Good morning, everybody. I'd like to welcome you to the presentation of Sandvik's fourth quarter results 2016. As per normal, we're going to run through the presentation, after which we open up for a Q&A session. Without further ado, I hand over to Björn and Tomas, please.
Thank you, Ann-Sofie. See if we're getting my voice up a little bit. Welcome to this last quarter result presentation. Starting up with the year, ended in a good way, I think more or less in all areas. First, I think the market stabilized, and we saw actually orders improving in all our three business areas organically. What's sticking out a little bit special is the Mining, which is actually up 19%, and we haven't actually seen this big number in a very long time. Some of you who know me, I'm normally very impressed with companies that can deliver 15% EBIT margin. This quarter, we are just sniffing on that number a little bit, even though in the full year we are not there, but we are heading in this direction. In the quarter, we delivered 15% reported EBIT margin.
There is, of course, also currency in this and also some metal price effects. The underlying, if you take those out, it's about 12.6%, which is an improvement from previous year. A very strong cash flow during the quarter, actually strengthening our balance sheet, also giving us gearing, which is well below the target that we have on 0.8. We are on a gearing at 0.73, which is on a good level. The result for the year was good. I think also the cash flow was in line with the previous year, which was a record year. Based on that, the board has decided to propose a dividend of SEK 2.75, which is an improvement of 10%. Looking at a negative point during the quarter that is related to Mining Systems, we were hoping to close that deal during the fourth quarter, which we didn't manage.
We are at the moment negotiating with other companies' interests, trying to find a solution for that business. It is, for us, a non-continuous business and will continue to be reported in that way. I mentioned that the market is stabilizing, and actually there is only one segment which is not flat or improving, and that is the automotive industry. The very strong market in China didn't compensate the weaker part in North America as well as in Europe. As I mentioned before also, the Mining part is actually sticking out very strong, and this is very much related to minerals like gold, silver, and zinc, which are moving very strongly. On the copper side, which is also an important mineral for Sandvik, we see not yet any movements within those areas, and that's mostly related to the South American market as well as in the Central African market.
If you're looking at otherwise the geographical areas, sticking out this quarter is actually Asia and China. Asia is up 27%, and if we're just looking at China, it's actually up 48%. That's very strong. If we look at SMS, which you know is more like an aftermarket business, that is actually up 29%. It's very high growth. North America, I'm sure many are looking at that number. We report 15% up. This is very much related to the SMRT business, the Sandvik Mining and Rock Technology business. If we're looking at the SMS business, it is much tougher. If you look North America, it is actually down 4%. If you're just looking pure U.S. for SMS, it's down 7%. It is quite significant. Europe is pretty much stable.
Australia, which is a big mining market here, is actually reporting -10%. That's related, if you maybe remember, we took that huge construction order last year. If you exclude that one, it's up 19% in Australia, which should be a number which is in a strong mining market. Orders up 8% for the group. I think we've been waiting for this for some time. It's been a number of tough years for Sandvik declining volumes. Finally, we're seeing good numbers. I mentioned this is actually in all three business areas. If you look at this 12-month rolling curve, it has actually started turning up. I think that might be a little bit of indication of moving forward. On the revenue sides, of course, that is trailing the orders. We are on a flat 0% year-over-year.
On the EBIT level, I mentioned that very strong EBIT up there, 42% for the quarter. There is a certain amount of currency, of course, also including metal prices where there is. If you exclude the currency, I think we end up at 27% improvement. If you then also exclude the metal price, it is up 14% compared to previous year. Starting up with a Machining Solutions, I think a good quarter. What's important, I think, in this report here is that we start seeing growth both on the orders intake as well as on the revenues. I'm talking organically. That is very positive. A really good job done on the net working capital. We see a net working capital reported as 23.3%, but that also includes the blanks and powder technology.
If you remember, we have a new product area, which is part of that group. If you exclude the blanks and powder technology there, it's actually 22%. I think it's on a really good low level. Result ended up at 21.6% on the EBIT. Mining and Rock Technology. The important thing is here, the orders received 90% up. This is mainly equipment sales and a lot of replacements. There is also a big order for Crushing and Screening in SEK 200 million, which is part of those numbers. Important is also that the aftermarket continues to improve. We are seeing also an improvement there. I am very happy also to see that we start seeing some movement in the net working capital, actually on the mining side.
It has been on a pretty high level, I think that our ambition should be that we start getting the net working capital down. Today being close to 25%, I think we haven't seen those numbers before or very long time ago, if you go back in time. That is good. That has, of course, also helped to get a very strong cash flow, as well as from the SMS. These two businesses are really delivering two strong results. On the Materials Technology, you see here that it says -4%, and previously I said that we were actually positive there. Last year we had an umbilical order which was booked during the last quarter. If you exclude that, we actually come up to 3%.
If you take out the currency as well as the metal pricing effects, we end up at +1% on that side. I think it's a good number, provided the tough market condition it is also in the oil and gas industry. On that EBIT level, underlying EBIT on 8.8%. If you actually take out the metal prices there, I think we are on 8.1%. Correct. Okay. Look a little bit on the dividend. I mentioned that strong results as well as good cash flow is the basis for our board's decision actually to lift the dividend to SEK 2.75, which is actually up 10%. This is pretty much in line with our strategy. If you're looking our underlying performance, it's actually 50% of the net profit. I think, Tomas, I hand it over to you. Talk a little bit about the numbers.
Thank you, Björn. Good morning. I have to excuse my voice today. I'll try to keep it up for the next hour. Otherwise, you have to do all the balance sheet questions, Björn. Okay. Anyway, let's start and jump straight into the financial summary. As you heard, the top line organically was +8%. The revenues are flat or -0.3%. If you add the positive currency on the top line, we had 5% more on order intake and 4% on the revenues. The totals would be then 13% for orders and 4% for revenues. Earnings increased, as you heard, with 42% from SEK 2.3 billion to SEK 3.3 billion. There's really three levers here. The organic part, the currency, and the metal prices. We'll go through that in the bridge just in a moment. The cash flow. Also, I'll do the working capital first.
The working capital ended at 24.7% in the quarter. Nice improvement compared to a year ago. The cash flow, SEK 4.1 billion operationally. A very nice cash conversion compared to the EBITDA of SEK 3.3 billion, up 24%. The return in the quarter was 17%. Also earnings per share increased in a nice way. Okay, let's jump into the bridge then. It has three parts as usual, the organic part, the currency, and what we call structure and one-offs. Let's start from the back. Let's start with structure and one-offs, this is just metal alloy surcharges and metal price effects on the earnings line, SEK 54 on the top line and SEK 227 as in a bridge effect on the EBIT line. The metal prices were +SEK 109 in the quarter, -SEK 118 a year ago. The bridge effect becomes SEK 227.
Currencies, SEK 99, as you heard, on the top line and SEK 416 on the EBIT line. This is a bit more than the guidance we had on SEK 200 million, but that guidance was done in November or late October, before certain happenings in the U.S. After the strengthening of the U.S. dollar, the currency effects increased, and the majority of the currency effects are in U.S. dollars and in AUD for our exports to Australia and to the U.S., and mainly on the mining side. That leaves us then with the organic part, a slight decline in revenues, SEK 106 million on the top line and SEK 319 positive drop-through. Yeah, really nice development. You can see the journey then from 11.1% to 15%, 1.6% organically, 1.3% from currency and 1% from metal prices.
Even if you take out currency and metal prices, we have a very strong drop-through in the running business. Let's take the next page. Move over to the balance sheet, working capital on the left-hand side at a very nice level, below 25% in the quarter, contributing to the cash flow in a very good way. On the right-hand side, you see the four business areas, including Other Operations, and you see all of them developing very well. We're especially happy with Mining and Rock Technology, who are on the lowest level, I don't know, ever, or at least 10, 15 years or something like that.
Decades. I'm sorry.
Yeah, a long time ago. It's very strong. The cash flow then, of course, developed also very well with a positive cash conversion. On the right-hand side, you can see the drivers and the main driver is increased profits. Working capital continued to deliver, not as much as a year ago, but still very strong. Close to SEK 1 billion. The CapEx was a little bit lower than a year ago, SEK 4.1 billion in operating cash flow. The sum of all this is, of course, the net debt development. This is quite interesting. We are now on SEK 28 billion in net debt. We're on a gearing of 0.73, as Björn mentioned, 73%. We think we have the target of 80% within reach. That's for the end of 2018. We should be able to do that.
If you look at the trend, the historical numbers, you can see that in mid-2014, we did the Varel acquisition, the net debt jumped up from SEK 28 billion up to SEK 40 billion. Now we have moved ourselves back to where we were pre the Varel acquisition, there's no structural changes in this journey here. There's no sell-offs, no nothing, no financial programs. It's just purely operational. SEK 12 billion over three years. As this is a full year, we also would like to say a few words on the full year numbers. In summary, if you look at the top line, minus 1% on order intake, minus 4% on revenues.
We saw during the year that the order intake picked up very strongly at the end of the year, you can see here that the book to bill for the full year is actually positive compared to a year ago, then it was the other way around. Earnings improved from 12.3% to 13.5% EBIT margin. The net working capital for the full year was 27%. Cash flow continued to be strong, around the same level as a year ago. The earnings per share, SEK 5.48 on an adjusted basis. The SEK 4.39 you see at the bottom, that includes discontinued operations as well. If you take the dividend proposal here, SEK 2.75, it means on the reported bottom line EPS, the payout ratio is 63%. If you take out discontinued operations, just look at continued operations, the payout ratio is exactly 50% or 50.1%, which is according to our policy.
Let's also take a look at the targets that we communicated in May 2016 on the Capital Markets Day. Starting from the left, we have an earnings growth target of 7% on average for the period. We did 3.1% in 2016. Even though it might sound strange to you, maybe this is according to plan, it's even a little bit better than planned. We have a plan to do 9% for 2017 and for 2018. We are confident that we'll reach this target 7% average for the period. The next one is the return, 3 percentage units in increased returns from 14% to 17%. We did 1% in 2016. The gearing is the third target, 0.8. As you saw, we're on 0.73 now. If we don't do something stupid here, we should be able to reach 0.8 at the end of 2018.
The payout ratio, 50%, as I mentioned, this is exactly what we do if you take away discontinued operations. Finally, a few words on the guidance. I've already mentioned the currency. We said SEK 200, it's ended up with SEK 416, mainly driven by the U.S. dollar and the Australian dollar, and mainly in the mining business. Metal price effects, SEK 109, a bit more than the guidance of SEK 15. For the first quarter 2017, with the currency rates we had a couple of days ago, it looks like SEK 400. It continues in Q1 and Q2. Of course, at the end of the year, it sort of fades out and becomes nothing, purely mathematically. SEK 400 for the first quarter. Metal price effects, we assume to be zero in the quarter.
For the full year guidance on some of the key measures here, CapEx, we did SEK 3.7 billion in 2016. We do have some investments in 2017 we need to do. SEK 3.9 billion is the guidance that we give, although long term, this volume or the investment level is going down. We have some of our businesses which are a little bit up and down, depending on what's happening, especially in SMT and in SMS. SEK 3.9 billion for the full year. The net financial items, which ended on SEK 1.7 billion or just below SEK 1.7 billion, we guide SEK 1.4 billion-SEK 1.5 billion, the interest net continues to go down, and the tax rate will stay at the same level as we have today, between 26% and 28%. We came out with 27% for 2016, around about the same numbers for 2017. That's it, and I'll hand over to you, Björn.
Thank you, Tomas. Besides that, I'm very happy of the development that we have seen during the fourth quarter. I would also like to reflect a little bit over the year that has passed. I have now been with Sandvik a little bit more than one year, and I'm feeling that I'm getting a pretty good grip of the company and the direction that we are heading. I would say that I think Sandvik is a great company. As more I work and spend time out in our operating entities, as you know, my viewpoint of Sandvik is that we have many operating businesses that are world-leading in what they are doing and doing a great job. During the year, we have done a lot of changes in the structure.
We have moved the decision making further out in the operations, actually to get closer to our customers, but also to create a little bit of this entrepreneurial spirit. I think our businesses have done an excellent job and in really taking one step forward in their work, both to improve their operations as well as keeping their costs under control during this period. Also, the new structure that we have is actually creating really good when it comes to this entrepreneurial drive, and we see a lot of power from the management teams out in the different operation. I think that's good. Also, as you know, that we are moving resources out from centrally into the operationals. It's been a lot of tough situation for many of the central resources.
They have done a great job delivering good result, good performance, at the same time as keeping the costs very much under control, which is necessary, of course, in a tough market conditions that we are operating in. Based on what we see here today and the expectations from the market, I feel very comfortable about these targets that we have set up, and we presented during the Capital Markets Day. We are delivering according to them, and we are all convinced that these are the levels that we need to do, and that we are going to deliver. I think I stop there, and we can move over to some questions and answers.
Yes. We move over to question and answers. We will be taking questions here from the hall, and also from the conference call and the web. Starting here in Stockholm, we have one question, please.
Yes, good morning. Thank you. Peder Frölén, Handelsbanken Capital Markets. I do want to hear more about the additive manufacturing part of the Machining Solutions business. Maybe you could explain if you have paying clients today, of course, on your know-how, but also how we should think on in the future, is it powder know-how that we want to see? Could it be M&A? Please elaborate a bit about the additive market and the manufacturing business.
Sure. This is, of course, a really exciting part of the growth opportunity, one of these, what we call a strategic growth area for Sandvik. As you probably know, that what we have in the group, we have the powder business. We have a company called Osprey, which is actually world leader when it comes to this fine powder that is being used in the 3D manufacturing. We have, during a three, four-year period, worked in a developing center up in Sandviken, where we actually have learned how the 3D printing methods is working. That, in connection with our 100,000 customers globally, that is the basis for what we are building up. At the moment, we are recruiting a management team for it, for them to set up actually a strategic agenda, how to go to the market.
We are today supporting many customers today with these solutions, mainly on a non-cost basis. That is correct. Even though we sell the powder, which is a good business, and it's a fast-growing business, and it's also a high-profit business for us at the moment. Our ambition is also, of course, to be able to charge customers, and support them, of course, learn the method, but also to design and develop components for just 3D printing. We are still in an early phase, and we still don't have the management team in place. That is being done at the moment. The business will be under SMS.
Thank you.
Thank you. Can we take a question from the conference call, please, operator?
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on the telephone keypad. We have a question from the line of Marcus Almert of Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, Marcus Almert here from Kepler Cheuvreux. Can I start on North America? Maybe you said engineering here is still weak and you see strength in mining. What did you see on the industrial side sequentially and throughout the quarter, and what are signals on the ground? Is it more on the year-on-year effect or also sequentially you see weakening or do you see any improvement at all? That's my first question. Then I'd like to ask on China, you see very strong growth in China. Is it sustainable? What sticks out in a specific end market? In interviews, you've used the word brutal. If you could elaborate on that, please. Thank you.
First, U.S., of course. I mentioned that we still see that market as being weak, especially for the SMS. It is correct that engineering, if you look year-over-year, that it is down. If you look at actually sequentially, it is actually flat at the moment. It is difficult to say what we are going to be expecting for North America going forward. It has been challenging for quite some time, and we still need to see some upswing there. We know, of course, the automotive industry is selling more cars than ever, even though the production rate was a little bit down during the quarter. So it is difficult to say how that is going to develop further.
Can I just follow up before you continue? What does the market shares look like? Is it stable, or do you lose some share, or do you gain share? Are you moving in line with market?
We believe that we are stable in our market share for the North American market.
Okay. Thank you.
When it comes to China, yes, it's a very big up boom during the quarter. It's difficult to say if this is sustainable or not. I personally believe that the government in China is actually turning on the valves a little bit to get a little bit of momentum in the industry because they had the target to reach 6.7% in GDP development, I think they were trailing a little bit down. There is the push from the government side. Also the automotive industry is very strong, we saw this year 27 million cars are being made. That is, of course, an important segment for us. If it's going to continue, it's a little bit difficult to say, but I think starting up the year, as we normally say, it's pretty much in line what we saw during the previous quarter.
What about heavy industry, also is it continuously weak? I would guess steel mills and that kind of business is still weak, I would assume.
I don't think we see any big uptick there. What we have seen, of course, is in the Mining and Construction business. That's where we see a very strong development during the quarter. On the steel side, of course, we are in a very small niche with very specialized alloys market. It's difficult to say how that total is. Within the segments that we are in the SMS as well as in the Mining, at least, we see a strong development.
Thank you very much. I'll get back in line.
Thank you. We'll take another question from the conference call, please.
Thank you. Our next question comes from the line of Guillermo Peña of UBS. Please go ahead. Your line is open.
Thank you. Good morning. It's Guillermo Peña from UBS indeed. One question, actually, a follow-up from what you commented on China. I wonder whether that is actually driven to some extent by the pre-buy ahead of the tax credit decreases that we will see through 2017, and whether you are seeing that already. Just to refer to your previous sentence, you said you're seeing the same activity level. Is that meaning that from Q4 it's stable or that you continue to see the same growth levels in China? That is the first question, and I'll wait for the second one. Thank you.
First, I think in China, it's not only the automotive industry. I think it's in the most segments which is going. It's not just related to the automotive side. I think that's also when it comes to the general engineering market in China. It's not only that. I only said that it started up in the same pace as we saw the ending of the year. You have to draw your own conclusion if that is a lot up or not. It started good here before the new year. You all know that the Chinese New Year started last week. During that period it's quite quiet, and we'll see what's going to happen when people come back from vacation.
Thank you. The second question goes to Machining Solutions and Mining and Construction together, basically. Maybe calculations are incorrect, but if I take out the currency out of revenues, if I take out the currency out of the profits, I see a rather flattish margin development for both. Is that correct?
No, there's an improvement in the SMS business. In the mining side, it's correct. What we have seen there also is that we have taken a write-off also from some developing projects that comes from previous, which is also hitting that market with around SEK 40 million.
Thank you.
It's been a little bit of a cleaning time on that part. In the result, what you also see here is the Varel business, which is affecting a little bit more than 1% negatively for the mining business that added on.
Thank you. Maybe a follow-up on SMS. It's up a little bit, but with all the savings you've been targeting, if my numbers are correct, that is 4 basis points improvement or maybe a little bit more than that. I just wonder, is it really gaining from the savings, or what's the underlying trends when it comes to organic developments? Are we seeing a mix that is poorer when it comes to SMS?
No, I think the SMS is developing according to those plans we have. The supply chain optimization programs are moving on, and there is also somewhat decreased sales and administration costs for the business. I think it's pretty much in line with our expectations.
The SMS business has been living with negative top-line numbers for a couple of years now, and that's been tough. It's been very tough for us. Having these supply chain programs and the savings programs, that's what have saved the result for us.
That is fantastic. Thank you very much.
Thank you. Do we have another question from Stockholm? Yes, we do. Please.
Thank you. It's Tony Edwards, Societe Generale. In terms of Mining Systems, you mentioned you're talking to other interested parties now.
Yeah.
Can you confirm that CoBe Capital is out of the picture completely? If so, add any colors to the reasons for that, please.
Yes. CoBe Capital is out of the business at the moment. The reason for it is actually related to the guarantees. One of the programs that needed to be in place to be able to close the deal was to get the guarantees from the banks. The banks did not accept CoBe. They did not put in enough capital into that business to be strong enough and to give the banks the comfort feeling to accept them. We are today looking actually with the industrial buyers at the moment.
Thank you. Operator, can you please put through another question from the conference call, please?
Thank you. Our next question comes on the line of Ben Maslen of Morgan Stanley. Please go ahead. Your line is now open.
Thank you. Morning, Björn, Tomas, Ann-Sofie. Björn, you mentioned Varel. Can you just give a bit more color as to how that performed in the quarter? Is it still loss-making? The rig count's getting better. Do you see any signs of improvement going forward? That's the first question. Thanks.
Good question. I think Varel is moving in the right direction, we actually saw, if you exclude the PPA, taking that out of the result, it was actually a slight positive for the first time in a very long time. It is moving. There are more activities on North American market, we see the oil price on this level is creating more activities at the moment. We are optimistic that we should continue to see an improvement during the year.
Thanks.
Actually cash contributing as well.
Correct.
Yeah.
The PPA is now coming up.
Thank you. Then coming back to the additive manufacturing in SMS. How do you plan to expand this business? Can you do it organically, or do you need to do M&A here to build out a bigger footprint? It sounds from your comments like it's either very low margin or loss-making, that entity at the moment. Should we expect that to continue being a drag on SMS going forward? Thanks.
First, I think we are in a very early stage, we're still waiting to have a business plan up and running. Additive manufacturing is important already today for Sandvik. I mentioned, we have a company, Osprey, in Wales, which is actually market leader in the powder. Powder is one of the core competencies you actually need to be successful in. When it comes to selling services, we are not doing that yet. Actually, we are not charging our customers. We are working with customers, supporting them in developing different components. We should also know that this market for additive manufacturing is still on a very early stage. It's mostly used for prototyping, but also for tools for molding where you need very complicated cooling channels within the molds, which additive manufacturing is an excellent part.
The potential for the business is enormous, but we decided that we rather start it in a really early stage to be in the front. We look at growth. Yes, of course, I believe that organically will be one important. We will also look, of course, for opportunities to acquire companies within the businesses. At the moment, many of these companies are very expensive because the talk about 3D is very hype. We have to, of course, value organically against acquisitions, and I think the new management team will actually have to drive that business. The whole new setup will have to make these decisions. It is at an early stage, but we are optimistic, and we think it's a very exciting new area for Sandvik.
Thank you. Just a final one, if I can, on inventories. Just to clarify, across the different businesses, did you still reduce inventories this quarter? It sounds like it's less of a drag on profits than it was last year, but in absolute terms, did you take inventory down in SMS, SMT? Obviously from your graph, it's at a low level now relative to history. How big a step up in production do you need going forward if your businesses get back to growth over coming quarters? Thank you.
Inventories went down a lot during this last quarter, and that's one of the main reasons for the net working capital improvements that we saw during the quarter. That is developing very well. If we're looking at the capacity that we have, from my perspective is that in Sandvik, we have a lot of capacity. We have a lot of factories, and I mentioned that before. We have a lot of factories have been half empty during these parts. One of the reasons why we are in a lower margin in our businesses. I do believe that we have a lot of opportunities in existing facilities, and if you're looking at our mining business, for instance, that is booming at the moment, it is a final assembly business which actually buying components from sub-suppliers, and you do just the final assembly.
Of course, when you get such a high increase in volumes, your lead times expands a little bit. Still we have good capacity within the group.
Thank you very much. Thank you.
Thank you. Do we have another question in the room here? Yes, please. We do.
Peder Frölén On mining, you mentioned aftermarket growing. Maybe we could shed some more light on the sequential and year-on-year development for both consumables and service, please.
Yes. Consumables and service has improved during the year, part, and I think at the moment it was not booming. It's more flattish on the consumable part of that. While we saw on the spare parts business and the service that actually went up. There has been a little bit of pressure when it comes, which we mentioned before, on the pricing side, on the consumable side. Now as the volumes are going up, we do expect that we should see an improvement also on the pricing side.
Okay. If we look at the 3D part of the manufacturing chain, it's an interesting addition, but it's still only one part. The metal cutting part is also only one part. How should we think about this going slightly further? Are there more initiative that we could expect in the entire manufacturing chain, given your knowledge about this and still being very limited into this?
Sure. If we look at the SMS business, we know the challenges that business is having. Every insert that we put into the market is more efficient and has a longer lifetime. We know that there is overcapacity in the manufacturing industry, meaning that the demand for high productivity is a little bit less. There are adjacent technologies coming in, like 3D, you have also on the automotive side, the electric cars coming in. There are a lot of things giving that market challenges, both when it comes to volume and competition. What we are doing in the looking, and I think Jonas have talked about this, we talk about different areas, strategic growth areas. One of these areas is actually on the software side.
It's related to CAM manufacturing, computer-aided manufacturing, where you actually analyze this CAD model and gives all the cutting input to the machine side. That's one of the areas that we are looking. We are also looking at metrology area, which we are interested because that actually connects the cutting and makes it possible to automatize in the production chain. The third one is, as I mentioned, is the additive manufacturing part of the business. When we talk a little bit about the additive manufacturing, that doesn't mean that it takes away the cutting, because a part that has been 3D printed also need to be machined afterwards. There is still business within those kind of products. That is still a very limited part, of course, of the manufacturing part of the industry.
We think that it's going to grow, and we want to be part of that.
Can you confirm that it needs more insert to produce a hybrid than a combustion engine-driven car? Obviously, I guess quite a lot less when it comes to a fully electric vehicle.
I think it's correct. If we look at a normal engine block, it's a lot of cutting. If you go for a hybrid, it's actually more cutting. Of course, with the electric car, it's significantly less cutting.
Thank you.
Thank you. Operator, we move back to the conference call, please, for another question.
Thank you. Our next question comes from the line of William Ashman of JPMorgan. Please go ahead. Your line is open.
Hi there, it's actually Andy Wilson from JPMorgan. If I can just ask you a couple of questions. Just a quick clarification on SMS in terms of the North American. Can you just talk about how December volumes compared to October, and whether you've just seen a sort of a sequential improvement actually within the quarter?
I don't think we normally talk about monthly. We normally talk about the quarterly numbers. That is, the quarterly numbers is down -7%. That is a little bit giving the situation where we had. You also saw that that was the same in the previous quarter. Sequentially, it's actually not down, but year-over-year it is.
Okay. Thank you. If I can just ask on Other Operations, it just looked like a very strong result, I guess, compared to what we've seen over the last couple of years. If you could just sort of help us with how much of that improvement is sustainable and kind of what sort of level of margin we should be expecting going forward, and whether we can kind of extrapolate the Q4 into 2017 or if there's some one-offs we need to think about.
Normally, we do not guide the future, that's normal. We have, as you all know from the Capital Markets Day and the group targets that we have set up, and we are committed to deliver on those targets that you have there. That means that we need to see an improvement in our profitability going forward. That can be driven, of course, of higher volumes, but also efficiency improvement in the operations. We have said 7% improvement in the EBIT during the three-year period, and that's what we are committed to.
Don't forget that the 7% is currency neutral as such. There are no enormous positive one-offs in the earnings for the fourth quarter. It's operational. Small, steady improvements. Not so small maybe, but good, steady improvements.
Right. Just finally, just in the Other Operations business unit, clearly that was a very good Q4. Can you just explain some of the kind of drivers of why the margin was so strong compared to what we've seen sort of through earlier in 2016? Appreciating that that's a non-core business.
Can you say again?
In the non-core business?
Yeah.
Yeah. There was a good ending from both of our businesses, which are the non-core or non-operational parts, that is the Hyperion and SPS. Both of them ended the year good. Normally for SPS, they have a normally very strong fourth quarter. They had a very strong part of the business, but it is a good business, as I mentioned before. I think that's going to help us in a good way when we are divesting that business.
That's great. Thanks.
I think if you put that, the contribution from that businesses are around SEK 50 million, above the expectation.
Yeah. Okay. Thank you.
Thank you. We'll have another question, please. Operator?
Thank you. Our next question comes on the line of Alexander Virgo of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Thanks very much. Morning, everybody. A couple of quick ones, please. Just on the Mining Systems business. Given the situation with respect to the transaction and the fact that it looks like operations got weaker, is it fair to say that the situation with respect to the disposal process is affecting the performance, and does that therefore affect the discussions and the potential value of the business? Then second question, just coming back to that Other Operations margin improvement. I know you don't guide, but is it fair to say that the strength of that Q4 margin, you can't carry that through the full year in 2017? Thank you.
Let's talk a little bit about the Mining Systems businesses there. Yes, it was a weak result, and we had to take some provisions there for some bad projects. I think this business has been suffering for a long time, especially now when the mining market has been soft during this quite a long period. It has taken a lot of hits in the results. It is, of course, always unlucky when you have some of these projects that are not running according to plan. Our viewpoint is that the operations that are running today is as strong as it was before. Of course, we need to find a solution for this within the near future, just to not to discourage that organization in the performance that they are doing.
We are doing our best to keep that atmosphere up and making sure that there will be a good future for those people. There is always a risk when you are saying that you are divesting. So far, we do not feel that we have been stronger in the structure than we were before. On the margin part, I don't know if I want to comment that part. I don't want to guide anything forward. I once again go back to the targets that we have set up, that we need to improve also during next year, and we are aiming to do that.
Okay.
The question was on Other Operations, or what?
Yes. Maybe I can just add a little comment there, if I may.
Yeah, do that.
I think Q4 is normally a delivery quarter for Other Operations, and hence supporting the margin. I think it's fair to assume that this level may not be reached in each and single quarter throughout 2017. What it averages out at, we'll have to come back to. I think Q4 is a seasonally strong quarter, given that it's deliveries.
Yes. It's mainly deliveries from Process Systems in the fourth quarter that drives the margin.
Okay, cool. Thank you. Just a quick follow-up on the Central Eliminations number came in a good SEK 50 million or so better than it was expected to be as well. Is that one that we can be more happy with being sustained going forward, or was that also a little bit of a one-off?
Are you referring also to the Other Operations, or?
No, to the SEK 200 million or so Eliminations number in the EBIT. Yes, it's the group cost you're referring to, which was alone minus SEK 190.
Yeah. Okay.
Okay. Yeah. Well, when we guide, we guide on the underlying, let's say, group common cost. The guidance we have for that is around SEK 200-SEK 225. Let's say around SEK 850-ish or something like that for the full year. Now, in the group, in the other, let's say, business, not Other Operations, but the other business, the group common, we do have other internal profit eliminations. You have some revaluations, and you have kind of everything when you consolidate a group, and that can fly up and down SEK 50 million. This time it was a bit positive, but it can be negative as well.
Okay, brilliant. Thank you. Yes, very good. We will squeeze in another question, please, operator.
Thank you. Our next question comes from the line of Lars Bergström of Barclays. Please go ahead. Your line is open.
Hi, thanks. Hi, Björn, Tomas. I have a couple of quick follow-ups from my side, just on the organic drop-through in mining. Even when I add back the impairment charge and 100 basis point year-over-year headwind in Varel, if I understood you correctly, Björn, despite obviously the sequential improvement, I was still a bit underwhelmed by the underlying improvement, or rather not, in the Mining and Construction business. Can you talk a little bit about where you are in ramping up capacity in your factories and how you should think about a cost headwind from that as we go through 2017?
I agree with you that I think the drop-through was a little bit weak during the quarter. That is definitely so. From what I mentioned before, it is a little bit of a cleaning up also. We have been writing off some of these developing projects from a long time ago. When we have divisionalized the business, each of the management teams, suddenly we have eight management teams driving each of their PA. Of course, they are extremely careful in what is coming with them. There is, of course, a little bit of an up cleaning in the start of this. I think that is now over and that is done. I think moving forward, we should see improvements, of course, with the volumes, the ramping up. I think we have seen two quarters now with good orders or improving orders, and that, of course, should flow through.
In the factories, we are not needing any new factories or any new capacity. It's maybe related to a number of new deployed within the production side that will help that part. I'm pretty optimistic about the development for the mining business during next year, to be honest.
That's helpful. Thanks. If I can just be another quick follow-up on Machining Solutions in the U.S. down seven. I appreciate you don't want to talk about what happened within the quarter, though it would be helpful given we are seeing an inflection, at least in December, from some of your U.S. distributors. You talk about not just auto being weak, but also highlighted general engineering and the energy segments, not quite what I would have expected for Machining Solutions. I wonder whether you could talk a little bit about what happened and what you see as we look further into 2017 for your U.S. business there.
I think it's difficult to project what is going to happen in the U.S. It's a lot of changes taking place, how much of that will actually do an upswing in the industry is still to be seen. I think we've been very clear during last year that the U.S. has been a challenging part, very much driven by a weak oil and gas industry. We had a lot of good tailwind from the automotive in the beginning of the year, during the last quarter, it was a little bit weaker, even though sales are still up for cars. We'll see how that will drive in the future. I think it's too many open issues actually on the U.S. market to actually predict what is the future going to be. The only thing we are going to be active there.
We are present in all the parts, I think we are, as I mentioned before, we are not actually losing market share on the North American market. If things improved, I think we will improve with it.
Okay, thanks.
Thank you. Cautious of the time here, if we can squeeze in one more question, please, operator.
Thank you. Our next question comes from the line of Andreas Koski of Deutsche Bank. Please go ahead. Your line is open.
Yes, good morning. Thank you. I have a couple of questions on Sandvik Machining Solutions as well, actually. If we strip out the cost savings that you had in the quarter, the drop-through was actually negative. I think we are now going to head back into positive organic growth. I remember 10 years ago or so, when you were growing in Sandvik Machining Solutions by around 5% organic or even more, you had a very strong organic drop-through of around 50% or so. When organic growth came back in 2013-2014, the organic drop-through was underwhelming, closer to 30%. I think that was partly because of somewhat lower price increases than you had back before the financial crisis.
I just wanted to see if you can give us a feeling of what kind of drop-through we could expect if organic growth returns to the level of 3%-5% in Sandvik Machining Solutions.
Maybe you can answer that, Ann-Sofie.
There's no reason to why the drop-through should change significantly from what you've seen historically. In the quarter, there's been some impact. They had a little bit of a mix. You had a little bit of a, like Tomas mentioned earlier, close of the year items.
Yeah.
There's no underlying funny business that goes on in Machining Solutions. On the contrary, they're delivering well according to plan, to the savings and structural improvements that they had set out to do.
When you refer to the level we have seen historically, that's the 40%-50% level, more than the 20%-30% level that we saw in 2013, for me.
A lot of price.
I think the 40%-50% level is from going back into pre-financial crisis, and I think that would be optimistic.
Okay. May I also ask on pricing in Sandvik Machining Solutions, are you raising prices now going into 2017, or is that still difficult to do?
The volumes have been challenging during quite some time, On the pricing side, during the quarter, we are flat.
Okay.
That's where we are. That's coming from previous quarter with a small positive.
May I also ask, would it be a positive or a negative mix if automotive goes down and the other parts go up in Sandvik Machining Solutions?
That's a good question. I can't really answer that, but we know, of course, that the engineering side has been better margins before, so that could be, but I can't really answer that question.
Okay. Thank you very much.
Thank you very much. With that, we say thank you for joining us today, and see you again in about a quarter's time.
Thank you so much.