Earnings Call: Q4 2018

Jan 21, 2019

And welcome to the presentation of Sandvik's results for the Q4 of 2018. As per normal, we'll run through the presentation. It will be our CEO, Bjorn Rosengren and our CFO, Thomas Eliason, who will run through the presentation and after which, we'll open up for a Q and A session. And I would already now like to remind you that there is an option to put questions on the online questionnaire on our website. And with no further ado, we'll open up for the presentation with Jan. Please. Thank you, Anssi, and good morning. I also like to say and welcome to this Q4 and full year report meeting. The year was a record year with a robust ending. Orders and revenues exceeded SEK 100,000,000,000. We had a solid profit margin of 18.6 percent strong cash flow, €15,300,000,000 which has helped us to reach a gearing of 20%. Half of that is coming from pension liabilities and half of that is coming from financial debt. The group is coming from stability to profitability, and I'm really happy that this year has been the first step in the direction growth through acquisitions. We have managed to sign and close 5 acquisitions last year and 1 in the beginning of this year. Also, Q4 was a very strong quarter. We saw growth in all three of our business areas but also in our main three regions. Orders improved with 6% and revenues by 9%. We saw strong adjusted earnings with a margin of 18.1%, and that's been affected with 0.7 bps coming from the planned destocking of the inventory. And that is, of course, the basis for the fantastic improved cash flow, and we reached a record of SEK 6,300,000,000 in the quarter, pushing the gearing to 0.2. And also, of course, happy with the net working capital reaching 23 0.7%. The Board has decided to propose a dividend of 4.20 euros 5 per share. So let's move over to what you all been waiting for. That's the market development during the quarter. We can here see that all 3 major regions or more or less all our regions actually have seen growth during this quarter. We see Asia up 2%. We see Europe pretty flat, around 3% and North America very strong. Maybe the most interesting here is, of course, to see what came in SMS, Machining Solutions, which is the really indicator of the demand for industry in the market. And we can see that we see in Asia and in China a small decline of demand, especially driven by the automotive sector. Europe, pretty flat and very strong in North America. If we look at all these segments, we can see either flat or improvement, except from the automotive, where you see weaker demand in China as well as in Europe. Both orders and revenues continues to develop well, and this is actually the 2nd best quarter in the group's history, reaching 25.6% in orders and 25.9% in revenues, 6% and 9% growth. Also, the EBIT continues to improve with the 16% reaching SEK 4,700,000,000. And that is, what I've said before, been expected by the destocking in SMS as well as in SMT with 70 bps. Excluding FX and metal price effects, the growth was 11%. So moving into our different businesses. Also, Machining Solutions had a strong quarter. It's actually also the 2nd best in the company's history, reaching over SEK 10,000,000,000 in both orders and invoicing. We saw strong North America, a flat Europe and, as I said before, a slight decline in Asia. And that's, of course, driven by the automotive sector. We reached 24% EBIT level. And the destocking, which has been quite significant within SMS, actually pulled down the result with 1 160 bps. So I think it's good. Yes, we managed to do a number of acquisitions, including the last one, Dura Mill, which was informed. We also decided to move the powder from S and P into SMS from 1st January 2019 will be reported there. And now it's part of the division for Additive Manufacturing. Then come to SMRT or Mining and Rock Technology. I think that's what we say in Sweden, it goes from clarity to clarity. A really strong quarter with growth of 15% both in orders as well as revenues. It's correct. We had a large order from Russia in mechanical cutting. But also last year, we had 2 large orders, each of them €200,000,000 So if you take those away, it is still 15% up. Maybe the most interesting order during this period, it's actually the order we got from Hindustan Zinc, which is an order of OptiMine, where we actually digitalized the whole mine, including equipping our competitors' equipment, making the mine fully digitalized. This is really a pioneering order for us and putting actually the standards in the market. Also, SMRT had good destocking during the quarter and generating a very strong cash flow. EBIT margin is now on 19.1%, which I think is a good number. This, of course, includes Varel. And if we exclude Varel, it's 20.1%. And if we want to be a little bit more specific, if we compare to our main competitors in the market for equivalent equipment, we are as high as 21.5%. I think Mining and Rock Technologies coming up to the levels, and what's really driving the good performance is the improvement in the margins for the aftermarket, which, of course, is important for the future. Then Material Technology. I think the development there continues to be solid. We can see that the orders increased with 0%. But if we remove the large umbilical order last year during the quarter, it is actually about 10% growth. So solid growth coming also there, and that's equivalent with what we've seen in the revenue side. We are moving in the direction of reaching 10% EBIT margin during next year. And this year, the underlying margin is 8 0.6%. So I think that is moving good. And maybe you saw this morning that we received 3 large orders of approximately SEK 1,000,000,000 during the beginning of this year. And I think this is both from umbilical as well as OCTG piping. So a strong start, which I think is important for S and T to be able to reach the levels for next year or for this year, I should say. So Thomas, I give you and talk a little bit about the balance sheet. Thank you, Bjorn. Okay. Let's jump into the numbers and start with the financial overview and the top line. If you look at the upper right hand side, you see the components of the revenue sorry, the orders and the revenue growth. Organically, 6% for orders, 9% for revenues. Currency added 4% for both. Structure, minus 4% and minus 5%. That's a net of divestments and acquisitions over the year and then actually ending up on the same numbers, plus 6% and plus 9%. The margin ended on 18.1% for the quarter, 18.6% for the full year. And the finance net came in at 1.36 percent in the quarter and minus 800 for the full year, quite an improvement compared to last year and actually a huge improvement compared to 3 years ago when the finance net was SEK 2,000,000,000 for the full year. The underlying tax rate for the quarter was 25.6% compared to CHF 27.3 percent a year ago. As you've seen in the report, the reported tax rate was 30%, and the difference is revaluation of a deferred tax asset, which we have done in the Q4. Cash flow, as Bjorn mentioned, very strong in the quarter, EUR 6,300,000,000 euros 15,300,000,000 for the full year, actually exceeding the guidance we had 6 months ago. Return, stable at 22% and earnings per share SEK262 for the quarter and above SEK10 for the full year. Now let's take a look at the bridge for the quarter. And the leverage, the organic leverage was 21% with a margin accretion of 30 bps. Now if you add back the effect of reduced inventories, the leverage would have been 29%, which is well, okay for the group, And the margin accretion would have been 1%. The currency added 1.3 percentage units and structure and one offs, which is mainly the net between acquisitions and divestments, was minus 0.5%. So all in all, 18.1%. Now let's move to the balance sheet. And you can see now in the Q4, we had a very strong development after 2 quarters with, let's say, some slightly unsatisfactory inventory development. Now working capital came down. But also accounts receivable came down, very healthy collections were very, very good and payables were stable. And on the right hand side, you can see that all three business areas contributed. And the whole group is now back below 25%. And you can see the corresponding development here in the cash flow. Cash flow was very strong in the Q4. And if you look at the right hand side, you can see that earnings improved. CapEx was a little bit up, but not much. And the main driver for the cash flow this quarter was the working capital improvement. The financial net debt continues to go down, now below SEK 12,000,000,000, half pensions and half financial net debt. Gearing, 0.2. Now if we then take a look at the dividend, the dividend proposal. The board, as you heard, has proposed 4.25%, an increase with 21%. Payout ratio, you can see on the right hand side, 43 percent, basically the same as a year ago, which was 44%. Let's have a look at the outcome Q4 and the guidance. We guided for a currency effect of EUR 400,000,000 3 months ago. It came in at EUR 528,000,000 or close to €500,000,000 in total currency effect. And the difference between the situation 3 months ago is, of course, the strength and U. S. Dollar. The metal prices we guided minus €100,000,000 came in on minus €86,000,000 Full year, we have guided a CapEx of $4,000,000,000 We came in at $3,900,000,000 Net financial, we guided $1,000,000,000 We came in at $0,800,000 and the underlying tax rate, we guided SEK 26,000,000 to SEK 28,000,000,000, we came in at SEK 26,100,000,000, taking out the effect of the write down of the deferred tax asset we have. Now as it is a new year, 2019, we have new guidance for you on these items. If we look at CapEx, we've said SEK 4,000,000,000 when I say below SEK 4,000,000,000 going forward. The currency effect, transaction and translation for the next quarter, we guide to plus €500,000,000 metal prices, minus €150,000,000 for the Q1 net financials, we have guided 1,000,000 before and I would say below 1. And tax rate, we're actually taking it down from 26% to 28% down to 25% to 27%. We said a year ago when we had the U. S. Tax reform that we expected the tax rate to come down quite a bit, but we would still be in the range, which we are. We are now on 26.1 percent for the full year. But as we see things playing out now, we have lowered it with 100 bps. So 25 percent to 27 percent for 2019. And with that, I would like to hand over to you again, Bjorn, for a summary and conclusions. Thank you, Thomas. That was impressive numbers on the balance sheet development, I must say. Always happy to help. Good. We are moving into 2019. And we are, of course, meeting more challenging numbers to beat, not least in SMS. We will work with continuous improvement to make sure that we protect and improve our margins. We will be focusing on our core, and we will challenge our 34 businesses. And we will drive growth both organically, but a lot of focus, of course, of M and A activities. And of course, with a strong balance sheet and lower valuation of many companies, I think it will be an exciting year. I also would like to take this opportunity. It's been a record year. It's been fantastic development for the group. And I'd like to thank all our employees who actually have made Sandvik so successful during this year. But I'd also like to thank our financial department. As you all know, we have moved the presentation 14 days earlier compared to last year, which is quite challenging for everybody to getting all the data, all the numbers ready for this presentation. So a great thank you for all of you. And I think by that, we move over to question and answers. It's a great ending. On the Q and A, I'd like to remind you now because I know there's quite a few already queuing up, so please limit yourself to 2 questions at the time. And I'll actually take the liberty to start with some questions put through online. And starting with a question from Olof Lars Hammar at DNB, who asks you to elaborate on the daily sales development in the machining solutions and what happened in the different markets and also what you've seen during the 1st few weeks of January. Yes, absolutely. I think this we do expect a lot of questions around our numbers, not least within SMS. And I think we can see that it's been a pretty steady quarter. It's pretty clear that we've seen a weaker China during this period, especially in the automotive segment. And we've also seen some weakening also in Europe and Automotive and affecting Germany with actually minus 1% in growth. On the other hand, we've seen an extremely strong North America with, of course, U. S. As being the driver force within this part. So good number. I mentioned during my presentation that the levels we are talking about here, these are the 2nd highest orders we have had in SMS during the company's history. So it is quite impressive numbers. If we're looking at the daily rates, we can see that it's moving on the same level as we've seen during the quarter. So pretty much no big changes in either directions, I would say. And the second question put through by Olof Larssonmar is on the inventory reductions in Machining Solutions. Do we see continuing continued reductions going forward and an impact also in the Q1 on 2019? I've been longing for this generated that we were we only generated SEK 4,000,000,000 during the first half year and now SEK 11,000,000,000 in the second. And of course, the quarter is a record with SEK 16,300,000,000. And there is a lot of destocking. And it's SEK 16,300,000,000. And there is a lot of destocking, and it's actually coming from all three of our businesses. They all have contributed very nicely. And you can see actually that our net working capital has now come down under the 25% level, which I think is important. And for SMS, where maybe we were most disappointed that we didn't see this reduction in Q3, they are actually down at 21.7%. I think these levels are good. Should not push the destocking more at this stage. I think now it's important to make sure that we produce in line with what we what demand we are getting from the customers. And I think you all know, we have no inventory. That means no inventory by the customer because we have 24 hours delivery, which means no one needs to keep inventory in that part. That's why we really can follow the demand very closely, and that's the importance going forward and make sure that we don't overproduce. Thank you. And with that, we'll take And the first question is It's Charles from Citi. So I have two questions, please. I want to come back on daily sales. On demand here at the start of the year, it seems like Asia is now witnessing some weakness also outside Automotive quarter on quarter. General engineering is still okay in Europe, still strong in North America, but it seems like it's softer in Asia. If you could talk a little bit about what you see in Asia outside of automotive? And then as you said just now, it seems like you're saying that production is likely I mean, what you see right now, likely to be in line with demand here in the quarter. So effectively, it's only the 50 bps that you overproduced last year that will reverse, if that is the correct understanding. Thank you. Let me talk a little bit about Asia. I think Asia is down. It's actually driven by automotive. We could probably see maybe a little bit in the general engineering. But otherwise, I think it's quite strong still. So that is correct. And it's correct that the destocking has been taking place during Q4, and we do not expect to have the same destocking during the Q1. Okay. Very clear. My second one is on SMRT and if you could help us with what you're hearing from your customers. And I'm thinking about replacement. When we speak to your competitors or well, shall I perhaps say your key competitor, they're indicating that it's only the first peak in 2007, 2008 that has been replaced so far, not yet the peak in 'eleven and 'twelve. And we also understand that most of the volumes at the last peak was primarily underground where the replacement cycle is particularly short, I think 5 to 6 years. So if there is also an argument that we could have a second wave of replacement pretty soon, is that something you hear from your customers and which could help orders increase sequentially from current levels? Any early signs of a new step up in replacement, please? It's difficult to talk about the future and expectation there. And you can, of course, do another series about if it's replacement of equipment and so on. First, it's pretty clear that all the equipment and I said that's why we are a little bit in the so called sweet spot of mining because all our equipment are actually ware equipment. It's not really capital investments in that way. You have to replace them all. And if you don't replace them, you have to spend a little bit more on aftermarket on the equipment. We've seen, of course, a lot of replacement of the fleet. And I think we will be expecting that also. But I'm still saying that what is actually driving I mean, every mine wants to have new equipment, more efficient, more automatized. But in the end, it's actually the boardrooms who turns on the valve and turns off the valve, and that depends a little bit on how much money the mines are making at a certain stage. So I think that is probably more important than just the replacement part of the equipment. So we have the model. We've seen metal prices gone down a lot. Gold, of course, has gone up, but we've seen copper go under 6,000. But I think it's improved a little bit more. And I think the investment decisions within that industry has been taken, and that is long term investment. So I think we are pretty optimistic when it comes to copper. Other metals have got maybe a little bit more hit. We've seen the nickel, which is affecting us, of course, in the FMT, revaluation of inventory and so on. But still, we feel that it's a good demand. And especially the aftermarket, I think it's a good indicator of the activity level. And we have had a fantastic development during 2018 with close to 15% growth, which is during the whole year, and that is important. But I think it's more, as I said, how much money the mines are making that's going to determine what kind of investments we will see going forward. Let me ask this in a different way, Bjorn, and I promise to be short. Is demand below replacement in drilling and underground still? I have a little bit difficult to answer. I think it's probably pretty much in line, I think. But I'm not 100% sure. But we'll investigate a little bit in that, and we'll try to come back a little bit more going forward. We'll continue with another question from Putrou online, and it's from Markus Almerud at Kepler Cheuvreux, who queries about the profitability in MREL and what will drive profitability from here on, I assume, in the total of SMRT. SMRT. Okay. A little short of Varel, as we see, we are getting closer now to put the company in the market. First, I'd like to mention that onethree of the company we are keeping, that is the mining related part. And then we have the other part, which is the oil and gas part. We've seen good development, and we are close to 10% margin on that part. But that's before the PPA. Then you have to deduct the PPA, and then you come actually to 0 profit on that part. Of that business, we have a lot of goodwill. And when we put that out to the market, I'm pretty sure that we will be needing to write off some goodwill during this process. On SMRT, generating profit, of course, I'm very happy with the development that has taken place during this year, very much driven from the aftermarket that has been enormously strong. But we have, of course, much more to be done going forward. It is continuous improvement. If we're looking at the last year, we've had such a huge volume increases, which means that we have been holding back a little bit on those continuous improvement activities. Now when the levels are I mean, we managed to get businesses better. And that hopefully will drive some margins also. Thank you. And we'll take another question from the conference call, please, operator. Of course. And the next question is from the line of Graham Phillips from Jefferies. Please go ahead. Your line is open. Yes. Good morning, Bjorn, Thomas and Nancy. Thank you. My first question is if you look at the drop through margin in SMS and adjust for the inventory change, it looks like it's sub-thirty percent. Is there any reason why it's coming in lower than that? And if we think about 2019, the impact maybe of more round tools, less inserts, more powder additive manufacturing, Farfetch, on the bps from the destocking, that is $160,000,000 So if you look at the underlying there, it's about 20 5.6 percent profit margin. That's a little bit where that business is running today. We know that during the last years, the round twos have been increasing more than inserts, and we still manage to protect the margins. And of course, going forward, more challenging numbers, less growth But we of course, we need to put a lot of efforts to be able to protect the margins going forward. So we will take measures to adopting SG and A costs in line with what demand we will see going forward. So it's very much important for SMS to show that we can maintain the margins going forward. Okay. And my second question then is on your targets. So I don't expect you to give the new targets today, but you said you will give them before the Capital Markets Day. Perhaps an indication would it be something that might publish in the annual report? And particularly when we think about the amount of cash you're now going to have, maybe this is a little bit directed also to Thomas as well. You're still guiding for net financial items under $1,000,000,000 But clearly, you're going to have probably net cash at some point today sorry, this year. And there's going to be the opportunity for obviously a lot more M and A. And again, I think, Bjorn, you've touched on the point that there's going to be some good division? Yes. Why don't you start? Yes. Okay. 1st But did you really get the question? On the first part, which was that, help me. Net financial. Net financial, help me. Yes. But what was the question, Greg? Okay. Well, the point is you're going to have net cash. It seems that you're guiding to quite a high net interest expense for the year. Is that anticipating that you're going to be making some acquisitions fairly large that will use a lot of that cash? Yes. Okay. I'll make I'll say that the acquisitions that are driven, of course, from our operating entities, and they will be freedom we need, and I think that is the most important. It's not actually how much money we have on the bank that drives acquisition. That is a purely strategic that. But of course, the freedom is fantastic to have a strong balance sheet going into tougher times. That's pretty clear. And to answer your question on the guidance, no, we have not built in any major acquisitions in that guidance on the net financial items for 2019 when we say below EUR 1,000,000,000. There is, in the 2018 numbers, around EUR 100,000,000 in positive revaluations, which will bump back up into the EBIT, which will impact the earnings. So really, the underlying is EUR 900,000,000 and then you have to add another EUR 100,000,000 for the IFRS 16 accounting thing. So we're coming close to EUR 1,000,000,000 for 2019. And the time before I now remember what the question you said, when are we coming out with the new financial targets? And we promised to have it before the Capital Market Day in May. I would be surprised if we would have them ready for the annual report. So I think it probably will be end April somewhere where we'll be launching, maybe in connection to their annual meeting, somewhere around there. But it will be ready for the Capital Market Day. Okay. Thank you. Operator, can we have the next question put through, please? Next Just my first question would be around sort of your customer inventories. And I wanted to see whether you had any sense of whether your sales had been going into customer inventories and whether from conversations with customers you'd seen any buildup of inventories on the customer side, which may then affect demand in Q1. So any comments there would be helpful. No. I think the structure and nature of that business we have, especially in the SMS part, that is, of course, from hand into mouth, meaning that we are delivering directly to the production. And our short delivery times helps us, of course, to avoid inventory buildup. So we have no indications that any of our customers have stocked up during this period. So we think they are pretty clear numbers. In the mining side, of course, the orders we produce what we get orders on, and that we try to deliver. We have also, of course, enormous inventory reduction also in the mining period, generating SEK 2,700,000,000 in fresh cash in that part. So I don't think there is any inventory buildup actually among our customers. Okay. And just the second question is around dividend. Obviously, you showed us you showed a slide that shows us a 19% increase since 2015. Obviously, the payout ratio coming down. But just in terms of when we think about your earnings growth maybe starting to flatten out, do you still think you can grow the dividend above your earnings growth, I. E, the payout ratio, essentially going back up as earnings start to flatten out given where your balance sheet is? So can we still keep the dividend growing faster than earnings given the lack of leverage in the group currently? I think that's absolutely our objectives. The one who decides in the end what we pay dividend is at the annual meeting. We can only propose for it. But of course and that's, of course, the reason why we don't pull up the dividend even higher, which we could actually do during this period. We have the objective to improve every year like everything else in the business. And now second time, we lifted with 21%, which I think is pretty generous and a good level at the moment. So yes, we will definitely strive to improve every year. Okay. Thank you very much. Thank you. And again, coming back to a question put through online from Riz Gmaide at Berenberg, coming back to China and the development there. Can you give an indication of the China decline outside of Automotive? Do you see any other segments coming down? I mentioned that it might be a little bit on the general engineering, but otherwise, it's mainly what we're seeing in the automotive sector that is pulling down. We should know, of course, that China has been producing 29,000,000 cars every year. And it's, of course, a big question if that's sustainable in the long range. So it's not a big surprise, I think, for us. Thank you. And then, operator, can we have the next question put through from the conference call, please? And the next wanted to go back to the mining margin and thinking about 2019. We've obviously seen very good improvement as we've gone through 2018. And is it kind of Q4 level, and thinking about the 19% or the 20% XL? And is there any reason why we shouldn't see that improving? And if we do have to think about some headwinds, is it things like the mix? Is there anything in terms of investment that we wouldn't be factoring in? Just trying to get a sense of, I guess, of how sustainable that Q4 run rate is and then what upside we have to it. Hi, Andrew. We never guide the profit parts. But of course, we're coming up to good levels. We have good orders on hand. We have a good development in the aftermarket and are really come up to new levels. So of course, that's our objective to keep ourselves on these levels. I think time will tell if we manage or not or if nothing to come. But it is a different SMRT that has been created. And I think we are we're coming up to levels where I think we should be. And this will, of course, also help us to protect the margins in the downturn. The aftermarket is the key for agility within the mining business, And that's, of course, I'm really happy to see that we reached this level. It is and I think they've done a good job there. We have still things to do. And I mentioned it before, when you're growing so fast that we have done during this period, it's difficult that you get inefficiencies in the processes. Subsuppliers are not supplying product components in time for your productions. You get hiccups and things like that, that can affect your margin. And we've seen that during the year. But I must say that one of the areas where we had a lot of issues during the year has been in underground drilling side there. But during the last quarter and the end of the quarter, they managed to get a lot of equipment up and getting the production in a really good shape, which is, of course, also paying off in when it comes to margins. So I think they're coming out they are on a good level now. And you can always see better. And maybe if I can just follow-up in terms of the mining portfolio. I mean, it's clearly the I think we've seen the statements around Varel and potential process there, but also think about the rest of the portfolio. How you want it to look going forward? Or do we need to think about either for divestments or needing to add either capability or capacity in the existing core? In Sandvik, we'll be challenging all our 34 operations, and they need to prove that they are number 1 and number 2 in the part. They have to prove that we see that this business where we are operating will be successful also in the future. So I'm going to challenge them continuously, and we'll see what comes out of that. I think, of course, it's a big difference today when you look the way they run their businesses and how our portfolio looks like. I think, more or less, all our businesses have improved and performs better. But there are a couple of the businesses that are challenging still and where we need to shape up a little bit to be able to be as successful as we want to. That's great. Thank you, Bjorn. Thanks, Andy. Operator, can we have the next question, please? Next question is from the line of Lars Forslund from Barclays. Please go ahead. Your line is open. Hi, good morning. Bjorn Thomas, a couple of follow ups for me. Bjorn, just on China first, if I could, within Machineing Solutions. My understanding is, it's down about 7% or so organically in Q4 at the order level. There would have been a bit of lumpiness around a couple of, I think, blanks and powder orders, but call it down mid single digit in Q4. Can you help me a little bit with the segmental color around that? You specifically said, of course, that you didn't see more broad based weakness in general engineering. I have your Automotive segment within SMS in China, it'd be about 20%, 25 percent of that business. So should we think of that down mid single digit or so in China in Q4 as Automotive down sort of high teens, low 20s and the rest broadly stable or something different from that? I mean, it's difficult to talk about what the future we can see that what how this year started, it started pretty much in line. There's no big deviation from what you are saying at the moment. It is the automotive, mainly this is going down. And of course, it has been affected as we have been reading in newspaper and seeing the automotive companies. Going forward, it's difficult to say. We also know, of course, China has the ambition to protect their growth. As you know, they want to reach a growth of 6.5% for the country. There are a lot of initiatives on the infrastructure side that might have effects going forward. So I think China will work hard and not try and not go into a recession going forward, to be honest. But I think 5 will tell, and we will adapt to that. You probably know that we started to prepare ourselves for tougher times for over a year ago now. And we I think we and every other industry in the world has done all those preparations if we would see that the demand would go down. And then we need to adapt ourselves and so on. But yes, correct, automotive is the driver, somewhat in the general engineering. And of course, things like that hangs together. The general engineering, of course, also supports the automotive in one way. So we'll follow that carefully and make sure that we take the actions that is needed. And on that, if I could, just secondly just second follow-up. The underlying incrementals in SMS in Q4, I appreciate it's in the high-20s or low-30s. But if I adjust for pricing, which presumably is a good €100,000,000 €150,000,000 or so, I still have a 0 or slight negative underlying volume leverage in the business. Can you help me a little bit with what exactly you're doing on cost in SMS? And what will be the timing and magnitude of the actions you're taking there? Yes. It's correct that the underlying, if you look at both days and pricing is also down line, it's pretty flat, I would say. And SMS are taking the actions within the business area to adopt SG and A costs in line with that demand. And that has already started, and they will continue to do that during the years. And as I said, they will work hard with this continuous improvement and adopting their operations to protect the margins. So just SG and A, no initiatives right now beyond what you've already announced in France around production. Yes. But that is an ongoing thing that we have. And if you recall, the last 3 years, we closed more than 15 factories within SMS, and we are looking into more also going forward. So this will be an ongoing journey, both structurally as well as through SG and A cost. And of course, if we would need to take down production levels, if that comes, of course, then we need to adopt those also, but we are not there yet. Understood. Thanks, Graeme. Thank you, Lars. Can we have the next question put through, please, operator? Next question is from the line of Gael Debre from Deutsche Bank. Please go ahead. Your line is open. Yes. Good morning, everybody, and thanks very much. The first question I have is related to SMS. I think one of the positive surprises in today's release was the sequential increase in demand seen at SMS in North America. So could you elaborate on this positive momentum in the U. S. In terms of the key drivers there and what you've seen so far in January, specifically, again, in the U. S? So that's question number 1. And then question number 2 about SMRT. I think in Q3, you had indicated that the order intake in mining was a bit shy versus your own expectations. And we had indeed a much stronger performance in Q4. But now I'm wondering to what extent there was a bit of a catch up effect this quarter with some orders potentially postponed from Q3 into Q4 implying that Q4 was perhaps a bit inflated, a little bit exceptional. So I'd like to get your thoughts on that, well, basically to get a better view of the on the underlying demand levels for SMRT. Correct. Let's start with the SMS development in North America. Yes, it is very strong. And I think it's only automotive, which I would say is flat, but otherwise, you're seeing a good push and good growth there. Aerospace is very strong. Oil and Gas is good. General Engineering is moving very well. So it is a strong development there. And of course, that's compensating the weaker part as we're seeing on the more Far East part. So that is good. It's a good momentum. On SMRT, on the order side, yes, I think we said that in the mining side, it bumps a little bit up and down when it comes to order and the timing of them. I think 15% was a little bit higher than we expected maybe for the quarter, but I'm happy that, that is, of course, boosted by this nice order in Russia. But to be honest, last year, we had 200,000,000 orders. So if you wash those out, it's pretty much what we see. On capital equipment, yes, or capital equipment on rigs, drill rigs and loaders and trucks and those equipment, they will be replaced when they need. But for me, the most important to see what where is really happening in the mining side, and that is actually on the aftermarket. And that has shown now for quite some time, the whole year actually, 50% around between 10% 15% growth. And that gives a good indication that there is a lot of hard work out in the mines at the moment. How that looks going forward? It's much too early to say. We take 1 quarter by quarter, and we see I think our factories have a lot to do at the moment, and they need to deliver on these large orders. And that's where the focus is. And I think the future will tell more in detail where the mining market is driving. Okay. Thanks very much. Thank you. I believe we have one more question on the conference call. Please, operator, can you put that through? Next question is from Alexander Virgo from Bank of America Merrill Lynch. Please go ahead. Your line is open. Thanks very much, Anthony. Good morning, Bjorn and Thomas. Good to see good to hear from you this year. A couple of ones. Thanks for squeezing me in at the end. I wondered if you could talk a little bit about pricing in mining, particularly in consumables. Just any commentary you can give us around there and I suppose in particular development sequentially through Q4? Yes. I think I mean, we are pretty far way into good times in the mining side, and I think the pricing has now, of course, added up to where it should be. It's running around 2%. This varies a little bit between the different businesses there, but around 2%, and that's also when it comes to building consumables part of the business. So I think overall, it's good price levels now in the mining business. And it should be I mean, it should be there. Yes, absolutely. I was wondering your commentary on efficiency measures in consumables or in rock tools. Just wondered whether you can give us an indication as to how structural that is, the timing of that and the impact that, that might have? Or is that just a sort of an ongoing efficiency plan? When it comes to consumables, it's a little bit same as when it comes to parts and service. This very much reflects what the mines are doing. These are the operational levels. And if you look at that, they are normally growing not as fast as you see the equipment. They are much more stable. They go with 1%, 2% up depending on how much work is taking place in the mines. They have worked hard during this period to make sure that they are efficient. I don't know if you had a chance to see our production facility up in Sandviken where we make the drill steel and all the bits and so. It's totally automatized and very, very efficient. And that's what we'll be working. And that is more easy to these small, but to say, continuous improvements because the growth and the demand improvement is more consistent than you see on the equipment side. And it continues to grow on a good level, pretty much in line with our aftermarket business. Operator, do we have any more questions on the conference call? Yes. We have one more question, and that is from Andreas Koski from Nordea. Please go ahead, Andreas. Your line is open. Thank you very much, and good morning to all of you. I would like to ask about the move of power operations from SMT to Sandvik Machining Solutions. So firstly, could we read this as a preparation for your decision of what will happen with SMT when they have reached the 10% margin, I. E, that you're preparing for an exit of SMT, is that what you would decide? No, it has nothing to do with that. This is actually that how can we drive powder, how can we develop our 3 d printing business in the most efficient way. And we have been considering this for quite some time because we're building up within SMS new division there. And to be honest, I mean, to be successful within 3 d printing, you actually need the powder. That's the basis for success. And being a leader within this, it makes sense to put this together. So it has only to do with our future operations within Additive Manufacturing. It has nothing to do with what's going to happen with SMT or not. I mean, SMT is what it is. I promise you that we'll reach 10% this year, and then I will be telling you what's going to happen with that business area, if it's going to continue its part or if we'll find some other place for that. But we'll come back to that at the right time. Yes. And would you like to give us what kind of impact this will have on SMS revenues and EBIT? And also, will this make SMS more volatile when it comes to organic growth, I. E, is Powder's revenues more lumpy than SMS? I mean, first, I can say the Powder business is around €400,000,000 So it's very, very small. It is actually pushing up the margins in SMT, but it's not pushing up the margins in SMS, if you put that way. A little bit dilutive. So to be honest, for the group, it's very have no impact. But of course, it's pulling down a little bit on SMT on SMS and also on SMT. So if you look at that, there are no winners. But of course, the ambitions for this, it is a high profit business, and it should be high growth and high profit. So we think it should be adding value also to SMS in the future. So what kind of impact does it have to the SMT's margin? To be honest, I promised that we'd make 10%. We're taking out that business. We have said 9.7 percent is the hour. So we've given them a relief of 0.3% if we Okay. It's not the case. Yes. That's about how it is. So we said, okay, when we've taken that out, if you do 9.7%, you reach your target. But before we finish, I'd like to remind you to if you haven't already registered for our Capital Markets Day in Finland in May, please do so now on our website. With that said, thank you very much for joining us today, and we'll see you in about a quarter's time. Thank you. Thank you.