One of three business areas within Sandvik Group, the Swedish engineering giant, Sandvik M&RT's order intake and revenues were also down in the first three months of the year, by 8% (to SEK 10,570mn - €966.56mn) and 5% (to SEK 9,775mn – €893.86mn) respectively. The fall in order intake followed an all-time period high level reported in Q1 2019.
Sandvik M&RT says an increased hesitancy in customer decision-making processes was noted toward the end of the quarter as the COVID-19 pandemic situation escalated.
Total equipment orders declined at a high-teen rate. The downturn particularly hit the Mechanical Cutting and Crushing and Screening divisions, which both saw record-high order levels in the same period of 2019. Orders for underground mining equipment also somewhat declined in Q1 2020.
On a more positive note, orders in the Sandvik M&RT aftermarket business remained mostly stable compared to Q1 2019. The aftermarket business accounted for 65% of revenues while the equipment business accounted for 35%.
Overall, the Sandvik Group made an operating profit of SEK 2,750mn (€251.47mn) in Q1 2020. The Group's order intake during the quarter stood at SEK 25,356mn (€2.318bn), with revenues at SEK 23,623mn (€2.16bn).
On 26 March 2020 Sandvik announced cost measures to mitigate future effects on its businesses from the rapid spread of the coronavirus. Temporary short-term actions primarily related to reduced working hours will generate savings of about SEK 1.5bn in 2020. Steps to cut work time will mean a temporary negative effect on many employees' compensation. As such, members of Sandvik Group's executive management team have also decided to reduce their salary by 10% during this period. Furthermore, long-term structural measures have begun, entailing costs of about SEK 1.4bn to be reported as items affecting comparability in operating profit for the second quarter of 2020, with the majority impacting cash flow. Savings of approximately SEK 0.9 billion from these long-term structural measures will reach full annual run-rate by the end of 2021.
Commenting on Sandvik Group's Q1 2020 trading, Group CEO and president Stefan Widing, who took on his dual senior roles on 1 February 2020, said: "I am proud to have assumed the role as CEO of Sandvik. Focus during my initial time has been to meet the teams, see our operations and visit customers. As expected, I have gotten to know a very committed and driven team who takes pride in representing Sandvik in the market. Of course, gradually, my focus became centred around the escalating corona situation.
"While we experienced some disruptions in our production resulting from local restrictions, our operations and logistics teams did a great job to ensure that we could continue to supply and service our customers without any major issues throughout the quarter. That said, Sandvik Machining Solutions noted a sharp drop in demand of about -25% year-on-year in the last week of March. In the near term, we expect very low business activity in our short-cycle operations as several customer segments are impacted by production stoppages.
"In this challenging environment, I am pleased to see that our ongoing efficiency initiatives are progressing according to plan with SEK 1.4 billion achieved, out of the expected total of SEK 1.7 billion. I am also satisfied with the speed with which we have been able to identify and start implementing new savings initiatives to protect profitability going forward. Short-term activities that have a quick impact will generate temporary savings of about SEK 1.5 billion in 2020. We have also identified additional long-term structural efficiency measures with estimated savings of about SEK 1 billion, with a full annual run-rate by the end of 2021. We continue to evaluate the market development and will not hesitate to take further actions if necessary."
Widing stressed how each of Sandvik's three business areas faced high comparables in the form of all-time-high order levels in the year-earlier period. Hence all three business areas noted declines in organic order intake, and Sandvik's overall order intake declined organically by -11% year-on-year.
He continued: "I am pleased to note that Sandvik Materials Technology's strong product offering to the energy segment resulted in large orders amounting to SEK 0.7 billion in the period, supporting deliveries from this high value-added segment into next year. Organic revenues declined by -7% year-on-year, with the short-cycle business impacted by weak demand across all customer segments toward the end of the period. All three main geographic regions declined. However, China noted a positive development driven by Sandvik Mining and Rock Technology. For Sandvik in total, the book-to-bill was positive at 107%."
Widing said the impact of negative organic revenue growth put pressure on Sandvik's adjusted operating profit in Q1 2020, which declined by -18%, and the adjusted operating margin fell to 15.8% (18.3). Notably, metal price effects had a significant negative impact in the quarter. Free cash flow decreased to SEK 3.1bn. However, Widing noted Sandvik's strong financial net cash position of SEK 1.4bn. In total, he said, Sandvik has accessible cash and unutilised credit lines of more than SEK 30 billion.
"Although we have a strong financial position, we currently face a high level of uncertainty in the market. Consequently, as a precautionary measure, the Board of Directors has withdrawn its dividend proposal to the 2020 Annual General Meeting. When the market has stabilised, and the financial position of the company so permits, it is the Board of Directors' intention to re-evaluate the situation."
