Welcome to the presentation of Sandvik's results for the first quarter 2015. As per usual, we're going to have a presentation by our CEO, Olof Faxander, and our CFO, Mats Backman. I think without further ado, Olof, would you please start off the presentation?
Thank you very much, Ann-Sofie, and very welcome to this press conference for Sandvik and our first quarter results. To start with the earnings, we did see both earnings growth and margin expansion in the first quarter. I think a very positive development from that perspective. This was in part driven by strong currency effects. We had a positive effect of SEK 770 million in the quarter, but also due to our underlying efficiency measures that are ongoing with a full pace in the company. The adjusted EBIT margin came in at 12.6%, and we were just shy of SEK 3 billion in EBIT. In combination with that result, we actually delivered the best first quarter cash flow that we have ever delivered in the company. A very strong cash flow.
The first quarter is seasonably normally weaker when it comes to cash flow, but SEK 2.4 billion is, I would say, a very strong performance regarding cash flow. When it comes to the market, the demand continues to be fairly stable. We don't really see any big dramatic changes in the markets or segments, with maybe the exception being the oil and gas market, and especially the onshore drilling activity in North America, which has been quite weak during the beginning of this year. Our programs are progressing according to plan. We launched earlier in this quarter the second phase in our supply chain restructuring program, and the first phase is running fully according to plan. I read someone saying that don't believe that the world is round, all the people who've been saying that the world is flat are right.
We do see an extremely flat development in the world economy around us. All markets have more or less been stable from a geographical perspective around the globe. The growth that we saw during 2014 in North America has been hampered, and we now see a more sideways movement in the North American market, but still at a very high activity level. Asia continues to be quite strong, but a sideways development with somewhat weaker development in China, with a gradually slowing growth rate there. On the other hand, India has actually, from our perspective, performed very strongly in the first quarter. Overall, geographically, I would say a flat development for our business. Looking at our segments, we continue to see invoicing decline in the mining sector, and this will likely to be continued in the future, driven by our Mining Systems business.
On the other hand, when it comes to the equipment and aftermarket parts of our business, there the market is quite stable, and we have a neutral book to build. The weaker or the negative book to build in mining is fully driven by the weaker order intake in the Sandvik Mining Systems business, which is quite normal given the low CapEx levels we're seeing with the mining companies right now. Aerospace had a positive development when it came to sales compared to the same period last year. If you look at the sequential trend, we do still see a slightly positive trend in Aerospace, and Energy, driven mainly by the weaker oil price, has seen a negative sequential development. Order intake and invoicing were more or less balanced. We had one order cancellation within Sandvik Materials Technology within the oil and gas sector in Asia.
This was more or fully compensated by other large orders that were received, two in the oil and gas sector, and actually, we got the first nuclear order to China that we've seen since the Fukushima accident. Sandvik Mining Systems, I mentioned earlier, as the area within mining where we saw weakness, but otherwise a fairly stable book to build and a quite neutral market environment. In the quarter, Sandvik Machining Solutions saw record high invoicing. We continue to see high sales levels for the SMS business. Sandvik Mining Systems is hampering the development for mining. Given that these are long multiyear projects that we deliver within the Sandvik Mining Systems business, with the low order intake, it's likely that we will see that gradually tail off going forward, the activity levels in that part of the business.
EBIT reported just over SEK 1 billion, but of course we had quite large one-off items in the quarter here, driven by the second phase in our supply chain restructuring program. What was positive was that we saw a net reduction of employees within the Sandvik Group of 461 people. This is witness about the efficiency measures that we are gradually driving and executing in the company, which is gradually lowering our cost base to respond to the weaker market environment that we see, or the very neutral market environment that we see right now. As mentioned, record Q1 cash flow, which is something I think we're very proud of in the company. It's a result of good management of our net working capital in the business, as well as a cautious approach to CapEx around the company.
Comparing against our financial targets, our growth was clearly higher when it came to sales. Compared to our 8% target, we came in at 12%, but this was mainly driven by the positive currency effects, principally coming from the weak Swedish krona. Return on capital employed was, of course, influenced by non-recurring charges, and came in at 11.5%. Here we're continuously focusing on holding back our capital base through a restrictive approach to investments and also net working capital reductions, and at the same time, driving for result improvements in the business through cost saving measures and so on. Net debt to equity continues to drop back in the quarter, driven by a strong cash flow and, of course, the earnings in the company. We are well below our 0.8 target in the company.
The proposed dividend is 73% of our EPS, so we continue to have a very generous dividend policy in the Sandvik Group. We use this slide when we make our presentations, really for you to have as a reference about the different activities you can see ongoing in the various business areas around the company. To highlight a couple of areas, firstly, within Sandvik Machining Solutions, we continue to launch new products at a high pace. The 1st of April, Seco Tools launched the next generation of their Duratomic grades, which is a very sizable product launch for them. Also Coromant and our other brands continue with a high activity with product launches. This is a result of our strong, focused efforts within research and development in recent years, which are now bearing fruit and resulting in products coming out in the market.
Mining continued to consolidate their footprint with, amongst other, a closure in Australia of a production unit in the quarter. We see very good development in the aftermarket, and actually start to see some slight growth in parts of the aftermarket business here. Sandvik Materials Technology had a good net working capital development, so they are working with improving the capital efficiency in their business. Within Sandvik Construction, we finalized the closure of our site in Swadlincote with the mobile crushing and screening in the U.K., and this will help Construction to establish a considerably better cost base within these products for the future. With that, I'll hand over to Mats to give some comments, and then I'll wrap up, and we'll open up for some questions. Mats.
Thank you, Olof. I will give some first quarter highlights in some of our prioritized areas, and starting with the supply chain optimization program, where we totally have announced the closure of 21 units now. Looking on the first phase that is including 11 units, we have completed seven of them, two of them in the first quarter, one for Construction, as Olof said, in Swadlincote, U.K., and one for Sandvik Mining in Australia, Hunter Valley. The remaining four units will be closed in the balance of 2015. When it comes to savings, we have annualized run rate savings of SEK 360 million now by the end of the first quarter, so we are well on track to reach the SEK 800 million in run rate end of 2015.
We also announced the second phase of this saving program now in the first quarter, and that is including the closure of 10 units. We actually started the closure of three of the 10 units in the quarter, and there's two for Sandvik Mining, one in Tornio, Finland, one in Nora, Sweden, and one for Materials Technology in Sheffield, U.K. We are aiming for savings of SEK 600 million by end full run rate end 2016. All in all, the supply chain optimization program is running according to plan. Moving to net working capital, Olof talked about the record high first quarter cash flow, and the development of net working capital is key in that cash flow performance.
We managed to keep the volume flat fourth quarter into first quarter when it comes to net working capital, and that is extremely strong looking on the enormous seasonality, where we are building volume mainly in accounts receivable. This quarter, we managed to fully compensate for the increase in accounts receivable with destockings. We have destocking approximately SEK 500 million in the quarter. When you see an increase in absolute numbers, that is fully due to currency effects. Looking on the relative net working capital, we actually decreased the relative net working capital slightly in the quarter, and that is despite enormous seasonality where we normally see an increase of 1.5%-2% units in the first quarter comparing to the fourth quarter. A really good performance when it comes to net working capital in the quarter.
Looking on the performance for the different business areas, we now have two business areas on target level. Looking on Sandvik Construction, that is actually the lowest relative net working capital ever for the business area. Machining Solutions continues to manage the net working capital on target level. The best improvement, however, we saw actually within Materials Technology that improved the relative net working capital with 3% units in the quarter, partly due to continued destocking, but also due to prepayments in the energy product business. That is something we are pushing for as well in order to improve the net working capital. Mining increased the relative net working capital slightly in the quarter, but that is mainly due to lower invoicing and lower top line. When it comes to the Inventories in volume, we actually continue to destock in the quarter. A fairly good performance for mining as well.
Looking forward and looking on the guidance, when we released the fourth quarter report, we talked about the positive effect from currencies of SEK 600 million in the quarter. We actually ended up with SEK 770 for the quarter, and that was mainly driven by a further strengthening of the US dollar, Chinese yuan, and the euro, which gave a much higher impact from currencies than we anticipated when we released the report for the fourth quarter. Looking into the second quarter, we are estimating the currency effect to be on the level of SEK 900 million, and that is based on the closing rates end March. Looking at metal price effect, we are estimating minus SEK 150 million for the quarter, and that is also based on the closing rates end of March for currencies, but also for metal prices.
Looking on the full year guidances for 2015, we are keeping the guidance when it comes to tax rate, 26%-28%. We are keeping the guidance for CapEx to be below SEK 5 billion for the full year. However, we can recognize that we have a lower run rate right now, but we will also have headwind when it comes to currencies on CapEx. We are keeping that guidance as well. When it comes to net financial items, we are actually lowering the guidance for the full year. Previously, we had SEK 2 billion for the full year. Now we are looking on SEK 1.8 billion-SEK 2 billion, supported by the good cash flow we have seen in the first quarter. With that, I think I will leave for Olof to summarize.
Thank you, Mats. Looking then a bit into the future, what are we focusing on for the remainder part of the year? Most importantly, I would say, our continued high activity level when it comes to product launches within the Sandvik Group. We have a plan to launch over 15,000 projects in the company during this year. I would say during April is the months when the first larger wave of this really has started within Sandvik Machining Solutions. A lot of activities going on with new products which will strengthen our long-term competitive position in the market and help us to continue to support our customers in an even better way to make them more productive and, of course, help Sandvik to strengthen its positions in the market.
We're also working a lot with aftermarket business and to really capture a larger part of the aftermarket business on our installed base. This picture shows a kit for a rebuild of a Sandvik drifter. This is one example of how we're trying to make it simpler for the customer to really buy their parts from Sandvik. You got a fully branded kit with the complete set of equipment you need for that rebuild. You don't have to order a lot of items individually. A simple solution for the customers. They get all the parts, and they can make sure that they do their drifter rebuild on time, are not missing any parts, and get their machine back into production as quickly as possible. We're quite optimistic about our opportunities of developing aftermarket in the next couple of years in the business.
We continue to focus on building a leaner company. We are closing our manufacturing units according to plan, and there's quite a high activity level ongoing with that. You can see the drops in the manning numbers within the Sandvik Group. A lot is happening in areas of what we can control as a company. Of course, the macroeconomic development right now is quite tough, and we see very limited market growth, but we have a strong focus of, despite that, improving Sandvik's performance through the internal measures that we're taking within the company. To summarize the first quarter 2015, we are seeing good and healthy earnings growth in the company and margin expansion for the Sandvik Group. We see a record high Q1 cash flow.
Our work, not only with improving results and margins in the company, is running well, but we also see good developments in terms of cash flow and performance. We are managing to actually deliver on both of these areas at the same time right now in the company, as we also did in the preceding quarter. We're making good progress on our supply chain optimization program. The factories are being closed according to plan, and the new closures are being announced according to plan. The provisions for the second phase have been taken now in the first quarter of this year. When it comes to the market development, we see overall a stable demand in most sectors and most geographies, with maybe the exception of the oil and gas sector, which has performed weaker than what we saw in the preceding quarter.
With that, I suggest that we open up for questions.
Yes, we will open up for questions, and we will alternate questions here from the audience in Stockholm, as well as through the conference call and through the web. We start off to see if they have any questions from here in Stockholm. Yes, please.
Yes, good morning. This is Peter from Handelsbanken. Could you please share some light of the demand drop in oil and gas business for the steel, but also in Varel? Try to help us to quantify that. Tied to that question, more importantly, maybe describe more in detail what you actually are doing to map out that weaker demand ahead.
When it comes to the demand development in oil and gas, we actually see a neutral book to build within Sandvik Materials Technology. We have received a couple of new large orders. We had a cancellation, which I would say was more approval and political driven than the direct consequence of the lower oil price right now. What does happen in the order book within Sandvik Materials Technology is the sequencing and time of the order stock has moved out. Of course, this cancellation was planned for more near-term manufacturing, and these new orders are for later in the future. We still see a balanced book to bill and a fairly actually normal type of activity level, not a big drop when it comes to Materials Technology.
When it comes to the venture business and especially Varel, they have about 40% of their sales in North America. I would say in the rest of the world, of course, some pressure downwards due to the oil and gas prices, the drop there, but there's been a very dramatic drop in North America. When it comes to the drilling within the shale gas areas and the onshore equipment, they very rapidly slow down drilling activity with the low oil price and also very rapidly ramp up again if the oil price comes back. While the offshore projects in SMT, they have a much longer time perspective, and you don't stop a multi-year, very large investment project just because of a temporary drop in the oil and gas price, which is what it does have effect in North America.
That's how we see a significant effect, especially in the North American business. Offshore, of course, pressure in the market, but not as dramatic as what we've seen onshore. The rig count since we stood here last time and released Q4 results has dropped by something like 40% further. It's no small changes that you see in that business right now. Measures we're taking, when it comes to our venture business, there the drop has been much more radical and faster than what we could anticipate. We've not, of course, fully been able to keep up taking our cost at the same rate as that market has dropped. We have a strong focus on reducing our cost base, mainly by adapting manning numbers and so to the new activity levels we see in the business. SMT have also taken certain measures during the quarter.
We have time banks, so we can flex time within the business over time. We're using historic overtime to reduce man time in the mills right now. We've also had some personnel reductions, mainly of temporary employed people and agency workers in the business.
The 461 are sequentially lower full-time employees excluded, I guess, temps or?
If they're employed in Sandvik, there's certain rules for when even agency workers get into our statistic after a certain point in time, but it's according to common definitions there.
Most of that is, of course, according to the Supply Chain Optimization Program. Could you quantify the Varel part of that?
No, we haven't specified that to that level of detail. We are seeing a good, healthy manning reduction as a consequence of our ongoing programs here.
Thank you.
We'll have one more question here from the audience in Stockholm before we open up from the conference call.
Okay. Anders Roslund, Swedbank. I have one question regarding SMS. You are lifting production slightly, you see flat or no growth. Is it only a seasonal effect of lifting production, or is it thanks to that you have new products?
Well, I would say we have a fairly neutral production. We are maintaining our net working capital. We're not building significant inventory in the business. We are fairly balanced, and that's what you should expect going forward in terms of production and sales within our Machining Solutions .
We are actually flat when it comes to inventory and volumes, it's not stock built up behind the machine solutions.
Okay, what about all the new product launches you mentioned? You will keep that in line with the ordinary production?
We have today a totally different focus when it comes to net working capital than we had a few years back in the company. As you should also remember, when you look at Q2, where we seasonally before built quite a lot of inventory in anticipation of the summer shutdown. We are now aiming to have a much more flat net working capital development over the year, which we think will be beneficial and reduces the risk of obsolescence costs and so on in the company. Plus, we get the more effective and consistent utilization of our production base. When it comes to new products, we're also aiming to manage that without having to build significant volumes of net working capital. This is, of course, a significant challenge for SMS to do that when they have both products that are exiting the portfolio and new products coming in.
We have a very high ambition when it comes to sticking to our net working capital target in the company.
Looking at the overall development of inventories in the quarter, we only had stock built up in volume in one business area, and that was Sandvik Construction. We had flat or de-stock in all the other ones.
Okay. Thank you.
Right. Operator, would you please let through the first question from the conference call, please?
The first question comes from Klas Bergelind at Citi. Please go ahead.
Yes. Hi, guys. It's Klas from Citi. I have a few questions, please. Firstly, Olof, on the EBIT margin in SMS, quite a big FX impact here on transaction. Pretty, you could say, weak margin underlying. You have no growth, but could you help us with the underlying investments in SG&A and R&D? I assume that they didn't start to fall sequentially.
With the leverage on SMS, you can see that we had more or less flat top line excluding currency, but actually had a slight drop if you exclude those currency effects. That's due to the, during last year, build-up of SG&A costs, or NS costs, as we call them, in the company that we had to focus and support new product launches and more ambitious plans in the market. That's the reason why you have seen this, that you don't see a better leverage excluding currency effects within Sandvik Machining Solutions in the quarter.
No. Yeah, exactly. I'm just trying to understand when will these investments start to annualize? I mean, when can we start to see a tailwind from lower costs as we go through this year?
Yeah. We built these costs up to and including the third quarter last year. Now we're comparing Q1 to Q1. You will see some increase Q2 on Q2, and then by Q3 you should start to see a more neutral situation here then.
Okay. My second question is on construction. Nice to see a 3% margin here. Now, reflecting back to what you said during the Capital Markets Day in November, I think head of construction, he talked about the actions that could drive the EBIT margin up to 6%, 7%, and this was at the current demand level, and that most of this could land in 2015. Obviously, today's result seems like the first sign that this actually might work. I guess a 6%, 7% margin for the full year, is that how we should look at it?
You're nearly answering your own question. Q1 for Construction, they're on track with the plan that they presented on the Capital Markets Day. They had, I would say, maybe the most ambitious improvement plan of all the business areas, and I think they should be proud and happy of what they achieved in the first quarter. They've definitely taken a clear step in that direction. They of course, still have a significant challenge to go to meet the full level that they were aiming for there. Q1 was definitely a good start and is totally in line with that plan that was presented.
Okay. My final question is on the aftermarket in Mining. The outlook for iron ore in particular is getting weaker. We're hearing about the largest producer, Vale, starting to cut production, i.e. this is no longer contained to the high-cost producers. We heard about Caterpillar talking about renewed aftermarket weakness. What are you seeing here, and how do you look at the aftermarket business ahead, given potentially slower production rates?
When it comes to especially the parts side, I would say that we start to see a slight positive development for Sandvik. Our business against coal and iron ore is mainly driven by our Mining Systems business, and we have very little aftermarket in those areas. Iron ore per se is not going to have a significant impact on Sandvik's aftermarket. It does manifest itself in the very low order intake we see when it comes to new projects within the Mining Systems business. The equipment and aftermarket business is much more driven by base metals, gold, platinum, and these other minerals.
Thank you.
Right. Operator, can we have the next question, please?
We have a question from Mr. Alexander Whyte at J.P. Morgan. Please go ahead.
Morning, everybody. It's Alex at J.P. Morgan. I've got a few questions as well. The first one is just a question around the inventory. Can you just quantify the size of the SEK 500 million destock in each division and just give us some idea of how much was finished goods and thereby weighing on the margins?
In terms of the SEK 500, the biggest one is actually Sandvik Mining in that number. It's quite a lot, again, related to part, meaning that it's no kind of immediate effect when it comes to under absorption. A very small margin effect on mining coming from destocking. Sandvik Materials Technology continued to destock in the quarter, and I would estimate the margin effect in the quarter to maybe around 1% units. More importantly, looking at Sandvik Materials Technology, and especially comparing with previous years, the delta in terms of destocking with first quarter 2014, because we had a significant stock built up last year in Sandvik Materials Technology. The difference in stock built up and destocking this year for Sandvik Materials Technology is about SEK 400 million year-on-year. Year-on-year, we have approximately, I would say 3% units impact on the margin for Sandvik Materials Technology.
In this quarter, it's maybe around 1%. For the other business areas, I would say it's kind of insignificant when it comes to the under absorption effects.
Okay, great.
The overall group leverage there, we did, for the company as a whole, I think, have a fairly okay or a good leverage in the company. Holding back a bit is SMS, and as we talked about, this focus on building up our sales cost to support our market position and new product launches. These effects that you see on Sandvik Materials Technology regarding stock build in Q1 last year and some stock reduction Q1 this year. If you disregard those two effects, actually, I would say the leverage in the company is quite strong this quarter. Looking into the second quarter in terms of production rates, I can see that we make some further kind of adjustments in terms of destocking in Sandvik Mining and Sandvik Materials Technology.
It will be maybe on the level of what we did in the first quarter, so not that kind of significant. For the other business areas, we will pretty much produce according to demand then.
Okay, great. The second question I had was on SMT. You've touched on it a little bit already, but just interested in how, last quarter you talked about having backlog support sort of through to the middle of this year. With the cancellations, does that now mean that we should be expecting invoicing to decline more materially already from Q2? Perhaps, can you just talk a little bit about what sort of cost opportunities you see outside of the temp reductions that you're already making, given you've already been through quite a large restructuring program over the last few years?
Well, I think when it comes to Q2, you shouldn't expect any significant changes in the volumes for SMT. There, we still have an order book to support the business as the world looks right now. When it comes to cost cutting, of course, we continuously look at how we should adapt our costs to the activity and market levels that we have. It's always possible to reduce shift forms or find other ways to take out costs if we feel that is necessary from a market perspective.
Do you expect to be able to maintain a double-digit margin in that division?
Well, we don't give that precise guidance. Now we expect to actually have negative metal price effects in the second quarter. Backing out that, we should be able to continue around the margins that we have right now, at least coming in to the second quarter for the business.
Okay. Then the third question I had was just around currency and how you think about opportunities to perhaps use it to price a bit more competitively in some of your segments, given you've got fairly important dollar-based competitors as well.
Well, our primary focus is not to allow price erosion due to the weaker Swedish krona. We feel it's a better policy to aim to maintain the pricing picture in the market and win orders based on having better products and better solutions for our customers, instead of doing that by lowering prices and being aggressive in that way in the company.
Okay. Thanks very much for your answers.
Thank you.
Operator, we'll continue with a question from the conference call, please.
We have a question from Lars Brorson at Barclays. Please go ahead.
Thank you very much. Good morning, Olof, Mats, and Sofie. A couple of questions from my side. Mats, if I could start with the EBIT bridge for Mining, the negative SEK 130 million for price volume productivity. I wonder whether you could help us break that down a little bit into the individual components. Give us a sense for how much sales mix supported margins in the quarter, and then just on the footprint and presumably the cost savings that are still coming through from the 2013 cost savings program, give us a sense for how much that's added on a year-over-year basis on the Mining EBIT bridge. Thanks.
Starting with the mix question. We have a positive mix now in the first quarter, and we will have it going down forward as well, as we can see an increase in share of the after market with higher margins. It is a certain mix effect in that one, but not maybe that big, but it will kind of increase now over time in terms of the mix. When it comes to savings, the supply chain optimization program for Mining is somewhat backloaded. We haven't seen significant savings from that program coming through in the first quarter. What we need to remember is that we had a right-sizing program last year where we reached the savings of SEK 500 million on an annualized basis already in the first quarter. It's not that much from that one either in the bridge down.
To some extent, savings coming through, to some extent, a positive mix effect in the bridge down. Getting back a little bit to the kind of the destocking and under absorption, even though we are destocking heavily within mining, we don't have any significant kind of margin effect from that one in the bridge.
That's helpful. Thanks, Mats. If I could just ask Olof briefly on the end markets. One, in Machining Solutions, the 2% organic order drop there. Obviously North America going to -8% from +11% in Q4. I wonder whether you can give us a bit of granularity around that. I noted from the press conference, Olof, you were talking about April running on a par with Q1. Again, if you could give us some granularity around this. That was one on Machining Solutions.
Yes, Mats, the specific drop that we see and why it's very significant in North America is related to that we took a quite large aerospace order, and it's quite unusual actually that SMS has larger orders, but we did have one that came through in Q1 2014. That was a somewhat inflated order intake that we saw in Q1 last year, and that's why the comparables become a bit tough. That order was in North America, so that's why you got the drop coming through there. I don't think that per se is any reason for concern in terms of the market development there. If you look at sales these first weeks in April, they have been online with average sales that we've seen in Q1. It's of course a difficult couple of first weeks.
We've had Easter in there's no reason to talk about any significant upturn compared to Q1, and of course not any weakening either.
Just on SMT, if I could, how much is Petrobras of your order book today?
To say that we could be moving into a period where political uncertainty perhaps more meaningfully impacts your overall business in SMT. If you could talk a little bit about the actual underlying drivers for your commentary on underlying improvement in the aftermarket. I appreciate that coal and iron ore is mainly systems, but what are you actually seeing within the aftermarket business? That'll be helpful. Thanks.
Well, it's difficult to comment on specific customers in detail, but in general, I would say we have a quite limited Petrobras exposure when it comes to technically the kind of umbilicals. They have been using plastic there. There's been a hope of them shifting into metallic umbilicals as they go deeper. With the whole situation with Petrobras and the uncertainty of how they're going to develop their business, I would say Petrobras has been a significant hope for the future for us, but it's not anything that we're banking on right now then. No near term effect, but of course, the uncertainty about the opportunities of securing them as a large customer going forward have maybe decreased a bit with the uncertainty in the company and in Brazil as a whole.
When it comes to mining, well, our equipment sales and our aftermarket, we have a neutral book to build, roughly. The market has stabilized at this level. I would say we're very much at the replacement activity level in terms of equipment sales and aftermarket activity. We've seen maybe some slight uptick in the market, as said, the equipment and aftermarket business is a lot driven by base metals, gold, platinum, and these kind of minerals, not as much on coal and iron ore then.
That's helpful. Thank you.
Let's see. Do we have any questions here from the audience in Stockholm? Not at the moment. We'll continue with a question from the conference call. I'm conscious of the time here. Can I please ask you to limit yourself to one question at a time, just to give everybody enough time to come through. Operator, please.
Next question comes from Mr. Guillermo Peigneux-Lojo at UBS. Please go ahead.
Good morning, everyone. It's Guillermo Peigneux-Lojo from UBS. I just wanted to check a bit my numbers, if you don't mind. Kind of boring question. If I back out your underlying margins, excluding currency, it looks like currency actually helped you by 200 basis points or 2%, which basically means that your underlying margins are around 10%. Then trying to understand the help of your savings, I think I get around 40 basis points, which will be equating to your SEK 90 million savings in the quarter, all the quarter, rather, the annualized figure. Is that sounding roughly correct?
Yes. We have more details when it comes to the leverage and to the bridges in the material, and it's there, but it's a fair assumption, yes.
Okay, thank you. Currency will be actually the majority of the improvement, I guess, when it comes to.
As we write in the CEO comment, that's correct. We have a very strong positive effect from currency. Underlying or not, we've had very negative currency effects previous years, and now we're getting back sort of part of that from where we've been historically.
If I can have a follow-up regarding SMS, I think we read comments of January and February being weaker than March, which was stronger, but then I think in your comments on an interview, you said that April, in terms of SMS, looks the same as Q1. I was wondering whether it looks the same as March or January, February, or a mix of the whole quarter.
I'd say the same as average in Q1 there. We've seen some difference between the various months in Q1. As said, we don't have any room to say anything else on a sort of neutral development compared to Q1 in the beginning of Q2.
If I read a stronger March, weaker first two months, is it weaker April than March? Sorry for the complexity.
Smaller differences between months, you shouldn't take too big assumptions on that. I would say you should assume that the beginning of April has started in line with the activity levels that we saw in Q1.
Thank you. How big the oil and gas orders for SMT? Do you have any size that you can share with us? Thank you.
We don't specify the specific orders in that size. We had two orders against oil and gas, and the third order we received was actually against the nuclear sector. We booked the first order against the Chinese nuclear sector since the Fukushima accident. That was also an encouraging, positive development, I would say then.
I can see. Thank you very much for the answers. Thank you.
That was significantly more than one question. Operator, please. The next one, please.
Next question comes from Mr. Andre Kuklin at Credit Suisse. Please go ahead.
Hi, yes, it's Andre from Credit Suisse. Just a couple of follow-ups. One is, I think you mentioned that you're looking for oil and gas acquisitions in the press call. Your current exposure is quite varied. Could you comment where you're looking and whether it would be reasonable to expect a deal this year? The second one is just on Mining Systems. Would you thinking of systems being about 10% of sales and near zero of orders? Would that be roughly right, or should we be thinking about different numbers?
Well, as far as acquisitions, it's difficult to speculate. We talk about several areas like SMS as an interesting area to expand. There could be potentials within mining, but also the oil and gas sector. Of course, this lower oil price may create opportunities for us. Out of mining sales, Mining Systems was roughly 20% of those sales in the quarter. We actually had as much as 57% aftermarket sales in this quarter. That gives you perspective of the size of Mining Systems.
Sorry, Systems of order?
Thank you, Andre. We're going tough here. We'll have to ask you to get back in line, and we'll put the next question through, please.
Next question comes from Andreas Koski at Deutsche Bank. Please go ahead.
Yes, good morning. Can you hear me?
Yes.
Perfect. On mining, if we exclude major orders, your mining business grew by 7% year-over-year. Is that entirely related to the aftermarket business, or are you also starting to see a pickup for equipment demand?
I wouldn't go as far as saying that we're seeing growth in equipment, but the market is definitely stabilized, and we do start to see some positive signs in the aftermarket business. That part of the business feels robust. We have a neutral book to build, and the weakness in the book to build for the business area as a whole is wholly driven by low order intake when it comes to mining systems.
Just to clarify, if orders grew by 7%, excluding major orders, and you don't have any major orders in the aftermarket business, and the equipment business didn't grow, it should imply that the aftermarket business grew by 10%-15%?
This sounds like a question to sort out with Investor Relations, Mining Systems do get orders that are not considered as major as well. The order intake was not zero for Mining Systems, which it sounds like you're assuming.
I'm not. I'm just assuming it's not up year-over-year.
I would say stable markets. We don't feel we can go any further than saying that we see positive market sales on equipment yet. Some positive signs in the aftermarket.
Can I take a follow-up question on mining, Ann-Sofie?
You're going to have to wait with Ann-Sofie.
Well, I have to do equal terms here now. I'm afraid not. You'll have to get back in line. The next question, please.
Next question comes from James Moore at Redburn. Please go ahead.
Yeah, good morning, everyone. It's James at Redburn. I'll just have the one then. SMS, your growth, I was surprised to see -1% organic decline for both orders and sales in Europe. European industrial production has grown 1%-2% in the quarter. European car production has grown 3%-4%. I don't know if that's a market share loss or a specific comparative for you or a customer issue, but could you talk a little bit about the European development there?
We see some markets which have been stronger in Europe, like for example, Italy. I would say Germany has had a fairly neutral development. In the European numbers and having a negative impact is the Russian sales, which continue to be clearly negatively affected in your year-over-year comparisons.
Did you say how much they fell?
We have not been specific on Russia as a country. We have seen a significant drop in market activity in Russia, which is negatively impacting the whole Europe number for Sandvik Machining Solutions.
Thanks a lot.
Thank you. Operator, the next question, please.
Next question comes from Sebastian Growe at Exane. Please go ahead.
Hi, good morning. A question again on SMS, but more on the margin. You said that you want to better manage working capital, and have less sensitivity there of margins, so less seasonality. I just want to check, compared to the 21.4% you achieved in Q1, would you say this margin is sustainable through the next quarters? Would you see the traditional slight uptick in Q2 and a lower margin performance in Q3, the usual seasonality? Do you expect something more or less stable from Q1?
Seasonably, there is some opportunity for margin improvement coming into Q2, but as I said earlier, the strong seasonality that we had before, driven by overproduction in Q2 and therefore over absorption of costs as we built inventories and then really giving that back in Q3, that will be much more limited between the quarters as we are running the company now then.
Okay.
Given the guidance when it comes to currencies in the second quarter, when we are talking about the SEK 900 million, that will have a slight positive effect on Machining Solutions in the second quarter.
Can you quantify that compared to the SEK 400 million we had year-on-year in Q1? What will be the share of the SEK 900 for SMS in Q2 based on your guidance?
We don't get into specifics, but what you can use as a guideline is the share from the first quarter, I guess.
Okay, thank you.
Thank you. The next question please, operator.
Next question comes from Mr. Colin Gibson at HSBC. Please go ahead.
Cheers. Colin. Morning, everybody. Several questions, but I guess I can only ask for one, so I'll pick this one. Varel acquisition last year, and you're now saying that the level of business in North America has fallen off far faster than you'd thought. At this stage, what would you assess is the risk of a goodwill impairment at Varel? Thank you.
I would say right now, none. We've made a long-term investment in Varel, and goodwills aren't impaired based on short-term market movements.
Okay. Thank you.
Thank you. Operator, the next question, please.
Next question comes from Alexander Virgo at Nomura. Please go ahead.
Thanks. Morning. I wondered if you could just talk a little bit around the decision not to pursue your JV with Zhuzhou. Could I clarify one thing, which is, did you say that Varel was down 40% year-on-year or not? Thank you.
With Varel, quickly then, no. We said that 40% of their sales are in North America, where we're seeing the most significant drop. There we're talking about since we released last quarter, about 40% drop in the rig count in North America. That puts things maybe into perspective there. When it comes to Zhuzhou, we put out a letter of intent and did have quite extensive negotiations with them. Given where our own mid-market offer is developing, and the nature of those discussions and where we felt those could lead, we jointly, from both companies, really took the decision not to continue with those discussions. I don't really have anything to add on that. We will continue our hard drive with Pramet, with the Carboloy brand, to organically drive our mid-market offering from the company side.
Thank you.
Thank you. We have one question from the audience here in Stockholm, please.
Yes, hello. This is Daniel Schmidt from SEB. Just wanted to ask you on net working capital, destocking was SEK 500 million in the quarter, and you are quite decently approaching your targets of 25%, and especially with the inventory, and you mentioned there will be some further destocking in Q2. What should we expect for the second half of this year? Will that fade quite a lot compared to the start of this year?
It already did fade to some extent. Looking on the third quarter and fourth quarter last year, it was significantly higher than we saw in the first quarter, and it will continue to fade. We will continue to structurally address the inventory situations within Sandvik Mining and within Sandvik Materials Technology. You can expect some further destocking in those two business areas now going forward. Also going forward into the third quarter, maybe into the fourth quarter as well, but not with a very significant kind of under absorption effect coming from that one. We have our target to reach 25% for the whole group then in the first quarter, and I feel we are on track on that one, and especially looking on the inventory and the development of the inventory in relation to sales.
We haven't been this low in a couple of years, that we are right now then looking on inventories. That will continue in two business areas then to address it structurally then going forward.
Thank you, Mats.
Thank you. Operator, the next question from the conference call, please.
The next question comes from Jan de Seymour at Goldman Sachs. Please go ahead.
Hi. Good morning, Olof. Good morning, Mats. My one question is, I'll split it slightly. 1A, how much of the lower order intake in SMT was due to volume, and how much was due to pricing? If you could split that out, that would be really useful. 1B, I guess, is can you quantify the FX impact on net working capital?
I can take the net working capital question first. If you are looking on the development in absolute numbers of net working capital in the first quarter, we have an increase of SEK 1 billion. That is all currency. The currency effect is basically SEK 1 billion in the quarter. For SMT, we had more or less no effect from metal prices. That didn't drive the absolute price of the product either up nor down. We had very limited, I would say, pricing movements also. It's not price driving the top-line development, it's an underlying volume development that you're seeing.
Very clear. Thank you.
Thank you. Operator, the next question, please.
The next question is from Andreas Koski at Deutsche Bank. Please go ahead.
Yes. Good morning again. Can you hear me now?
Yes.
Back to Sandvik Mining, because you're now changing your aftermarket offering, and I understand the extension of the spare kit you presented earlier. Can you elaborate a bit more about what you're doing? Are you doing something with your internal structure you have right now, like changing your existing pricing model or something like that?
No. As said, we are a company that offers productivity to our customers and excellent solutions. We're not a low-cost price competitor in the market, and that's not our ambition to slash prices and try to gain market share that way. What we're looking very much now is our full installed base, the level of sales we have in different regions on that installed base.
Driving really strong performance management on how much of that aftermarket business we're capturing. That's sort of a pure operational driver that we have in the aftermarket. We're improving our offering when it comes to, for example, products like the one I showed you, to sort of have better solutions to offer our customers because they want their machines with a high availability, high uptime, and we need to help them to solve that problem in an efficient way. We are also continuously looking at various types of IT or information technology solutions in terms of remote monitoring, following our installed base, and having automatic processes to follow up on service needs, and so come up on the machine.
They're both elements of pure driving the organization, which Scot is driving very hard and has a tight follow-up on our salespeople and making sure that we have the right focus in our organization, but also then continuously developing our aftermarket offering to our customers.
I was actually not thinking about price decreases here, but a change to the business model or the pricing model, which would make it possible to actually increase your prices. Because I think you have been running below Atlas aftermarket business margins for a very long time, and I think it, to some extent, can be because of the pricing model. That was more what I related to.
Well, of course, these kind of kits and so on, they give us better opportunities to lock in and potentially maybe expand margins in the future. In this very, very tough and competitive market we see in the mining sector right now, I think significant price increases are very challenging with the current market environment, and there's a lot of pressure from the miners on their cost base. To really gain more business with our customers, we need to prove to them that we offer them a better solution that helps them to be more effective. If we can help a mine manager to look good in his business by us solving his problems in a more efficient way, and Sandvik at the same time doing more business, then we have this win-win situation that we really need to build on.
If we more forcefully just force changes on our customers, we instead risk, I would say, getting an adverse negative reaction from the customer. We want to build this in a positive environment where we really give something better for the customer at the same time as we help Sandvik develop this business.
Perfect. Thank you very much.
Thank you. I believe we have one more question from the conference call. Please, operator.
Yes, we have a question from Mr. Colin Gibson at HSBC. Please go ahead.
Hi. Thanks so much. Quick follow-up from me. I think it would be wrong if we let this conference call go entirely past without asking anything about Anders Nyrén, and I'm happy to be the guy who does that. I understand from reading Industrivärden's commentaries this morning, he won't be proposing himself for reelection as Sandvik's chairman. When do you expect to be able to make a new announcement in that regard, please? Thank you.
Very good question. Just shortly about the facts. There's been a lot of changes going on around the Industrivärden, which is the largest shareholder in Sandvik. They own 11%, but of course, we have lots of other shareholders, many of you probably on this call as well. As a consequence of these changes, Anders has decided to leave Industrivärden, and as a consequence of that, he's not going to be nominated, or he's turned down the opportunity to be nominated again as Sandvik's chairman. This news was released early this morning. Right now, there is no new name for a new chairman for the Sandvik Group.
As you know, the board and the chairman is decided by our owners, and we have a nomination committee with the representation from the largest owners in the company, and they will have to, of course, now meet and discuss how to deal with this situation. For me, it's important that we don't let these kind of changes in any way distort our focus on driving Sandvik, continuing on our journey with making improvements that we are driving in the company. That would be my focus and the management's focus. If you have more specific questions about what that will mean in terms of, and who will succeed Anders, you really need to turn to the nomination committee in Sandvik, who will make a proposal for our AGM, where then a new chairman will be elected.
Thank you.
I'm sorry I cannot give you any more than that right now, but good question, and I'm glad you asked it.
Yes. Thank you very much for joining us today. Should you have any additional questions, please don't hesitate to contact us at Sandvik Investor Relations. Before I let you go, I would just like to mention that we run our Capital Markets Day on the 16th of November. We run it at our Gimo site here in Sweden, and you'll find a link for registration, et cetera, at the Sandvik website. Hope to see you there. Thank you.
Thank you.