Summary, Group total

In 2018, demand for Sandvik’s products improved. This was the result of a broad-based improvement from all business areas. Sandvik’s order intake and revenue for continuing operations increased by 9 percent (15) and 11 percent (10), respectively at fixed rates for comparable units.

Financial target¹⁾

Sandvik’s financial targets are based on assessments of the company’s strength and how it is positioned for the future. The Group’s targets and target fulfillment are presented in the table below.

Target fulfillment

The financial targets were set for 2016–2018. For the period, the adjusted EBIT CAGR was 19 percent and the adjusted return on capital employed improved 9 percentage points. At the end of 2018, the net debt to equity ratio was 0.2. The proposed dividend for 2018 corresponds to a payout ratio of 43 percent of adjusted earnings per share.

Earnings and return

Sandvik’s order intake amounted to 102,510 million SEK in 2018 (96,743), and revenue totaled 100,924 million SEK (93,906). The operating profit was 18,137 million SEK (18,011), corresponding to 18 percent (19) of revenue. Movements in metal prices for Sandvik Materials Technology made a positive contribution to the operating profit of 255 million SEK (113). Changes in foreign exchange rates since the beginning of the year affected earnings favorably by about 774 million SEK (128) compared with the preceding year. Net financial items amounted to –788 million SEK (–1,071). Result after financial income and expenses for the Group was 17,349 million SEK (16,940), and 17,894 million SEK (16,992) for continuing operations. Income tax had a total impact of –4,646 million SEK (–3,780) on earnings, corresponding to 27 percent (22) of profit before taxes. Profit for the year attributable to equity holders of the Parent Company was 12,714 million SEK (13,174). Earnings per share for the Group amounted to 10.14 SEK (10.50) and 10.57 SEK (10.54) for continuing operations. Return on capital employed was 22 percent (24) and return on equity was 23 percent (31).

Financial position

Cash flow from operating activities increased to 14,914 million SEK (14,286). Net cash flow after investing activities was 10,631 million SEK (15,734). At the end of the year, cash and cash equivalents amounted to 18,089 million SEK (12,724). Interest-bearing liabilities, less cash and cash equivalents, yielded a net debt of 11,557 million SEK (16,040).

Sandvik’s credit facility of 9,000 million SEK was unutilized at year-end. Under the Swedish bond program, totaling 15,000 million SEK, bonds corresponding to a nominal amount of 5,650 million SEK were outstanding at year-end. Under the European bond program, totaling 3,000 million EUR, a nominal amount of 1,103 million EUR was outstanding at year-end. In addition, there were bonds outstanding in the US for a nominal amount of 555 million USD. The remaining maturity of bonds averaged 2.3 years for Swedish bonds, 7.5 years for European bonds and 1.8 years for US bonds. At year-end, the international credit-rating agency Standard & Poor’s had a rating of BBB+ for Sandvik’s long-term borrowings, and A–2 for short-term borrowings.

Working capital

Relative net working capital for the year was 24 percent (23) of revenues, a year-on-year increase of one percentage point. In terms of volume, net working capital increased by 3,198 million SEK (685) compared with the preceding year, driven primarily by higher levels of inventory. Changed currency rates increased net working capital by 1,086 million SEK (–660) compared with the preceding year. The structural effect from acquisitions and divestments decreased working capital by 1,208 million SEK (99). Net working capital amounted to 23,803 million SEK (20,727) at the end of the year.

Equity

Equity at year-end amounted to 58,518 million SEK (48,722), or 46.7 SEK per share (38.8). The equity ratio was 49 percent (46).

Investing activities

Investments in tangible and intangible assets for the full year 2018 reached 3,984 million SEK (3,578) corresponding to 100 percent of scheduled depreciation. Proceeds from sale of companies and shares, net of cash amounted to 4,052 million SEK (4,786). Acquisition of companies and shares, net of cash amounted to 4,631 million SEK (0). Investments in internally generated intangible assets were 484 million SEK (658).

Portfolio management

On 31 January, Sandvik announced the completion of the divestment of the welding wire business to ESAB, part of the Colfax Corporation. Revenues for the welding wire business amounted to 490 million SEK in 2017.

On 15 May, Sandvik announced the divestment of its 50 percent stake in Fagersta Stainless wire rod mill, a joint venture between Sandvik Materials Technology and Outokumpu. Outokumpu has taken full ownership of Fagersta Stainless and the purchase price was 184 million SEK. In 2017, the company’s revenues were approximately 1.6 billion SEK.

On 19 June, Sandvik announced it had signed an agreement to divest its stainless wire business to Zapp Group, a German family-owned leading supplier of advanced metal products. Revenues for the stainless wire business amounted to 310 million SEK in 2017.

On 2 July, Sandvik closed the acquisition of privately owned Inrock. Inrock is a leading supplier of rock drilling tools and services for Horizontal Directional Drilling (HDD) in North America. In 2017, Inrock had revenues of 46 million USD. On 2 July, Sandvik also announced the completion of the divestment of Sandvik Hyperion. As of that date, Hyperion was deconsolidated from Sandvik and a net capital gain of 618 million SEK was reported in Sandvik’s financial statements. The transaction represents the final divestment of all assets in Other Operations.

On 4 July, the acquisition of the France-based metrology software company Metrologic Group was completed. Metrologic Group is a market leader in agnostic software for metrology, automation and robotics control. Metrologic Group has as of 4 July 2018 been reported as part of Sandvik Machining Solutions. In 2017 Metrologic Group generated revenues of 43.3 million EUR.

On 17 July, Sandvik announced it is evaluating the strategic options for Sandvik Drilling and Completions (Varel). The business being reviewed relates to the oil and gas industry, representing approximately 75 percent of the total revenues of 2.3 billion SEK generated in 2018 by Sandvik Drilling and Completions.

On 1 August, Sandvik closed the acquisition of the US-based company Custom Electric Manufacturing Co. The company is a manufacturer of original equipment and replacement heating elements in North America. In 2017 Custom Electric Manufacturing Co. had revenues of 5 million USD.

On 10 November, Sandvik announced an agreement to acquire the privately owned US-based company Dura-Mill Inc., a manufacturer of precision solid carbide end mills. In 2017 Dura-Mill had revenues of 7.2 million USD.

On 26 November, Sandvik announced an agreement to acquire the Chinese company Kunshan Ousike Precision Tools Co., Ltd (OSK), a leading supplier of solid carbide round tools. In 2017 OSK had revenues of 120 million SEK.

Going forward

The market conditions improved during 2018 with increased customer activity levels which supported Sandvik’s profitability. Sandvik’s operating decisions are based on the priorities of stability and profitability before growth. Given our improved operational performance, the next phase of our journey will include a higher focus on growth.

Parent Company¹⁾

The Parent Company’s revenues for 2018 amounted to 20,141 million SEK (18,764) and the operating result was 2,566 million SEK (1,260). Income from shares in Group companies consists primarily of dividends and Group contributions from these and amounted to 4,364 million SEK (–706). Interest-bearing liabilities, minus cash and cash equivalents and interest-bearing assets, amounted to 15,059 million SEK (11,180). The Parent Company’s total assets increased by 2,710 million SEK, from 61,219 million SEK to 63,929 million SEK. Investments in non-current assets amounted to 799 million SEK (875).

The number of employees in the Parent Company and the subsidiaries operating on commission for Sandvik AB as of 31 December 2018 was 6,793 (7,204).

The Board of Directors proposes a dividend of 4.25 SEK (3.50) per share to the 2019 Annual General Meeting, corresponding to approximately 5.3 billion SEK (4.4).

Employees

The average number of employees amounted to 42,540 (43,376), of which 19 percent (19) were women. The employee turnover rate was 8 percent (9). Wages, salaries and other remunerations for the year totaled 21,425 (21,354) million SEK.

Safety First

During the year, Sandvik worked towards achieving a total recordable injury frequency rate (TRIFR) target of 4.3. Sandvik’s TRIFR improved 15 percent and was 4.0 (4.6) at year-end. For lost time injury frequency rate (LTIFR) the target was 1.4. The target was not met as the LTIFR amounted to 1.7 (1.6).

Proposal regarding guidelines for the remuneration of senior executives

The Board of Directors proposes that the Annual General Meeting resolve to adopt the following guidelines for the remuneration of senior executives for the period extending until the 2020 Annual General Meeting, which corresponds to those guidelines adopted by the 2018 Annual General Meeting.

The remuneration of the Group Executive Management is to comprise fixed salary, variable salary, pension and other benefits. The total remuneration package should be based on market terms, be competitive and reflect the individual’s performance and responsibilities as well as the Group’s earnings trend.

The variable salary may comprise short-term incentives in cash, and long-term incentives in cash, shares and/or share-based instruments in Sandvik AB. Variable salary in cash is conditional upon the fulfillment of defined and measurable goals and should be maximized in relation to the fixed salary. Long-term incentives in the form of shares and/or share-based instruments in Sandvik AB may be provided through participation in long-term incentive programs approved by the General Meeting. Terms and conditions for variable salary should be designed so that the Board of Directors, if exceptional economic circumstances prevail, has the option of limiting or refraining from payment of variable salary if such a measure is considered reasonable.

In specific cases, agreements may be reached regarding one-off remuneration amounts provided that such remuneration does not exceed an amount corresponding to the individual’s annual fixed salary and maximum variable salary in cash, and is not paid more than once per year and individual.

Pension benefits should be defined contribution.

Normally, severance pay is paid when employment is terminated by Sandvik. Members of the Group Executive Management generally have a period of notice of not more than 12 months in combination with severance pay corresponding to 6–12 months fixed salary. An alternative solution may be applied to the President comprising a period of notice of 24 months and no severance pay. No severance pay will be paid when employment is terminated by the employee.

The Board of Directors is to have the right to depart from the guidelines resolved on by the Annual General Meeting if, in an individual case, there are special reasons for this.

The sphere of senior executives encompassed by the guidelines comprises the President and other members of the Group Executive Management.

For information concerning the current remuneration of senior executives, including ongoing long-term incentive programs, refer to Note 3.5.

The guidelines adopted by the 2018 Annual General Meeting are presented in Note 3.5.

Research and development (R&D)

Each business area is responsible for its own R&D activities that focus on product development, technology platforms and new innovations.

Sandvik has a portfolio of approximately 5,900 (6,700) active patents. In 2018, 700 (1,050) new patents were granted. The drop in patent portfolio and new granted patents is mainly related to divestments, in particular the divestment of Sandvik Hyperion. Investments in R&D were 3,727 million SEK (3,498) in 2018, corresponding to 3.7 percent (3.9) of the Group’s revenues. The number of employees in R&D, including Quality Assurance, was 2,554 (2,612).

Tax

Sandvik is a multinational group with many intercompany transactions. The OECD has issued guidelines for transfer pricing of cross-border transactions in multinational groups. Sandvik adheres to these guidelines and also to the local legislation of each country to ensure that a correct pricing model is deployed and that a correct amount of tax is paid in each country. Sandvik monitors the OECD’s tax reform work and the EU initiatives on Tax transparency carefully and observes these standards as and when enacted. Sandvik strives to have good relations with our stakeholders, such as tax authorities, non-governmental organizations and investors.

Sandvik has initiated cooperation with tax authorities in several countries. We are convinced that an open discussion and cooperation with tax authorities around the globe will help us to reduce uncertainty about the taxes we are obliged to pay. We contribute to the local communities and countries in which we operate in the form of, for example, taxes and employment opportunities. In 2018, the Group paid 2,978 million SEK (2,466) in income taxes globally. Income tax comprises just a portion of all taxes paid by Sandvik worldwide. In addition, we pay social security contributions, environmental and energy taxes, property taxes etc. Furthermore, Sandvik collects and pays taxes at the request of governments and authorities, including indirect taxes and payroll taxes.

Environment

Sandvik respects and complies with environmental legislation in all countries where it operates. The most significant aspects of environmental impact are:

• Energy use
• Climate change
• Water management
• Waste management

Environmental permits

Sandvik has a number of sites worldwide that hold environmental permits. Sandvik is dependent on the environmental permits granted for these sites.

In Sweden, Sandvik conducts licensed operations at 10 plants and notifiable operations in one location. All these hold the requisite environmental permits. No breaches of the permits occurred during the year. A number of guideline values were exceeded for noise and emissions to air and water. Actions are taken to comply with these target values. One environmental permit needs to be renewed in 2019.

In other countries where Sandvik operates, some target values were exceeded and acted upon in cooperation with relevant environmental authorities.

Investigations and remediation activities have been performed at production sites with ground pollution. These activities are always performed in close cooperation with environmental authorities.

Statutory sustainability report

Sandvik has, in accordance with the Annual Accounts Act, prepared the statutory sustainability report as a separate report which was approved for issue by the Board of Directors and the President and CEO. The scope of the Statutory Sustainability report and Sustainable Business Report, is defined under Reporting principles.