Greetings to you, and a very welcome to the presentation of Sandvik's fourth quarter and full year 2014 results. Our President and CEO, Olof Faxander, will run through the presentation together with our CFO, Mats Backman. As per norm, there will be opportunities to ask questions after the presentation, both here in the room in Stockholm as well as via the telephone conference. That said, I hand over to Olof Faxander for the presentation.
Thank you, Ann-Sofie. Some people will be distracted and thinking about what happened to my hand, so I'll start by actually commenting on that. I managed to fracture a small bone in my thumb on my vacation, mountain climbing, and now even have a stainless steel pin in the thumb holding the small bone together. What don't you do for your company, even operating the products into your own body here? On a more serious note, on safety, that's one thing that we actually had a very good improvement in the Sandvik Group during 2014. We've been focusing a lot on safety, and we reduced our lost time injury frequency rate by 22% in 2014 compared to 2013. We do have a strong focus on safety, and I'll not go on any dangerous vacations for a period of time, and stay at safe Sandvik instead here.
Looking then at the fourth quarter and coming on to our numbers, and maybe first some comments about the full year 2014. We've continued with our active portfolio management. We've made an acquisition of Varel International Energy Services. Despite seeing some weakness in the oil price in the near term, we do still strongly believe in the energy sector as an important and interesting growth sector for Sandvik in the future. We've also made some divestitures of non-core businesses, so we're gradually trying to refine our portfolio to the areas where we see higher growth and higher opportunities to gain good returns in the company. We're trying to make Sandvik more cost efficient and streamline our business operations continuously. We have our ongoing supply chain optimization program, and we have currently initiated the closures of 11 different production facilities around the company.
To date, have closed five facilities around the group, and expect a further two to be closed now in the first quarter of 2015. That's running well according to plan, and we're tracking according to the communication we've given regarding that program. We see stable market conditions. There's some pluses and minuses, but on the big picture, we do see very stable market conditions for the Sandvik Group. We end the year with a total turnover of SEK 89 billion and an EBIT margin of 11% for the Sandvik Group. In the quarter, as you've seen, we've had a very strong cash flow, and with that background and the quality of our balance sheet, the board's recommendation to the annual general meeting will be to maintain the dividend at SEK 350 per share. Looking more specifically then at the fourth quarter for the Sandvik Group.
We do see a mixed demand pattern. North America continues to be very strong, and we see stable demand in both Asia and Europe. Especially, I would say, the industrial parts of our business now start to see a good momentum in most parts of the world. We continue to see low order intake in our Mining Systems business. This is, of course, in Sandvik, the most CapEx-oriented part of our mining business, the Mining Systems projects. We don't really feel too concerned about seeing that low order intake. I think it is quite natural with the low CapEx levels you are seeing in the mining companies right now. At the same time, we have very low fixed costs associated with the Mining Systems business, being a project business where we really deliver mainly engineering services and project execution to our customers there.
That is the main driver behind our lower order intake in the group in the fourth quarter. We do see some, so far, smaller effects due to the lower oil price in order intake affecting somewhat the order intake on Sandvik Materials Technology. The cash flow for the fourth quarter was very strong. That was really based and driven by very good, strong inventory reductions across the group, but especially within Sandvik Materials Technology and Sandvik Construction. We actually delivered in the fourth quarter, the second-best cash flow ever in the company's history. This strong cash flow helped us to drive down our net debt to equity ratio. We are now well below our net gearing target of 0.8 for the group, and we ended the quarter at 0.75. Earnings grew for the Sandvik Group in the fourth quarter compared to the same quarter last year.
We came in at an EBIT margin of 11.2% for the company. We are starting to see stronger and stronger currency tailwinds for Sandvik. We had +270 million SEK in this quarter. Based on the currency rates we saw at the end of the fourth quarter, we would expect something in the magnitude of 600 million SEK in positive currency effects in the first quarter. Currency is really starting to give a strong positive impact on the Sandvik group. Preceding years we have had, especially 2013, very strong negative effects from the currency. That trend has now turned. Metal prices had a somewhat negative effect in the quarter, -71 million SEK. We had a positive effect of 71 million SEK that happened to match the metal price effect within SMT from the divestiture we have done and closed during the quarter. Looking geographically at Sandvik's business.
In Europe, which now represents 38% of our sales, we saw a neutral pattern. Some growth in some parts of Europe, mainly in industrial parts of the business, which was somewhat negatively affected by what is going on in Russia with the trade sanctions and the very weak Russian RUB. Asia saw a negative development. That was mainly driven by the developments we see in mining and construction. On the industrial parts of the Sandvik group, we see a positive development. North America displayed good, strong growth, +5%, driven again a lot by especially Machining Solutions, which has a very good momentum now in the North American market. The southern hemisphere, while it is mainly driven by the mining sector in both South America and Africa, we had fairly stable invoicing levels. We had a further drop in Australia then. This is all mining driven.
If you look at the pie chart on the right-hand side of this slide, you can see mining is the area where we get still a negative invoice in developments. In energy and aerospace, we do see a positive development year-on-year, and the rest of the company more or less a stable demand pattern compared to where we were a year ago. The arrow in energy, we have turned slightly downwards, driven by the weaker oil price, which is likely to have, in the near term, some negative effects on demand. Aerospace continues to be now then the only arrow where we really see a strong positive development and continued strong demand. Order intake was down 6% year-on-year, and the main driver between the somewhat lower order intake that we saw in this quarter was again Mining Systems, as I mentioned earlier.
We also saw some weakness in order intake from Materials Technology. Invoicing was down 1% year-on-year, but up 2% comparing to the preceding quarter. We actually, in the quarter, had record high invoicing from our Machining Solutions business area. You can see now the weakness that we have seen in mining is really being compensated or driven in a positive direction by the strong development we start to see in Machining Solutions and the good result development we see in that business area. EBIT came in at SEK 2.6 billion, and we did have a fairly strong positive effect from currency. As you can see, the cash flow was very strong in the fourth quarter, mainly driven by inventory reductions. The strongest inventory reductions we saw in Sandvik Materials Technology and in Sandvik Construction.
Investment levels continue to be at a fairly low level. We have shown, I think, good discipline during 2014 on our CapEx levels, and we end the year with a CapEx level of SEK 4.7 billion for the Sandvik group and expect to be able to stay below SEK 5 billion also in 2015. This, of course, when it comes to our cash flow, influences in a positive direction as well. Comparing this quarter's development to our financial targets in the group. Actually, in terms of growth, supported by currency and structural steps we have taken, we are pretty close this quarter to the total top-line growth. We are up 7% compared to our target of 8%. Return on capital employed came in at 13.4%, and to move towards our target, we need to continue to work, especially on mining and Construction's financial development and bring the returns up in this business.
Of course, in connection with continuing to develop Machining Solutions in a positive direction. Net debt to equity shrunk quite significantly in the quarter. We were at 0.87 the preceding quarter, and that dropped to 0.75. Very strong improvement, which takes us clearly below our long-term target of 0.8. That, of course, influences the board in feeling comfortable about recommending a maintained dividend, even though that still is quite a high share of our earnings per share, 73% in the dividend recommendation we give. Sandvik is a company that generates strong cash flows. We have an uninterrupted dividend since 1870 in the company. I think very few companies can show that. We have a strong confidence in the future potential and development in the business.
With that, I'll hand over to Mats, who'll talk a bit more about the financial aspects, and then we'll wrap up and open up for questions.
Thank you, Olof. I hope my voice will keep up. It's a little bit bad. It's a bad cold. It's not whiskey. Some highlights on some of our key areas now in the fourth quarter, starting with the Supply Chain Optimization Program, where we closed another three units in the fourth quarter, one for Sandvik Mining in Germany and two for Sandvik Machining Solutions, one in Italy and one in U.K. As Olof said, we have now closed five out of the 11 initiated closures. Looking on the phasing of the coming closures, we will close another two in the first quarter, one for Construction and one for Mining, and then the remaining four in the balance of 2015, ending up with a total of 11. Looking on savings, we actually reached SEK 260 million in run rate savings in 2014, that's actually slightly better than previously communicated.
We are well on track with our ambition to reach SEK 800 million in full run rate in 2015. All in all, this program is running according to plan, we are actually detailing the final plans now for the second step of the Supply Chain Optimization Program. Moving over to net working capital. We reduced our net working capital in net numbers with SEK 1.5 billion in the quarter. The positive trend from the third quarter continued into the fourth quarter. That is including SEK 2 billion in volume, SEK 500 million in structure related to the divestments within Sandvik Materials Technology, and finally, SEK 1 billion in currencies going in the other direction, ending up with a net of SEK 1.5 billion.
All in all, we have over the last two quarters actually reduced our net working capital in volume with SEK 3 billion, and most of it coming from de-stocking and from inventory stock. Looking on the relative development over the quarter and the trend, I'm a little bit disappointed with the 28% in relative net working capital. What I would like to highlight looking on the relative numbers is the inventories in relation to sales was very well today, we have not been since 2011. The gap in performance we can see right now is very much due to let go prepayment with the shrinking product business then. We are proud over what we have done on the inventory side. Looking on the different business areas, Sandvik Machining Solutions continue to perform very well on 24% in terms of relative net working capital.
Most important is that we have less volatility when it comes to the net working capital for Machining Solutions, and that is important in terms of reducing earnings volatility as well for the business area. Constructions are now close to the long-term target. They are on close to 25%, so they have done a great job. We have a good development for Materials Technology and for Mining as well, but we are still far from the long-term target looking on Mining and Materials Technology. Looking on the development in the fourth quarter, we have de-stocking in all business areas. You cannot expect that kind of development in the first quarter. Constructions, Machining Solutions will pretty much produce according to demand, while Mining and Materials Technology will continue the de-stocking, but not to the same extent as we saw in the fourth quarter. Moving on to net debt.
Like Olof said, we have been able to reduce our net debt further. We reduced with SEK 2.5 billion in the quarter. We reached a net debt to equity of 0.75 being below our target. Definitely driven by strong cash flow, where the inventory reductions play a very big role in that reduction. You probably remember the net debt to equity ratio when we ended the second quarter, where we ended at 1. We have actually then been able to restore the net debt to equity over two quarters back to targeted levels, which we are very proud of in terms of produced cash flow. With that, I will leave for Olof to summarize.
Okay. Thank you, Mats. To summarize first, the fourth quarter, we saw earnings growth in Sandvik, which I think is very positive, together with a very strong cash flow in the fourth quarter, which brought down our net debt to equity level to 0.75. That means from the 1 down to 0.75, we have actually come back below our targets despite a fairly sizable acquisition and a very generous dividend payment in 2014. Very good cash flow during the year on good balance sheet development from that perspective. We are making good progress on our Supply Chain Optimization Program. As Mats said, we are actually slightly ahead of where we were planning to be now by year-round, and we feel totally comfortable with the progress of this program according to the plans that we have communicated and drawn out within the Sandvik Group.
When it comes to the demand picture around us, we see mixed demands, but I think in general, actually quite a lot of positive things happening in the market right now. North America has very strong demand. Sandvik has quite a large European business, and a lot of stimulus is going right now into the European economy with the steps that Draghi has been taking, with a fairly weak EUR, and also a lower oil price, which somehow you have to expect will stimulate the European economy to increase growth rates. That is a big positive for the Sandvik Group. We normally put this slide in our presentations. This summarizes really the actions and the steps that we are taking in all our different business areas.
The main things we are trying to achieve as a company is to, of course, yield higher returns for you as shareholders in our business. To reduce the risk you can see in the company by reducing earnings volatility, to have more stability in the earnings profile throughout the cyclical sectors that we serve as a group, and develop towards fast-growing markets, both in terms of geographies and in terms of sectors and customer groups. Looking forward into 2015. Well, we've been talking a lot about our efforts within research and development. They are starting to bear fruit. We're going to launch a lot of new products throughout the Sandvik Group during 2015. Sandvik Machining Solutions are planning to have a very high level of product launches during 2015. The total number they're talking about is some 15,000 new products into their product portfolio.
This is absolutely key in terms of long-term value creation in the Sandvik Group, that we really keep this leading position in the market, that we have the best products out there, the best offerings, the most productive solutions for our customers. Mining may well stay slow in terms of capital expenditures for a long period of time. We still believe in this market that we have great opportunities to improve our mining business from where we stand today. Especially in the aftermarket, we have a lot of opportunities to develop our positions further, capture more sales on our installed base, help our customers with getting up the availability on their equipment by supporting them in both service parts and, of course, good rock tools. Technology development also in mining.
We've launched a number of products during 2014. We'll continue also in mining here to develop good products for our customers that help them to be more productive. Today, even though customers are not investing for capacity today in the mining sector, mining customers are very interested in solutions that can help them drive out costs and be more productive. I think Sandvik has a lot of good solutions in that area. We will continue to look at our portfolio of businesses, to trim the portfolio, to move into more fast-growing, strong sectors where Sandvik really can add value, as gradually step out of certain areas which we believe are less core to the business. Okay, with that, I think we open up for question and answers.
We do indeed. If we start with, see if there are any questions from the audience here in Stockholm. Appears not. We'll go to the operator and see what the first question is from there.
We have a question from Mr. Andre Kukhnin at Credit Suisse. Please go ahead.
Good morning. Yes, it's Andre from Credit Suisse. Thanks for taking my questions. Just one at a time. Firstly, on mining profitability at these levels, is there anything there happening, like inventory obsolescence or any other sort of abnormal effects taking place in that sort of level that we've been at in Q4 and Q3?
We have not had any material effects from stock obsolescence or credit losses or so affecting us in the fourth quarter.
When it comes to destocking, it's very much related to parts. We don't have that much of a margin effect from the destocking either in mining.
Got it. Thank you. That actually just brings me on to the second question on destock effect. Could you quantify what was the impact on EBIT from destocking in the work in progress there?
You mean for all business areas or only Mining?
I understand it was around 300 basis points in SMT.
Yeah
Just wanted to get the picture for the whole group across all divisions.
Yeah. I would say, like I said, for Sandvik Materials Technology, 3%. Sandvik Construction's around 1%. Sandvik Mining, I would say, maybe around 1%, so it's a very small effect. For Sandvik Machining Solutions, a very small effect as well. The most important one to observe is Sandvik Materials Technology with the 3% unit.
Then looking into Q1, we expect some under absorption effect to continue when it comes to Sandvik Materials Technology here as well. We'll talk about maybe half the under absorption effect that we saw in Q4 coming in Q1 as they continue to drive down inventories in Sandvik Materials Technology.
That's very clear. Thank you. Just the last one, on the FX guidance for Q1 of SEK 600 million, would I be right to think that roughly half of that is translational and half transactional? Could you just help us maybe with any more color on that and how that can evolve during the year? I appreciate you don't give quarterly guidance or full year guidance for the year, but just in terms of how we think about the shape of that tailwind for the rest of the year.
It's a fair assumption, 50% translation and 50% transactional. Then if you look on the kind of the step up between the fourth and the first quarter, we had some, as Olof said, some ruble effect in the fourth quarter that will not be as pronounced in the first quarter. Secondly, we had a much higher run rate, so to speak, in Q4, which we are taking with us now into the first quarter.
Just on the ruble effect, I was trying to get my head around it, that it shouldn't be giving a year-on-year tailwind in Q1 2015, right?
No
you've reset your selling prices to hard currencies out there, right?
Yeah.
Versus Q4, it gives a benefit, but versus Q1
No, actually Q4, the ruble has a negative impact for us. Without the ruble, we would have had an even stronger, and that's what Mats was meaning. I mean, this negative effect, we have had customers buying our products in rubles, but now with the high volatility and the weak ruble and so, we have steered over those sales to selling in other currencies. Our ruble exposure is actually decreasing quite a lot currently. We've had in the fourth quarter still, for example, receivables in rubles and so, where we've seen certain negative effects due to the changes in the ruble.
Got it. Thank you very much for your time.
Yep.
Thank you, Andre. Then we'll move on to the next question from the telephone line, please, operator.
The next question comes from Alexander White at JP Morgan. Please go ahead.
Good morning, everybody. It's Alex with JP Morgan. I've got a couple of questions. I'll ask to take them one at a time, if I could. Firstly, could you just talk a little bit about the levers that you can pull to maintain SMT margins as we move through 2015, given the weakness that's coming through on the energy side?
Well, SMT is both areas which are affected negatively and positively from the oil price development. SMT, I would say from an EBIT perspective, is the part of Sandvik that has the biggest potential negative impact from lost oil and gas sales, though, because we have very high profitability on a lot of those products. Firstly, with umbilicals, which is the most important EBIT driver for SMT, we have a fair order stock. Umbilicals installations are normally one of the final stages of an investment that one makes with a new well, or if it's repairing or trying to extend the life of an existing well. Therefore, we still believe that our order book will be delivered and will take us at least halfway through 2015 and potentially actually getting some further orders in umbilicals that potentially could take us all the way through the year.
When orders tail off and if we start to lose volume, of course, we will have to address the cost base and take measures to try to mitigate that loss contribution if we start to see those drops in sales coming through in the business area.
Could you help us out with how much of the sales would be going into umbilicals?
Well, for Materials Technology, about 20% of their sales are to the oil and gas sector.
Sure.
Those 20% are clearly overrepresented in terms of profitability. It is a higher percentage of the business area's profitability than 20%.
Just still on SMT, how much longer do you expect the destocking to persist in SMT? Do you think that you can get to where you want to be in terms of inventories by the end of Q1 or?
No, it will probably take a couple of quarters to get where we want to be. We will do it in a balanced way going forward.
A couple of quarters. If we're thinking about sort of the back half of next year, we start to get a bit more aligned with demand.
Yes
barring perhaps some seasonal destocking in Q3.
Yes. SMT is still clearly above our long-term targets of being, for the group, at 25% net working capital to sales. To achieve that target, we need to see inventory reductions in several areas. As Mats was showing on the graphs here, the need for destocking is most pronounced in really SMT and in mining within the Sandvik Group right now, though.
Again, I don't-
Especially during 2015, yeah.
That's helpful. The other question I have is just a follow-up or a clarification. The destock drag on margins in Mining, in your previous answer to Andre, was that one percentage point, so 100 basis points-
Yes
in Q4?
Approximately.
Okay, great. Thanks very much for your answers.
Thank you. I know we have more questions queuing up from the telephone conference, but just to make sure, are there any questions here from the room in Stockholm we should cut in with before we proceed? No, it appears not. We go back to the telephone conference, please, operator. The next question, please.
The next question comes from Mr. Guillermo Peigneux at UBS. Please go ahead.
Hi. Good morning, everyone. It's Guillermo Peigneux at UBS. Just a question on pricing on mining. You mentioned pricing weakness. Can you quantify that weakness and which areas have been weaker? I guess aftermarket hasn't been, could you give us some clarity on that? I have more questions, I'll ask them one by one. Thank you.
Well, when it comes to pricing for the group, we saw about 1% positive pricing development, which mainly was driven by the Machining Solutions part of our business. Mining, I would say, we saw a fairly neutral price development.
Is it fair to assume that when you talk about pricing, I guess it's also mix included? I'm thinking about how much was equipment or let's say product related versus mix related.
That's our underlying pricing development that we're talking about there, really, when we talk about the 1%.
Okay, thank you. Aftermarket in Mining, I understand the potential for this division, I think you mentioned no growth one follows the production reports for most of the majors, we're talking about 10% growth. Maybe the industry is not growing as much, the industry is still growing. I'm wondering whether aftermarket is actually disappointing your growth expectations so far.
Not really. Aftermarket has been very stable for a number of quarters for us right now at Sandvik. Our customers are trying to extend life of their equipment, of their parts, there's a lot of cost focus with the customer base, we don't feel that we're losing any market share, we are developing in line with the market demand for our products in the aftermarket, that we're going forward actually should have a good opportunity to, so to say, increase market share growth with the market rate even faster.
Thank you. The last question, probably. On the SMT operations, I think you mentioned around 20% of the revenue is going to oil and gas.
Yeah.
Could you also give us some clarity as to whether that is all upstream or actually there's more downstream exposure to oil and gas in other SMT operations? Also, I will love to hear about, if you add basically everything that is oil or oil derivatives within the SMT operation, i.e., oil and gas is something, but also I would like to know about petrochemical exposure, fertilizer exposure, chemical exposure. CapEx is going down as well on the chemical segment, so I'm just wondering whether you could aggregate everything. Thank you.
We don't share that level of granularity on the SMT business with exactly what we're selling into certain customer groups. SMT has, as you're pointing out, I would say the bulk of its oil and gas business in the upstream part when it comes to extracting oil. That's where umbilicals go, also to CT tubing, control lines, risers, and these kind of products that we're selling from SMT. We do also have a certain exposure to more downstream petrochemical, as you say, fertilizer is definitely an interesting, important area for us in general chemical plants, because they use a lot of stainless steel since they have corrosive environments in their manufacturing processes. It's more heavy towards the upstream part.
We've put in a slide in the backup pack in this presentation that tries to guide a bit on our both geographical exposure and our up and downstream exposure for various parts of Sandvik. I suggest you have a look at that, and I'm sure IR or ultimately Armas can help you if you need further details to that.
That's fantastic. Thank you. Thank you very much.
Thank you. We have a question here from the audience in Stockholm.
Yes, hello. Anders Roslund, Swedbank. I am interested in Machining Solutions. What will it cost to launch 15,000 new products? Will you have some additional sales and marketing costs, or do you stick to your present level?
Well, we have been investing during 2014 in our sales marketing costs within Machining Solutions, and we have been talking about all through 2014, somewhat weaker leverage due to that fact. We feel that we are at the right level when it comes to those investments. We will maintain the current cost level, but we do not see that increasing further going into 2015 now. We have already impart down that investment to meet a higher level of ambition in the markets that we have.
Given that you get some volume growth this year, why should not incremental margins be in a more positive way this year than in 2014?
Oh, they should absolutely.
We had very low incremental margin in Q3.
This quarter, we are 27% from Machining Solutions, which is a reasonable margin, and given what you've been looking at throughout 2014, I think there's good opportunity to see those kind of higher leverages coming through 2015.
Okay. Thank you.
Given that the market continues to grow as so here.
Okay. Thank you.
Okay. Thank you. Next question please, operator.
Next question comes from Mr. Lars Brorsson at Barclays. Please go ahead.
Yeah. Hi. Thanks very much. Good morning, Olof, Mats, Ann-Sofie. Just a couple of questions from my side. First of all, Olof, on the mining mix in Q4, sales mix. Obviously it's a quarter normally weighted towards systems, but given the high level of invoicing in Q3, are you seeing a higher level of aftermarket here than seasonally is the case? Also, just as you look into 2015, can you give us a sense of what you see from a mix standpoint in mining, given the current backlog, which I assume is weighted towards systems, but also, of course, offset against your ambition to grow the aftermarket? Thanks.
Well, in the fourth quarter, we had about 54% of our sales in the aftermarket, 20% roughly in equipment, and the remainder in Mining Systems. As you say, we normally have a very high level of invoicing in Mining Systems in Q4. In Q1, there should be potentially somewhat positive mix effect as Mining Systems will be a lower share of the total sales, which should enhance margins from the ones that we saw.
Just to be clear, given Q4 is normally, again, seasonally weighted towards systems, that was a normal quarter and not offset against the high level of invoicing in Q3. You saw a normal seasonally weighted quarter in Mining towards Systems. Is that right?
I would say so, and we had a very high level of invoicing in Mining Systems in Q4. That's correct, yes.
How do you see that develop in 2015?
We will see a declining trend on Mining Systems. We are still working off our order backlog that we have within the business. We have had a weaker order intake in that part of the business, and gradually as these projects, which can stretch over several years, are completed, of course, the sales level of Mining Systems will decrease. That, from a mix perspective, should have a positive impact on margins within mining.
Just secondly, Mats, on the Manufacturing Footprint Program, you said you are detailing the final plans for phase 2. Does this now have scope to include SMT and Venture? And what is the scope here from a manufacturing footprint standpoint?
We will not reveal any details now when it comes to that program. Like we have communicated previously, we will come with all details now during the first half of 2015. I would not go into the details in the second step yet.
The brunt of that project is focused on Machining Solutions and Mining, where we have a very large number of manufacturing sites, and we have the biggest opportunities for consolidation. There have been sites in other parts of the company as well that we've been looking at, but still, the biggest opportunity for these consolidation efforts are within Mining and Machining Solutions.
That's clear. Thanks.
Thank you. We move to continue with the telephone conference and the line there, please, Operator. The next question.
Next question comes from Peder Brolin at Handelsbanken Capital Markets. Please go ahead.
Yes, thank you. Good morning, Olof, Mats, and Ann-Sofie. A couple of questions, if I may. If we start with savings, Mats, you mentioned the run rate of 260 or 65 in the quarter from the supply chain. Could you help us understand the entire savings? At the CMD, we talked about other savings. We also have possibly some CapEx related capacity adjusted savings. If we try to sum it all up, that's my first question. My second question is related to-
Let's take it one at a time maybe. Looking on the impact in the fourth quarter, I think you need to remember two major parts, the supply chain optimization program with the SEK 65 million effect in the fourth quarter. We also had the right pricing in mining last year, where we ended with the full run rate of the right sizing savings within mining of SEK 500 million on an annualized basis in the second quarter. We are also benefiting from that part now in the fourth quarter. You need to add that one on top of the supply chain optimization savings.
Yeah. Exactly. The ones that should save around SEK 500 million, the capacity adjustment. You have some other savings as well, I guess, from outsourcing and IT infrastructure, some economic functions and so forth. Is that any meaningful number to add to that?
No, I would have said the major two parts are related to supply chain and to the right sizing programs within mining. That's the major part of those savings you see in the fourth quarter.
Yes. On 2014 full year basis, is it fair to assume that you have maybe reached 400 of the 500 right sizing, or is it less or more?
Like we said, we reached the full run rate for right sizing mining in the second quarter. You can start from there. It's a fair assumption.
Yeah. Okay. Sorry about that. Coming back to this, the SMT and the umbilicals. Just to get my head around this, you get an order first quarter last year around SEK 1.1 billion. You argue that you feel that you will deliver on that specific order. We know that the umbilical system majority of the 20% oil and gas business in SMT. How is it then that you're halfway through 2015? Please help me to understand that. For me, it seems like if you deliver on the order with a big if, the revenues for the energy related would be up year-on-year 15%. What have I misunderstood? Thank you.
Well, some of these projects stretch considerably longer than, of course, the first half year. We will not be able to maintain full production. That doesn't mean that we go down to zero at that point, that's when we're going to start to see the tailing off on these products. We will still, of course, be delivering off certain elements of the order book.
Okay.
It will not suffice to give us full utilization of our production facilities after that point. That's when you're going to see a tailing off. It's not that we have an order book, we deliver everything by the summer, and then it goes down to zero. Some of the sequencing of delivering on these projects is, of course, longer into the future.
That's when we're going to start to potentially see a meaningful decrease in sales in these products if new orders don't come in.
Yeah. Given what we know today, if you deliver on the order, will the oil and gas revenues be up or down 15% with sort of a, call it flat or underlying demand from now, just to take it out of the equation?
Well, of course, if there's flat, no further orders coming in, we're likely to see sales that are down compared to 2014 when it comes to oil and gas products.
Okay. I'll get back to that. My final one on inventories. You talk about the ruble effect hitting less. Just a curiosity here, how much did the negative ruble actually hit the margin and the SMS in the fourth quarter? Are we talking about tenths of basis points or is it less?
No. That's a bit more detail than we would normally share, I would say. I cannot give you a specific number, but Russia is quite an important market for the SMS business.
On the exposure to Russia over the full year 2014, we have approximately SEK 2.5 billion in sales to Russia, whereof approximately 50% is related to machining solutions.
Approximately how many %?
Out of the total exposure of SEK 2.5, about 50% is related to Sandvik Machining Solutions.
Okay, thanks gentlemen. I will get back in line.
Thank you. Cautious of the time here, I know there are quite a few people still queuing up to ask questions, I kindly ask you to limit yourself to two questions, as we go from here on. Please operator, put through the next question, please.
We have a question from Mr. Ben Maslen at Bank of America. Please go ahead.
Yeah, thank you. Morning, Olof. Morning, Mats. First one, please, just on Venture. Maybe give a bit of color on how badly Varel has been affected by the oil drop so far. How you'd expect that to develop as we go through the year, because I think companies like Cat say we're not really going to see the negative impact of weak drilling in the U.S. until the second half of the year. That's the first question.
Yeah. Varel has about 40% of its business in North America, which is of course, heavily geared to the drilling activity in North America. That part of the business will, of course, be affected if we see drops in rig counts and so going forward. At the same time, we do feel that we have a lot of good growth opportunities internationally with Varel potential to take market share and so, because we have a good product and a lot of not fully explored market opportunities, as well as the downhole products that we are supplying from there, where we believe we can continue to see a strong growth rate. The immediate effect of a dropped rig count in North America is affecting about 40% of Varel's business. We're trying to, of course, in part mitigate that by increasing sales in other parts.
The part that we cannot mitigate, we of course need to, if that drop becomes material, adapt our cost base to the volumes we see in the market.
Got it. Thanks. On Sandvik Mining, the book-to-bill for the year 2014 was 87%. I'm guessing it's pretty close to 100 on the aftermarket. Is all the shortfall on your book-to-bill last year coming on the Mining Systems business or is equipment still running below one, and we'll see a volume drop in 2015? Thanks.
The majority is coming from the Mining Systems business, but we have had a slightly negative book-to-bill on equipment as well during 2014. The big deviation in book-to-bill is coming from Mining Systems.
Got it. Thanks, Olof.
Thank you. We'll move on to the next question on the telephone line, please, operator.
We have a question from Mr. Andreas Koski at Deutsche Bank. Please go ahead.
Yes, good morning. This is Andreas. Firstly, on Sandvik Mining, can you share with us what size of backlog you have in Sandvik Mining, and if it all relates to Mining Systems?
Well, we have ongoing projects that will gradually tail off, but of course, sales tail off very gradually when it comes to Mining Systems, given the length of the projects. In other parts of the business, we have a very limited order stock today. If you want a mining machine, we can supply one very quickly to you, unfortunately.
Okay. Can you also share with us what kind of margin difference you currently have in this low demand environment between mining equipment and Mining Systems? Just to understand what kind of a mix effect we will have here when Mining Systems decline. Will we have a very positive mix effect or-
Mining Systems is-
-is the margin in mining equipment also depressed?
We have big underabsorption issues in equipment given that sales have dropped off some 70%, 75% from the peak levels we saw on equipment. Mining Systems is clearly below the average profitability rates for the mining business area today.
That might be because of the aftermarket business. It could all be compared equipment to systems.
It is mainly driven by the aftermarket, that's correct. Sandvik's near term profitability development is very much driven about the utilization rates in the mines and very little driven, I would say, about the CapEx rates. When CapEx picks up, that's a big positive, but we don't have much more downside really from CapEx related cuts. Production related cuts, of course, then that could lead to weaker aftermarket demand, rock tools demand in these areas. We don't see that today.
Lastly, on Sandvik Machining Solutions, now we will see operating leverage is normalized. Would you say about 40% is the normalized operating leverage in Sandvik Machining Solutions?
Well, there is upside from the 27% that we saw in this quarter anyway, given that growth rates pick up going forward into 2015. I think there are good opportunities if the European economy picks up with the very strong development that we see in North America, that Machining Solutions could see good growth rates going into 2015 now.
Okay. Thank you very much.
We take the next question from the telephone line, please, operator.
We have a question from Mr. Erik Karlsson at AKO Capital. Please go ahead.
Yes, hello. Hi. You're cutting a number of plants as demand can't support these at the moment, which makes a lot of sense. Just thinking in the long term to avoid restructuring costs and underabsorption in future cycles, how do you think about increasing cost flexibility in the business for the next downturn, and what are you doing to achieve that? Thanks.
Very good question. Well, we feel by consolidating the number of sites, that is one way actually that we can increase our cost flexibility. Because if we have larger manufacturing units, if certain product lines are operating on a higher level and others on a lower, we have better opportunities to use personnel between different areas. It's easier to use temps for certain parts of the production. By consolidating onto a smaller footprint, that gives us more flexibility. We believe that net working capital is very important for us to have a lower volatility in our earnings going forward.
Both because, of course, you face risks with stock obsolescence and so with a high net working capital if you have a downturn, but also that forces you, when you need to bring down inventories, to slow down production more than what you necessarily would have had if you would have had continuously your inventory levels balanced. Of course, this inventory management is also helped by having fewer manufacturing locations. We're taking a number of measures to look at both structurally improve our cost base and through how we operate the company. On top of that, we need to continue to build our aftermarket business, our service business, as a share of our total sales, because that's really what sustains profitability through the weaker parts of the business cycle.
Thank you.
We continue with the next question from the telephone line. Please, Rachel.
We have a question from Mr. James Moore at Redburn. Please go ahead.
Good morning, everyone. I've got one on currency and one on demand. On currency, thanks for the SEK 600 million at current rates for the first quarter. I'm coming out at around SEK 1.5 billion for the full year 2015 at current rates. Does that seem fair?
It's a ballpark figure that would be fair, yes. I would say so.
Thank you. I'm just trying to understand demand better.
Just to qualify that's of course year-end currencies, given that they stay stable throughout the year. If these currency rates remain at this level throughout 2015, we're going to have a quite strong currency tailwind for the group this year.
Okay, thank you. Just on demand, I see that orders have been just under SEK 21 billion for the last couple of quarters, including Varel, which is a sort of times by four, if you like, an SEK 83 billion year, and I see consensus is more like SEK 93 billion. I'm just trying to understand conceptually, do you think that there was anything that was particularly weak in terms of orders and artificially weak that you can see bouncing back, other than just the macro in the U.S. and Europe? Are these order run rates a representation of where revenues need to go, currency adjusted?
Well, we had a balanced book-to-bill in the quarter for most parts of the company. The two areas where we had a weakness in order intake relate mainly to Mining Systems, and there we can expect lower sales going forward given that we've had such a low order intake, and in part to Materials Technology. Besides that, other parts of the company have been operating at more a balanced book-to-bill, and there should be opportunities, of course, for growth going into 2015 now from those levels.
Just on that, as we look at the start of the year, could you say anything about the demand trends in January for SMS or any other parts of the business? Has there been a change in terms of the rate of year-on-year growth?
No. The operating levels we saw on the end of the fourth quarter have been sustained into the beginning of the first quarter this year. We see similar operating levels as the year started here.
Sorry to be pedantic, but I got the sense that the end of the fourth quarter was the better part of the fourth quarter, with a lot of companies seeing quite a strong December. Is that the case? Are you saying that January is up with a strong December, or is that not the case?
We continue to operate at similar as December levels. We did see a slight positive trend during the quarter, for example, Machining Solutions, where December was a strong month. That is correct.
Very helpful. Thank you.
We take the next question please, Operator.
We have a question from Mr. Daniel Schmidt at SEB. Please go ahead.
Yes, hello, good morning. I think most of the questions have been asked already. Just a detail on Mining Systems to start with. I think you had mentioned historically that you do the in-house production when it comes to the crushers. Is that correct? If you would see this sort of lack of orders continuing, would that mean any under absorption going into the end of 2015?
There are certain amounts of crushers that go into the Mining Systems business. We also manufacture some conveyor components internally. Those are the two in-house components that we really supply to the Mining Systems project. There could be some effects in this area with the low continued activity level in Mining Systems.
With the lack of orders, I think you mentioned there were sort of six, seven orders that were pending in Q3 that didn't come.
Yes.
None of those have sort of surfaced yet. Is that correct?
No. The mining market is still quite hesitant. It takes longer time for investment decisions to be taken and placed by the mining companies. We haven't lost any projects. No projects have been canceled or decided not to go ahead that we were hoping to get. It's just that the time frame to actually get the orders signed up and so with the customers is continuously dragging out in time. That's what's happening right now.
Okay, good. The final question on Construction. In connection with the CMD in the U.S. during the autumn, you talked about a substantial part of white-collar workers in Construction being let go in the next phase of the program, I guess. Is this process being started yet, or when do we see that coming into the numbers?
That is a process that will happen during 2015. Yes. There is a strong focus on the overheads, SG&A costs of the business within Construction, and that was what DG was talking about at the Capital Markets Day. There's no changes in that plan.
Thank you, Olof.
I think we may have time for one more question from the operator. Please go ahead.
We have a question from Mr. Daniel Conliff at Liberum Capital. Please go ahead.
Hello. One question, please, on write-down risk. Just on the carrying value of your global asset base with oil and gas exposure, I note a number of companies recognizing, obviously, the halving of the oil price structurally changing their outlook and earnings evaluations. This morning, I know Vallourec has written down EUR 1.2 billion in its oil and gas exposed business. How confident are you that you will not see any write-downs to your oil and gas exposed business, in particular Varel and SMT? Thank you.
We don't feel that we have any such risks currently within the Sandvik group when it relates to oil and gas, no.
Good. Thank you very much.
Yep.
Oh, that was a quick one. We squeeze in another one, please, operator.
We have a question from Mr. Peder Brolin at Handelsbanken Capital Markets. Please go ahead.
Thank you. A couple of very short ones. The FX guidance or calculation, what date are you basing those on? Take that first.
It's year around.
No, it's very January. Ann-Sofie, what date is it?
The actual date.
Around the.
I don't remember the actual date. I can check that and come back to you.
I think it's around the 15th of January or something like that.
Somewhere that range. Mid-January.
A week or two into January. That's the base.
Okay, fine. You mentioned, Olof, that SMS business or the industrial business in Asia and China was okay or even strong. Could you help us to understand the magnitude, the SMS growth in China, I'm talking about then organically?
Well, we see a fair level of activity in automotive and in general engineering. We don't break out China specifically, but we do see a good activity level when it comes to industrial businesses like SMS in China. What has been weighing down the Asian sales for us is mining and construction, really.
Okay. That's clear. On the systems, and this is nitty-gritty, but at least according to my calculations, the systems order has been a bit of SEK 1 billion or so the last couple of quarters, except the Q3 and obviously Q4. Could you help us to understand this? Is it even lower in Q4 than Q3, or is it basically wiped out compared to previous quarter? To understand the magnitude here.
It's clearly below SEK 1 billion, but we have been taking certain orders, of course, so it's not zero either.
That's very clear. Thank you for that.
Yep.
Okay, thank you. I can just confirm to you that the date is on the 16th of January.
Okay. Thank you, Ann-Sofie.
With that, thank you very much for joining us for this presentation this morning. Should you have any additional questions, please don't hesitate to contact Sandvik Investor Relations. Thank you very much.