Greetings to you all, welcome to the presentation of the results of Sandvik's first quarter 2016. I'm Ann-Sofie Nordh, Head of Investor Relations at Sandvik, and with me here on stage, I have our CEO, Björn Rosengren, and of course, our new CFO, Tomas Eliasson, who will run through the presentation. After which we open up for a question and answer session. Without further ado, I'll hand over to Björn and Tomas.
Thank you, Annsi, everybody welcome to the quarter report presentation. As Annsi said, with me I have Tomas Eliasson, our CFO. He's new. This is his first meeting. You will have a chance to present yourself in a little while. Good. Moving over to the report. Saying number one first is that the result for the quarter is pretty much in line with our expectations and the targets we have for the full year. You all seen that the market continues to be challenging, resulting in volume decreases for us of 7%, and adding to that another 4% for currency headwind. Despite low volume, despite having headwind from the currency, we delivered 12.2% EBIT. If you add back the negative currency, we reached 13.6%, which is actually equivalent with last year.
It's positive to see that the cost, the restructuring part of the work, minimizing our cost is now biting in, and we can see that we have a leverage of -10%, which we are very happy with. Compared to last year, we are 1,600 people less, and compared to last quarter, 600 people. I'm also very happy in the pace we have in restructuring Sandvik towards a more decentralized structure. During the quarter, we have had a press release regarding the merge of Mining and Construction business areas to create these new business areas, which we call Mining and Rock Technology. I will come back a little bit more to that further on. Looking a little bit at the market. I mentioned that we see a challenge. There are, let's say, three market areas which are important for Sandvik.
Europe is the largest market, then we have North America, and then Asia. If we start up, look at the year-on-year numbers, there are two numbers that are sticking out. First, North America says 26% down. That sounds awful a lot. It's important to dig into these numbers a little bit, and you can see that in last year first quarter, we booked 700 million umbilical order in U.S. If you lift that out, it's about 14% down year-over-year. Also very strong number here is Europe, which is +7%. As you've probably seen, we have also a number of oil and gas orders also during this quarter. If you lift those out, it is pretty flat in Europe. Asia is -8%. In that, there is China, which is -20%, it continues to be on that level.
In Asia, we also have India, which is moving very well at the moment. If we're looking at the different segments that we are operating in, mining, our largest segment, continues to see challenges. I'm saying we are down 8% in volumes. We are actually comparing with the strongest quarter last year. If you recall, the third became a little bit weaker, and then you had third and fourth quarter where we are pretty much, if you look sequentially, on the same level. No really deterioration of that. It's pretty much flat. Another segment which have been under pressure for quite some time is the oil and gas industry. Even though we've seen some improved oil and gas prices, we do not see any improvements in the market. More contrary, especially in U.S.
As you know, some of our businesses are very much related to the rig market, and if you look at the number of rigs operating of the U.S. market, it is actually down 70% compared to last year and almost 40% compared to last quarter. No light in the tunnel regarding the oil and gas market. Also, to be mentioned there that there is a spillover in the general industry in U.S. from the oil and gas side, which shows that North America is actually down in all different kind of segments here. Two segments which have shown strength during the previous quarter is the aviation and automotive, and that continues to be on a strong level. If we look at both the order intake as well as the revenues, it is down 7%. Book-to-bill is 1.03.
It's actually the first quarter in quite some time where the orders are higher than the revenues. That's moving in the right. You can also on this picture see that potentially the orders are not deteriorating. It's flat on a low level. On the profit side, I mentioned the 12.2% EBIT level. That is actually year-over-year down 19%. I also mentioned here that the currency part is If you add that back, it's actually the same level as previous year. Moving over to our business areas. Sandvik Machining Solutions continues to be performing and the star of Sandvik. Even though we had a volume drop of 4% in orders and 5% in invoicing, they managed to deliver 20.3% EBIT level. If we add back the currency part of this, it's actually 21.7, which is 0.3% better than last year.
The business area has been working very hard on adjusting the cost. You know the supply chain optimization programs are biting in, and we have a leverage here of 14% for Machining Solutions. In addition to that, Machining Solutions also had a record first quarter cash flow. Moving over to mining, which is down 8% in orders and pretty flat on the revenues. In addition to that, it's a business area who has the biggest effect from the currency changes. Countries who have had devaluation of them is, for instance, Australia, it's South Africa, it is Brazil, and it's Canada, and all of them are major mining markets. The business area delivered 13.8% EBIT, If we add back the currency losses there, we actually end up to 16.4%. That is even significantly better than last year. I think that's a good development.
On the aftermarket, it continues approximately on the same level as we saw on Q4. On the equipment side, we saw more headwind on that side. Maybe you remember that we had a very strong Q4 on equipment, which we do believe was taking market share this time it is somewhat weaker in the quarter. On the Material Technology, very happy to book orders on the oil and gas part on the umbilical side, which was booked during the first quarter. We have also here a book-to-bill ratio of 1.1, so orders are higher than invoicing, very positively. Also here, the saving programs are biting in, and the underlying EBIT is 10%. In the business here, there are some inventory on net working capital build up during this period, which had some effects on the over absorption of approximately 1%.
The metal price charges was $109 million, somewhat lower than what we guided before. On the Construction side, it is a challenging market also for this business. At the same time, we also here had a positive book-to-bill of 1.1. In a lot of actions that have been taken, our production facilities, we had less under absorption and an improved profit. We have the Venture, which consists of four different businesses, and these businesses are very different. Two of the businesses are very much dependent on the oil and gas industry, and one is the drilling and completion or the Varel business, which is significantly down and is under big pressure also when it comes to pricing. That has a very tough situation at the moment.
Also some parts of the Hyperion business, which is related to the diamonds and the drill bits, basically is also under quite big pressure. We have a book-to-bill ratio of 1.1, which is good, meaning that orders were higher than revenues. We see, of course, under absorption impact in the earnings. Both Wolfram, by the volumes up, and we had also on good orders on the processing systems. By that, I think I leave over to Tomas to talk a little bit more deeper about the numbers.
Thank you, Björn. Good afternoon, everybody. It's great to be here today. I think I know at least half of you in the audience here, I don't know if that's good or bad, but here I am. I should say this is my first quarterly report with Sandvik, but it's not my first quarterly report. It's my 61st quarterly report. I have, as you might know, those of you who know me, I come from Electrolux. Before that, I was with ASSA ABLOY, and before that, I was with Seco Tools. I'm, in a way, kind of back to the scene of the crime, you could say. I've been on the job for three months now, sorry, three weeks. Three weeks, which is oceans of time, as you understand.
I have memorized all the numbers, and I know all the ins and outs of the Sandvik Group now, so this will be an easy ride. Let's get on with it and start with the financial summary. I will not comment on all of it, but some of the highlights, as you've heard, both orders and revenues were down 7% organically, and then on top of that, we have 4% currency. The adjusted operating profit, adding back the restructuring charges in Q1 2015 was SEK 2.4 billion, 19% down. The margin was 12.2%. As the CEO said here, if you add back the currency impact, we're actually on 13.6%, so flat-ish. Net operating working capital, 28% of the revenues compared to 29% a year ago. It continues down, however, sequentially up on a seasonal basis from 27% to 28%.
That, of course, has an impact on the cash flow, as you can see on the next line, SEK 1.6 billion compared to SEK 2.7 billion a year ago. The return was 11.2%, and the earnings per share, SEK 1.12. Let's look at the earnings development in a bridge, a traditional bridge. Here we start with the adjusted operating profit, SEK 2,977 million, and the way to SEK 2.4 billion. We can really stop on the first three effects here: organic growth, the savings programs, and the currency impact. You can see that, of course, with 7% decline in price and volume will of course have an impact on the earnings. The impact, however, is much smaller than it has been previously over the last quarters. Now, as we see how savings programs and efficiency measures, et cetera, are starting to take effect into the group.
If you see at the upper right-hand side of the graph here, the leverage was -10% only, which is much, much better than previously. The announced savings programs continued with SEK 350 million, and the currency impact was SEK -375 million. You can also see here in the graph that currency has a huge impact on the earnings. I should mention also that we, as from now, as from Q1 2016, have a, let's say, a little bit of a change principle for communicating currency effects. We have previously only talked about translation effects and transaction effects. Those are, of course, the two big ones. Now we include revaluation of working capital and revaluation of hedges in the currency effect as well. That is where it should be. Now we have all four main effects.
This makes the currency impact a little bit larger this time compared to what we guided for. This is how we will communicate this going forward as from now. If we go back to the savings, SEK 350 million, of course, that's not all the savings that we have in the group. We have more than that. We have capacity adjustments. We have efficiency improvements on that, which helps the negative leverage or which mitigates the negative impact of the volume drop in the group. As the CEO mentioned here, we have 1,600 people less now in the group compared to a year ago. That's 3.5% of the total number of employees. If we then move to another bridge, well, really the same bridge, but in another way. Here you can see the reported earnings in Q1 2015, including everything, including the restructuring charges and one-offs.
You see the reported sales and earnings and margin in Q1 2016. You can see the organic decline had an impact on the top line of SEK 1.2 billion, and the EBIT was SEK 115 negative. That's the 10% in negative leverage. The currency, as you can see as well, had an impact of SEK 800 million, a little bit more than SEK 800 million on the top line, and SEK 375 on the EBIT line. On structure and one-offs, the SEK 1,704, of course, is the big charge that we took in Q1 2015. Let's move to the balance sheet and the cash flow. Working capital went down year-over-year, Q1 2015, although we have a seasonal buildup, as we always have in the first quarter of every year. 28% of the revenues compared to 29%, as we mentioned, a year ago.
If you look at the right-hand side here, you can see that Sandvik Machining Solutions and Sandvik Construction and Sandvik Materials Technology are in really good shape, close to or below the long-term target of 25%. The one who sticks out a bit is Sandvik Mining, where we have continued challenges on the working capital side. On the cash flow side, of course, as I mentioned, the net sequential working capital buildup had an impact on the cash flow in the quarter. This is seasonal buildup, as always. Investments were a little bit lower than normal. What does this mean for the financial net debt? The financial net debt continues to go down. It ended at SEK 27 billion. The gearing is 0.69 now, and to be compared with a target of 0.8, as we have, the net debt over EBITDA is 2.0.
You can see that we peaked mid-2014. That was after the Varel acquisition, with 2.5 or in excess of 2.5 in net debt over EBITDA. The gearing was close to 1 as well. We've come down quite a bit since that point in time. When it comes to guidance, we guided for the first quarter a currency effect of SEK -300 million and metal price effect of SEK -130 million. The outcome was SEK -375 million and the metal price effect of SEK -106 million. The SEK -375 million, the difference between that and the SEK 300 million is to a large extent dependent on the change principle. Looking at IR now, right? If we would use the old method, the currency effect would be something with 2. For the second quarter, we got SEK 500 million in negative currency effects and SEK -50 million in metal price effects.
When it comes to the full year guidance, it is completely unchanged. CapEx on or below SEK 4.1 billion, and net financial items of between SEK 1.7 billion and SEK 1.9 billion, and a tax rate of 26%-28%. With that, I'd like to hand back to you, Björn, for conclusions.
Thank you, Tomas, for those numbers. Just concluding up the presentation before we move into question and answers. Market continues as it is. It is challenging. No big changes on that part. I think due to the profitability cost reduction measures and the programs that we have been driving, we keep a solid profitability going forward. These changes in our structures are going with a good pace. I am happy with this one. I think we are moving in the right direction. I mentioned the merger mining and construction. We also have created eight new so-called product areas, which we will have fully end-to-end responsibility over costs and revenues. We are in the process of hiring all the managers for these different businesses, and we will move out the responsibility for each of these product area to the existing competence centers we have around the world.
That is an important move in becoming more customer-focused, more transparent, and quicker in our decision making. By that, I think I end this presentation, we move over to question and answers. Annsi, please.
Yes. We will take questions directly from the holding's conference call, from the conference call, and from the web. Should we see if there are any questions here in the room to start with? We move straight to the conference call. Operator, could you please put through the first question?
Thank you. The first question comes from the line of Klas Bergelind from Citi. Please go ahead, Klas. Your line is open.
Yes. Hi, Björn. Hi, Tomas. It's Klas from Citi. A couple of questions, please. Firstly, on the aftermarket in mining, can we talk through parts, services, and consumables a bit more in detail? What happened in each segment quarter-on-quarter? I'm particularly interested in services. Do we see any incremental weakness here offsetting better momentum elsewhere, or was it relatively stable across the board?
Good. Thank you. On the aftermarket side, as you know, we divided that in both service as well as in consumable or rock drilling equipment. If you look at the service and spare part business, it is very much similar as previous. There is no deterioration when it comes to the aftermarket at all. On the consumable side, I also would like to mention that the pricing part is also very stable on that part. We are competing actually with ourselves and our competitors on that side. While we move over to the consumable side, which is also very flat when it comes to volumes, but there is price pressure on this side because we are fighting with the competitors about contracts for these consumables. There we can see some price pressure.
Okay. My second question is on short cycle. I guess demand improved for you as you went through the quarter when you look at Sandvik Machining Solutions. March is always a big month. Can we talk about the different end markets a bit more in detail, just to get this right quarter-on-quarter? Am I right to assume that autos and aero was a bit better for you versus the fourth quarter, and general engineering and energy stood out as being a bit weaker?
Yes, I think you're pretty correct on that side. Yes.
What happened in general engineering? We're seeing PMI starting to improve towards quarter exit. Is this in China and North America that is weak?
No, it's more related to North America than to U.S., where you have the big drop in number of drill rigs. We know that from previous that the general engineering segment is very much affected by the oil and gas industry, and that continue. As the drilling part of the business has deteriorated during the quarter, that has also affected the general industry there. I'd like to also mention then that we are comparing this with the first quarter, which was actually the top quarter. It looks, of course, totally different if you look sequentially compared to third and fourth quarter.
Sorry, Björn, are you saying that general engineering was flat quarter-on-quarter, or was it slightly lower?
It's slightly lower.
Okay. My final question is on tendering activity in mining and looking at commodities. We've seen a big jump in iron ore followed by gold year to date. Have you seen any improvement, any positive signs in discussions with your mining customers? I'm not looking at current orders, in discussions, or has it been similar to last quarter?
I've been following of course this uptick when it comes to all these prices on minerals. I think this has so far not affected any more demand. To be honest, we do not maybe really think that this is sustainable. There is no really something that in the market that should be driving. This is a little bit of a bounce back, we do not believe that we'll see any growth. I think we will continue to, at least this year, be a challenging year when it comes to the demand for the mining business.
Thank you.
Thank you. O perator, can you please let the next question through?
The next question comes from the line of Marcus Anauer from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, this is Marcus Anauer from Kepler Cheuvreux. I'd like to continue on Klas' question on short-cycle demand. Maybe go a little bit more into the regions where we've seen some signs of weakening throughout the quarter, where January and February were actually relatively strong and then a weakened towards the end. Have you seen the same thing? Especially in North America, if you saw that, if you can talk a little bit about how April has started? Also on China, towards the end, it's difficult because of the new year there. Can you give some more color on the trend throughout the quarter in China, and if you're seeing any signs of a pickup in demand over there?
It's correct that during the quarter that March was of course a strong month in the quarter. I think everybody has realized that. I don't think I want to comment April yet. I'll wait to that until we move into next quarter report. China, I think it continues on the same level. We see both the aerospace and the automotive to be on a strong level, giving good effects for the Sandvik Machining Solutions. The big challenges, it's more related to infrastructure and the mining part of the business, but also on the steel side. I think that is really where you see the big challenges. North America, it is not becoming better. I think that is pretty clear. Probably somewhat weaker than Q4. That is a little bit the feeling we have regarding that.
While we feel that Europe is becoming. We think it's on a stable level. Of course, as I mentioned, it looks maybe a little bit better when it says plus 7%, but at least it feels stable. If you look in places at the automotive industry, we saw a stronger part east than we saw on the west side of Europe. East was a little bit better on that side. Otherwise, Europe is pretty good on that side. I don't know if I followed that question enough, or if you want me to repeat.
No, it's good. Maybe one follow-up on that, on North America. There's a lot of talk about the restocking effect across the value chain in the U.S. Is it possible to say at all where we are in that cycle and what your customers are doing? What does it say when you have your ears to the ground over there?
Yeah. Maybe Annsi, see if you have maybe some information. I haven't really heard anything on that direction. It's more that it is somewhat weaker. Maybe you have heard something else.
No, we, just like you do, see the data points from the distributors, et cetera, in the U.S., and we've had questions on it through the quarter, but as of yet, I can't say that we have seen any particular pattern of a recovery in the North American as a consequence. More like what Björn is referring to. With that, I think we thank you, Marcus, and we'll take to the next question, please. Operator?
The next question comes from the line of Andre Kukljic from Credit Suisse. Please go ahead. Your line is open.
Good afternoon, everybody. I'll go on for time as well. Firstly, just to confirm on overproduction, was that only in SMT, that basis points effect that you cited?
Yeah, it's correct. It's only on the SMT business where you have some over absorptions in the production and none of the other businesses.
Great. Just another quick one on the Central line. That, I think, trend is a little bit better than we expected in the previous sort of quarters run rate. What should we expect for full year? Is that a trend or should there be a normalization later?
Did you understand the question?
The group cover cost.
I can help you with that, Andre. Like we said before, the group cost should, for the year, total up to about SEK 1 billion, and it should average through the year about SEK 250 million per quarter. There's some seasonality in that also for you to remember, where the Q3 is normally somewhat lower, and then the Q4 comes back a bit. There's an average through the year, SEK 250 million.
Great, thank you. Just final one question on the umbilical order that you booked, how would you expect the profitability to pan out there versus what you're delivering right now in SMT?
We all know that it was an umbilical order, and we all know that that's a very profitable part of the business. I don't think I can say more than that.
Nice try, Andre. Thank you.
Thank you.
The next question, please, operator.
The next question comes from the line of Guillermo Pena from UBS. Please go ahead. Your line is open.
Hi, good afternoon, actually. It's Guillermo Pena from UBS. Sorry if this question was asked by Andre, I was cut off by the operator just right when he was asking the question about overproduction. Maybe it's the same, just forgive me if that is the case. Regarding the working capital swing, seasonal obviously, and it's Q1, I was wondering which segments have been building inventories for deliveries. Is it mining related? Is this mining systems related, or is this also Sandvik Materials Technology?
Yeah, you probably saw that in Sandvik Materials Technology, we were, I think, up a little bit more than SEK 400 million in that part. That is to be delivered in the coming quarters. We see the build-up there is nothing, I think, we should be worried about. We've gone through that very carefully, and we still have our tough targets when it comes to working capital for the full year. We should see improvements in the coming quarters.
Just to confirm, on the mining part of the working capital stream, I was wondering whether this is just mining systems or is just your continuous operations in mining?
I think it's our continuous operations. If you look at the mining business, most of the equipment is, of course, built towards orders. Sometimes there are bigger orders, and you are building a number of units before you ship all of them. This is actually one of these reasons why you see this increase. We have some big deliveries taking place in the next quarter, and many of the units have already been produced. I don't think this should be anything to worry about. In the quarter, we are up 1%, you know our target, and that is what we are going to reach for the full year.
Okay, thank you. That's what I was trying to get to, because when I look at the margins, probably, I should be thinking about a degree of lower margins into the following few quarters.
I report it back that it's only in SMT that we have an overabsorption of approximately 1% for that building. In the other business areas, there is no effect on the margins.
Okay. Thank you.
Thank you. Operator, can we please have the next question put through?
The next question comes from the line of Ben Maslen from Morgan Stanley. Please go ahead. Your line is open.
Thank you. Good afternoon, Björn, Tomas. Just a quick one on machining and the growth you reported. I just wondered whether there was any negative working day effect from the timing of Easter this year that would have dragged on March, and if you see any reversal, obviously, of that in April when you're looking at daily sales rates. Thank you.
It's true that if we look at March, Easter was part of the cause. In effect, I think, was it two days or something like that?
Yes.
Maybe you remember that. Is it two days we're talking about March?
In March specifically? I think so. Let me confirm back to you.
Previous year, I think it was in April. Still, March was possibly a good month.
Okay. You would obviously, on a daily sales rate basis, how is demand trending if you ignore the working days through March and into April?
Yeah. I think I hold back on April because we save that to going forward. It's been an improvement during March. That's pretty clear.
Thank you. Then on SMT and the SEK 600 million of large orders you won. Obviously, as you say, that market is pretty difficult. How does the pipeline look for further large orders wins in oil and gas, in SMT? Then given those wins this quarter, how long does your backlog last on oil and gas and vehicles? Thank you.
That is about six, seven months at the moment. That's where we see the backlog at the moment. It's difficult to say, but it's pretty clear it's the oil and gas industry. That visit is going to be more effective going forward. That we do believe. There are still projects. We will try to pick up the ones that are in the market, but sure, it's the oil and gas market. It doesn't look too bad going forward.
Thank you. Then just finally on your change in approach for the currency guidance. That now includes the hedges and working capital swings. Where would those effects have been taken before? Just in the businesses or with the hedges in the central line?
Well, they were included in the organic part in price volume, which is not really the right thing to do. By doing this way now, I would say the more correct way, you get a much more clearer picture on what is the true organic top line and EBITDA effect and leverage. What is the true currency effect.
Got it. Thanks, Tomas. Thanks, Björn.
Thank you. Operator, we'll continue with a question from the conference call, please.
The next question comes from the line of Lars Larsson from Barclays. Please go ahead, your line is open.
Hi. Good afternoon, Björn. Just two quick follow-ups, if I could. On automotive segment in the U.S., the slightest line, I was curious about how you read that. Do you see a sort of slightly weaker underlying market in terms of reaction by your customers to slightly weaker sales numbers in March, i.e., pulling back perhaps even inventory levels there? Or do you see perhaps competition stepping up in that part of your business? Separately to the question on mining consumables, I take it that flat volumes on overall consumables across this predominant production consumables. Can you just say a word or two about your exploration consumables and how they have fared sequentially? Thanks.
Yeah. I'll start up with the exploration part of that. Yes, I've also heard that there have been some signals that the exploration is improving. From Sandvik part, we haven't seen that improvement. Sorry, the one I was referring to before is actually the production consumables, which I think is pretty steady and related. We know today that 86% of all our equipment is today operating in the market. That's actually no change from previous quarters. That keeps pretty steady. Moving over to the automotive sector, you probably recall that during last quarter, I mentioned that we saw that we thought it was a destocking in the automotive side, but it's somewhat down during this quarter also here. We do not really want to relate it to destocking this time. It's probably a little bit less volumes.
Okay, thanks.
Thank you. Operator, we'll have the next question, please. Put through.
The next question comes from the line of Peder Frölén from Handelsbanken Capital Markets. Please go ahead, sir, your line is open.
Thank you. Hi, Annsi. Hi, Björn and Tomas. Let me first ask you a bit about price and mix. You mentioned about the pricing details for mining off the market, but could you share some light on the SMS business as well? Are we still sort of on a healthy positive contribution here, or any change specifically due to the lower general industry activity in the U.S.?
I think it's the same level as we said during Q4, so it's up about 1%.
Yeah, that's fair. Another question related to the SMS business. Normally, you tend to build some inventory, although this business is very short cycle. You tend to build some inventory in the second quarter. Referring to your comments about the working capital during the first quarter, could we expect the same pattern in the second one, that you tie some more capital, but you get some ease on the profitability in SMS business?
No, I think they've done a good job. I think they have a very strong focus on working capital and keeping that on the right level, which I think they showed also during the first, which has resulted actually in a record first quarter cash flow.
Yeah.
On the second quarter, I think it's a little bit too early to say at least, but I can assure you that Jonas and his team have a very strong focus on the working capital, and we hope that one can be kept on the same level or lower.
Yeah. That's my point. Maybe the sort of normal gain in profitability might be less gradually during the course of the year due to the working capital management, basically. Okay. Another one on mining, back to mining. On the divestment of mining system business. Some regulation according to IFRS and stuff like that, and you're heading for a soon to be a 12 months after you announced the divestment, so to speak. You continue to argue that it's going to be divested during the course of this year. Could you share some light on how the process is going?
Okay. The process goes according to plan. We still have the objective to announce signing before the end of the quarter. Of course, the closing takes a little bit of time before things are in place. There is no change in the objective of closing during Q2.
Okay. That's fair. Sorry for all of these questions, but a small one more. You mentioned about the headcount reduction quarter-on-quarter, year-on-year. Thank you for that. If we look at the phase ahead and the 10% incremental on the -7% organically, and you get into easier comps. Are we looking at soon to have a flat EBIT development or flat leverage, so to speak, in the Q2 and onwards, given the easier comps and then slightly lower negative organic?
I think according to the supply chain optimization program and these announced savings there, we are today at approximately SEK 1.3 billion in savings. We have the ambitions to reach SEK 2.1 billion, there's a little bit more to go. We said we try to have that ready by the end of 2017. There are, of course, activities in all our operations, and that's where I think it should be. If you have less demand, you have to adjust your profitability or your cost according to your demand. We have an objective for each of the business. I don't know if I'm allowed to say it, 3% efficiency improvement per business a year. That's our target, and that's what we need to guide. If you don't have any growth, you need to adjust your costs.
Yeah.
Tomas. We've said it. 3%.
That's it anyway.
Yeah.
Yeah. I think it's very clear.
Yeah. I don't think that we should guide, or can guide really, when the leverage will break even and come back into black numbers. I don't think we should do that. That number, the minus 3% number, can and will go a bit up and down. What we clearly see is that the savings and the efficiency programs are taking effect, that we can say. Yeah. It will continue to improve, but we don't have any specific guidance on when it could go to black numbers.
No, I understand. Okay, thank you so much again. Back in line. That's it.
Thank you.
Thank you, Peder and operator. We continue with the question from the call, please.
The next question comes on the line of James Moore from Redburn. Please go ahead, James, your line is open.
Yeah, thanks. Hi, everyone, Björn, Tomas, and Annsi. I've got three, if I could take them one at a time. Firstly, on savings, the $253 million looks a bit more than I might have expected. I don't think you've changed your total savings plans. Is the phasing coming in a bit quicker than you thought, or will you lift your savings targets at some stage?
No, I think they're pretty much in line with our expectations. This is what we expected.
Okay. Just on that, can you say anything about the capacity adjustment, other productivity treatment savings you've just let out the bag for the quarter?
I'm probably going to eat that up later.
No, it's pretty clear. This is no news. Of course, you understand that in a business that All the investments where we are doing, of course, you need to have some type of payback on that side. I think for any kind of business, 3% efficiency improvement is, of course, necessary and should be in every company, from my perspective.
Thanks. Switching to China, I just wonder if you could help within SMS, specifically SMS China, on the general engineering side of that, are you still seeing sequential declines? Our sense is the stimulus is more infrastructure and property and is not helping the machinery industry much in China. Just wanted to check that you're seeing that too.
Yeah. That is correct.
Okay. On SMT, I just wanted to ask Andreas's umbilical question a different way. We know umbilical margins are very high, late cycle, they have a backlog. Without putting numbers on it, are you seeing margins in new umbilical orders lower than margins in umbilical invoicing?
No.
Okay. Just finally there, on SMT, if the backlog on umbilical sort of runs out in 2017, is there a risk of a significant margin drop in 2017 with a mix change?
No, I don't want to speculate. There are so many activities. One of the important part is the OCTG, obviously, the piping part. If we go back to 2015, we had zero orders. On that side, now we are a full half way into 2017. There are businesses to pick up. You have the business for nuclear, which has been down for a long period. We are very optimistic that this will start moving in China. The plant is there, which is a great upside also. This varies a little bit. Of course, the oil and gas industry is going to be weak. That is pretty clear for a while. Of course there will be effects, but there will also be mitigating actions in relation to that.
Thanks, Björn
Thank you.
Thank you, James. Operator, can we have the next question, please?
The next question comes from the line of Jonas Smith from SEB. Please go ahead. Your line is open.
Yes, hello, this is actually Daniel Schmidt. Anyway, do you hear me?
Yes, we do.
Hi, Björn and Tomas, and Ann-Sofie. I was just wondering, you announced the merger between Construction and Mining during the quarter. Looking at the structure right now, do you see any sort of further potential in terms of streamlining Sandvik, and particularly thinking about Venture? Could you say anything more in terms of details when it comes to costs taking out, I assume, when you merge Mining and Construction?
I think we wait with that until we meet on the 24th of May. I don't have any numbers on that part. Sure, there will be some parts when you merge these two businesses because there's a lot of overlapping positions there is. The most important thing going forward is that the businesses will be very transparent, and the business leaders for each of these product areas, they will own their business. That's an end-to-end responsibility. They will own their costs. They will own their business, which means that if you are not growing, if you're not improving, you need to adopt your cost part. Instead of having one management drive efficiency in the operation, you will have eight managers driving efficiency. That is where I believe the big saving is going to come in the future.
I think you've been really clear on that since you took charge, basically. What about further streamlining of the structure in terms of Venture, et cetera?
I think we'll be talking a lot about that at the 24th, so let's save it until then.
All right. Then just final, on construction, which we don't talk about a lot, and I'm meaning more the end market, it seems to be some anecdotal evidence, but also coming from a number of companies been reporting Q1 so far that construction seems to be picking up, in North America, in Europe, and even in China. Do you have any comments on this?
First, I'd like to say that from my perspective, in construction, we are in a very small segment. The new name of the new business here is called Mining and Rock Technology, because that is in the rock excavation and rock processing. That is the little part that we are. I don't think it's really fair to compare Sandvik Construction with any of the other construction players, because it's a totally different business. We are, from my perspective, in the nice little good niche. You are working with rock excavation, few competitors, good market, technology-driven, and that's the important part. From my perspective, we should not be comparing ourselves too much with the construction companies, which are much broader than this. I know what you are referring to, and I read these reports also.
It's of course, when infrastructure is increasing in the part, yes, rock excavation has the tendency to ride with it. So far, we are not seeing too much improvement on that side yet.
All right. Thank you, Björn.
Thank you, Daniel. We have another question from the conference call, please.
The next question comes from the line of Andreas Koski from Deutsche Bank. Please go ahead. Your line is open.
Thank you very much. Three questions from my side. The first one is on the merger between Sandvik Mining and Sandvik Construction, and not what will happen. Could you please explain the main parts, explaining the difference in the margin between Sandvik Mining and Sandvik Construction as it is right now?
It's a good question. Sometimes they wonder that. When these two businesses were split, they split all the assets. All the equipment are produced in the same factories. They are bought by the same purchasers. They are supplied through the same supply networks out to the market. I'm a little bit confused myself when you see such a big deviation in margin. To be honest, it's related to a number of businesses that we are in there, a little bit to a crushing business, maybe much related to mid-end market in China, and also on some other products. The main business which are related to the same equipment as tunneling, underground mining, surface drilling, or drilling in relation to mining on surface sites are not so different then.
On the aftermarket, there are some differences also that when you, for instance, are using a crawler in a quarry, for instance, quarry owners are more small businesses. They are normally not running their business 24/7. That means day and night, which they have a little bit more time to fix the equipment if they break. They sometimes move them between different quarries. They are not so in desperate need of, let's say, service support and spare part needs. Sometimes they try to make some good businesses themselves. Also, when you're selling through distributors, it's normally more difficult to really catch the aftermarket. There are some parts of it, but I still like to underline that many parts of Sandvik Construction today is very much related to the mining business that we are going to.
Moving these together, I think it will be a little bit easier in the future to follow, what is the difference or what is the opportunities for that?
Thank you. In the annual report, you are saying that quarrying and crushing are global growth areas. Does this mean that the crushing part, in your view, is a core business to you?
Of course, it is a core business with us. It is one of our business areas we have. If we are looking to the new setup, I mentioned we will have four areas, and one of these product areas is going to be the crushing business. When you own your own costs, you own your own business, and you follow it by that part, the transparency becomes very clear. That means now we have a good opportunity to see what really the profitability is for each of these business area. The one who knows me, I have a viewpoint on our businesses. If we have a business that is underperforming, it can be two reason. It can be bad management, and in that case, we have to change the management, or it is a bad business.
If it is a bad business, we have to question ourselves if are we going to stay in that business. With the transparency, it will be much easier to make these decisions in the future.
Okay. Last one on the productivity improvement that should increase by at least 3%-4% per annum. Would you say that this, maybe I missed it during your presentation, would you say that this is a step up from what Sandvik previously has achieved? From what level in that case?
I did not to mention the history on that part. I think for Sandvik going forward, it should be important. I do not recall myself saying 4%. It grows a little bit. I said 3%. I think.
I'm actually referring to the annual report again.
Okay.
Here you're saying 3% to 4%.
Okay. Maybe I'm a little bit too modest at this moment. It's true. I haven't really the history behind me how that has been evidenced before. From my perspective, this is a very important measurement, and this is a very important achievement from all our operations. It means if you are not in a growing world, we have to decrease our costs otherwise, all the investments we do in improved productivity will not be paid off.
Thank you very much.
Thank you, Andreas. I know we have one more question from this call. We only have a couple of minutes left, please, operator, let the question through.
The next question comes from the line of Philip Saliba from HSBC. Please go ahead. Your line is open.
Hi, just a special question on additive manufacturing. Could you describe your exposure to additive manufacturing? I know that you sell metal powder, if you could give us an idea on how large that is within the segment of Materials Technology. Have you added capacity, and what can we expect going forward? The other thing is, do you also additively manufacture drill bits, or are you considering to do this?
When it come to additive manufacturing, we are doing I mean, on the research side here. We actually have in our research center in Sandvik, we have all these 3D manufacturing equipment where we are developing and testing for different kind of production facilities. So far in our own product, it's very much limited at this point. It's more on the research side. It's true that we have a powder business supplying to that business. To be honest, I don't really know. Maybe you know how big or important that part is.
I know, but we don't share it, I'm afraid.
Okay. I was hoping you would do it, but okay. Obviously. I understand it then.
All right.
Can you give me an idea on whether you have expanded capacity significantly this year, and whether, let's say, your key peers have done something similar, like Höganäs or I've seen that OKD has added some capacity. Just an idea on capacity expansion, maybe.
No, I can't comment on either size or capacity expansion at this point, I'm afraid.
Okay.
Perhaps we can enlighten you more on the Capital Markets Day.
Yeah, I think we should go home and do our homework. Yeah, maybe we can come with some better information at that time. You will also have a chance to talk to Petra at that time, and she's probably very much into those numbers.
Okay, perfect. Thank you.
Okay. Thank you all for joining us today at this presentation, and I hope to see many of you at the Capital Markets Day on the 24th of May. Thank you and take care.
Very much.
Bye.
Bye-bye. Thank you.