INTERVIEW: Turning Around Steel Unit Tests Sandvik's Mettle
March 21 2012 - 5:51AM
Dow Jones News
Sandvik AB (SAND.SK) has been making steel in the northern
Swedish town which gives the engineering group its name for 150
years. But Jonas Gustavsson, the recently installed chief executive
of Sandvik's specialty steels division, has less than three years
to improve the unit's returns or prepare it for a full or partial
sale.
Sandvik, founded in Sandviken in 1862, is hardly the first
heavy-industrial group in Europe to question whether its steel
business can stave off competition from lower-cost foreign rivals.
But Sandvik's Chief Executive Olof Faxander said last September the
group wouldn't tolerate Sandvik Material Technology's poor
performance indefinitely.
"I'm perhaps not entirely calm, but I am quite confident that we
will deliver on the goals we have stated," Gustavsson told Dow
Jones Newswires in a recent interview.
Gustavsson said the specialty steels business has to improve its
return on capital employed to around 17% from the current 7% by
reducing costs by SEK500 million over a two year period and
shifting its product mix more aggressively toward more
technologically advanced and profitable products. Sandvik's overall
ROCE was 16% in 2011 though it has a target of 25%. SMT still
contributes around a fifth of Sandvik's annual revenue of 94.08
billion Swedish kronor ($14 billion) with the group's
mining-equipment and machine-tools units the major contributors to
revenue and profit.
Relatively low returns from SMT and Sandvik's construction unit
explains why Sandvik stock trades at a discount to other Nordic
engineering companies. Its shares are on a multiple of 12 times
forecast 2013 earnings compared with 15 times at Alfa Laval, 14
times at Atlas Copco, and 13 times at Assa Abloy, according to
Morgan Stanley.
On the cost front, SMT, which employs 8,200 people, is laying
off 600 permanent staff and letting go of 180 temporary workers in
the first half of this year amid plans to consolidate its Swedish
steel wire and strip production in Sandviken.
Gustavsson, who took the reins at SMT last May, is also
reviewing strategy. The unit, which makes a variety of industrial
components from stainless and other steel alloys and titanium, has
become a diversified business in its own right over the years. It
supplies everything from equipment for nuclear power stations to
parts for hair dryers and dish washers.
But the technology that is at the root of Sandvik's success,
namely the mass-production of steel that founder Goran Fredrik
Goransson helped pioneer, has come back to haunt it as competition
from lower-cost Chinese and Indian companies has grown in recent
years. With sluggish economic growth in Europe also a factor, SMT
has struggled, particularly the higher-volume, lower-margin,
consumer-orientated parts of its business.
"SMT hasn't really delivered good enough returns in the past 10
years," said Gustavsson. Order intake fell 19% in the fourth
quarter from a year ago as high demand from customers in the oil
and gas industry failed to offset weak demand in other sectors. The
unit reported an operating loss of SEK841 million hit by SEK900
million in one-off impairment and restructuring costs. "Oil and gas
continue to be strong, while it's still more difficult in standard
or in consumer-related segments," Gustavsson said.
Gustavsson aims to make more of SMT's industrial expertise and
reduce the number of standardized products and instead focus
efforts on projects where the barriers to entry are higher for
emerging-market competitors. Today, around half of the products
that leave its steel mills are standardized.
"We are working actively to change this, this makes the upside
to our business quite big," Gustavsson said. SMT aims to focus its
resources on the oil and gas industry, which currently makes up
around 30% of sales volumes. As energy companies explore for and
produce oil and gas at increasing depths and in difficult
conditions like the Arctic, SMT's high-performance metals should
come into their own, Gustavsson said.
Gustavsson is prepared to sacrifice SMT's revenue growth to make
the unit more profitable. "We will be quite tough with what orders
we take in as we focus on profitability, so there will be no
dramatic [top line] growth for SMT," Gustavsson said.
As the restructuring of SMT starts to bite this year, Gustavsson
said investors shouldn't expect sudden change in the unit's
fortunes. "There won't be any dramatic lifts at once, but I believe
we will see an improvement step by step," he added. Gustavsson is
optimistic the unit will make a profit in 2012. "We have good hopes
about that," he said.
-By Katarina Gustafsson, Dow Jones Newswires +46-8-5451-3097;
katarina.gustafsson@dowjones.com
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