Good morning and greetings to you all. Welcome to the presentation of the results of Sandvik's fourth quarter in 2015. Today, our CEO, Björn Rosengren, and our CFO, Mats Backman, will run through the presentation, after which we, as always, open up for the Q&A sessions. Without further ado, I'll just hand over to Björn and Mats. Go ahead.
Thank you, Ann-Sofie, and welcome everybody to this Q4 result presentation. As Ann-Sofie said, I will start up with presenting a number of slides, and after that, we would do the Q&A sessions. If we look at the Q4, we can see that the challenging market conditions continues. If you look for year-over-year, we can see that the demand, especially in China as well as somewhat in U.S., is declining. We also see that the energy market continue to be challenging. There are some spillover effects, especially in North America, when it comes to the general engineering part. The organic growth for the quarter was negative, and in the back of the low volumes, our EBIT decreased with 11%. On the other hand, we have three business areas, and that is Machining Solutions, Mining and Construction, that have a stable or improved EBIT level.
The Venture business area, as well as Materials Technology, are being influenced by the low oil price. We are continuing and pushing, in terms of the operational improvement, and also a little bit of cleaning. In the fourth quarter, or actually in December, we booked SEK 1.5 billion as non-recurring costs. Then, if you divide these costs up, there is SEK 250 million related to the last part of the supply chain optimization program. There is about SEK 320 million in cost adjustments in SMS as well as at the group. Then you have just under SEK 1 billion, which is related to impairments, mainly to the Chinese market, as we are not really living up to the measures that we were taking. The very positive thing in the report, I think, is the cash flow.
We had a strong cash flow in the quarter, and in the full year it was actually the highest ever. This is, of course, driven by a decrease in the working capital. I think all our business areas contributed to this good cash flow. As I mentioned, we're seeing less demand in the North American and the Asian region. As I mentioned, Asia is mainly China, which is down, while we see Europe as being flat, and Europe is our largest market. The order intake is actually down 7% year-over-year. This pie chart actually represents our invoicing, which is down 6% year-over-year. The small arrows, the yellow one, they actually represent the sequential development.
We see it pretty much flat, somewhat down when it comes to the energy segment as well as the mining side, while we see a strong development of the automotive as well as the aerospace. When it comes to mining, it is pretty clear it is an effect which is coming from the low mineral prices. On the engineering or the energy side, that is very much, of course, driven by the low oil prices. Just giving you an example, in the U.S. market, the sequential development of drill rigs actually went down with 20%. If you look year-over-year, it is actually 60% down. I think the number of rig count in U.S. today is about 650, somewhere around there. It is significant. Of course, these two are affecting two of our business areas. Sandvik Machining Solutions business.
I think the development there in volume follows pretty much the group. I think a lot of good mitigated actions and efficiency measures and structural improvements, the business here has managed to keep the EBIT level, and then I am talking about the adjusted EBIT level, at 20%. I think that is a good achievement from them. SMS actually has the highest cash flow ever, both in the quarter as well as the full year. A lot of credits to that. It has been a year of a lot of new product introductions. In SMS, up to 15,000 new products have been introduced. One of these products is the Walter DC170, which is a round tool. They call it the icon of round tools, and it is very much for the automotive industry. Mining. With mining, there are both positives and negatives.
Of course, they are inflated by weak demand in the market. Even though that, they managed to have good orders received, and actually flat development compared to the year before. That is especially a lot of equipment orders, which has come in during last quarter. We are happy that we can move into next year with a good order book. What I am not really happy with, maybe, is the profitability, which was lower than we expected. Approximately 1 percentage. That is very much related to three things that came up. One is the mix between the equipment sales, and that is probably a half percent affecting. You have some higher obsolescence compared to a normal quarter. On the last part, there were some tax issues in Asia, which actually burdened the profitability for the quarter.
We have a new head of the business area, Lars Engström. Lars Engström is one of my dream team candidates from my Atlas Copco team, and I am very happy to have him on board. Lars and I have very similar viewpoints how we would like to take the mining business forward. Also, in mining, they have new products, and here we present a narrow vein loader. By the side, it is also an electrical one, which fits in the today world, and drive towards electrical drives. As I mentioned, two of our business areas have been affected very much from the low oil price, and that is the Sandvik Materials Technology, as well as Sandvik Venture. If you start up with the Sandvik Materials Technology, I would say some parts of the tubular, which is called the core and standard, have had effects.
We haven't seen too much effect yet on the umbilicals business. We have a front view of about six months. What is very positive with SMT is that they actually got the working capital under 24%, and I think that's the best ever in the business area's history, which of course also is driving cash flow in a positive way. The underlying profitability, and I call the adjusted, also including the metal price part, is 7% for the quarter and 8.4% for the full year. Venture, I think that is definitely the business area which been affected mostly from the weak oil and gas industry. Of course, you understand that the Varel business, or we call it drilling and completion today, it's of course directly affected because they deliver the drill bits for the industry.
With such a weak market, of course, they are being quite severely affected. We also have some effects within the Hyperion business. They deliver some of the hard materials, and also the diamonds, which are used on the bits. That is being affected. On the construction side, I think we having improved profitability, both on the quarter as well as the full year. It is a challenging market. We got some exciting orders from Australia, SEK 270 million in tunneling equipment, which we are very happy for. Otherwise, I think China market for construction is very weak. While we see a little bit better in the U.S. market there. The dividend proposal is SEK 2.5. We do believe it's important to secure the balance sheet going forward to get a little bit more flexibility. It is, of course, within our policy when it comes to dividend.
If we look at the adjusted earning per share, which is SEK 437, I think it is, or SEK 27, this is 57% out of that. I think it's within the range. By that, I will hand over to Mats. He will talk a little bit about the financials.
Thank you, Björn. Moving into the financials and starting with the order intake for the quarter. We had an order intake of SEK 19.5 billion, which corresponds to a negative organic growth of 7% in the quarter. Negative book-to-bill, 0.93. We also had some order cancellations in the quarter, mainly related then to mining and constructions, about SEK 200 million in China within crushing and screening. On the positive side, we had a large tunneling order for constructions in Australia, about SEK 270 million. Looking on the invoicing, SEK 20.9 billion in the quarter, corresponds to minus 6% looking on the organic growth. We actually had negative growth in all business areas but mining, where we had a positive 3% in organic growth. That was very much, as Björn said, supported by the strong equipment order intake during the first half of 2015.
Looking on the EBIT side, adjusted EBIT of some 2.3 billion SEK in the quarter, corresponding to 11.1% in margin. We had a reported EBIT of 770 million SEK, but that is also including the one-off items of approx 1.5 billion SEK in the quarter. Despite a positive currency effect of about 70 million SEK and savings from our savings programs of about 270 million SEK, we still had an adjusted earnings decline year-over-year with about 11% in the quarter. Cash flow, 3.4 billion SEK in cash flow in the quarter in operational cash flow. Looking on the full year 2015, we actually had the all-time high operational cash flow of some 12.8 billion SEK. Very positive on the cash flow side for the fourth quarter as well as the full year 2015. Investments in the quarter, 1.3 billion SEK.
Total capital expenditures for the full year 2015 on the level of 4.1 billion SEK. For those of you that attended our Capital Markets Day back in 2014, we had the target for 2015 to be below 5% in terms of capital expenditure in relation to sales. We're actually on about 4.8% for 2015, so I would say a lot of positive development on that side as well there. The main driver looking on the cash flow development for the year is actually coming from the net working capital. Just looking on the development in the quarter, we reduced net working capital in absolute value with some 2 billion SEK, whereof 500 million SEK are related to currencies, but 1.5 billion SEK related to volume, whereof the de-stocking and inventories is the major part of the volume reductions.
In the quarter, we had actually de-stocking for all our business areas, and we had some under-absorption effect looking on the quarter. I would say that SMS, Sandvik Machining Solutions, as well as Sandvik Materials Technology, had an under-absorption effect on the margin. For Sandvik Materials Technology, about 2% units, and looking on Sandvik Machining Solutions, about 50 basis points in under-absorption in the quarter. Looking on the development of the relative net working capital, we're on the level of 25.7%. This is the best figure since 2010, 2011, where we're actually hitting the long-term target of 25%. Very positive development on the relative net working capital as well.
I'm actually extremely happy to see that we have three out of five business areas today that are below our long-term target of 25%, and we can welcome Sandvik Materials Technology into the 25% family as well in the quarter, and that is a great improvement for Sandvik Materials Technology. To summarize our savings programs, as we are stating here, we are halfway there when we're talking about the savings, both in terms of the savings as such as well as time. We have targeted total savings of 2.1 billion SEK with a full run rate 2017. By the end of 2015, we have savings of about 1.5 billion SEK. In the fourth quarter, we announced the third and the final step of the supply chain optimization program, and we have, by the year end 2015, closed 11 out of the 23 announced units to be closed.
Looking on the guidance for 2016 and starting with the first quarter, we are guiding for, or we are estimating a negative currency effect of SEK 300 million in the first quarter. That is based on the closing rates end of 2015. Metal price effect for the first quarter, minus SEK 130 million, also based on the closing rates end of 2015. Looking on the full year 2016, we are guiding capital expenditures on the level to be below the SEK 4.1 billion that we saw this year. In terms of net financial items to be between SEK 1.7 billion and SEK 1.9 billion, and finally, the tax rate to be between 26%-28%. With that, I'm leaving for Björn to conclude.
Thank you, Mats. If we then look at the summary of the year, it's pretty clear it's been a challenging year in our end markets. We reached SEK 86 billion in sales or 12.3% EBIT. We continue our portfolio optimization program, and we have booked-- Sure. That was the divestment of the Mining Systems business. We are going through all of our businesses going forward and challenging them. We continue to drive the efficiency program, and we have booked during the last quarter SEK 1.5 billion as a non-recurring cost, which is affecting the result. We have a high cash flow, SEK 12.8 billion, and the dividend is SEK 2.5. Look a little bit going forward. We do not actually believe that the market will do any major changes. We think it will be a challenging year also 2016.
Maybe we sequentially don't expect any further big drops, but probably moving in the same direction as we've done. We will continue to drive efficiency and the operational improvements in the company. I also am a strong believer in decentralization. We will drive out the responsibilities further out in our operations, closer to our customers to create transparency, accountability, and speed. We will challenge all our businesses. I have a firm belief that we should be number 1 or number 2 in the businesses that we are operating or have the possibility to get there. Otherwise, we have to question ourself, are we the right owner? I do believe that we should work in the direction of continuous improvement, not to expect any quantum leaps when it comes to improvements of the operations, but small steps every year.
We do expect that all our businesses will improve their performance going forward. By that, I think I will end this session, and we will move over to the question and answers.
Yes. Thank you. I think for those brave guys in the room who've braved the terrible weather here in Stockholm, we'll start with the questions from the room. Please go ahead here in the front.
Thank you. Peder Fryklund, Handelsbanken Capital Markets. Björn, on your last comment here, challenging the businesses. We need to see some time passing, come up with an explanation whether you can be number 1 or 2 in each and every one of them. When do you think it's time to put the foot down, which parts that do fit in Sandvik or not timeframe-wise? Mining Systems is one that you already announced, if we look at further portfolio optimization actions.
Yeah. Of course, I'm in the middle of analyzing the group, I'm spending a lot of time out in the different businesses. Just to mention that I'm very optimistic and positive what I have met out there. I think we have a lot of good businesses. We have a lot of good technologies, a lot of good people around. I do believe that the most of our businesses are world-leading businesses. That is pretty clear. There is, of course, always exceptions, I'm not planning to give any news today, but I will give you a little bit more flavor when we come closer to the Capital Markets Day, which is actually the 24th of May, in the direction where we're planning to take the company. Of course, the Mining Systems was a decision which I think is very good.
It's moving more into the core business of the mining part, that process is moving very well at the moment. We hope that we will be able to close this before the end of this half year.
Mats, if I may continue with a follow-up. Mats, you mentioned, or Björn, you mentioned that you don't expect any sort of big sequential differences in the demand. You usually talk about machining solutions, trading conditions into January, maybe you could comment on that, and then especially, of course, how the U.S. market is operating.
I would say we haven't seen any big changes to what we saw in the fourth quarter. I would say a flat development. It's always kind of difficult to draw any conclusions of beginning of January, and with all the holidays and so forth. I would say basically flat, unchanged market environment overall.
Is it fair to assume that you will not underproduce in the first quarter in SMS?
We are producing according to the demand. In terms of structural need to de-stock or to adjust inventories, that's mainly related to mining and to some extent to venture. The effect in terms of under absorption looking on mining is very small, you couldn't expect that. We are planning to produce according to the demand basically.
Thank you.
Thank you, Peder. Yes, please go ahead, one more from the hall.
Hi, good morning. It's Guillermo Peigneux from UBS. A question, actually a follow-up on Peder's questions on growth and focus on SMS, maybe a bit more regional color. It's difficult to see when you have the U.S.A. going down 15% organically and 13% in Asia, whether there is some de-stocking going on, and therefore, one should actually adjust for that going forward as the de-stocking stops to some extent.
Yeah. It's pretty clear that both Asia or China and the U.S. are the markets where we have seen the most decline of demand. China, I believe, will continue in a tough part going forward. I don't see any big changes in the near future there. Of course, there are a number of segments which are doing well, and that is the automotive segment and the aviation side. There, I think we should be able to see good volumes going forward. In U.S., I think the big drop actually came in relation to the oil and gas industry. Sequentially, it's, I would say, pretty flat at the moment.
A follow-up actually on oil and gas and your comments on umbilicals earlier on saying you haven't seen it yet and therefore it's stable. I'm just wondering why the weakness. Umbilicals tend to be higher margin within Materials Technology, and yet the margins have been very weak. I wonder what does it mean for the rest of SMT? Is that negative, or just basically losing a lot of ground when it comes to margins? Also, what would happen? Because I guess umbilicals will be impacted at some point.
Of course, the umbilical business, we all know it's a high margin business for SMT, it's very much important. We have a viewpoint when about six months, and that's where the order book is approximately. So far, orders have come in, and we have good orders in the pipeline. If the market will go down, which probably will do in the future, of course, it can affect the part because it's a very important part of the business. Of course, we need to then, in that case, and we have a little bit of foretime there to take mitigated actions in relation to that. So far, we have not seen any decline in the umbilicals orders.
The last one, very short. Pricing. I missed a bit of commentary on pricing.
Yeah
Given the deflationary environment we live in, which segments do you see price erosion?
I would say, if you look at the group overall, it's flat or somewhat positive. There are a couple business areas which are mostly related, of course, to oil and gas, and that is the venture business or the drilling and completion, where you see a drop in margin. There is also some drop in margin when it comes to core and standard in SMT.
Thank you.
Thank you. With that, we move on to the conference call, please. Operator, would you please put through the first question?
Certainly. As a reminder, star and one to ask a question, and your first question from Klas Bergelind of Citi. Please ask your question.
Yes. Hi, Björn. Mats Backman, Klas from Citi. A couple of questions, please. First, starting with return on capital employed. Has been a problem last few years, hovering around 10%-12%, despite considerable cost cutting and a major supply chain effort. This is well below the likes of Atlas. Björn, can you help us understand how we can improve asset turns? When you look at divesting Mining Systems, that won't help you that much as working cap is effectively zero. The simple logic is that you have to divest units operating low margin with too much capital. Is there something else you can do to get asset turns up, or do we have to rely on divestments?
To improve the capital employed is two things. You have to improve your margins, and you have to decrease your capital employed. These are the direction we're heading, and I think all our businesses has to be driven in that direction. I think this year we have seen good development in the net working capital, which has gone down, and we will continue to pull that. When it comes to all other businesses, yes, we're going to drive the performance from each of these business. I do expect that each of our businesses will improve year-over-year, which will give effect on the return on capital employed, of course. I don't really want to comment anything today of divesting any businesses at this part.
As I mentioned there, we are challenging our business structure, and we are looking into all our areas and analyzing if we are the right owner.
Let me ask this in a different way. We've done a big Supply Chain Program that is currently running. Given low volumes, you can't really see ROCE improving until volumes come back, I assume. When you've done analysis, what can happen here in terms of ROCE on the existing Supply Chain Program? Do you need to do more?
I think on the existing program, you will see effects. That's pretty clear. We will also continue in each of the businesses to work the working capital down, and that's going to be in each operation. That's a little bit part of what I'm saying, that we're in the decentralization, we are moving the responsibilities further out, and when you have the balance sheet and the P&L responsibility, of course, you are very much responsible for your return on capital employed.
Very good.
That is the direction we will push it.
Okay. My second question is on volumes and pricing in the aftermarket in mining. The weakness there towards the end of the quarter, is that just because of mine closures, or do you also see the miners canceling service agreements in existing mines, bringing services more in-house? Also, what are you seeing on pricing? The pressure we saw in rock tools last quarter, is that still confined to rock tools, or has it started to spread elsewhere?
No, it's correct. We're talking about the aftermarket, where the demand has been somewhat weaker. On the rock tools, I think that's sequentially pretty much as it was in Q3. What we're seeing in Q4 is that also on the spare parts and there we are seeing slight decline, and I'm talking about low single-digit. The volumes are still pretty good in the mining market, the tonnages that are being produced. It's keeping up. Of course, there are mine closures, and there are parking of equipment. Today, I think we have a pretty good viewpoint of our operating unit market share out of the existing business. I think you can mitigate that. We'll follow that very carefully going forward, and we'll keep you informed.
My final question is also on the aftermarket. Can you help us with the split of rock tools, i.e., spares and wears, versus pure service contracts? Within pure service, there is an insourcing risk building that they intend to bring more services in-house, and then we have to understand what is the risk to the aftermarket business?
Sure.
Thank you, Klas. Now we're.
Thank you
going to have to let someone else through on the line. I know there's a long line-
Sorry
Of questions waiting, I kindly but strictly ask you to limit yourself to one question and one follow-up. Please, operator, let the next one through.
Next question from Markus Almerud of Kepler Cheuvreux. Please ask your question.
Hi, Markus Almerud from Kepler Cheuvreux . My first question is on the mining equipment to follow on to Klas' question on the aftermarket. You talk about positive development or if you see it as a trend.
Of the demand in the mining market is actually going down slightly in the fourth quarter. What we were very happy to see, that we managed to get good orders, and that's mainly in relation to underground drilling and also loading and hauling. I think that's very positive. That has had a good development during the whole year. Previously as well, looking on the margin, and we are saying that the umbilicals or the more kind of CapEx related businesses, we haven't seen the effects there still. Meaning that what you see on the margins right now, it's a pressure on the core and standard side, meaning that we have a kind of under absorption effect in the melting shop due to lower demand.
First on the spare parts. Can you help us with what product categories or geographically that's taking place? It sounds like a new trend, so curious to find out what's changed to cause it. Is this the effect of longer term service agreements or spare parts agreements now coming to an end and being renegotiated, or is it something else?
No, it's not actually any dramatic part when it comes to any of these contracts. It's, I would say, the underlying pressure. Of course we mentioned that there are, of course, price pressures when it comes to the consumables, but we haven't seen it here. Underlying demand, and we see the mining companies are suffering hard, and they of course, doing everything they can to lower their operational cost. I think this is all over. This is not just in certain markets. This is all over. Many of the big mining companies, they are global companies, and they are operating both in surface mining as well as in underground mining. I think it's a global issue.
I don't think we should at this point, it's a slight, and I think we are careful to give that, but it is not any dramatic changes. I said, I think there are opportunities to mitigate these volumes, the demand decrease, by being active and making sure that we are delivering spare parts and service to our existing fleet. Where I think in Sandvik we have quite a lot to do.
Thank you. I appreciate the color. Just on SMS, in terms of new product introductions, against the up to 15,000 that you've been launching or you were launching in 2015, what is the plan for 2016, and how should we think about the margin impact from those product launches? Because I assume they come with, first, some kind of a J-curve effect.
They will continue to launch a lot of new products. Maybe 2015 was a little bit of a top, they continue. There is a lot of focus on R&D activities within the business area and also the other business areas. They have a lot of new exciting products that will be introduced also during 2016. They will continue with a very strong focus on R&D.
Thank you, Andre. Operator, we'll continue with a question from the conference call, please.
Your next question from Ben Maslen of Morgan Stanley. Please ask your question.
Morning, Björn. Morning, Mats. Firstly, just on SMT and the weaker order intake, you mentioned greater competition in the standardized tubular offering. Can you just put a bit more color around where that competition comes from? Is it developed economy players or is it emerging markets starting to encroach on these markets? Are you having to walk away from business because the net consequence of that is pricing is much tougher? Thank you.
I would say it's probably the usual suspects. It's the same kind of competition, but it's a little bit of a spillover from what we see within the kind of oil and gas segment, where all players are trying to utilize capacity in other areas. That's the main reason behind the increased competition. In terms of pricing, we're clearly stating that we have a negative price effect at materials technology in the quarter. It is on the core and standard business, a much tougher situation in terms of pricing, yes.
Got it. Thank you. Then the follow-up, just on ventures in process systems. You mentioned the postponement of projects for large systems. Just which end market areas do you see those postponements coming through? I would've thought that would've been a more resilient end market area. Thanks.
Yeah, it was a couple delays, I think, there in Q4 in that part, some orders which were slipped over to the next quarter. There are, of course, some very much related to the sulfur part, which has a relation to the oil and gas industry. We don't believe any sequential decline in demand when it comes to process systems. We'll probably continue in pretty similar as we have seen this year.
Thank you, Ben. Then I think we'll continue with another question from the conference call, please, operator.
Next question from Lars Brorson of Barclays. Please go ahead.
Thanks. Good morning, Björn, Mats, Hansi. Mats, just a quick one on Machining Solutions margins. Can I just confirm that the net proceeds from the divestment of property within that was about SEK 40 million-SEK 50 million, so about a 50 basis points positive impact to margins here? Secondly, Björn, I wonder whether you could just talk a little bit about what you see in automotive within Machining Solutions.
I think I heard you say automotive was doing well in China. That is not what you're obviously saying in the report. It looks to me as though automotive is weighing quite heavily, both in North America and Asia. Can you assess what is the underlying market demand versus channel de-stocking, to what extent do you think you might be losing market share here? Thanks.
Maybe I should start with the margin question on Sandvik Machining Solutions. Yes, it's a wash between the property sales and the gains on that one, and the under-absorption. About 50 basis points for both then, net zero if you're looking on both then. Yes.
If we look into the automotive segment, all markets in automotive has been strong, also in Europe, of course. In U.S., we've seen a very strong second half of the year, and a little bit flattening off in the part. I think we follow pretty much. We do not believe that we are losing market share there. In China, on the other hand, we saw that our supply was a little bit less than the general demand. On the other hand, in Q3, we had higher deliveries than the underlying market. We do believe that this is some de-stocking that has been taking place there. We do not have any signals that we are losing market share, neither in U.S. or in China. That's about it.
It's true that our volumes during the quarter were somewhat lower in China than the underlying demand.
Can I just confirm, automotive is about 25%, 30% of Sandvik Machining Solutions, and the geographic exposure mirrors that of the overall Sandvik Machining Solutions. Would that be a fair assumption?
Yes, it does.
Great, thanks.
Just to see, do we have any more questions from the conference room here? Yes, please. We have one more question here.
It's Guillermo Peigneux from UBS again. Maybe a question on competition as well, and for inserts, Machining Solutions. I'm thinking that as a fast-moving good, whether you're actually seeing pressure from lower quality Chinese competitors in international markets. Western markets.
Yeah
more than emerging markets.
Maybe I'll let you answer that, but you are from that business.
No. If you're looking on the development of the cutting tool market, it's the traditional players we can see. It's the Japanese players, it's the big players like IMC, like Kennametal and so forth. We haven't seen local low-end competition moving up in that value chain. It's the same existing brands as before.
Is it reasonable to expect they will come at some point?
Looking back seven, eight years, we thought that we would already be there today. I don't know. We are not there today.
Thank you. Operator, we'll go back to a question from the conference call, please.
Your next question is from Andreas Koski of Deutsche Bank. Please go ahead.
Thank you very much. Firstly, on Sandvik Materials Technology and umbilicals. I just wanted to understand how large part of sales umbilicals is today. Would you agree that sales for umbilicals in 2015 was between SEK 3.5 billion and SEK 4 billion?
I don't think we are that transparent on the umbilical sales. What do you say?
Unfortunately, the answer is no here as well. We don't give that specific details on the sales split.
Okay, at least historically, you've said that the oil and gas exposure in SMT was between 20%-25%. Is that correct, at least?
Umbilicals is of course part of that, but you have also the standard and core, which Mats talked about before, which is the part which have been affected so far. We have not seen the effects on the umbilicals at this stage, while we've seen it then in the standard and core. As Mats said, this is because many competitors, due to lack of market in other parts, are moving in that direction.
Yeah, I understand that. I just want to understand how big umbilicals is for you in SMT.
I think umbilicals is an important part of our profitability in SMT.
What we have said is that we have a higher margin than an average margin looking on the umbilicals. It is important, yes.
Yeah. I know that as well. Thank you very much. The second question, on the remaining savings of SEK 1 billion. The program is expected to close by the end of 2017, but could you give some sort of guidance how much of that will be materialized in 2016?
I think we have the full split as a backup in the slide deck, looking on the timing of the different savings done.
Yes, you have the phase 2 of the Supply Chain Optimization, which is due to close for savings at the end of 2016. That should give you some guidance towards the phasing of the savings.
I think you see the split on business areas as well in the information that we have been giving previously, it's no change to that.
Perfect. Thank you very much.
Operator, we'll have the next question from the conference call, please.
Next question from Alasdair Leslie of Societe Generale. Please go ahead.
Hi, good morning. A couple of questions on mining. You've obviously got a new mining president, replaced Scot Smith, who was charged with improving the aftermarket focus. I know Smith wasn't really at Sandvik for that long, but I was just wondering if you could highlight what progress was made over the last 18-24 months in terms of capturing more of the install base mapping and understanding that, and where you stand in today in respect. Then maybe also, just obviously with your comments about moving to a more decentralized model and being closer to the customers in mind, what the priority now for that division is. Has the focus changed? Thanks.
I think we should give credit to Scot Smith and his actions in the aftermarket. He has really made that as a big focus to the business area. I think one of the important parts, and of course, the visibility, you have to know where you make money and you not make money in the part. We have to know where we are, what is our market share in the aftermarket, and what is the potential. I think one of the really good project that they have been running there is the mapping of all our equipment out in the market. I think that is a very good start when it comes to driving the aftermarket. I think he made a good job in putting that focus.
That focus will of course, continue, because that is the basis for a stabilized and a good profitability for the business area.
You'd say you're in much better shape now compared to 18, 24 months ago?
It's difficult for me to say because I wasn't there then, but what I hear from the mining operation is that there is a very strong focus on the aftermarket. I also know that there is a lot of potential in the aftermarket also for us going forward. That will definitely be priority 1. When we come into, you talk a little bit about the decentralization part of it. I'll just give you a little bit of a flavor. I cannot go too much into detail, but I have a very strong belief in business units that have a fully responsibility. I'm talking about both P&L and the balance sheet. The decision has to be taken close to the customers, and they have to drive the business from there.
We are going through our different businesses, and we are trying to move as much as possible further out. That is a little bit of a direction. I will be talking much more about that during the Capital Markets Day, the 24th of May.
Thanks. If I could just have a quick follow-up on the, when you talked about the softness in consumables and spare parts and services in the quarter, just to be clear, for you, are the drivers for each of those, are they the same or were there different drivers in the quarter? Because obviously we've heard from one of your peers that consumables was weak, but spare parts was okay.
Yeah, I think they're pretty different. Consumables is very much, how are you driving, how much are you drilling? You follow that pretty much. On the service side, of course, that can be a decision from the customer. I would like to do it myself. I'm buying your spare parts. I'm buying pirate spare parts. There are a lot of different kind of viewpoints on that. I think the consumable business is probably the best way to actually see how much is being drilled out there, how many rigs and so on. There are not too many players, as you know, in the market. There are a couple, and they split the market pretty well. You get a pretty good picture of what is the actual situation out there. So far, we haven't seen any volumes going down yet.
The volumes have been flattened out, but they're not going back. That is how the market look today.
Thank you very much. I believe we have one question here from the room. Please, Anders.
Yes. Good morning. Anders Roslund , Swedbank. I have two questions, one regarding Machining Solutions and the automotive sector. You've introduced new products specifically for the automotive sector. How are you performing there? Now the new products in this area coming on stream, or have you seen the full effects yet? The second question regarding Mining. The aftermarket, how do you see the two aftermarket areas, consumables and spare parts, looking into a one-year perspective? Are there any specific trends?
When it comes to the new products being developed, and we have a very strong focus on how big part of our sales are from products that have been launched during the last years. We also have how big part of our sales is coming from products launched the last year. We can see that both of these have changed and are moving in the right direction. That's a very important stage, showing that the R&D part is actually paying off. I don't have any details. Maybe you have, Mats, directly if you have, how are the new products actually performing in the automotive industry?
It is according to plan, it takes some time to reach all the kind of applications as well. We have a spillover effect into 2016 and going forward before we have the full kind of impact from the new products. According to sales, or according to plans, it is a tough demand situation. I guess that's on the negative side.
On the Mining question?
Yes, of course. Sure. The aftermarket, of course, consists of two things. It's the service and consumables as well as the service and spare parts, as well as on the consumable side. I think we mentioned that there have been a little bit of a pressure on the consumable side also Q3, Q4. I think that's pretty much sequentially on the same side. While, as I mentioned before, during Q4, we've seen this small decline in demand. So far low single digit numbers there. Maybe I didn't really get the question full out
2016.
Yeah.
Do they go together, or will there be differences?
I think there will be.
Trends, differences in the trends.
I know what you mean
of spare parts and consumables.
It's difficult to forecast, we know that the demand will continue to be weaker. I think it very much depends on what's going to happen with mine closures or not, if it will continue. I think we probably will see the same trend. Hopefully, we will have a chance to mitigate some of the aftermarket service by being more active in the market there. Probably you will feel the same trend going forward.
Thank you. Operator, we move on to the conference call, please, for the next question.
It's from Graham Phillips of Jefferies. Please ask your question.
Yes, good morning. A question around Machining. Can you just confirm that the SEK 40 million to SEK 50 million profit from the sale of asset in that division actually went through in the profit bridge as organic growth? If also that meant that the drop-through margin's actually quite negative at around 60%. Do you think looking into 2016, that reduces? You've got a -7% order to take through. Would that also see perhaps some underabsorption on fixed costs?
Looking on the bridge, when you're talking year-on-year, the fourth quarter this year comparing with last year, I think you have positives and negatives that are kind of not included in the organic side in the bridge. First of all, we had a higher underabsorption this year comparing to last year within Machining Solutions. It's about the same effect as we saw in the quarter, kind of isolated, about 50 basis points. So it is basically a wash between the underabsorption and the gains we have from the sales of the property when you're looking on the year-on-year bridge for Machining Solutions.
No, I understand that. If we're trying to look at the true organic impact, then we obviously have to take that away, which would imply the drop-through decremental margin, if you like, is quite high, sort of 60-odd%. If you've got a -7% organic growth, potentially in this current quarter, given the order development, then that's going to be again, quite difficult to recover against fixed costs. You'd expect.
It's not correct. If you're looking on the incremental margin of the leverage quarter-over-quarter, year-on-year. We have a negative leverage of 24%, and I think that is kind of decent looking on the whole integrated business model. What you need to do then, to starting with the 24%, you can kind of start taking away the underabsorption that has a negative impact year-on-year, and then you can put a property on top of that. What I'm saying is that the underlying leverage, if you're looking on a year-on-year, it's the same, because it's a wash between the property and the negative effect from underabsorption. I would argue that we have an incremental margin of some 24% and nothing else.
Okay. Just in terms of the new solid carbide tool, I'm sorry, you might have gone through this at the beginning, the operator was very late connecting me to the call. Can you talk about what market that's targeting, where you think your overall exposure in this division as well is towards energy and mining? Obviously you've got some indirect exposure through the general engineering segment.
You're referring to the Walter new developed tool. Yeah, that is targeting the automotive industry. What I said a little bit on the SMS part, where the reason why we're seeing the volumes down as a part, the general engineering has been affected by the low oil prices. I think maybe we were surprised that, maybe not only in this quarter, but also in Q3, that the low oil prices would affect so much of the general industry. That means that many of these workshops has been actually targeting the oil and gas industry, which is of course suffering at the moment. That is what we see. We do not see any sequential further decline in the market on SMS than we've seen from between the, let's say the first half to the second half.
I think energy overall is around, what, 10% or 15% of this division, but of the general engineering, which was about half, a good portion of that is then also related to energy and also other heavy industries like mining, I guess.
I think on the general engineering side, I think the big hit was when they lost their contract, and that was actually between second and third quarter. We haven't seen any further on the general engineering. That is sequentially pretty flat.
Okay. Thank you.
It's actually, you're comparing with the high numbers of the first half of last year.
Yeah. I guess I was looking year-on-year, okay, no, that's fine. Thanks.
Yeah.
Thank you. We're coming towards the end of this session, but we still have some more questions from the conference call. Operator, would you please let one through?
Next question from Andreas Wirth of JP Morgan. Please go ahead.
Good morning, everybody. My question on Machining Solutions, if you could talk a little bit about pricing there and the ability to price up for particularly the new products that give customers more productivity, and whether that's enough to offset that some of these products also don't last longer, and therefore the replacement cycle gets pushed out. Maybe if you could talk a bit around kind of the pricing ability of these new products. That's the question, please.
The new products, that's adding ability to increase prices, but in the same time, it's a very tough environment looking on the demand. We can see a much tougher environment in order to increase prices, for sure. Without any new products, it will be a real challenge to keep that one on positive, I would say. I would say that the product introduction is a prerequisite to continue our pricing strategy.
My follow-up question on the FX guidance you've given for Q1 that's based on December year-end rates. We've seen some emerging market currencies weakening further since then. Have you run the numbers as well for end of January? Also, given the impact of SEK 300 million for Q1 already, what will be the full year estimate for the currency impact at current run rates? Thank you.
We are not giving the full year effect. We're sticking to the first quarter. We have not recalculated any numbers. We're sticking with the year-end numbers. I think that is good for you then to make your own calculations based on the year-end rates. What I would like to add, looking on the minus SEK 300, the reason for the very negative outlook looking on the currency effect is mainly related to the mining and oil-dependent currencies. Talking about the AUD, the BRL, and so forth. When you are looking on the currency effect as such, the biggest hit will be on mining looking forward.
Thank you very much.
Thank you. That implies the end of this session. I know we have more questions on the line waiting to come through, but please feel free to contact us at investor relations. We'll do our best to help you. Thank you all for joining us today. We'll see you in about a quarter's time. Thank you.
Thank you.