases the commentary about order intake for the first two weeks of the current quarter in order to show momentum, but Mr. Widing isn’t wild about it — he says it’s too limited to be definitive about anything, and especially when going from the usually weak summer quarter into what is typically a big fourth quarter.
Upbeat and also cautious start to earnings. Lots more to come!