Sandvik reports “one of the most challenging quarters” in its history
July 17, 2020
Sandvik AB, headquartered in Stockholm, Sweden, has reported its results for the second quarter of 2020, in which the business was strongly impacted by COVID-19. Revenues declined sharply by 20%, while adjusted operating profit declined by 43% to SEK 2,837 million (Q2 2019: SEK 4,968 million). Order intake declined by 23% and the adjusted operating margin declined to 14% (Q2 2019: 18.8%).
The company added that its operating profit was adversely impacted by costs of SEK 1,329 million related to structural measures related to the coronavirus (COVID-19), and SEK 24 million related to the internal separation of Sandvik Materials Technology from the remainder of Sandvik Group.
Stefan Widing, president and CEO of Sandvik, stated, “The second quarter of 2020 was one of the most challenging quarters in our history. Never before have we managed such a significant drop in orders over such a short period of time, while also having to manage both health and safety concerns as well as logistical challenges on a global scale.”
“I am proud of how the Sandvik team has responded to this challenge,” he continued. “While putting the health and safety of our people first, we have continued to serve our customers throughout this period, ensuring that their businesses have continued uninterrupted. At the same time, we have shifted to new ways of working, while quickly and decisively implementing significant cost-saving measures, which unfortunately also means that some of our colleagues have to leave the company.”
“Consequently, we are now able to show the resilience of a decentralised, focused and more agile Sandvik. I want to acknowledge all the hard work and great achievements that have led to the results accomplished this quarter.”
“Unless there are new lockdowns, the worst should be behind us, but we expect the recovery to be slow given the low business activity in several of our key end-market segments, such as automotive, aerospace and energy,” he noted. “Our savings activities are now shifting from temporary to a more long-term adjustment to this new reality, and I am pleased to see all our businesses implementing and delivering on both short and long-term savings measures.”
Across the Sandvik Group, customer activity was said to be particularly slow during the first half of the quarter, due to widespread closures caused by COVID-19. Recovery was subtle in the major regions of Europe and North America, while in China, a more V-shaped recovery was noted during the first quarter 2020.
The last month of Q2 2020 reportedly showed signs of a slight increase in the pace of recovery, although with lingering uncertainty in major segments such as automotive and aerospace. Underlying development in the mining segment was stable despite the negative impact from mine closures, predominantly in April, and consequently order intake decreased organically by 10% year on year.
In Asia and in China in particular, Sandvik reported that the recovery noted towards the end of the first quarter marked a resumption of more normal demand in the second quarter, where domestic demand in particular showed improvement while exports remained subdued. Overall, all major regions declined at a double-digit pace, at -33% for Europe, -30% for North America, and -12% for Asia.
As a result of the slowdown in the majority of short-cycle segments, order intake decreased organically by 35% year on year in Sandvik Machining Solutions, and by 33% for Sandvik Materials Technology where – in addition to short-cycle deterioration – a significant weakening was also noted in the oil & gas segment.
Sandvik Machining Solutions
Sandvik Machining Solutions saw a significant decline in its Q2 adjusted operating profit, reporting a total of SEK 927 million, down 63% on the same period in 2019 (SEK 2,483 million). The operating margin declined to 8.9%, compared to 23.3% in the same period in 2019.
The company stated that order intake and revenues declined significantly due to a softening of customer activity across all segments, with aerospace and automotive accounting for the largest drop. Demand declined across all markets, with sequential recovery in China, mainly driven by domestic consumption. However, this business area only experienced some disruptions to its own production, where the closures of large sites in India were most challenging.
During this period, it was announced that Sandvik Machining Solutions will be renamed Sandvik Manufacturing and Machining Solutions and will consist of two business area segments: Sandvik Machining Solutions (SMS) and Sandvik Manufacturing Solutions (SMF).
Sandvik Mining and Rock Technology
Sandvik Mining and Rock Technology saw order intake decline organically by 10% year on year. Mine closures in the first half of the quarter had a negative impact on both equipment and aftermarket, but showed signs of recovery in the second half as mines began to reopen.
Adjusted operating profit for this segment declined by 14%, primarily due to lower organic revenues. The operating margin decreased to to 12.3% (Q2 2019: 18.9%), impacted by costs of SEK 667 million related to structural savings measures.
Production in this business area was impacted only to a minor extent by COVID-19 closures during the quarter, and both supply and distribution were said to have proceeded as planned.
Sandvik Materials Technology
Sandvik Materials Technology saw a decline in organic orders of 33% year-on-year due to COVID-19, as well as uncertainty in the oil & gas segment. All major regions and customer segments declined during the quarter, except for Asia. However, revenues were reported to have performed better, supported by a strong backlog.
Adjusted operating profit excluding metal price effects SEK 248 million, down from SEK 585 million in Q2 2019. The operating margin for Q2 2020 was -2.4%, down from 14.6% in Q2 2019, impacted by costs of SEK 331 million related to structural savings measures – including the layoffs of 429 employees in the quarter.
Production during the quarter was largely unaffected by COVID-19, the company reported, with supply and distribution chains remaining largely intact.
First six months of 2020
For the first six months of 2020, demand for Sandvik’s products declined year on year as a result of COVID-19, with order intake falling by 17%. Excluding the impact of large orders, growth fell by 16% and revenues decreased by 14%.
Underlying customer activity is said to have decreased in all customer segments, with mining showing the least negative impact. There are high levels of uncertainty in energy segment and severe effects have been seen in automotive and aerospace.
Order intake for Sandvik’s products declined in all three major regions, amounting to SEK 44,327 million (2019: SEK 53,905 million), and revenues were SEK 43,851 million (2019: SEK 51,492 million), implying a book-to-bill ratio of 101%.
Adjusted operating profit decreased by 31% year on year to SEK 6,565 million (2019: SEK 9,535 million), and the adjusted operating margin was 15% (2019: 18.5%), with cost measures offsetting some of the impact of the negative year on year organic revenue growth.