Earnings Call: Q1 2018

Apr 24, 2018

Greetings to you all, and welcome to the presentation of Sandvik's results for the Q1 of 2018. As we normally do, we will run through a presentation with our CEO, Bjorn Nord Sigren and our CFO, Thomas Eliason. After which we will open up for questions. And without further ado, please, Bjorn and Thomas, go ahead. Thank you, Anssi, and welcome, everybody, to this Q1 presentation. We are very happy to see that the demand in the market continues on a good level. We see that in all our regions and in all segments that we're operating. So also all three of our businesses are contributing to the good order growth, which was 7%. This should be compared with the previous year where we the Q1 actually had the best quarter for the entire year. We're also happy to see that the leverage is developing in a good way, and we see development of our profitability and our margin this quarter actually reaching 18% profit margin. That includes EUR 250,000,000 of negative currency effects. So if you add that back, we actually reach 19%, which I think is extremely good number for Sandvik. Cash flow has been impacted during the Q1 on buildup of inventory, mainly in SMRT, in our mining business, to be able to deliver the extremely large orders on hand that we are having. This is no worry. This will recover during the year, and we will experience also this year good cash flow for the full year. We've had a number of activities during the quarter. We managed to close the welding the sales of the welding wire business to ESAB, and we believe that it has found a good home for that business. We have also made a decision to invest EUR 200,000,000 in new powder plants for titanium for our 3 d printing business, which is growing and a very profitable part of the SMT business. So this picture looks pretty much like the one we showed during Q4. You can see strong demand in all our segments as well as in the regions. If we're starting with the regions, you see 0% in North America, but that is the underlying there is actually 8% positive. We had a large umbilical order that were booked during the Q1 there. So the underlying is still strong in North America. Europe is up 6%, continuing Asia, 90%. So and out of that, 27% in China. So China continued to be very, very strong. We see we had leveling out mining aero. That means that, that market continued to be very strong and in line with what we have seen during previous quarter. So very strong market, mainly driven by replacement, but we also see a number of new projects. We had one in Sweden, for instance, starting up the mines. So they are popping up a number of these projects going forward and also extension of existing mines. So very strong market there. Also good contribution, as I mentioned, from all 3 of our business areas. So on the orders and revenues, we had this quarter of 1.07. That means that our orders are higher than the revenues, and we continue to build up orders on hand. We see 7% growth, and that is also we have I would say that is a strong number. And revenues is increasing, which it should do because we start delivering more out, not least in the mining business. EBIT development of 22%. That is then if we then exclude the currency effect of EUR 250,000,000 and the EUR 100,000,000 metal effects and also structure changes of SEK 56,000,000, which we had last year coming from the process system, which is a sole business, is actually 31% improvement of the profitability, which we think is a very, very strong number. This SEK 4,200,000,000 is also the strongest number that we had in the company's history. So 18% profit margin. The one who knows me say that the company should deliver over 15% profit margin to be a strong company. This quarter is 18%, and it's a strong 18% because underlying 2019. So looking at our 3 business areas, how have we seen the development? Sticking out as we have seen also during previous quarter is machining solution that have so high growth as 8%, and you know that is amazing. Also see a leverage here that continues to be on a very high level, 55%, and reaching a profit margin of 26 percent, probably one of the highest, if not the highest, we've had for that business. The good thing is also that the cash conversion is close to 100% there, which means that we are delivering a very strong cash flow also from that business. Only some building up of inventory more to be able to meet the demand that we have from our customers. You probably remember that we said that we are struggling with too low working capital during the previous quarter to be able to have full delivery capacity, but that has worked well during this quarter. Then Sandvik Mining and Rock Technology, also there, we are happy to see orders up 4%. And that actually surprised me a little bit because we had such huge orders during 2017. So we are glad that, that demand continues to be in good. I talked before about the EUR 250,000,000 FX for the group. All of that is actually coming, EUR 250,000,000 on the mining side. That comes the question, why is it coming there? Yes, we are producing more or less the most of our equipment and spare parts within the euro land. So the euro against the dollar has not developed that well as we have seen with the weak krona for the rest of our business. So that actually affects our EBIT margin with 2 percentage points to 15%. So if we take on the take away the currency part, it's actually 17%. And that's the leverage of 35%, which is in line with expectations. Even though you know that we have big expectations for the mining business and with big ambitions for improving the margins going forward. So we are going to be focusing even more here on efficiency improvements and to try to drive the profitability even somewhat further. Also very happy that we've seen growth, as I mentioned, 4% here. On the aftermarket, we were actually over 10%, close to 15% on the service and spare part business. So that's a good contribution, and it's very important also for the future performance of that business area. SMT, very strong orders. It's up 13% here. But if you actually put back the underlying here because we had so you may remember, I said EUR 430,000,000 umbilical order last year from North America. If you put that back, it's actually 31% up. So very strong orders intake here. We see a profit margin of 9.9%, but in that, we also have the methotized effect, which if you remove that, it moves down to 7.2%. But I think that's well in line with the development that we are expecting to be able to reach the 10% margin 2019. So that's good to see. Thomas, how's the numbers? Yes, Bjorn. Yes. How's the numbers? Let's jump straight into the financial overview. I'll start with the top line. As you heard, orders received 7 percent organically. Revenues, 14% organically. Currency was minus €2,000,000,000 for both orders and revenues. And then structure, minus 3% for orders and minus 2% for revenues. And that is mainly the Process System divestment. So total reported, +2,000,000 and +9,000,000. The EBIT margin, 18%, and we'll get back to the bridge in a second. Working capital, you heard from Bjorn here, the percentage is down, but sequentially, the value is up. We'll get back to that as well. And of course, this had an impact on the cash flow, but cash flow is still positive and the net debt continues to go down. Finally, you see that return and earnings per share continues to improve in a very nice way. If you look at earnings per share, it was up 30%, whilst operating profit was up 22%, but this is what you get when you have a stable tax rate and the finance net continues to go down. So you get an over absorption and a reduction in the finance net. So if we jump to the next page and look at the bridge and see then how we go from 16.1% to 18% in EBIT margin for the quarter. On the organic side, you can see that the leverage was 39%. And the good thing this quarter was that all three business areas contributed: 55% from SMS in leverage, 35% for SMRT and a positive leverage of 5% from SMT, which is good. Haven't seen that for a while. That meant an accretion of 2.7 percentage units organically. So take 16.1%, add 2.7%, and then you get the close to 19% that Bjorn was alluding to. Currency, EUR 255,000,000 negative. Basically, all of it, SMRT. And it's the U. S. Dollar, which sort of represents more than 90% of that. Structure 1 offs, 10 bps of dilution, and that takes us to 18%. Now working capital. Of course, percentage is down year over year, but the value is up sequentially. It has two explanations. There's two reasons for it. The biggest one being the buildup of inventories in SMRT in order to deliver the order backlog for the year, which we will do. And the other one is to restore sales stocks in parts of SMS in order to defend the delivery service. You can see on the right hand side that SMS is on a very good level. We expect them to be on that good level. SMRT is picking up, but it will sort itself out during the remaining three quarters in the year. Of course, this had an impact on the cash flow. But if you look at the right hand side, you can see that earnings continues to contribute to the cash flow, euros 900,000,000 cash contribution. Working capital took its part of cash flow. At the end, it was SEK 2,000,000,000 SEK 2,100,000,000, which, of course, is less than a year ago but still enough to continue to reduce the net debt, which we can see on this page here. You can see the net debt now was down to SEK 14,700,000,000 and the gearing is SEK 0.27. If you look back in time, you can see mid last year, you see a big jump from Q3 to Q4. That was when we got the proceeds from the Process Systems divestment. But the rest of the journey from SEK 40,000,000,000 down to SEK 14,700,000,000 is purely operational. And as you might have heard as well, we got a new outlook from Standard and Poise from BBB plus stable to BBB plus positive as a recognition for what has happened with the balance sheet and the strength in the balance sheet. Finally, a few words on the outlook and the guidance. We guided for €250,000,000 negative in underlying currency effect, and we basically landed there for the quarter. We guided €100,000,000 on metal price effect, and we were spot on as well. For the next quarter, we with the currency rates we had March 31, we expect the currency effect to be 0. That is translation and transaction effects. Metal prices, euros 100,000,000 for the 2nd quarter. Full year guidance on CapEx, euros 4,000,000,000 We had euros 740,000,000 in Q1. Net finance items, euros 1,000,000,000 and we were spot on €250,000,000 in the first quarter. If you just go back 2 years, the finance net was €2,000,000,000 So it's been cut in half now. Tax rate, 26% to 28%, and we ended Q1 on 26 0.5%. And then I'll hand over to you again, Jan. Thank you, Thomas. So where are we now then? Yes, I think we are in many the most or majority of our operating entities, we are both stable and profitable. That means that we have a strong focus on growth. When we are talking about growth, we talk about 3 different way of growing. 1 is organically, and that's, of course, developing new technologies and products and sell more and take market share. The second part is new technologies. And at the moment, we are experiencing probably one of the most exciting times when it comes to the mining industry. There are huge amount of automation projects, I would say any serious mine around the world today are looking into the automation area. Sandvik is in the forefront. We are there, and we have many, many products that we are projects that we are running at the moment, which is going to be exciting for the future development of the mining market. The 3rd way of growing, that is through acquisitions. And we have been talking about acquisitions now for the last 6 months, and we are getting closer to be able to present our first acquisition with Insoon. We are interested to grow mainly within SMS, where we have this enormous strong position at the moment. And we would like, as you know, to broaden ourselves to catch the whole cutting process, everything from designing the component to verifying the result of the production. So within very short, you will hear something from us on that part. But we are also interested to see growth within other product areas that are both stable and profitable. Mining have a number of exciting projects that could be. But even in some part of SMT, like the Powder and Cantal and these areas where we see good profitability and good position in the market. So going forward, a lot of focus on growth but also to drive efficiency. And we have especially in 2 of our business areas, SMT, we will continue to drive the project to reach the 10% for 20 19 as a profit margin. And on SMRT, I think we have more to squeeze out in the coming quarters. With that, I think we can end the presentation, and we go over to question and answers. Yes. We will indeed. Let's start with the room here in Stockholm. Do we have any questions in here? Yes, we do. We have the microphone up here? Thank you. Andreas Bokhats clearly. I have a question there on the mining business. You talk a lot and you seem very confident in the efficiency measures. Could you elaborate a bit on what kind of efficiency measures are you focusing on for this year and next year? Yes. I mean you're seeing these enormous volume increases that have taken place during the last 12 months or even more. In some of our product areas, especially when we are referring to the underground business, that is the loading and haul and the drilling part of that business, volumes have actually doubled. And you can imagine the burden for any division to drive volumes up. As you probably know, we have been focusing a lot by using satellites to be able to add the volume, but we have also shortened lead times and tried to get more through. But it also puts a lot of pressure on the sub suppliers, especially when you come into hydraulics and certain components because we all know that it is. So there is a lot of inefficiency in the supply chain to get everything in. It's enough that you are missing a couple of components before when you're putting together, you have to move it by side until you get the right components. So there is a lot of focus to get the good efficiency through the whole chain, but also to make sure that we are focusing on our customers in the right way, that we are winning the right project going forward. But we will be driving efficiency, making sure that we grow. We have a target of reaching 3% productivity improvement. We are, for the group, running at 8% today. But at such a good time, we would like to see that even improve. So there is a lot of measures being taken at the moment. And each of the product area are driving this, what we call, continuous improvement. And a question for Mr. Liaison. On the pension deficit, if you you're paying down debt, can you see yourself making extra contributions, etcetera, just to get the pension deficit even further? You mean the pension debt in the balance sheet right now, which ended at €4,300,000,000 Well, the reason why the pension debt has come down from €5,000,000,000 down to €4,500,000,000 and up €4,300,000,000 is purely technical. It's because the discount rates are going up So I mean discount rates are going up in all regions in the world. But no, we have no plans on making any extra contributions today. Thank you. Okay. Operator, can we have a question from the conference call, please? Yes, of course. We first go to the line of Klas Bergelind at Citi. Please go ahead. Your line is now open. Yes. Hi, Bjorn and Thomas, it's Klas van Sichte. The first one is on S and P. The drop through is 5%, and pricing is now improving a bit. So it should help the drop through as we go through the year. Against this, however, is a pretty tough comp on large orders in umbilicals, which is high margin. These orders are also very short cycle when we look at deliveries. Orders in the year often becomes deliveries in the year. There were no larger orders this quarter. Have we passed the peak on the billable side? So if you could talk, Bjorn, about quotation activity, order scope versus 2017, please. There are quite a lot of activities out in the market, both large projects as well as small projects. But of course, an order is never an order before it's signed and delivered. So we are working with it. So far, we have taken the majority of these umbilical orders during the last 2 years, and we have a very strong position in that. So we continue to focus to get these orders in. We have orders on hand between 2 4 months approximately. And we hope to get some orders within the short near future. That's how it looks. But there are many projects, but they have to be closed, of course. Okay. On mining, my second question. Aftermarket, if I heard it correctly, was up near 15% year over year and the Mining OE down slightly on the tough comp. If I get this to sequential flatter OE, but higher aftermarket quarter on quarter. So here's the question on the equipment side. Last time that SMRT, when I look back, surprised positively against expectations about 1 year ago in the Q1 of 2017. So the question is really, are we plateauing here on the replacement and brownfield side? Or do you think increased automation can drive upside to equipment volumes? Thinking about whether they can shorten the life cycle. I wonder to what extent I struggle to see it, but if you could comment on the scope for the equipment business to reaccelerate in mining, please. Difficult to say. If we see so much accelerate. I mean, we're very happy if we can keep it on this level. For if we're looking at SMRT, we are last year, we had the highest orders, was over SEK 10,000,000,000. That was absolutely the best quarter during previous year and to beat that with 4%. And of course, I'm very happy that it's the aftermarket that is what's growing most because that's, of course, the most profitable part of our business going forward. We don't see any weakening in the mining market. And if you have heard me before, from my perspective, this is driven by metal prices. As long as we see the metal prices on this level, we will continue to see good demand. We have, as you know, close to 20,000 equipment out in the market, which will be replaced and bought new. They have a certain lifetime being they will be coming. Some mines will place bigger orders. We didn't have any huge orders during this quarter. Probably, we'll expect that in the coming quarters also to come. So I think if we can keep this level that we are having today, we are very happy with that part. Gives us also because we got, of course, the production rate up to certain levels now so we can also drive efficiency a little bit more. And you get the whole supply chain rolling in the way you need to do at this volume. But we don't see any weakening of the market. One very quick one finally on SMS and the $0.55 drop through. When we met last time in London, you said SMS should normalize to 40% to 50% in the medium term, 30% to 40% longer term. How should we think about inventory build also in the Q2, cost going back in, in both digital, more feet in the street? Can we hold 50% for the year and then we come down next? Or so how should we think about incremental margins for 2018? I think yes, 55% surprised us also a little bit. It's on a very high level. I think long term wise, you cannot expect that we should be on this level. So we should be more on what we have communicated before. We are investing, as you know, a lot of money in new technologies, both in the 3 d printing. So during this year, we are putting in SEK 300,000,000, which is actually taking out of the profit and straight in. And it will take a couple of years before we can see good returns on those investments. But we're taking the opportunity now, and that business also is delivering such a strong and good result. But 55% leverage, I doubt that we should see that many quarters going forward, even though I hope. That would be nice. Of course, 35% to 40% is a more normalized level. Thank you very much. Operator, can we have the next question put through, please, from the conference call? Yes, of course. We now go to Guillermo Pinault of UBS. Please go ahead. Your line is now open. Hi, good afternoon. Guillermo Peneur from UBS. Just a question on pricing for Machine Solutions. How much of your organic growth was pricing? And what do you think about pricing going forward? And then on SMRT on mining, kind of the same question regarding like for like equipment, how pricing moving, but more interested in understanding how what, let's say, the amount of growth you saw in aftermarket and consumables relative to equipment, how is that basically mix not helping you to get better operating leverage numbers into the quarter? I'm wondering. If we're looking at the pricing side, yes, we've seen an improvement during the quarter. So we are approximately 1.5% up. So that is developing well. And that is both on the SMS as well as on the SMRT, which it should be also now when the demand is on a high level. On the growth of equipment, I think you said in relation to aftermarket, yes, equipment can go a little bit up and down for quarter. The demand is still good, and we have nothing else signals. I spent quite time out also this quarter out meeting customers around the world. And it's happy customers, growing customers and prepared to invest also in our equipment going forward. So I'm not so worried about that development as long as we see the metal prices on the level that we see now. The 15% on the aftermarket is, of course, important for us because this the aftermarket remains also in weaker time. You know we put in quite a lot of efforts to grow the aftermarket. And we know that the market is the underlying market is not growing as high as we are growing that. So we are improving in our own abilities on that market. On the consumable side, that means the drill steel and the drill bits and the part, that is not growing in these numbers. We're only talking about a couple percent there, 1%. Maybe a follow-up. You mentioned automation in mining. Could you characterize or could you give us basically an indication of how your order intake is becoming more or higher content in terms of automation? So maybe just compare the amount of equipment that goes into high level of automation versus the, let's say, traditional level of automation that you may have had over the last 5 years? Still, the majority of the equipment that we supply is not for automated part, but we have a number of projects. We have so far 30 installations today of automated mines on different levels. And we have a huge amount of projects that are running and is going to be in the future. Yes, automation drives equipment also because when you are moving into automation, you also need equipment which are equipped with the latest technology when it comes to navigation and the automation, also on the equipment. So yes, it drives that part. But these projects, I mean, that we're talking about is still a minority of what you are seeing, and that's what we probably see more in the coming future of these projects. We have one exciting project, what we talked about, and that is a project in Mali. Normally, you think about automation is taking place in the northern atmosphere in the most modern countries. But in the middle of Africa, in Mali, we are actually putting in the 1st fully automated mine with all equipment from Sandvik today. So even in these parts of the world, we see development on that side. So we expect a lot to come there, both when it comes to automation equipment as well as new driving new equipment sales. Thank you very much, Guillermo. Can we put through the next question, please, operator? Yes, of course. We go to the line of Peter Frieland at Handelsbanken. Please go ahead. Your line is now open. Thank you. A couple of questions, if I may. Firstly, on the additive investment in SMT. If you take sort of a group view on this, could you just repeat the amount of revenues you get from Powder today? And could you also please try to talk about what type of sales that plant investment eventually could drive if they were fully operating? That's my first question, please. Yes. Okay. 3 d printing, as you know, there are different parts. Powder is the part of the business which is growing faster than where we have the strongest market share at the moment today. Our powder business, but that includes not only for 3 d printing, there's also metal injection molding, which is part of that, is around SEK 300,000,000 in size. But the 3 d printing part of the business, which is probably growing 4 facets of these, are growing around 20%, 25% in growth. When we're looking at the 3 d printing, we are, of course, still in an early stage. It's building up. We are running a number of projects with customers. They are setting up the business model. They are employing a lot of people. So it will take some time before we can see revenues actually coming out of that. But we will be the business model is being set up, and we will be able to service our customer to help them to both design, in some cases also to make components. The start up has been together with SMS actually because today, we are already producing a number of 3 d printed components for tool holders, which are very lightweight and designed in a way to run for high productivity, which we are really benefiting already from today. But there are a number of projects. It will take a number of years before you can even see these numbers in our total numbers. But it's a big focus, and we are investing heavily into this business. But shortly, on raw material, I guess it's wise to take a group view there. So you managed to positive on a net of price raw material, I guess, with 1.5% price increase, but maybe you can confirm on that, Thomas. And lastly, just on trading conditions. Were March a bit weaker than January, Feb? And how is April looking so far? I'm talking about SMS, obviously. No. I think if you're looking at March, it was a little bit shorter because of the Easter, of course. But if you look at the day to the day trade, we actually had the strongest one in March. So it accelerated during the quarter. Did you want to answer anything on the material prices? Well, we don't price based on raw material costs, not really. But just the net effect. I guess your you have a raw material content. Many alluded to that. In bridges, you don't, which I find relevant. But still, could you verify that the raw material increase was sort of less than 1% then? We don't have a number for that. Okay. Trading conditions in April, Bjorn? Yes. The trading condition, as I said, is that if you're looking the day of Du Boisim, SMS, the day trade was actually better in March than the previous 2 months. So it accelerated in the end of the month end of the quarter. Okay. Thank you so much. And did you sorry, Bjorn, did you actually answer Peter on the April stocks? On the sorry, I didn't I missed that part. Yes, April has continued at the same level as we saw during the previous quarter or in March. No change in trade there. Thanks a lot to both of you. Thank you. Sorry about that. Nice try, Gjoern. We'll have the next question from the conference call, please, operator. Thank you. That's over to the line of Markus Almerud of Kepler Chevreux. Please go ahead. Your line is now open. Hi, this is Markus at Kepler Chevreux. So I'd like to start by going back to Guillermo's question just on the margin in SMRT. So you see strong growth in aftermarket. And despite that, you saw the lowest margin except for Q1, but Q2, Q3 and Q4 last year was much higher than it was. So is it just currency? Or is there something else as well that is driving that? So that's my first question. It's only currency. You can say that you have compared to Q4, you have EUR 70,000,000 in negative currency compared to the previous quarter there. So as I mentioned, that is SEK 250,000,000 compared to last year. So the underlying is 17%. Then of course, which we have been very open before, we have 8 product areas within the part. Some of them are performing extraordinary good, and some of them have a little bit more challenging position. And that is, of course, how it is. We are everything from mechanical cutting to crushing to drilling as well as loading and hauling the part. We can say that the underground drilling and blasting side and loading and haul is doing extremely good. So does that also mean then, if I can just follow-up on that, that if the underground loading, hauling and drilling is doing good, but the equipment overall is flattish, do the other one like crushing is not is actually declining then? Crushing is pretty flat. Okay. My second question, just curious to hear if you are seeing any improvement in underlying demand on the oil and gas side for umbilical, but also for Sveral, if you're seeing any impact from the higher oil production in the U. S. On that. So do you have seen any movement in oil and gas demand from Yes. It does. It follows very much the number of rig counts. And we are up in I think in Varial, it's over 10% growth during this quarter, which is good. And the underlying profitability is also doing well. So if you take away the PPA amortization, we are running close to 10% today. So it's developing in a very good way. With a steady and good cash flow. Yes, very good cash flow. And in terms of discussions, etcetera, with oil and gas customers in on the umbilical side, any change or still too early? I think it's too early. I mean, there are a number of projects that we are waiting for at the moment, but that's the story of umbilicus. I've been in the company now for 2.5 years, and there is a constant waiting for umbilicals, and they come. So we'll see. But we don't feel so worried about that. Okay. Thank you very much. Thank you. Operator, can we have the next question, please? Yes, of course. We now go to the line of Christian Clouetiere Duigner at Redburn. Please go ahead. Your line is now open. Hi, good afternoon. I have two questions. The first one is on Machining Solutions. The Chinese demand keep on surprising. And I was wondering if you have any visibility on the level of inventories for customers and distributors in China, specifically for SMS. No. I would say that we don't have any kind of reports that we have any inventory building up there. It's the underlying demand, which is actually driving this good development that we are seeing. Okay. And the second question still on Machining Solutions. I mean, you're still growing in automotive while global auto production was broadly flattish in Q1. And just what is driving this outperformance? Is it market share gains? Or do we see a marketing tool spending per vehicle produce? I mean, what's the driver behind this outperformance versus production? I didn't really hear that. No. You were asking about market share gains in China in Automotive? No, no, no. It's not in China, but overall global automotive production was flat in Q1 and Machining Solutions seems to be growing in automotive. What's driving this outperformance? I think the underlying market, what we have, if you look at the regions there, we've seen a flat development of the sales in North America. We are growing in Europe, and we are growing in China. And I think that pretty much follows the demand we're seeing in the market. Okay. I mean that's it. Thank you. Thank you very much. Operator, we'll have the next question, please. Yes, of course. And that's over to the line of Andrew Wilson at JPMorgan. Please go ahead. Hi, good afternoon, everyone. Just a couple of questions, please. Redivanting, I think, one of the earlier questions, just on the inventory levels in SMS and I guess SMRT as well. Can you just give us a sense of kind of where we are in that sort of build process? Are you should be expecting to see a similar inventory benefit in the Q2? Or are you kind closer to the levels that you feel like you need to be for those two businesses now? Yes. I mean for SMS, I think we got it up to a level where we want to have it. So we are not expecting any growth in inventory during the Q2. Also on SMRT, we will not have this increase during the Q2. That's pretty clear. So we will have a lot of deliveries during the period. You can probably see also we had huge deliveries during March. So there's a lot of receivables in the net working capital also, which will be money coming in during the Q2. So I'm not worried at all about the cash flow for the coming quarters. That's very clear. And just on a slightly different question, but on the M and A opportunities you've kind of talked about in SMS, I'm just thinking about from a strategic perspective, you've been quite clear about the kind of businesses you're targeting and why within SMS. Can you just talk a little bit about whether you're seeing your competitors, the kind of traditional competitors in that market, talking about doing the same things or perhaps seeing those bidding for the same kind of assets. Just give us a sense of whether you think the kind of the SMS strategy there is different to what you're seeing your competitors try to do. No, it's quite amazing. We are quite alone in putting that strategy up. But if you look back a number of years, I think Coromant and SMS has been really on the front side when it comes to the digitalization and introducing intelligent tools in the market, which we haven't actually seen by any of our competitors. So I think we are in the front line when we are looking at driving our business in this direction. And I think it comes from our very strong position through Coromant, but also with our other two brands that are operating very close to our customers and helping them to of software companies of software companies, which has actually played out very well and added value for our customers. So but that might change. The competitors might go this way also in the future. But at the moment, we're not really seeing that. Thanks, Bjorn. Very helpful. Thank you, Andrew. Can we have the next question, please, operator? Yes, of course. It's over the line of Graham Phillips of Jefferies. Please go ahead. Yes, good afternoon. A couple of questions, please. Could you talk a little bit about the aftermarket growth of 15% and where you were seeing the major benefits there? Because clearly, that has well outperformed underlying level of production. And just and I apologize, you may have this in the release here, but I'm actually traveling. What was the organic growth of original equipment, aftermarket and consumables for mining? We don't do that split. So sorry about that. We are not going that deep into our numbers. So the only thing we actually that we are telling we are being a little bit generous when we say 50% on the aftermarket or on the parts and service business. While we talk about that a little bit extra is because we see that as a really enable us to both strengthen the business that we have but also make it more agile in downturn. So that is important. We have the last 2, 3 years been a lot of focus on the aftermarket. And it's actually Thomas and I, we spent a full day with the whole business area or the product area team in Amsterdam last week and looked into the new technologies that they are putting in. And it's quite impressive what the both the technology they're using to drive the business, but also the good knowledge they have of our performance with our equipment in the market. Coming also and that is the connectivity, which I think is probably one of the most exciting side within the aftermarket is today. We have more than 3,500 customers today connected into our My Sandvik, and that's the portal where you can actually order all your spare parts. You can bring up service journals, you can find all spare parts, you can even monitor your equipment if you buy that service also for the future. And this is growing dramatically. And of course, this generates revenues into the future. So the 15% that you quoted for aftermarket, that includes consumables and including No, no, sorry. This is the parts and service business. The consumable business is only growing 1% or something like that during the quarter. So that is more following the output that you are getting from your operations. And I normally been explaining this is that the output from the mining companies actually is coming to 1% to 2% per year. That's how that is developing. So if you're in an aftermarket grow faster than that, you are actually taking market share. And when we're talking market share, it's of our aftermarket business. That means against what our customers are doing themselves or pirates with our equipment. So or we're taking a bigger percentage of the service that is being done on the equipment. And that's the ambition we have. And the original equipment order is down 4%. Can you contrast that between surface and underground? No, I don't have that. But I mean the big drive is underground, of course, in the park. And that's also where we have our strongest position in the mining side. I don't think you have to worry about a couple percentage down. This varies a little bit between the quarters. You might be surprised during next quarter in the other direction. I mean, this is a little bit how it goes. If you get the big order in during this quarter or not. So I think it's better that you listen to the underlying demand has not changed. It has not gone down. Then, of course, when you take the certain orders and when you get them into your order books, that can vary a little bit between month and quarter. So I think you have to trust us there. The underlying demand is very strong in mining and is expected to be at least, what, in the near short future. Okay. And my final question is on this, Joel, sorry. Yes, sorry. We are also comparing, as you probably remember, we had huge orders during previous year, so 2017. That was over 30% growth at that time. Fair enough. Sorry, my final question is around the potential credit rating upgrade. So S and P moved from stable to positive. If you did go from BBB plus to A- and remind us how much you're thinking of spending on M and A, would you get a benefit from lower interest cost borrowings? Or have you already got set lines of credit at rates determined already? Our debt portfolio is very long. It stretches out over 10 to 12 years, and basically all of it is, well, long term debt. And of course, over time, it will have an impact, but immediately, not that much. No. And just remind us how much you're looking to spend in terms of M and A? I mean, we can say that we are not into I mean, at these price levels that you can see in the market, we are not going to take any huge bite that would jeopardize Sandvik's rating or our cash flow or our net debt. So we are looking for small- to medium sized companies, especially on the tech side, which can add both technology and products just for these areas. And then we will utilize the group size and all our competence centers around the world to drive volumes. And the credit and the net debt to EBITDA that you'd be happy to add, just remind us of the figure on that. I mean, we said that we are happy with BBB. I mean, that's what we have said. We have BBB plus today, but it can also depending on how you rate our business. Yes. But what was the question on net debt to EBITDA? Or Well, did you I mean, you obviously would need to gear up if you made some acquisitions and what were you comfortable with in terms of a ceiling for net debt to EBITDA that wouldn't jeopardize potential credit rating upgrade? No, we don't have a target on that as such. We're around 1 right now. It has come down quite substantially over the last 2 years. If you read the Standard and Poor's press release and their reports, you would see that when they give us the credit rating we have and the outlook we have, they have an assumption on like up to €5,000,000,000 annually on M and A spend. But I mean, we don't have an outspoken target as such for ourselves, but the rating is important for us. Okay. Thanks very much. Thank you, Graham. Do we have any additional questions from the conference call? Yes. We have 4 currently in the queue. Do you want the next one? Yes, please. That's over to the line of Ben Uglow at Morgan Stanley. Please go ahead, Ben. Your line is now open. Thank you. Good afternoon, everyone. I had two questions. The first, and forgive me if this sounds slightly pedantic, I'm trying to figure it out. But on your market development slide this time, your arrows and particularly Europe stood out, have kind of flattened. So 3 of the 6 arrows have begun to go sequentially sideways. In Europe, when I look at the individual end markets, all of them with the exception of mining are actually heading upwards. So what I really wanted to know is, is your is this sort of flattening, is this kind of change on the slide simply to do with mining? Or do you see anything else in the European environment or anywhere else, which is sort of incrementally more cautious? I know mining in your opening remarks. I just wanted to make sure that's the only that you're trying to make. Yes. I mean, it's the mining that is actually driving this. There is nothing else to worry. It's strong, strong all over. You can see you can actually see from last year, it's up on all of them. But sequentially, we had, as you also know, that Q4 was pretty much in line with the strength that we have seen now during Q1. It was very, very strong at that moment. So the only one where you say is that, yes, mining has probably flat rolled out on a very high level. Okay. That's very helpful. And just second question briefly. On China, and I want to make sure I got the numbers right, you had 27% order growth. I wanted to check, first of all, were there any large orders or any one off effects in that? And for Sandvik Machining Solutions specifically, was there kind of growth in line with that type of level? And did it change at all during the quarter, I. E. Did we see a sequential acceleration or deceleration? Did it was there anything significant either way during the period? There was no I mean, if you're looking at the 27%, there were no big orders driving that. But that's pretty much in line what we see now during actually the last quarters also. So that was pretty much in line. And on SMS, it's about 20%. That's where they are in China. So very, very strong. And remaining strong throughout the quarter. Yes. That's very helpful. Thank you. Thank you. We'll have the next question, please. Okay. The next question is from the line of Gael Lebray at Deutsche Bank. Please go ahead. Your line is now open. Open. Two questions, please. The first one is, I mean, the business grew again tremendously this quarter, but the number of employees has actually been fairly stable year on year and even slightly down, I think. So and you've been talking about future efficiency opportunities, but it appears to me that you've been pretty efficient so far already. And I guess my question is, at what point will you need to invest more in people, in more sales on the ground perhaps to sustain future growth? So that's question number 1. And question number 2, I was surprised by one of your earlier comments that the production of your spare parts in mining is mostly in Europe. I thought it was a sort of a local business for the most part. So is there a plan to better optimize the manufacturing footprint for the spare parts and reduce the mismatch you have between the revenue base and cost base in euros? Thank you. Okay. First, on SMS efficiency programs there. I think, first, when it comes to people, yes, we have grown a little bit. But yes, we have been able to grow a lot of business without adding a lot of people. And a lot of this is, of course, coming from the SMS. We closed 23 factories all around. So it's actually on the backside that we are becoming more efficient. We are running more products through bigger factories, and that is driving efficiency. And without doubt, the best job is done there by SMS. In mining, yes, they have added people on to the business, but the people they have added on is mainly related to the aftermarket and to service contracts. We're taking numerous of large service contracts around the world where you need to add people. But these people are added on the contract. That means if we lose the contract, the people are connected to that. So they are not like stuck into our books. But we monitor this very, very carefully because we all know that in the future, it's going to change. So we say that you have to drive efficiency all the time, and that's why we're driving the target of 3% per year. We are running at 8% today, and we're probably going to be even higher than that. But that's how it is when you are on the top side. There is a lot of efficiency in all our operations to be done, and we will continue to drive that also in the future. When it comes to the mining equipment, the setup we have is that each product area is responsible for its own production. If you're looking where we have our production facilities, we have four product areas, which are located in Finland. We have in Turku, in Tampere and in Austria. Yes. No. But if you then we have 4 big factories there. We have production in Austria. We have production in China. And we have some small production also in Sweden. The crushing equipment, let's say, the station equipment is down in Svydalla. And we are making real steel in Sandviken. So you can see it's pretty much brought up. But spare parts are bought from suppliers all around the world. So it's some of them is coming from our production facilities around the world, but also from subsupplies. It can be in Germany. It can be in China. It can be all over. But if you look at the majority of the costs that we are generating, it's done in euro cost if you compare that part. And then we sell the most of the equipment into countries in the dollar base. Many of the 3rd world countries are driving most of this in dollars. So it's the euro to the dollar part. I mean, we have no ambition to try to change that or hedge that in a way. We do believe that we can drive good profitability even when the currencies change, and that's how we do it. If the cost goes up a lot, we and we have a big demand, we will also lift the prices. So it's this is moving all the time. And it will be also in the future decided by our product areas. Can I just clarify a little bit here? When we talk about production in euros, we don't talk about spare parts. We talk about equipment, really. So the comment here on producing in euro land and selling to dollar land, it's equipment. As Bjorn said, the spare parts, they are partially produced by ourselves but sourced externally from all over the world. Okay. Very clear. Thanks very much. Thank you. And I know there's probably a few questions still to be asked from the conference call, but unfortunately, we're out of time. So please feel free to call myself or my colleague in Investor Relations. I'll be happy to help you. And with that, we'll say thank you very much for joining us today, and we'll see you in about a quarter's time. Thank you so much. Thank you. This now concludes today's session. So thank you all very much for attending, and you may now disconnect your