Greetings to everyone, I would just like to welcome you to the presentation of the results for Sandvik's first quarter 2017. As per norm, we will run through the presentation under the management of our CEO, Björn Rosengren, and our CFO, Tomas Eliasson, subsequently, we will run through the Q&A session. Without further ado, I will just hand over to Tomas and Björn for the presentation.
Thank you, Ann-Sofie. Also, I would like to welcome you to this Q1 first quarter result presentation. I think the quarter which we have behind us was a very strong quarter for Sandvik. We continue to develop in many areas in a positive direction, there are three areas which I think sticks out a little bit more than the other. The first thing, which of course from our perspective is very positive, is that we see orders continue to strengthen. This quarter, orders were actually up 16%. Sticking out in the order side is, of course, mining and rock technology and Lars' team standing over here, who actually were up 30%. I think these are numbers that we have not seen since the rise of China in the beginning of 2010. That is very positive. All business areas actually contributed to this good order intake.
The second is, of course, the EBIT margin, this is the second quarter in a row where we are over 15%. If you have listened to me before, I think quality companies deliver EBIT level over 15%, that is extra fun. Of course, there is a lot of currency and also alloy surcharges that have been positive for the quarter, but the underlying improvement of the EBIT level is 18%, and that should put in relation to our target, which is to improve by 9%. I am very happy with that. As the third, and not least important, that is the cash flow. The cash flow actually doubled compared to last year and is actually the highest cash flow that we have had in the group. That is very positive.
That is, of course, driven by the good profit, but also by keeping the net working capital on a good level, which is actually under 25%. That is very positive. If we look at the different markets, we see good growth in all our three big regions. Europe starting up with just 5% here, but if we exclude the big order where we received last year, it is actually 11%. For the first time, we are really seeing Europe taking off in a positive direction. North America, 41%. I think it talks for itself, but in these numbers, there is one large mining order, about SEK 250 million. If you exclude that, it is about 25% for the mining side. Asia, 7%, a little bit lower than we saw previous quarter, but if you look at China by itself, it was up 31%.
China is strong, while it was a little bit weaker in rest of Asia. I think India was negative for the first time in a very long time. I don't think that's a big issue. I recently visit India, and I think the momentum and the positivism in the market there is on a level that should generate good growth in the coming quarters. If we look at our targeted segments, I think all of the segments were flat to positive. Also here, of course, sticking out is the mining side. Very positive. Very positive also the general engineering, which is positive. I personally believe that that's driven also by the oil and gas industry, which is coming back in North America. Positive continues to be good is the aerospace, up. The other, automotive, flat.
We have also on the oil and gas, and construction is pretty flat so far. Maybe some one of you saw here that the automotive in North America was negative. I think that should be seen from a very high level. There were, I think, produced 17 million cars in North America last year, so it's from a high level. In Europe, we saw a flat development automotive industry, and actually in China, it continues to grow and strengthen. At the order, I said 16% up, that's the underlying organic, and then you have to add, of course, the currency there. The book-to-bill ratio is 114%, which I think is a good sign for future growth in revenues in the coming quarter. The revenues were up 5%, which is not that big, and as you know, our order's been pretty high now for the last two quarters.
In the coming quarters, we should see an improvement of the revenues trailing. From the mining, we see normally about a six-month delay between orders and invoicing. EBIT development, I mentioned that one of the positive, it's actually 45% up, but if you exclude the currency effects and the alloy surcharges, it is 18%. I think that's a good level. It continues to improve. This is driven mainly from efficiency improvement, but also, of course, volume improvements from what we've seen before. If we now look a little bit closer into each of the business areas, Machining Solutions continues to impress. Strong orders this time up 10%. That sounds a lot, but if you actually dig into it a little bit more, there we had, during this quarter, 3% more working days.
If you exclude the working days and also a big order that we received in the powder and blanks technology, the underlying is about 4% or 5%. That's about how you should see the level for SMS at this moment. If we look at the margin, 23.2%, a very strong continuous improvement where we're seeing there. SMS continues to have good control over the operations and the net working capital continue to go down, which of course generated an excellent cash flow for the business area. To Mining and Rock Technology, the one who has listened to me, this is the area where I think we have the best improvement potential. I think Lars and his team showed that very good during this quarter. We made 14.1% EBIT, and that's an improvement from 9.6%. I think that's a good number.
If you dig a little bit deeper in here, I think was good. If you lift out the Varel business out of the Mining, it is actually 15.2%. Now we are talking. Now we are coming much closer to the levels where I think this business should be delivering on. We can see that orders were up dramatic 30%. Invoicing still only 6%. That is what I said, it is trailing. Also credit to the whole team for keeping the net working capital under 25%, I think, and that is also why we generated a really good cash flow from the Mining and Rock Technology business. If you look at the different metals that you are seeing there, it is actually gold, silver, and zinc, which is driving. We are still waiting to see some improvement from the copper. The copper price is going up slightly.
Maybe in the coming quarters, we could see some more activity in that part. If you look at the different businesses we have, you know that I think the most important part of the Mining and Rock Technology is the aftermarket. They really showed strength during this quarter, 11% up. I think that should be put in relation to how the market is developing. We know that the mining output from the mine is about 1% up per year, not more than that. That shows that actually we have a strong belief that we are really taking market share now on the aftermarket, which is the important part, not least in tough times. We are also seeing good volumes in the underground business. Loaders and trucks is doing amazingly well. Also the drilling.
We also start seeing really good momentum in the surface part, while it is a little bit more slow on the core mechanical excavation part of the businesses. Moving over to Materials Technology. Also here we see some growth, 5%. If we exclude the alloy surcharges improvement there, it is what we call a black zero, just a little bit growth. This is supported by the great order that we received in the oil and gas industry from Leviathan. It is actually gas order for umbilicals, which is actually helping us to keep up the orders on hand on a healthy level. We also do expect that we should, during next quarter, get one of these size orders to help to secure the full year. That looks quite promising. Volumes is -1% here. If you take away the metal surcharges, it is actually down 6%.
That is actually what is driving the weaker earnings, which is the underlying, which is actually 6.3%. We do believe that the coming quarters will offset this low part. We think we will reach the targets that we have set. We are quite optimistic to a number of good quarters for SMT moving forward. [Hankel Scrooge].
Did you have any money?
Well, don't listen to him. He's from Gothenburg. Okay. Yeah, we do have some money. If you want to buy something or build something somewhere in the world. Let's jump into the numbers and start with the overview. 16% order growth and 5% revenue growth organically, as you've heard. If you look at the upper right-hand side, you can see the currency effects 5%, taking an order to 23 and revenues to 10 in total. The operating profit or the EBIT was up 45% or 18% excluding FX and metal price effects, 16.1% in EBIT margins. Net working capital reduced again down to 24.5%. Should mention that the rolling 12-month number is a little bit above 26%, so we still have some way to go to reach the 25% target, but we're approaching. Cash flow was slightly up 94%, up to SEK 3.7 billion. A very good quarter.
Return 18%. Also earnings per share grew healthy. If we then jump into the bridge, we see the quarters here, Q1 compared to Q1, year-over-year. We can start on the right-hand side, the structure and the one-offs, it's just metal price effect and alloy surcharges here. SEK 235 million on the EBIT line, meant an accretion of 1.1 percentage unit. Currency SEK 400 million on the EBIT line, 1.1%. On the left-hand side, you see the organic part, price, volume, productivity. SEK 800 million in revenues and SEK 458 million in EBIT. A drop-through of 56%, which we're pleased with. 1.7% in organic margin accretion. We move to net working capital to the balance sheet. You can see that we continue to decrease. As you can see in the graph here, Q1 is always up a bit seasonally compared to Q4 sequentially. It's been like that all the time.
There is a buildup in Q1 for deliveries to come. You can also see that the increase in Q1 2017 was much, much less than what we've had over previous years. The percentage is down to 24.5%, as I mentioned, a very good performance. On the right-hand side, you see the business areas, SMRT and SMS continue to perform very strongly. SMT has a buildup ahead of deliveries in the coming quarters. The cash flow was up, a very strong quarter, probably the best in modern times, with SEK 3.7 billion in free operating cash flow. You can see on the right-hand side where it comes from. As Björn mentioned, it's mainly driven by increased earnings. SEK 1.4 billion up from earnings.
Working capital is normally negative in the first quarter, but you can see here also that the negative was much, much less than a year ago, SEK 0.5 billion than a year ago. CapEx was slightly up. The last graph is this beautiful one. It's the net debt. From the peak level in 2014, the net debt has come down from SEK 40 billion down to SEK 26 billion right now. The gearing is 0.63. We have the target of 0.8 within reach. Also, we should mention that after the fourth quarter closing and the release of the fourth quarter result, we had a new outlook from Standard & Poor's, and the negative outlook was taken away, and we instead got a positive outlook. We now have BBB with a positive outlook. We'll see what happens. Outcome and guidance.
If we look at the first quarter, SEK 401 million year-over-year in currency effects. We guided for SEK 400 million, so that was pretty spot on. The metal price effect here, we guided SEK 129 million, and maybe we should mention that this is the in-quarter guidance, not the year-over-year guidance. So SEK 129 million was the actuals, and zero was the guidance. The big difference is chromium and the U.S. dollar movement. For the second quarter, we got SEK 400 million in year-over-year currency effects and about zero in metal price effects. The metal price effect a year ago was also close to zero, so it is zero both in quarter and year-over-year, basically. The CapEx we keep at SEK 3.9 billion as guidance. Net financial items, we keep SEK 1.4 billion-SEK 1.5 billion.
We should mention that we had SEK 387 million in the first quarter, SEK 387 million times four, that's a little bit more than SEK 1.5 billion, but that's because we have some FX and hedge temporary valuation differences in the finance net. If you just look at the pure interest rate net, it was down with 25% in the quarter year-over-year, close to SEK 100 million down. We had FX and hedge valuations going the other way, but that's just temporary, so that will flow back and forth. It's a little bit difficult to predict. We keep the guidance for SEK 1.4 billion-SEK 1.5 billion. Tax rate, 26%-28%. We had 26.9% in the quarter. Before I finish, maybe I forgot something which is a bit important. On the cash flow side here, you can see that we had SEK 1.9 billion a year ago. We have SEK 3.7 billion this quarter.
That's quite an improvement, nearly 100%. We don't guide on cash flow as such, but I just want to say that don't expect 100% up every quarter for the rest of the year. We do have starting to have some positive numbers now on the top line. I'm talking about revenues now, and as Björn mentioned here, this fantastic order intake will transform into revenues stronger and stronger during the year. Even though capital efficiency, as you have seen, is improving all the time, growth eats up a bit of working capital. I think we can safely say that it's not going to be 100% up in Q2, Q3, and Q4. Be a bit careful in your Excel sheets. Okay. With that, I hand back to you, Björn.
Good. Thank you. Just as an end, our direction towards a decentralized structure continues. I think we start seeing all our product areas with full management teams in place, and we see improvements in all different corners. As you know, we decided to divest three of our businesses, two of them, because we call them non-core, that is the Process System as well as the Hyperion. We started the process during this quarter for Process System, and that is moving well. It's a great interest for the business, and we're expecting to get well-paid for that business. When it comes to Mining Systems, I'm sure many of you are curious, where are we in the divestment there? We've had a good quarter in the works here, meaning that we decided instead of selling the whole business as one lump, we divide it into two businesses.
One of the businesses, which is the component business, is this conveyor component business, which we are selling separately. We are close to signing there. We have a buyer and the development, it moves the right direction. For the project business, which is the big part of the business, we also here have a buyer, and we are close to signing a letter of intent there. We expect now to have it closed during the second quarter. I feel very comfortable about the development here, and that we should be able to close the deal within the quarter off. By that, I think I end the presentation, and we move over to question and answers.
Yes, indeed. We'll start here in the presentation hall, please. Do we have a question at the front?
Yes. Thank you, Peder
Flinn, Handelsbanken. A couple of questions regarding the leverage, if I may. Firstly, if you look at the order intake in the mining business, and you mentioned that not only aftermarket is strong, but also the underground and the replacement of equipment. Could we discuss the future leverage in the mining business? Extremely strong right now, obviously, with little invoicing increase and very strong savings increase. What to expect there in the long term? Moving over to the SMS business, the SEK 50 million sales provision. Could you explain that? Is that something that we should look at non-recurring, or it's actually provisions for salespeople doing better than expected? Thank you.
If you start with the SMS business and the SEK 50 million, as you noticed, is that the development of the group is going a little bit better than we anticipated from the beginning. In those SEK 50 million, it's actually built up for the short-term and long-term incentive programs. That's lifting it to a certain level. That's where it came in.
Back to the leverage-
That is actually non-recurring. It moves up. It's in a special extra during this quarter. You should not expect that every quarter. When you look at the leverage, you could actually put that back and you end up then at 47%, which I think is a reasonable level.
You start the year with an assumption, but then, if things develop much, much stronger, you immediately have to change your provisions about those. Yeah.
On the leverage on the mining, I think we try not to speculate much within this part. Of course, in the improvement, and I mentioned that we did a lot of cleaning during last year, and some of that has been taken out. We are now moving in more to levels that we should be seeing going forward. It's correct that the volumes are up, but they are not extremely up. How the leverage will develop, I think we'll wait and see to the next quarter. I think we're starting coming up to see levels where I would like to see the business. If we can keep it on this part or improve it somewhat, that would be great.
Another way of asking that question might be on pricing on the mining, different revenue streams of mining. Are you pleased when demand is returning on the equipment side? You manage to also look at decent prices? The competition ought to be rather tough out there with a lot of capacity.
It is correct. We're seeing a positive pricing now in the mining part. What we saw before, which was negative, there has now changed into positive. Of course, when your production facilities are full, it doesn't really make sense to sell equipment with a lot of discounts. That definitely helps the pricing situation for mining.
Thank you. I'll get back in line.
Thank you, Peder. Do we have any additional questions here in Stockholm? Yes, please, Anders.
Okay, Anders Nilsson, SEB Bank. How does the demand picture look like in the SMS business given this issue with working days and the underlying 4%, 5%? What's the trend in the quarter?
We normally give you a little bit of an indication here, and I would say there's no big changes. I think we continue. Normally we look at the invoicing per day, and that continues to be on a similar level as we've seen under the first quarter.
Are there any differences in the different geographies?
I don't have that information yet. I can only see what's actually going out from our distribution center. We'll see that pretty soon when we have the Q1 ready. We'll come back to that during next quarter.
Okay, the final question about the Materials Technology business. What do you see there from the order side?
I was, of course, happy that we received this big oil and gas order from Leviathan, it's actually the gas order. If we're looking at what has happened during the last year, mainly big orders is actually coming from the gas side. That's also where we see the most positive looking forward. There is a big demand for gas in the market. That's, of course, what's driving these kinds of investments. It was pretty flat in orders. That's pretty clear. We are quite optimistic in the coming months when it comes to order side on the SMT. It looks pretty okay. I can't say more. It's like everything, an order is never an order before it's signed, you have it on your table. It looks pretty okay.
Okay.
Thank you. With that, we'll move into the conference call, please, operator. Do we have the first question? Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. Our first question comes from Klas Bergelind from Citi. Please go ahead, your line is now open.
Yes. Hi, Björn and Tomas. It's Klas from Citi. A couple of questions, please. Firstly, on SMS, Europe is flattish ex working days. It's good to see the better momentum in North America, given the strong momentum in PMIs in Europe ongoing since September of last year, flattish growth underlying is a bit disappointing. Could we drill down a bit more by end markets in Europe if there's something at all that stands out on the positive side, did you see any improvement in Europe in the beginning of the second quarter? I'll start there.
I think from the beginning, if you look at SMS, I think we have positive development in all three regions. It's correct when you're saying that the working days is mainly affecting the European market, which continues to be somewhat positive. I don't think I have any direct information about the different segments. The only thing we can see is that the automotive industry continued to be flat. We are seeing an improvement, of course, in the general engineering side. Of course, also aerospace. Also, aerospace is positive on that side. I think we are pretty optimistic about the European market. Of course, North America and China is sticking out more than Europe at the moment. That's where we've seen the best growth during this quarter.
It feels that it's pretty healthy in the industry and that the whole market seems more solid than we've seen before.
Can I just follow up on energy? It seems like energy and SMS took a leg down in Europe. Was this just a tough comp on larger orders, or was that an underlying improvement?
I would say that's the underlying, yeah. Of course, it depends on how you measure these, but I think it's the underlying, yeah.
Sorry to labor the point, Björn, would you say that the general engineering side is looking healthy and that accelerated ex working days? Do you feel more optimistic about general engineering?
Yeah, probably.
Okay. My second question is a follow-up to Peder's question on SMRT and on the lead times and potential bottlenecks in the supply chain. We've seen very strong growth here, and we've seen momentum since the third quarter of last year. Do you now see increased bottlenecks? What is the implied lead time for when you get an order on a drill rig to when you can deliver it? Is that the key reason for pricing moving higher, or is it just because of higher input?
Sure. This is an assembly business mainly, so it's of course getting the whole supply chain up and moving.
Yeah.
You're seeing the acceleration in orders during the last quarter and this quarter. Of course, it takes a little bit of time to get everybody up and running. If we look at this quarter, for instance, we had on the invoicing pretty weak during the first two months. Then we had an extremely strong March.
Okay.
We start seeing things move in the right direction there. It is normally We say six months. If you place an order today, it varies, of course, what kind of equipment that you are ordering, but it would probably difficult to get any big deliveries before the end of the year. It has been pretty full. I mentioned, if you look at the orders, it's at 30% up. That's on the whole business. If you're looking at the underground business and also the surface business, it's significantly higher.
Yeah.
We're talking really high numbers there. Of course they are under pressure. That's true. At the same time, they are assembling equipment in the factories. They're working together with sub-suppliers and using the facilities we have at the moment. I think they're doing a good job. It takes a little bit of time to get up, and the pricing is definitely related to this. I think selling a drill rig today with a discount is more throwing money away. I think this is a good opportunity to keep the pricing on a good level.
My final one is on mining in terms of quotations. Key commodities such as iron ore and copper rolled over towards the end of the first quarter. Has this slowed down quotation levels at all, or are we still looking at the same solid activity when you look at your pipeline?
Copper is very important for us and we start seeing movement there. It hasn't really taken off yet. Iron ore is significantly less for us. It's related, some of that, of course, in Northern Sweden, we have some, and then in South America, in Brazil, that's where you see the big iron ore part of the business. That hasn't really taken off.
Thank you.
Thank you very much. Operator, we'll have the next question, please. In cautious of the time here, and no offense to you, Klas, but can we please limit the questions to two per person, please?
Thank you. The next question comes from Ben Maslen from Morgan Stanley. Please go ahead. Your line is now open.
Yeah, thank you. Good afternoon, Björn, Tomas, and Ann-Sofie. A couple on mining for me, please. Björn, you said that drilling and the underground segments are the ones that are really driving the recovery. Can you talk a little bit about what you see in the crushing and screening segment at the moment? Are you seeing any pickup in that business? Thanks.
Sure. There is also good improvement in the crushing side. Of course, it's not on the huge numbers as you're seeing in the underground. Definitely crushing is picking up quite well also.
Thanks. Just on the split between equipment and aftermarket within mining, can you give us a split for orders and revenues, maybe, as just to how much of the business is aftermarket now? Just clarify what the growth rate was. I think you said it was double digit, but in the release it says single digit.
I think when we were a little bit lower, it was about 65%. We're probably around 60% at the moment.
Okay, great. Thank you. The growth rate?
Mining on the aftermarket is 11%, if that's what you referred to.
Okay, thanks. I'll circle back on that. Thank you. Just finally, Björn, you mentioned Varel, and it sounds like it's not contributing much to profit or it's still in loss. Just what are you seeing in terms of demand there? U.S. rig count is looking better, and when can it get back to profitability?
Sure. The Varel business is very much related. It's in the Middle East, but also in North America. Where we're seeing a good pickup is, of course, on the North American market, which is very much related to the number of drill rigs. I think the numbers we saw lately was just over 800. It's growing. The last five months, Varel has contributed with a positive EBIT. It's still on around 5% level, and the PPA is actually affecting negatively 10%. If you add the PPA on there, it's actually negative still. It's not contributing that well. I think the underlying business is improving, and as I said, five months with positive EBIT margin, I think it's a good improvement from last year.
Got it. Thank you.
Maybe Tomas will add a little bit there.
Yeah. What that means is that it's been cash accretive for five months if you take out the PPA part of things. Taking that out, it's mid-single digits in terms of EBIT margins. Q1 showed a steady growth in order intake for Varel as well.
It should improve further as we go through the year.
It follows pretty much the drill rigs in U.S., to be honest.
Okay, got it. Thank you.
Thank you. We'll have the next question please, operator.
The next question comes from Alexander Virgo from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thanks very much. Good morning, good afternoon, everybody. Just a quick one on SMT, please. I think the Leviathan order ends up being about 11% of the growth. You talk about the alloy surcharge also adding about 5 to 600 basis points. I'm just wondering if we look at everything on an underlying basis, is it right to assume the business is down order-wise 10% or so? Then second one, just to follow up on the impact on EBIT of working days as we look forward into next quarter, presumably we can expect that to drop through at a similar sort of operational leverage you've seen in Q1. Thank you.
Starting up with the SMT there, we actually had a big order last year also, which was actually bigger than the Leviathan. It has actually a negative effect on that part. Underlying, it's actually a little bit more positive. Did you take that one?
Yeah. The other one, sorry, can you repeat the question, please? Working days in Q2?
Yeah. Just as you obviously, you had a much stronger impact from working days in Q1 than I think most people were expecting. Presumably that all reverses in the second quarter, I'm just checking that should drop through with the usual amount of operational leverage.
Yeah. I mean, it all goes back in Q2.
Okay. Thank you.
Thank you. We continue with the next question, please, operator.
The next question comes from Markus Almerud from Kepler Cheuvreux. Please go ahead, your line is now open.
Hi, Markus Almerud here. I'd like to start with just to look again at SMS throughout the quarter, to follow up on Anders' question. If you could talk a little bit about a daily sales rate. Did it grow stronger into March, coming out of January, February? That's my first question, please, especially if you could talk about North America.
Sure. It's correct that we saw stronger in the end of the quarter, the level continues to be on the same level. Yes.
Okay, thank you. If I can ask just on SMT and the umbilicals projects. You talk about you're optimistic here about the projects going into coming quarters. Is it still the same type of political orders? Can you talk a little bit about the discussions in just a regular oil project? Are there any discussions at all, have they progressed any, is there more optimism now as oil prices have come up, or is it pretty much the same?
No, it's great. I think there is more. What we see, of course, is the gas side of the market, which is driving most of the projects at the moment. I think that continues. It's difficult for me to comment if it's a political order or not, because it's actually both kinds that are expected. Yes, it is mostly gas. Correct. These projects, as you probably understand, you have a pretty good visibility when they are going to come and to be placed. As I said, we are very optimistic that it will be placed during the quarter. An order is never signed before it's signed.
Okay. Thank you.
Thank you. Do we have any questions here in Stockholm? Yes, we do. Please, Daniel.
Yes. Hello, Daniel Schmidt from SEB. Björn, you've clearly mentioned that you are in the process of divesting 3 of your businesses, and one might be coming before the summer. Could you give us any timing on Process Systems, Hyperion, and also the fact that you've stated at least last year that you need to invest those proceeds into some sort of software platform for the Machining Solutions business?
I don't know if I understand. First, I can just mention out of those, there are three businesses we are selling. The Mining Systems, I expect that to be closed during second quarter. On Process Systems, that is taking place. We have a big interest in this. We are in the due diligence. A number of players are now in the last phase, and we have a due diligence process that will continue to end of May, where the final bids are coming in. We expect to have a closing on this one before the end of the quarter. Hyperion is still in a startup phase, so we are preparing. It's a little bit more complicated spinoff than we have on the other businesses. That process will start in August. It's moving the right way, and it's a good business. We're looking at both of these businesses.
They are developing well, so that's going to support the process.
What about sort of the need to buy a software platform for SMS? I got the feeling that that was something that you're not going to build greenfield or organically. Has that changed?
Software platform for SMS. Oh, you mean for the growth?
Now I know what you're referring to. That's the growth strategy which was presented by SMS, where they look at different growth opportunities going forward. In that growth strategy, it is, of course, to strengthen the core business. It is also investing more in software. We have made a number of smaller investments within the software. We have created a common business for SMS, where they are developing the software part of the business. We also look for opportunities to grow the measurement part of the business, as well as the 3D printing or additive manufacturing, and also on the CAM side. These are the growth opportunities. We have Klas on board since 1st of April, now taking over the strategy from Jonas.
Of course, he's reviewing the plans that are in and making sure that they are in line with his and his team's viewpoint forward. I don't expect any big deviations from that, but at least a little bit update, Klas should land before we really get the momentum going forward. That's how I saw it. Klas is new, but he's internal. He's been in the company for many years. He's been running Coromant for the last five years, so it takes very short time to get him full speed up and running.
Thank you.
Thank you, Daniel. Then we move back to the conference call, please. Operator?
Yes. We have a question from Andrew Wilson from J.P. Morgan. Please go ahead. Your line is now open.
Hi. Good afternoon, everyone. Just a couple of quick questions, please. On SMS and obviously the very good improvement you've seen in the Q1, can you just talk a little bit about what you've seen in terms of pricing and whether you've seen a kind of step up, I guess, with the obviously improved backdrop?
Yeah. It's more positive. If you look at SMS, I think it was up 1.7% positive pricing, which I think is a direction. It should be noted that first quarter is normally the best quarter when it comes to the pricing side. Definitely, significant improvement from the zero we had in the last quarter.
On the mining aftermarket, just to clarify, I think on Ben's question, I think in the release it talks about being up a single-digit number year-on-year, and I think you've talked about being +11. I just wanted to clarify if that what the right number was.
It's correct, it's 11.
Okay.
It's correct, it's 11. It's a very good number for that business. I think from my perspective, one of the most positive numbers for SMRT.
Yeah. That, I guess, leads nicely into the question I wanted to ask about, which really was exactly how you're delivering growth to that degree. I mean, you talked very clearly about the market share gains. I guess just give us a bit of color in terms of exactly what you're winning share on.
Yeah. When we're talking market share within aftermarket, it's actually against yourself. We look at the whole fleet, and you know we have about 8,000 units that are operating out there. We know exactly where each of these units are operating, and we also know how much spare parts and service each of the units are consuming. When I say a market share improvement means that we are taking a little bit bigger market share of our own fleet. It's actually not against any competitors, it's our own job to serve a bigger part of our own fleet. That's how we measure that.
That's great. Thanks, Björn.
We'll have a question here from Stockholm, please, from the audience.
Thank you. Peder from Handelsbanken. You mentioned savings, Tomas. You also mentioned the sort of EBIT growth ambition that you sort of released on the CMD. If we look at the report and we add sort of the savings comment, it's around SEK 130 million or something like that.
SEK 135 million.
Yeah. How should we think about this going forward? The real question I want to ask is that, are you reaching a higher sort of ambition, or it runs faster than expected? Obviously, you talked about the improvement of EBIT in a flat volume scenario, and we need to sort of calculate the volume improvements out of the equation again. Are you reaching higher or is it just going faster, and hence what will happen to the savings and the efficiency gains, well, for this year?
Maybe I just can add on a little bit just to get a little bit understanding then. When volumes goes up and you start getting choked in your production facility, it becomes a little bit more difficult to drive these kind of efficiency improvement programs within the operations. Even though, as you know, we have a productivity improvement target for every unit within the group. That means three percentages points. How do we measure that? That's actually sales per employee. That's how we measure the improvements. That will continue. Of course, it will be easier when the volumes goes up. That's natural. While when you're in a down turn in volumes, you have to actually take out more people than you have and than you need. It will be difficult to get more efficiency.
Even though we have our supply chain optimization program, where we have closed 19 factories out of 23, and we expect to do the final of these during the rest of the year. There are still these activities are going. I also like to underline is that with the new structure, with the so-called operating entities with full accountability, I do expect that each of these units will improve their performance. That comes, one thing, of course, for your sales rep, but your S&A costs, your COGS, your pricing, you have to drive your businesses. I mean, this is an ongoing story, and this will never end, and this is built into the, what we say, this continuous improvement. Me and Tomas, we actually follow that down to product as well, 34 units every month.
We have the famous scorecards that Tomas and his teams have developed, which actually gives us full accessibility of all the performance in every business unit. I can assure you, we put a lot of pressure on that.
Yeah, we're a real pain for the organization. There is no getting away. As you mentioned, Peder, we have the 7% EBIT CAGR growth for the three years. That's right. We did 3% in last year. It means that we should do 9% average CAGR now and next year. We did 18 now in this quarter. There's still seven quarters to go, of course. I mean, if you just look at the numbers- I'm looking at Ansi now, but if you look at the numbers, from 2015 to 2018 here, it's SEK 2.3 billion that we need in profit improvement to do the 7% CAGR.
SEK 1.2, SEK 1.3 comes from the announced savings programs. There's another SEK 1 billion from efficiency, productivity, et cetera. We're tracking, but there's still seven quarters to go, and the comps are not getting easier, as Björn mentioned.
Okay. Operator, please, we'll have another question from the conference call.
The next question comes from Andreas Koski from Deutsche Bank. Please go ahead. Your line is now open.
Thank you very much. A couple of questions on mining and rock technology. Firstly, on the demand situation. In Q1 to Q3 last year, you had an order intake of around SEK 7.5 billion per quarter. Now in the first quarter, you exceeded SEK 10 billion in orders. Do you think this is the new normal level, or have you seen a lot of larger orders, although they were not recognized as large orders in your report because they were lower than SEK 200 million each?
I think being in the mining business for so many years as I have been, I learned to understand that there are no new normals now. It's like it's always been. It goes up and it goes down.
If you look in the short term, if you look at your tender activity, you see no reason that it should slow down in the next couple of quarters, at least?
I think there is a big demand for improving the fleets in the different mines around the world. As you know, we are two suppliers in this part. We are in a very pleasant working environment for us. We will get the questions as well as our competitor in this part, that's going to be driving. I do believe that as long as we see the metal prices on this level, this is a level where the mines are making money. When they make money, they need to invest in our equipment because we call it capital equipment. From my perspective, it's not capital equipment. It's actually wear equipment. It's what I said before. They have a lifetime of seven to 10 years, but after five years, they start becoming expensive to maintain and to get the efficiency out of the equipment.
Of course, with the fleet that we have in the market and so many years without big investments, I think there's a huge demand for equipment going forward. If the mines are prepared to take it now or later, I think that we will see. We are in a sweet spot when it comes to equipment for the mining industry.
Okay, thanks. Secondly, I have to ask about the operating leverage as well, because it was 70% in the quarter. You had a book-to-bill of 1.22, which corresponds to a difference of around SEK 1.9 billion between orders and sales. If we would apply a 30% drop-through on that kind of gap, when you bridge it, you would reach a margin of 17%. If we would apply 70% drop-through as you had in the quarter, you would more than double your EBIT in SMRT. How much of the cost in SMRT are fixed, and how much are variable? How should we think about the drop-through now when revenues are going to ramp up?
When you say these numbers, I look at Lars in the corner, and he looks very nervous when you say those numbers. It's correct that you should not expect a 71% drop-through. That's pretty clear. What level we will get, we'll wait and see. Let's see what's going to happen in the next quarter. It depends a little bit on how efficient they manage to get it through their production facilities and so on. Keeping, of course, the S&A costs on a low level, because that's the key. We have to make sure that we don't believe that these are new normal levels and lift our costs in relation to that. I think we should expect that this is temporary, and it will be lower later on. We need to keep the costs and the efficiency in our operations at that.
I'm looking at Lars, he's nodding, he agrees with me.
Do you have some kind of indication to give on how much is fixed and how much is variable?
No. Sorry, I can't give you that part.
Okay. May I also ask on your new product area in Sandvik Machining Solutions, additive manufacturing, and how that is developing? Have you now hired a new management team, and what are they focusing on?
Yeah. First, of course, you know then when Jonas left, we lost a couple of months in the development there. As soon as Klas came on board, we went full speed ahead, and we have actually the management team in place now. We will come out with a press release any day with a name and other parts. Klas comes to work to drive this business forward. You should still know that it's only a fractional part of the group's business.
Definitely.
It has so far no influence on the performance of the group. It is exciting, and we're really looking forward. I personally take this very eager to see that we start seeing some development within this business. I will be all over that.
Okay. Thank you very much.
Thank you, Andreas. Do we have another question from the conference call, operator?
Yes. The next question is from James Moore from Redburn. Please go ahead. Your line is now open.
Yeah. Hi, everyone. Björn, Tomas, Ansi. Thanks for taking my questions. I have two, one on SMS. One on the strategy. On SMS, I wondered if you could help us understand the 31% China organic sales growth. I'm really trying to think about its sustainability, and I wondered if you could help us with two things there. Is there a big difference between automotive growth and general engineering growth? Do you have a sense of how much of the 31 is inventory build, and whether that restocking is about to end or has more to go? My second question is on savings, and you talk about the continuous improvements from underperformers, decentralization. I think you put a SEK 1 billion hard number on that in your original budget. Where do you think that number is today?
I have a sense that it's moving upwards. If we index the original to 100, are we at 110? Are we at 150? How is that internal story developing?
Okay. Tomas, would you take that last question, please?
Yeah. I don't think we have guided specifically a SEK 1 billion on that. I think coming back to what I said here 10 minutes ago, we have SEK 1.3 billion or something like that in the announced savings programs with supply chain optimization one, two, and three, and all that. The gap up to the SEK 2.3 billion that we want to achieve in the EBIT improvement plan for the three years is SEK 1 billion, and that includes everything including decentralization, efficiency, productivity, et cetera. It's not a specific program as such. It's just a number that we are going to achieve.
That's what we're going to push for.
Yeah.
If we're looking at the SMS performance in China, as you saw, that was at 21%. It's good. I think we are seeing good development in the automotive industry. That continues to be. We also see aerospace and also general engineering.
Did you have a sense for how much of the demand is restocking?
We don't see that as restocking at all.
Just circling back to that SEK 1 billion gap, Tomas, if I could. I guess you're tracking this very carefully, your 30-odd business units all the time. Would you be able to, without putting a number on it, say in qualitative terms whether that's developing favorably?
We're doing okay, we don't have any guidance on it.
Okay, thanks.
James, if I could just clarify there, the 31% growth in China just mentioned is actually for the group, not for SMS specifically. For SMS specifically, growth in China was 21%, just so we're clear on that.
Sales?
Orders.
Thanks.
With that, we're actually running out of time. There may be a couple of questions still at the conference call. If you do have any more questions, you know where to find us, either myself, Ann-Sofie Nordh, Head of Investor Relations, or my colleague Anna Vilogorac in the investor relations department. I would just like to finish off with reminding you of us having our Capital Markets Day on the 21st of November in Germany. Please go onto the website and register your interest to attend. Thank you very much.
Thank you so much.