Earnings Call: Q1 2016

Apr 25, 2016

Greetings to you all, and welcome to the presentation of the results of Sandvik's Q1 2016. I'm Anssa Fanon, Head of Investor Relations at Sandvik. And with me here on stage, I have our CEO, Johan Rolf Singleton and of course, our new CFO, Thomas Lejesson, who will run through the presentation, after which we open up for a question and answer session. And without further ado, I'd hand over to Bjorn and Thomas. Thank you, Anssi, and everybody welcome to the quarter report presentation. As Andy said, with me, I have Thomas Leerasson, our CFO. He is new. This is his first meeting. You will have a chance to present yourself in a little while. Good. Moving over to the report. And I'll say number 1 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 will see that the market continues to be challenging, resulting in volume decreases for us of 7%. And adding to that another 4% for currency headwind. And despite low volume, despite heading headwind from the currency, we delivered 12.2 percent EBIT. And if you add back the currency, the negative currency, we reached 13.6%, which is actually equivalent with last year. So 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 minus 10%, which we are very happy with. Compared to last year, we are 1600 people less and compared to last quarter, 600 people. I'm also very happy in the pace we have in restructuring, funding 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, 3 market areas which are important for Sandvik. Europe is the largest market, then we have North America and then Asia. And if we start up, look at the year on year numbers, there are two numbers that are kicking out. 1st, North America says 26% down. That sounds awful a lot. But it's important to dig into these numbers a little bit. And you can see that in last year Q1, we booked 700,000,000 silicon order in the United States. So if you list that out, it's about 14% down year over year. Also very strong number here is Europe, which is plus 7%. As you've probably seen, we have also a number of oil and gas orders also during this quarter. So if you lift those out, it is pretty flat in Europe. Asia is minus 8%. In that, there is China, which is minus 20%. So it continues to be on that level. But in Asia, we also have China sorry, India, which is moving very well at the moment. So if we're looking at the different segments that we are operating in, Priming, our largest segment, continues to see challenges. And then I'm saying we are down 8% in volumes, then we are actually comparing with the strongest quarter last year. If you recall, the 3rd became a little bit weaker, and then you had 3rd and 4th quarter where we are pretty much, if you look at sequentially, on the same level. So no really deterioration of that business. It's pretty much flat. Another segment which have been under pressure for quite some time is the oil and gas industry. And even though we've seen some improved oil and gas prices, we do not see any improvements in the market or contrary, especially in United States. As you know, some of our businesses are very much related to the drill market. And if you look at the number of drills operating of the U. S. Market, it is actually down 70% compared to last year and almost 40% compared to last quarter. So no light in the tunnel regarding the oil and gas market. Also to be mentioned 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. 2 segments which have shown strength during the previous quarter is 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%. The book to bill is 1.03. So it's actually the Q1 in quite some time where the orders are higher than the revenues. So that's moving right. And you can also, on this picture, see that, sequentially, the orders are not deteriorating. It's flat on a low level. On the profit side, I mentioned 12.2 percent EBIT level is actually year over year down 19%. I also mentioned here that the currency part is about yes, if you add that back, it's actually the same level as previous year. So then moving over to our business areas. And 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. And if we add back the currency part of this, it's actually 21.7%, which is 0.3% better than last year. So the business area has been working very hard on adjusting the cost. And you know the supply chain optimization programs are biting in, and we have a leverage here of 14% for My Solutions. In addition to that, Machining Solutions also had a record first quarter cash flow. Then moving over to mining, which is down 8% in orders and pretty flat on the revenues. In addition to that, this is the business area who has the biggest effect from the currency changes. So countries who have had devaluation of them is, for instance, Australia, it's South Africa, it's Brazil and it's Canada, and all of them are major mining markets. Our business area delivered 13.8 percent EBIT. And if we add back the currency losses there, we actually end up to 16.4%. So that is even significantly better than last year. So I think that's a good development. If we're looking at the aftermarket, it continues approximately on the same level as we saw on Q4. And on the equipment side, we saw a more headwind from 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. Then on the material technology, very happy to book orders on the oil and gas part on the technical side, which was booked during the Q1. We have also here a book to bill ratio of 1.1. So orders are higher than invoicing very positively. And 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 absorptions of approximately 1%. The metal price charges was €109,000,000 so 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. Percent. And in a lot of actions that have been taken in our production facilities, we have less under absorption and an improved profit. Then we have the Venture, which consists of 4 different businesses, and these businesses are very different. 2 of the businesses are very much dependent on the oil and gas industry. And one is the drilling and completion or the barrel business, which is significantly down and is under big pressure also when it comes to pricing. So that has a very tough situation at the moment. But also some parts of Hyperion business, which is related to the diamonds and the drill bits, particularly, is also under quite big pressure. We have our book to bill ratio of 1.1, which is good, meaning that also higher than revenues. And then we see, of course, under absorption impact in the earnings. So both Wolfram, but the volume is up, and we had also on good orders on the processing systems. That, I think I'll leave over to Thomas to talk a little bit on the computer about numbers. Thank you, Bjorn. Good afternoon, everybody. It's great to be here today. I think I know at least half of you in the audience here, so I'm not not good or bad, But here I am. This is not my I should say, this is my 1st quarterly repo with Sandvik, but 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 Seaco Tools. And so I'm in a way kind of back to the scene of the crime, you can say. I've been on the job for 3 months now sorry, 3 weeks, 3 weeks, which is oceans of time as you understand. So I have summarized all the numbers. And I know all the ins and outs of this and we could now. So this will be an easy ride. Anyway, 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, the 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 2,400,000,000 dollars 20% down. The margin was 12.2%. But as the CEO said here, if you add back the currency impact, we're actually on 13.6%, so flattish. Net operating working capital, 28% of revenues compared to 29 year ago. So it continues down. However, sequentially up on a seasonal basis from 27% to 28%. And that, of course, has an impact on the cash flow. As you can see on the next slide, dollars 1,600,000,000 compared to $2,700,000,000 a year ago. The return was 11.2 percent and the earnings per share, dollars 1.12 So let's look at the earnings development in a bridge, the traditional bridge. And here, we start with the adjusted operating profit, €2977,000,000 and the weight of €2,400,000,000 And we can really stop on the first three effects here: organic growth, savings programs and the currency impact. You can see that, of course, with 7% decline in price and volume, we, 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, etcetera, are starting to take effect into the group. If you see at the upper right hand side of the graph here, the leverage was minus 10% only, which is much, much better than previously. The announced savings programs contributed with the SEK 350,000,000 and then the currency impact was minus SEK 375,000,000. You can also see here in the graph that currently, it has a huge impact on the earnings. And I should mention also that we, as from now, as from Q1 2016, have a, let's say, a little bit of a changed principle for communicating currency effects. We have previously only talked about translation effects. Those are, of course, the 2 big ones. Now we include revaluation of working capital and revaluation of hedges from the currency effect as well. That is where it should be. So 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 from now. And if we go back to the savings, euros 250,000,000 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. And as Lucio mentioned here, we have 1600 people less now in the group compared to a year ago, that's 3.5% on the type of number of employees. Hopefully then move to another bridge. Well, really the same bridge, but in another way. Here, you can see the reported earnings in Q1 20 15, including everything, including restructuring charges and one offs. And you see the reported sales and earnings and margin in Q1 twenty sixteen. You can see the organic decline had an impact on the top line of SEK 1,200,000,000 and the EBIT was SEK 115,000,000 negative. So that's the 10% in negative leverage. The currency, as you can see as well, had an impact of €800,000,000 a little bit more than €800,000,000 on the top line and €375,000,000 on the EBIT line. And on structure and one offs, the €1704, of course, is the big charge that we took in Q1 2015. So let's move to the balance sheet and the cash flow. Working capital went down year over year, Q1 20 15, although we haven't seen that buildup as we always have in the Q1 of the 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 Machining Solutions and Construction and Materials Technology are in really good shape, close to or below the target, the long term target of 25 percent. And the one who sticks out a bit is 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. But this is seasonal buildup as always. And the investments were a little bit lower than normal. Now what does this mean for the financial net debt? The financial net debt continues to go down. It ended at €7,000,000,000 The gearing is €0.69,000,000 now. And to be compared with the target of the 0.8 as we have, the net net revenue EBITDA is 2.20. And you can see that the peak mid-twenty 14, that was the Parral acquisition, with 2.5% or in excess of 2.5% in net debt and EBITDA. And the gearing was close to 1% as well. And we've come down quite a bit since that point in time. When it comes to guidance, we guided, for the Q1, a tariff effect of minus €300,000,000 and a metal price effect of minus €130,000,000 And the outcome was minus $375,000,000 and the metal price effect of minus $106,000,000 Now the minus 3.75 difference between that and the €300,000,000 is to a large extent dependent on the change principle. Looking at IR now, right? Yes. If we reduce the old method, the currency effect would be something that was achieved. For the Q2, we got DKK 500,000,000 in net currency effects and minus DKK 50,000,000 in net price effects. When it comes to the full year guidance, it is completely unchanged. So CapEx on or below €4,100,000,000 net financial items of between $1,700,000,000 and $1,900,000,000 and a tax rate of 26% to 28%. And with that, I'd like to hand back to you, Bjorn, for your future. Thank you, Thomas, for those numbers and again. So just concluding up the presentation before we move into question and answer. So the market continues as it is. It is challenging. No big changes on that part. I think due to the possibility of the cost reduction measures and the programs that we have been driving, we keep a solid profitability going forward. The changes in our structures are going with a good pace. I'm happy with this one. I think we are moving in the right direction. I mentioned the merger Mining and Construction. We also have created 8 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 content centers we have around the world. So that's an important move in becoming more customer focused, more transparent and quicker in our decision making. With that, I think I end this presentation, then we move over to question and answers. Hansery, please. Yes. We will take questions first here from the audience. Thomas Taylor from the conference call and from the web. The first question comes from the line of Claus Bergelind from Citi. It's Claus from Citi. A couple of questions, please. Firstly, on the off market 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. Did we see any incremental weakness here offsetting better momentum elsewhere? Or was it relatively stable across the board? Good. On the aftermarket side, as you know, we provided that in both service as well as in consumable or block drilling equipment. If you look at the service and spare part business, it is very much similar as previous. So there is no deterioration when it comes to the Aptum market there at all. On the consumable side, I also would like to mention that the pricing part is also very stable on that part. I mean, we are competing actually with our sales 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 consumers. So 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 Solutions. March is always a sort of 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 big for you versus the Q4 and general engineering and energy stood out as being a bit weaker? Yes. I think it's you're pretty correct on that, Brad, yes. On what happened in general engineering, I mean, we're seeing sort of PMIs starting to improve towards quarter exit. Is this in China and North America that is weak? No. It's more related to North America and to U. S, where you have the big drop in number of drill rigs. And 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. Like to also mention then that we are comparing this with the Q1, which was actually the tough quarter. So it looks, of course, totally different if you look sequentially compared to Q2. So sorry, Bjorn, are you saying that general engineering was flat for the quarter to quarter? Or is it slightly lower? 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 and followed by gold year to date. Have you seen any improvement, any positive signs in discussions with your mining customers? Are you not looking at current orders, in discussions? Or has it been similar to last quarter? A big follow-up, of course, is uptick when it comes to all these prices on minerals. I think this is this has so far not affected any more demand. And to be honest, we do not maybe really think that this is sustainable. There is no really something that is in the market that is should be driving. This is a little bit of a bounce back, but we do not believe that we have will 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. The Next question comes from the line of Markus Hannan from Kepler Cheuvreux. I'd like to continue on Klas' question on onshore cycle demand and maybe go a little bit more into the regions where we've seen some signs of weakening throughout the quarter where January February were actually relatively strong and then weakened towards the end. Have you seen the same thing? And especially in North America, if you saw that, if you can talk a little bit about how April has started? And also on China, towards the end, it's difficult because of the New Year there, but 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? Yes. It's correct that during the quarter that March was, of course, a strong month in the quarter. I think everybody has realized that. And 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. So we see both the aerospace and the automotive to be on a strong level, giving good effects for the Machining Solutions business. The big challenges, I mean, is more related to infrastructure and the mining part of the business, but also on the steel side. So 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. So 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 we're looking, basically, at the most of the industry, we saw a stronger part east than we saw on the West side of Europe. So East was a little bit better on that side. But otherwise, Europe is pretty good on that side. I don't know if I followed that question enough for if you want me to repeat that. No, no, it's good to make maybe one follow-up on that, the North America. So there's a lot of talk about the destocking and restocking effect across the value chain in the U. S. Have you seen any is it possible to say at all where we are in that cycle and what the customers are doing? So what does it say when you have your yesterday ground over there? Yes. Maybe answer, 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, I mean, we, just like you do, see the data points from the distributors, etcetera, in the U. S, and we've had questions on it through the quarter. But as of yet, while I can't say that we have seen any particular pattern of a recovery in the North American as a consequence, more like what Jan is referring to. And with that, I think we thank you, Markus, and we'll proceed through the next question, please. Operator? The next question comes from the line of Greg Kouppen from Credit Suisse. Please go ahead. Your line is open. Good afternoon, everybody. I'll go one at a time as well. Firstly, on the just to confirm on oil production, was that only in SMT, that's 100 basis points effect when you started? Yes, it's correct. It's only on the S and T business where you have some overlap functions in the production and none of the other businesses. Great. And just another quick one. On the Central Line, that I think trended a little bit better than we expected in the previous sort of quarter's 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 current cost. I can answer with that, Andre. Like we said before, the group cost should, for the year, total up to about €1,000,000,000 and it should average through the year about €250,000,000 per quarter. But 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. So at an average through the year, euros 250,000,000 Great. And just final one question. On the Simbethicals order that you booked, how would you expect 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 it's a very profitable part of the business. I don't think they can say more than that. Next question please, operator. The next question comes from the line of Guilherme Opena from UBS. Please go ahead. Your line is open. Hi, good afternoon actually. Guillermo Pena from UBS. Sorry, this question was asked by Andre, but I was cut off by the operator just right when he was asking the question about overproduction. So maybe it's the same, but just forgive me if that is the case. Regarding the working capital swing, seasonal obviously, and it's Q1. But I was wondering which segments have been building inventories for deliveries? Is it mining related? Is this mining systems related? Or is this also material technology? Yes, you probably saw that in Materials Technology, we were, I think, up a little bit more than SEK 400,000,000 in that part. That is to be delivered in the coming quarter. So we see the buildup 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. So we should see improvements in the coming quarters. And 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. But sometimes, there are bigger orders, and you are building a number of units before you ship all of them. It is actually one of these reasons why you see this increase. We have some big deliveries in place in the next quarter, and many of the units have already been produced. So I don't think this should be anything to worry about. It is in the quarter, we are up 1%. But you know our target, and that is what we are going to reach for the full year. Okay. And that's what I said, what I was trying to get to. But when I look at the margins, probably I should be thinking about a degree of lower margins into the following few quarters. I reported it's backing up. It's only in SMT that we have an over absorption of approximately 1% for that building. In the other business areas, there is no effect on the margins. Okay. Thank you. Thank you. And operator, can we please have the next question? The next question comes from the line of Ben Maslin from Morgan Stanley. So just a quick one on machining and the growth you reported. I was wondering if there was any negative working day effect from the timing of Easter this year that was dragged on March? And have you seen any reversal, obviously, of that in April when you're looking at daily sales rates? It's true that if we look at March, Easter was part of the I'd say the fact that it was 2 days or something like that. Yes. Maybe you remember that. Is it 2 days? We're talking about March. In March, I think so. I can let me transfer Sam back to you. On the previous year, I think it was in April. But I can ask you in March, where it was, it was a good month. Okay. But you would obviously on a kind of on a daily sales rate basis, how is demand trending if you ignore the working days through March April into April? Yes. I think I hold back on April. We'd say that going forward, it's been an improvement during March. That's pretty clear. And then on the SNC and the EUR 600,000,000 of large orders you won, Obviously, as you say, that market is pretty difficult. So how does the pipeline look for further large wins in oil and gas in SNC? And then given those wins this quarter, how long does your backlog last on oil and gas and chemicals? Thank you. That is about 6, 7 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. So that business is going to be more effective going forward, but we believe. They are still projects, and we will try to pick up ones that are in the budget. But sure, it's the oil and gas market, and it doesn't look too bad going forward. And then just finally on your change in approach for the currency guidance. So that now includes the hedges and working capital swings. Where would those effects have been taken before just in the businesses? Or would the hedges in the Central Line? Well, they were included in the organic part in price volume, so which is not really the right thing to do. So by doing this this way now, I would say the more correct way, you get a much more clearer picture on what is the true organic growth for top line and then the FX and leverage and what is the true currency effect. Got it. Thanks, Thomas. Thanks, Bjorn. Thank you. And operator, we'll continue with the platform. Question from the conference call, please. The next question comes from the line of Lars Oorson from Barclays. Just two quick follow ups, if could. On Automotive segment in the U. S. Slide decline, I was curious about how you read that. Do you see a sort of slightly weaker underlying market in terms of by your customers to slightly weaker sales numbers in March, I. E. Pulling back some slight inventory levels there? Or do you see perhaps competition stepping up in that part of the business? And then separately to the question on mining consumables, I'd say that flat volumes on overall consumables were predominantly production consumables. Can you just say a word or two about your exploration consumables and how they have fared sequentially? Yes. I'll start up to the exploration part of that. Yes, I've also heard that there have been some signals that the exploration is improving. But from Sandvik Park, we haven't seen that improvement. Sorry, the one I was referring to before is actually the production consumables, which has been pretty steady and related. We know today that 86% of all our equipment is today operating in the market, and that's actually no change from previous quarter. So that keeps pretty steady. And moving over to the automotive sector. You probably recall that during last quarter, I mentioned that we saw that it was destocking. We thought it was a destocking in the automotive side, But it's somewhat down during this quarter also here, but it's we do not really want to relate it to destocking this time. It's probably a little bit less volumes. Thank you. And operator, we'll have the next question please for true. The next question comes from the line of Peter Fullen from Handelsbanken Capital Markets. Please go ahead. Peter, your line is open. Thank you. Hi, Anssi, hi, John and Thomas. 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, especially due to the lower general industry activity in the U. S? I think it's about it's the same level as we said during Q4. So it's up about 1%. That's fair. Another question related to the SMS business. Normally, you tend to build some inventory, although this industry this business is very short cycle. You tend to build some inventory in the Q2. Referring to your comments about the working capital during the Q1, could we expect the same pattern in the second one that you tied some more capital, but you get some ease on the profitability in SMS business? 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. 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 we can be kept on the same level. Yes. And that's my point. Maybe the sort of normal sort of gain in profitability might be less gradually during the course of the year since it is to working capital management basically. Okay. And another one on mining back to mining. On the divestment of mining systems, I mean, there are some regulation according to the IFRS and stuff like that. And it's you're heading for soon to be a 12 month before after you announced the divestment, so to speak. So you continue to argue that it's going to be divestments during the course of this year. Could you share some light on how the process is going? Okay. Yes, because it goes according to plan, we still have the objective to announce signing before the end of the quarter. Then, of course, the closing takes a little bit of time before things are in Italy. But there's no change in the objective of closing during Q2. Okay. That's fair. Sorry for all of these questions, but a small one more. I mean, you mentioned about the headcount reduction quarter on quarter, year on year. Thank you for that. And if we look at the savings ahead on the 10% decremental on the negative 7% organically, I mean, and you get these easier comps. So I mean, are we looking at soon to have sort of a flat EBIT development or flat leverage, so to speak, in the Q2 and onwards, given the issue comps and then slight to lower negative organic? No. I think according to the first, I would like to say to the supply chain optimization program and this announced savings there. We are today at approximately €1,300,000,000 in savings. We have the ambitions to reach €2,100,000,000 so that's a little bit more to go. And we said we try to have that ready by the end of 2017. And then 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. And we have an objective for each of the business. I don't know if I'm allowed to say it, but 3% efficiency improvement per business year. That's our target, and that's what we need to drive. So if you don't have any growth, you need to adjust your costs. Yes. I mean, Thomas, I would have said it. Yes. Chris, anyway. Yes. No, I think it's very clear. Yes. I don't think we should guide or can guide really when the leverage will break even and come back into tax numbers. I don't think we should do that. I mean, that number, the minus 2% 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. Yes, so it will continue to improve, but we don't have any specific guidance on when it's confirmed with the black numbers. I understand. Okay, thank you so much. I'll get back in line. That's it. Thank you, Kide. And operator, we continue with the question from the call, please. The next question comes from the line of James Moore from Redburn. Please go ahead, James. Your line is open. Yes, thanks. Hi, everyone. Bjorn, Thomas and C. I've got 3, if I could take them 1 at a time. Firstly, on savings. The €253,000,000 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. So we this is what we expected. Okay. And just on that, can you say anything about the capacity adjustment, how the productivity 3% savings you've just let out the bag for the quarter? Probably going to eat that up later. No, I mean, it's pretty clear. This is not new. So course, you understand that in a business that you need to all the investments where we are doing, of course, you need to have some kind of payback on that side. And I think for any kind of business, 3% efficiency improvement is, of course, necessary and should be in every company from my perspective. Thanks. So switching to China. I'm just wondering if you could talk 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 is not helping the machinery industry much in China. I just want to check that you're saying that too. Yes. That's correct. Okay. And on SMT, I just wanted to ask Andreas' umbilical question a different way. We know umbilical margins are very high. Late cycle, they have a backlog. But without putting numbers on it, are you seeing margins in new umbilical orders lower than margins in umbilical invoicing? No. Okay. And 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 'seventeen with a mix change? No, I don't want to speculate that. There are so many activities. One of the important part is the OCC, OTCD's pipeline part. If we go back to 2015, we had the 0 orders. On that side, we now we are full halfway into 2017. So 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 would have stopped moving in China, the plant is there, which is a great upside also. So this varies a little bit. Of course, the oil and gas industry is going to be weak. That is to be clear for a while. So of course, there will be effects, but there will also be mitigating actions in relation to that. James. And operator, can we have the next question please? The next question comes from the line of Jonas Smith from Citi. Please go ahead. Your line is open. Yes, hello. This is actually Daniel Smith. Anyway, do you hear me? Yes, we do. Yes. Hi, Bjorn and Tom van Sanansi. I was just wondering, you announced the merger between 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? And could you say anything more in terms of details when it comes to costs out, I assume, when you merge mining and construction? I think we wait with that until we meet in the 24th May. So I don't have any numbers on that part. But sure, there will be some part when you merge these 2 business because there's a lot of overlapping positions there is. But the most important thing going forward is that the businesses will be very transparent. And the business leaders in 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 approving, you need to adopt your cost part. So instead of having 1 management drive efficiency in the operation, you will have 8 managers driving efficiency. So that is where I believe that you're saving us in the future. I think you've been really clear on that since you took charge basically. And what about further sort of streamlining in terms of Venture, etcetera? I think we'll be talking a lot about after 'twenty four. So let's save it until then. All right. And then just final, on construction, which we don't talk about a lot and I'm meaning sort of more the end market. It seems to be some anecdotal evidence, but also coming from a number of sort of companies been reporting in Q1. So far, the construction seems to be picking up in North America, in Europe and even in China. Do you have any sort of comments on this? First, I have to say that from my perspective, in construction, we are in a very, very small segment. And 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 middle part that we are. So 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, a little good niche where you are working with raw filtration, few competitors, good market, technology driven, and that's the important part. So from my perspective, we should not be comparing ourselves too much with the construction companies, which are much broader than this. And I know what you are referring to, and I read these reports also. It's, of course, when infrastructure is increasing in the park, yes, rock exploration has a tendency to ride with it. So far, we are not seeing too much improvement on that side yet. Bjorn. 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. So 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 They are supplied through the same supply nets out to the market. I'm a little bit confused myself when you see such a big deviation in margin. But to be honest, it's related to a number of businesses that we are in there, but a little bit to a crushing business, maybe much related to mid end market in China and also on some other products. Let's say, the main business which are related to the same equipment as tunneling, underground mining, surface drilling or drilling in relation to mining or surface ideas 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 a bit of 20 fourseven, 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 coils. So they are not so in desperate need of, let's say, service support and the spare parts. Sometimes they try to make some good businesses themselves. Also, when you are selling through distributors, it's normally more difficult to really catch the aftermarket. So there are some parts of it, but I'd still like to underline that many parts of core construction today is very, very much related to the mining business that we're going through. So moving these together, I think it would be a little bit easier in the future to follow what is the difference or what is the opportunities for that. And then in the annual report, you are saying that coring and crushing are global growth areas. Does this mean the crushing part, in your view, is a core business for you? Of course, it is a core business with us. It's one of our business areas we have. And if we are looking to the new setup, I mentioned we will have other 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 areas. And the one who knows me, I have a viewpoint on our businesses. If we have a business that is underperforming, that's going to be too recent. It could be bad management. In that case, we have to change the management. Or it's a bad business. If it's a bad business, we have to question ourselves if we're going to stay in that business. But with the transparency, we will be much easier to make these decisions in the future. Okay. And then last one, on the productivity improvement that should increase by at least 3% to 4% per annum. Would you say that this maybe I missed it during your presentation, but would you say that this is a step up from what somebody previously has achieved? And from what level in that case? I it's not to measure the history of that part. I think for Sandvik going forward, it should be important. I don't recall myself saying 4%, but in close, it will be that I said 3%. So I'm actually referring to the annual report again. Here, you're saying 3% to 4%. Okay. Maybe I'm a little bit too modest at this moment. But I would say it's true. I just got to I haven't really the history behind me how that has been provenanced before. But from my perspective, this is a very important measurement. This is a very important achievement from all our operations. It means if you are not in a growing world where we have to decrease our costs in otherwise, the old investments we do in improved productivity will not be paid off. The next question comes from the line of Philippe 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 saw metal powder, So 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? And then the other thing is, do you also additively manufacture drill bits? Or are you considering to do this? When it comes to additive manufacturing, we are doing a lot of I mean, on the research side here, we actually have in our research center in Sandviken, we have all these 3 d manufacturing equipment where we are developing and testing and for different kind of production facilities. But so far, in our own product, it's very, very much limited at this point. So it's more on the research side. It's true that we have a powder business supplying to that. But Cubron, I don't really know. Maybe you know how big or important that part is. I know, but we can share it, I'm afraid. Okay. I was hoping you would do it, but okay, obviously. Yes, okay. I understand it then. 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 Kirganas or I mean, I've seen that Alcoa has had some capacity, I mean, just an item capacity expansion maybe? No. I can't comment on either size or capacity expansion at this point, I'm afraid. Perhaps we can enlighten you more on the Capital Markets Day. Yes. We should go home and do our homework, yes. Maybe we can come with some better information at that time. You will also have a chance to talk to Piazza at that time, and she is probably very much in 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