Report on the third quarter 2006
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CONTINUED STRONG DEMAND AND INCREASED PROFIT
• Order intake +14%*, SEK 18,627 M.
• Invoicing +15%*, SEK 17,587 M.
• Operating profit +26%, SEK 2,854 M.
• Profit after financial items +21%, SEK 2,583 M.
• Net profit for the period +19%, SEK 1,826 M.
• Earnings per share +21%, SEK 1.45.
• Cash flow -5%, SEK 2,788 M.
* Change compared to the same quarter the preceding year at fixed exchange rates for comparable units.
“The strong global demand for Sandvik’s products continued during the third quarter. Growth in Europe increased further. Higher volumes, improved product mix and high internal efficiency contributed to improved earnings. Invoicing increased a total of 13% to SEK 17.6 billion and profit after financial items rose 21% to SEK 2,583 M.
The high demand in our core areas as well as improvements in both product mix and internal efficiency are highly satisfactory. Structural improvements and acquisitions are being carried out continuously that strengthen Sandvik’s long-term competitiveness and secure future earnings improvements,” says Lars Pettersson, President and CEO of Sandvik.
FINANCIAL OVERVIEW
SALES
Invoicing amounted to SEK 17,587 M (15,554), an increase in total of 13% and 15% excluding currency effects for comparable units. The increase for comparable units excluding currency effects was 8% for Sandvik Tooling and 18% for Sandvik Mining and Construction. The increase for Sandvik Materials Technology was 20%, of which about 6% was attributable to price surcharges for increased raw material prices.
Order intake totaled SEK 18,627 M (16,480), representing a total increase of 13% and by 14% excluding currency effects for comparable units. Changed exchange rates affected order intake negatively by 3%. Growth excluding currency effects for comparable units was 7% for Sandvik Tooling and 3% for Sandvik Mining and Construction. The order intake for Sandvik Materials Technology rose by 41%, including a positive effect of approximately 6% as compensation for increased raw materials prices.
Adjusted for large project orders, growth was 18% in the Group, 20% for Sandvik Mining and Construction and 34% for Sandvik Materials Technology.
Demand for Sandvik’s products improved further in Europe and order intake rose 28%. Development in Western Europe improved in all business areas, while at the same time demand in Eastern Europe was highly favorable. The business climate in NAFTA was strong and order intake increased by 15%, or 10% adjusted for large project orders, particularly in investment-related segments such as oil/gas and mining.
The trend in Africa/Middle East remained positive. Order intake declined by 8% compared with a year earlier, but adjusted for project orders it increased by 35%. Demand was also high in South America, mainly for Sandvik Mining and Construction and Sandvik Materials Technology. Order intake increased organically by 8% adjusted for project orders, but reported order intake declined by 10%. Order intake in Asia/Australia increased by 6%, 11% adjusted for project orders. Growth remained highly favorable, primarily in China, India and Japan.
The global industrial economy remained strong in most segments, particularly in investment-related areas, such as machinery, mining and construction industries, as well as the oil/gas and process industries. Demand from the general engineering industry continued at a high level. Activity in the global automotive industry remained favorable and demand from the heavy vehicle industry was stronger than from the passenger car industry. Activity was high in the aerospace industry and demand increased primarily in NAFTA.
EARNINGS AND RETURN
Operating profit amounted to SEK 2,854 M, an increase of 26% compared with a year earlier. The operating margin improved and amounted to 16.2% of invoiced sales (14.5). All business areas reported increased operating profit and operating margin. The earnings improvement was attributable to higher sales volumes and positive price trends, increased internal efficiency, successful product introductions and a more advantageous product mix. Changed exchange rates had a negligible impact on earnings in the quarter.
Net financial items amount to an expense of SEK 271 M (expense: 135). The change compared with the preceding year was due to increased borrowing and the effects of about SEK 100 M of the market valuation of financial instruments related to employee stock option programs.
Profit after financial income and expenses increased by 21% to SEK 2,583 M (2,126), 14.7 % of invoiced sales. Tax amounted to SEK 757 M (597). Net profit for the period increased by 19% to SEK 1,826 M (1,529). Earnings per share rose by 21% to SEK 1.45 (1.20).
Cash flow from operating activities amounted to SEK 2,788 M (2,932). Working capital declined by SEK 62 M in volume compared with the preceding quarter, due mainly to advance payments of project orders and reduced accounts receivables. Investments amounted to SEK 1,446 M (1,003), of which company acquisitions accounted for SEK 234 M. Cash flow after investments was SEK 1,373 M (1,969) for the quarter.
Working capital as a percentage of invoicing amounted to 29% (31). The return on capital employed rose to 26.5% (22.8) through improved operating margin as well as increased capital efficiency. The return on shareholders’ equity was 31.1% (25.5). Interest-bearing liabilities and provisions, less cash and cash equivalents, resulted in a net debt of SEK 17,173 M (17,413). Cash and cash equivalents amounted to SEK 1,580 M (2,007) and loans to SEK 15,268 M (15,703). Net debt/equity ratio was 0.7 (0.8).
SANDVIK TOOLING
Sandvik Tooling’s order intake in the third quarter amounted to SEK 5,268 M (5,089), which was an increase of 7% for comparable units excluding currency effects. Invoicing totaled SEK 5,298 M (5,066), an increase from the preceding year of 8% for comparable units excluding currency effects. Order intake and invoicing was affected negatively by slightly more than 1 percentage points due to the third quarter of 2006 having fewer working days than 2005.
The market trend was favorable for Sandvik Tooling. Tools in cemented-carbide developed better than high-speed steel tools. Demand rose further in Europe, with Germany as well as France and the UK showing favorable growth. Demand remains high in NAFTA and positive growth was noted in South America after three quarters of negative development. In Eastern Europe and Asia, the demand situation was as strong as previously, particularly in China, India and Japan.
Demand was favorable from the engineering industry, oil/gas as well as the heavy vehicle industries and increased in the aerospace industry. Activity in the automotive industry was good in Europe and Asia but weaker in North America.
Successful product introductions during the past year, including a new generation of cemented-
carbide inserts, are contributing to further strengthening Sandvik Tooling's competitiveness.
Sandvik Tooling continued its strategic work to develop synergies and capitalize on cost advantages between product areas. As part of this effort, the intention was announced to discontinue production of high-speed steel tools in Worksop, UK. Negotiations have been initiated with the affected employee organizations. Production will be consolidated with other units, with the aim of achieving improved cost efficiency. A provision for the estimated costs for the phase-out of about SEK 100 M was charged in the third quarter. The quarter also includes a capital gain of SEK 112 M from property sales in Rovereto, Italy.
Operating profit improved by 15% compared with the third quarter of 2005 and amounted to SEK 1,235 M (1,074). The operating margin totaled 23.3% (21.2). The profit increase was mainly attributable to favorable price trends, higher volumes and improved internal efficiency. Changed exchange rates had no significant effect on earnings. The return on capital employed rose to 33.8% (30.7).
SANDVIK MINING AND CONSTRUCTION
Sandvik Mining and Construction’s order intake in the quarter amounted to SEK 6,717 M (6,283), an increase of 3% for comparable units, excluding currency effects. Adjusted for project orders, the increase was 20%, which illustrates the continued strong demand for the business area’s products.
Market activity was high in the quarter and the demand for base metals, precious metals and coal remained strong. High production rates combined with new investments resulted in continued high demand for machinery for the mining industry. Demand for machinery and tools from Sandvik Mining and Construction was strong for both underground and surface mining and the construction industry as well from all geographical regions. During the quarter, a number of large contracts were signed for new machinery for underground mining, mainly in Southern Africa.
Invoicing rose by 18% for comparable units excluding currency effects and amounted to SEK 6,518 M (5,409).
The Chilean company Implementos Mineros (Implemin), Latin America’s leading producer and supplier of consumables for rotary drilling and RC drilling within mineral exploration, was acquired in September. The acquisition complements previous acquisitions and means that Sandvik can now deliver fully integrated solutions for rotary drilling. In addition, the acquisition also strengthens Sandvik’s capacity in the aftermarket.
Operating profit rose in the third quarter by 30% to SEK 952 M (730) or 14.6% (13.5) of invoiced sales. The increase was attributable primarily to higher volume and high capacity utilization combined with increased efficiency.
The number of project orders in invoicing increased in the third quarter, which affected the operating margin somewhat negatively but return positively. Changed exchange rates had a marginally positive effect on earnings. The return on capital employed increased to 30.6 % (25.1).
SANDVIK MATERIALS TECHNOLOGY
Sandvik Materials Technology’s order intake in the quarter amounted to SEK 5,359 M (3,922), an increase of 41% compared with the year earlier period for comparable units excluding currency effects, or 34% after adjustment for major project orders. Invoiced sales amounted to SEK 4,501 M (3,890), an increase of 20% for comparable units excluding currency effects. Price surcharges for high raw material prices had a positive effect of about 6% on order intake and invoicing. This meant that order intake increased by 28% and invoicing by 14% in comparable terms.
Demand for products from Sandvik Materials Technology remained strong. The business climate in Europe was stable and improved in NAFTA. In Asia, particularly China, growth remained strong, as in South America, where mainly Brazil posted a positive trend.
Business conditions remained strong for most product areas, although primarily in the energy, process and aerospace industries. Demand for tube products to the oil/gas, fertilizer and nuclear power industries developed highly positively during the quarter and a number of large orders were secured. Activity in the general engineering industry and consumer-related industries was stable and improved in the electronics industry. Demand from the automotive industry was stable, with favorable growth in Asia, weak in the US and stable in Europe. New rapidly growing industries such as medical technology and precision mechanics showed highly positive development during the quarter.
Operating profit in the third quarter increased by 62% and amounted to SEK 473 M (292) or 10.5% (7.5) of invoicing. The improved profitability is primarily attributable to higher volumes resulting in better capacity utilization, in combination with the change program in progress that resulted in increased capacity, reduced costs and an improved product mix. Changed routines for managing preventative maintenance among other areas resulted in a shorter vacation stop than previously at the production units in Sweden. This contributed to higher capacity utilization and reduced seasonal variation. Changed exchange rates had no significant effect on earnings. Return on capital employed increased to 15.9% (12.1).
FIRST NINE MONTHS 2006
The order intake for the January to September 2006 period amounted to SEK 58,743 (49,497), an increase of 19% in total and 15% for comparable units excluding currency effects. Invoicing was SEK 52,919 M (45,897), an increase of 15% in total and 12% for comparable units excluding currency effects.
Operating profit for the period from January to September amounted to SEK 8,703 M (6,727), an increase of SEK 1,976 M or 29%. The operating margin was 16.4% (14.7) of invoicing. Currency effects had a positive impact on profit of about SEK 450 M from the beginning of the year.
Net financial items amounted to an expense of SEK 740 M (expense: 474). Profit after financial items was SEK 7,963 M (6,253), an increase of 27%. The tax rate was 28%, and profit for the period amounted to SEK 5,753 M (4,500). Earnings per share amounted to SEK 4.60 (3.45).
Cash flow from operating activities amounted to SEK 6,644 M (5,060). The Group’s investments in fixed assets amounted to SEK 3,403 M (2,347). Company acquisitions accounted for SEK 1,099 M. After investments, acquisitions and divestments, cash flow was SEK 2,532 M (2,701).
The number of employees was 41,126 (39,613 at 31 December 2005), an increase of 791 persons for comparable units since the beginning of the year.
SIGNIFICANT EVENTS
• Sandvik Tooling announced its intention on 25 October to discontinue production of high-speed steel tools in Worksop, UK. This measure means that production of high-speed steel drills is being shifted to other production units within Sandvik Tooling to achieve a more cost-efficient production structure. The phase-out affects about 200 employees.
• As part of the development of Sandvik Mining and Construction’s strategic position, the Chilean company Implementos Mineros (Implemin) was acquired in September. The company is Latin America’s leading producer and supplier of consumables for rotary drilling and RC drilling within mineral exploration. Implemin has annual sales of about SEK 90 M and some 90 employees. The acquisition complements previous acquisitions and means that Sandvik can now deliver fully integrated solutions for rotary drilling. Implemin is consolidated within Sandvik Mining and Construction from 30 September. Since the acquisition was relatively small, no specification in accordance with IFRS 3 is provided in this report. Complete reporting of acquisitions carried out in 2006 will be provided in the 2006 Annual Report.
• In September, Sandvik Tooling inaugurated a unit for recovery of cemented carbide in Chiplun, India. The facility has a recovery capacity of 600 tons and is strategically important for the supply of raw materials as well as Sandvik’s environmental commitment.
• Sandvik Hard Materials, within Sandvik Tooling business area, has decided to transfer production of wear parts and other products at the unit in Torino, Italy, to the product area’s facilities in Epinouze, France and Barcelona, Spain. Operations in Torino will be phased out, but sales and service in Italy will not be affected. The decision is part of the work to enhance cost efficiency and achieve economies of scale in production. The phase-out affects about 20 persons and is scheduled to be completed at the end of 2006.
PARENT COMPANY
The Parent Company’s invoiced sales were SEK 12,815 M (11,157) and operating profit totaled SEK 374 M (244). Interest-bearing liabilities and provisions, less cash and cash equivalents and interest-bearing assets, amounted to SEK 9,563 M (8,266 at 31 December 2005). Investments in fixed assets totaled SEK 682 M (610).
ANNUAL GENERAL MEETING
The Board of Directors has decided that the 2007 Annual General meeting will be held in Sandviken on 26 April 2007 at 5:00 p.m. The notice to convene the Meeting will be made in the usual manner.
ACCOUNTING PRINCIPLES
This report was prepared in accordance with IFRS, with application of IAS 34, Interim Financial Reporting. The same accounting and valuation principles were applied as in the most recent annual report.
Sandviken, 27 October 2006
Sandvik AB; (publ)
Lars Pettersson
President and CEO
Review report:
We have reviewed the interim report for
Sandvik AB; (publ) for the period 1 January to
30 September 2006. Management is responsible for the preparation and presentation of this interim report in accordance with IAS 34 and the Annual Accounts Act. Our responsibility is to express a conclusion on this financial interim report based on our review.
We conducted our review in accordance with the Standard on Review Engagements SÖG 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by FAR. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with the Standards on Auditing in Sweden RS and other generally accepted auditing practices. The procedures performed in a review do not enable us to obtain a level of assurance that would make us aware of all significant matters that might be identified in an audit. Therefore, the conclusion expressed based on a review does not provide the same level of assurance as a conclusion expressed based on an audit.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim report is not prepared, in all material respects, in accordance with IAS 34 and the Annual Accounts Act.
Stockholm, 27 October 2006
KMPG Bohlins AB
Caj Nackstad
Appendices:
1. The Group in brief
2. Sales and operating profit
Additional information is available from Sandvik Investor Relations, +46 (0)26-26 10 23, or by
e-mail to info.ir@sandvik.com
Calendar 2007:
1 | Feb | Report on Fourth Quarter and Full Year 2006 |
26 | Apr | Annual General Meeting in Sandviken |
26 | Apr | First Quarter Report |
19 | July | Second Quarter Report |
6 | Sep | Capital Markets Day |
26 | Oct | Third Quarter Report |
APPENDIX 1
THE GROUP IN BRIEF
(The PDF version is recommended for studying the tables)
APPENDIX 2
SALES AND OPERATING PROFIT