Earnings Call: Q4 2014

Jan 29, 2015

Greetings to you and a very welcome to the presentation of Sandvik's 4th Quarter and Full Year 2014 Results. Our President and CEO, Olof Wachsander, will run through the presentation together with our CFO, Mats Backman. And 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. And that said, I hand over to Olof Alexander for the presentation. Thank you, Anssi. And some people will be distracted and thinking about what happens to my hands. 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 we even have a stainless steel pin in the thumb holding the small bone together. So what don't you do for your company even operating the products into your own body here? But on a more serious note, on safety, that's one thing that we actually had a very good improvement in the Samik Group during 2014, and we've been focusing a lot on safety. And we reduced our lost time injury frequency rate by 22% in 2014 compared to 2013. So 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 Sandvik instead here. Looking then at the Q4 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. And 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. And to date have closed 5 facilities around the group and expect a further 2 to be closed now in the Q1 of 2015. So that's running well according to plan, and we're tracking according to the communication we have 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 Samik group. And we end the year with a total turnover of SEK 89,000,000,000 and an EBIT margin of 11% for the Samik 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 3.50 per share. Looking more specifically then at the Q4 for the Samik Group. Well, we do see some mixed demand pattern. North America continues to be very, very strong, and we see stable demand in both Asia and Europe. And 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. And this is, of course, in Sami, the most CapEx oriented part of our mining business, the mining systems projects. But we don't really feel too concerned about seeing that low order intake. I think it's quite natural with the low CapEx levels you're seeing in the mining companies right now. And 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. But that is the main driver behind our lower order intake in the group in the Q4. We do see some so far smaller due to the lower oil price in order intake affecting somewhat the order intake on Sandvik Materials Technology. The cash flow for the Q4 was very strong, and that was really based and driven by very good strong inventory reductions across the group, but especially within Sandvik Materials Technology and Sandvik Construction. So we actually delivered in the Q4 the 2nd best cash flow ever in the company's history. This strong cash flow helped us to drive down our net debt to equity ratio, and we're 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 Samik Group in the Q4 compared to the same quarter last year. And we came in at an EBIT margin of 11 point 2% for the company. We are starting to see stronger and stronger currency tailwinds for Sandvik. We have plus EUR 270,000,000 in this quarter. And based on the currency rates we see also at the end of the Q4, we would expect something in the magnitude of SEK 600,000,000 positive currency effects in the Q1. So currency is really starting to give a strong positive impact on the Sandvik Group. The preceding years we've had, especially 2013, very strong negative effects from the currency and that trend has now turned. Metal prices had a somewhat negative effect in the quarter, minus €71,000,000 and we had a positive effect of €71,000,000 that happened to match the metal price effects within S and T from the divestiture we've done and closed during the quarter. Looking then 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 and mainly in the industrial parts of the business, which was somewhat negatively affected by what's going on in Russia with the trade sanctions and the very weak Russian ruble. Asia saw a negative development, and that was mainly driven by the developments for Sea Mining and Construction. On the industrial parts of the Samik Group, we see a positive development. North America displayed good strong growth, plus 5%, driven again a lot by Specialty Machining Solutions, which has very, very good momentum now in the North American market. The Southern Hemisphere, well, it's mainly driven by the mining sector. In both South America and Africa, we had fairly stable invoicing levels, but we had a further drop in Australia then. And this is all mining driven. And if you look at the pie chart on the right hand side of this slide, you can see mining is an area where we get still a negative invoice in developments. In Energy and Aerospace, we do see positive developments 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 aero and energy, we've 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 aero 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 then Mining Systems, as I mentioned earlier. And we also saw some weakness in order intake from Materials Technology. Invoicing was down 1 percent year on year, but up 2% comparing to the preceding quarter. And we actually, in the quarter, had record high invoicing from our Machining Solutions business area. So you can see now the weakness that we've seen in mining is really being compensated or driven positively 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 then at SEK 2,600,000,000 and we did have a fairly strong positive effect from currency. And as you can see, the cash flow was very, very strong in the Q4, mainly driven by inventory reductions and the strongest inventory reductions we saw in Sandvik Materials Technology and in ceramic construction. Investment levels continue to be at a fairly low level. We've shown, I think, good discipline during 2014 on our CapEx levels, and we end the year with a CapEx level of EUR 4,700,000,000 for the Samik Group and expect to be able to stay below EUR 5,000,000,000 also in 2015. So this, of course, when it comes to cash flow, influences in a positive direction as well. Comparing then this quarter's developments to our financial targets in the group. Well, actually in terms of growth supported by currency and structural steps we've taken, we're pretty close this quarter to the total top line growth. We're up 7% compared to our target of 8%. Return on capital employed came in at 13.4%. And to move towards our targets, we need to continue to work especially on Mining and Construction's financial developments and bring the returns up in this business, of course, in connection with continuing to develop Insignia Solutions in a positive direction. Net debt to equity shrunk quite significantly in the quarter. We were at 0.87 the preceding quarter and they dropped to 0.75. So very strong improvement, which takes us clearly below our long term target of 0.8. Percent. And 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. But Samik is a company that generates strong cash flows. We have an uninterrupted dividend since 18/70 in the company. I think very few companies can show that. And we have a strong confidence in the future potential and developments in the business. So with that, I'll hand over to Mats, who will talk a bit more about the financial aspects, and then we'll wrap up and open up for questions. Thank you, Ulf. I hope my voice will keep up. It's a little bit bad. It's a bad call. It's not whisky. Some highlights on some of our key areas now in the Q4, starting with the supply chain optimization program, where we closed another 3 units in the Q4, 1 for Samik Mining in Germany and 2 for Machine and Solutions, 1 in Italy and 1 in U. K. And as Olof said, we have now closed 5 out of the 11 initiated closures. Looking on the phasing of the coming closures, we will close another 2 in the Q1, one for constructions and one for mining and then the remaining 4 in the balance of $2,015,000,000 ending up with a total of $11,000,000 Looking on savings. We actually reached EUR 260,000,000 in run rate savings and 2014, and that's actually slightly better than previously communicated. So we are well on track with our ambition to reach €800,000,000 in full run rate in 2015. And all in all, this program is running according to plan, and we are actually detailing the kind of 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 1,500,000,000 in the quarter. So the positive trend from the Q3 continued into the 4th quarter. And that is including EUR 2,000,000,000 in net structure EUR 2,000,000,000 in volume EUR 500,000,000 in structure related to the divestments within Materials Technology and finally, SEK 1,000,000,000 in currencies going in the other direction, standing up with a net of SEK 1,500,000,000 So all in all, we have over the last two quarters actually reduced our net working capital in volume with €3,000,000,000 and most of it coming from destocking and from inventories. 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. But what I would like to highlight looking on the relative numbers is the inventories in relation to sales. Because where we are today, we have not been since 2011. So the gap in performance we can see right now is very much due to lack of prepayment with the shrinking product business then. So we are proud of what we have done within the on the inventory side. Looking on the different business areas. Machine Solutions continue to perform very well on 24% in terms of relative net working capital. And I mean most importantly 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. I mean, 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. So looking on the development in the Q4, we are destocking in all business areas. You cannot expect that kind of development in the Q1. Constructions, Machine Solutions will pretty much produce according to demand, while Mining and Materials Technology will continue the destocking, but not to the same extent as we saw in the Q4. Moving on to net debt. Like Olof said, I mean, we have been able to reduce our net debt further. We reduced with SEK 2,500,000,000 in the quarter. We reached a net debt to equity of $0.75 being below our targets. I mean, definitely driven by strong cash flow where the inventory reductions play a very, very big role in that reduction. You probably remember the net debt to equity ratio when we ended the Q2 and when we ended at 1. We have actually then been able to restore the net debt to equity over 2 quarters back to targeted levels, which we are very proud of in terms of the produced cash flow. With that, I believe for you, Olof, to summarize. Okay. Thank you, Mats. So to summarize first on the Q4, we saw earnings growth in Sandvik, which I think is very positive, together with a very strong cash flow in the Q4, which brought down our net debt to equity level to 0.75%. And 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. So very, very good cash flow during the year and good balance sheet development from that perspective. We're making good progress on our supply chain optimization program. As Mats said, we're actually slightly ahead of where we were planning to be now by year end, and we feel totally comfortable with the progress of this program according to the plans that we have communicated and drawn out within the Samik group. And 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. Samik 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 taken with a fairly weak euro and also a lower oil price, which somehow has to you have to expect will stimulate the European economy to increase the growth rates there. And that is a big positive for the semi group. We normally put this slide in our presentations. This summarizes really the actions and the steps that we're 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 say 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 just both in terms of geographies and in terms of sectors and customer groups. And then looking forward into 2015. Well, we've been talking a lot about our efforts within research and development, and they are starting to bear fruit. We're going to launch a lot of new products in throughout the Sandvik Group during 2015. Sandvik Machining Solutions are planning to have a very, 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. And this is absolutely key in terms of long term value creation in the Samik 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. And 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 availability on their equipment by supporting them in both service, parts and of course, good rock tools. And then technology development also in mining. We've launched a number of products during 2014, and we'll continue also in mining here to develop good products for our customers that help them to be more productive. And 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 cost and be more productive. And I think Sandvik has a lot of good solutions in that area. And we will continue to look at our portfolio of businesses to trim the portfolio to move into more fast growing, strong sectors where Samik really can add value as gradually step out to 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. And if we start, we'd see if there are any questions from the audience here in Stockholm. If not, so then we'll go to the operator and see what the first question is from there. We have a question from Mr. Andre Kuehnen 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 Q4? 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 mine. Got it. Thank you. And that actually just brings me on to the second question on destock effect. Could you quantify what was the impact on the 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, but wanted to get the picture for the whole group across all divisions. Yes. I would say, I mean, like you said, Materials Technology 3%, constructions around 1%. Mining, I would say, I mean, maybe around 1%. So it's a very small effect. And for Machine Solutions, a very small effect as well. So the most important one to observe is Nephirios Technology with the 3% tune. And then looking into Q1, we expect some under absorption effect to continue when it comes to Materials Technology here as well. So 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 Materials Technology. That's very clear. And just the last one. On the FX guidance for Q1 of €600,000,000 would I be right to think that roughly half of that is translational and half transactional? And could you just help us with the 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. And then if you look on the kind of the step up between the 4th and the Q1, we had some, as Ulo said, some ruble effect in the Q4 that will not be as pronounced in the Q1. And secondly, I mean, we had a much higher high rates of run rate, so to speak, in Q4, which we are taking with us now into the Q1. But 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? Because you reset your selling prices to hard currencies out there, right? So versus Q4, it gives a benefit, but versus Q1? No. Actually Q4, the ruble has a negative impact for us. So without the ruble, we would have had an even stronger and that's what Mats was mainly that I mean, this negative effect with 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. So our ruble exposure is actually decreasing quite a lot currently. But we've had in the Q4 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. Yes. Thank you, Andre. And then we'll move on to the next question from the telephone line, please, operator. And the next question comes from Mr. Alexander White at JPMorgan. Please go ahead. Good morning, everybody. It's Alex at JPMorgan. I've got a couple of questions. I'll have to take them one at the 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, I mean, SMT is both areas which are affected negatively and positively from the oil price developments. S and T, 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 S and T, 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. So 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 up potentially could take us all the way through the year. But when orders paid 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 those if we start to see those drops in sales coming through in the business area. And can you 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. And that's those 20% are clearly overrepresented in terms of profitability. So it is a higher percentage of the business there's profitability than 20%. And 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. But we will do it in a balanced way going forward. So a couple of quarters. So if we're thinking about sort of the back half of next year, we start to get a bit more aligned with demand by perhaps some seasonal destocking in Q3? Yes. I mean, it's clearly above our long term targets of being for the group a 25% net working capital to sales. So to achieve that target, we need to see inventory reductions in several areas. And as Mats was showing on the graphs here, the need for destocking is most pronounced in really S and T and in mining within the Sami Group right now though. Okay. 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 1 percentage point to 100 basis points in Q4? Approximately. Okay, great. Thanks very much for your answers. Thank you. And 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. Then we get back to the telephone conference, please. Operator, the next question, please. The next question comes from Mr. Guillermo Pinie at UBS. Please go ahead. Hi, good morning everyone. It's Guillermo Pinie 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, but could you give us some clarity on that? I have more questions, but I'll ask them 1 by 1. Thank you. Well, Mackenzie, the 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. But is it fair to assume that when you talk about pricing, I guess, it's also mix included. So 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 that really when we talk about the 1%. Okay. Thank you. Now aftermarket in mining, I understand the potential for this division, but I think you mentioned no growth. And one follows the production reports for most of the mayors and we're talking about 10% growth. Maybe the industry is not growing as much, but the industry is still growing. So 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. And I mean, our customers are we don't feel that we're losing any market share, but that we are developing in line with the market demand for our products in the aftermarket. And that we're going forward actually should have a good opportunity to, so to say, increase market share growth with the market even faster. Thank you. And then last question probably on the SMT operations. I think you mentioned around 20% of the revenue is going to oil and gas. Could you also give us some clarity as to whether that is all upstream or actually there's more actually downstream exposure to oil and gas in other S and T operations. And 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 we would like to or I would like to know about petrochemical exposure, fertilizer exposure, chemical exposure, because CapEx is going down as well on the chemical segment. So I'm just wondering whether you could aggregate everything. We don't share sort of that level of granularity on the S and T business with exactly what we're selling into certain customer groups. But S and T 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 g tubing, control lines, risers and these kind of products that we're selling from S and T. But we do also have a certain exposure to more downstream petrochemical, as you say. And so fertilizer is definitely an interesting important area for us in general chemical plants because they use a lot of stainless steels since they have corrosive environments in their manufacturing processes. But it's more heavy towards the upstream part. We've put in a slide for 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. So just have a look at that, and I'm sure IR or ultimately IRMATCH can help you if you need further details to that. That's fantastic. Thank you. Thank you very much. Thank you. Then we have a question here from the audience in Stockholm. Yes. Hello, Anders Jocelyn, Swedbank. I'm interested in Machining Solutions. What will it cost to launch 15,000 new products? Will you have some additional sales and marketing costs? Or are you do you stick to your present level? Well, we have been investing during 2014 in our sales and 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're at the right level when it comes to those investments. So we will maintain the current cost level, but we don't see that increasing further going into 2015 now. So we have already in part done that investment to meet a higher level of ambition in the markets that we have. So given that you get some volume growth this year, why shouldn't incremental margins be in a more positive way this year than in 2014? They should absolutely. We had very low incremental margin in Q3. This quarter, we have 27% from Machine and 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 markets, I mean, continues to grow as so here. Okay. Thank you. Okay. Thank you. Next question please, operator. Next question comes from Mr. Lars Brorsen at Barclays. Please go ahead. Yes. Hi. Thanks very much. Good morning Olof, Matt, it's Anssi. 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 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? And 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 Q4, we had about 54% of our sales in the aftermarket, 20% roughly in equipment and the remainder of mining systems. And as you say, we normally have a very high level of invoicing in mining systems in Q4. So in Q1, there should be potentially a 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. So 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 Seward Systems. Is that right? I would say so. And we had a very high level of invoicing in Mining Systems in Q4. So that's correct, yes. And how do you see that develop in 2015? Well, I mean, we will see a declining trend on Mining Systems. We're still working off our order backlog that we have within the business. We've 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. But that, from a mix perspective, should have a positive impact on margins within Mining. Thanks. Just secondly, Matt, on the manufacturing footprint program, you said you're detailing the final phases or the final plans rather for Phase 2. Does this now have scope to include S and T and Venturin? And what's the scope here from a manufacturing footprint standpoint? I mean, we'll not reveal any details now when it comes to that program. I mean, like we have communicated previously, we will come with all details now during the first half of twenty fifteen. So I would not go into the details in the second step yet. But 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. And we move to continue with the telephone conference and the line there. Please, operator, the next question. Next question comes from Peter Frolin at Handelsbanken Capital Markets. Please go ahead. Yes, thank you. Good morning, Olof, Mats and Annecy. A couple of questions, if I may. If we start with savings, Mats, you mentioned the run rate of €260,000,000 or €65,000,000 in the quarter from the supply chain. You help us to understand the entire savings? At the C and D, we talked about other savings. We also have possibly some CapEx related capacity adjusted savings. So if we try to sum it all up, that's my first question. My second question is related to this. But that's money, if I may. Okay. Looking on the impact in the 4th quarter, I think you need to remember 2 major parts. The supply chain optimization program with the EUR 65,000,000 effect in the 4th quarter, but we also had the rightsizing in mining last year, where we ended with the full run rate of rightsizing savings within mining of EUR 500,000,000 on an annualized basis in the Q2. And we are also benefiting from that part now in the Q4. So you need that. So add that one on top of the supply chain optimization savings. Yes. And yes, exactly. The ones that should save around €500,000,000 the capacity adjustment? And then do you have some other savings as well, I guess, from outsourcing, not infrastructure, some economic functions and so forth. Is that any meaningful number to add to that? No. I would have said that the major two parts are related to supply chain and to the rightsizing programs within mining. That's the major part of the savings you see in the Q4. Yes. So on 2014 full year basis, is it fair to assume that you have maybe reached 400 of the 500 rightsizing? Or is it less or more? I mean like we said, I mean, we reached a full run rate for rightsizing mining in the Q2. So I mean, you can start from there. So I mean, it's a fair assumption. Yes. Okay. That's fair. Sorry about that. Okay. Coming back to this to the S and T and the umbilicals, just to get my head around this. You got an order Q1 last year around SEK 1,100,000,000 You argue that you feel that you will deliver on that specific order. We know that umbilicals is the majority of the 20% oil and gas business in SMT. How is it then that you hit you 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 up beyond year 15. What have I misunderstood? Thank you. Well, some of these projects stretch considerably longer than, of course, the first half year. So but we will not be able to maintain full production. That doesn't mean that we go down to 0 at that point, but that's when we're going to start to see the tailing off on these costs. But we will still, of course, be delivering off certain elements of the order book. But if we're not suffice to give us full utilization of our production facilities after that point. So that's when you're going to see a tailing off. So it's not that we have an order book. We deliver everything by the summer and then it goes down to 0. But I mean, some of the sequencing of delivering on these projects is, of course, longer into the future. But 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. Yes. So 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 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 you. My final one on nitty gritty. You talk about the ruble effect hitting less. Just a curiosity here, how much did that the negative ruble actually hit the margin in the SMS in the Q4? Are we talking about tens of bps? Or is it less? That's fine. No. I mean that's a bit more detail than we would normally share, I would say. So I cannot give you a specific number, but Russia is quite an important market for the SMAS business. On the exposure to Russia over the full year 2014, we have approx 2,500,000,000 euros in sales to Russia, whereof, approximately 50% is related to Machining Solutions. Approximately how many percent? Out of the total exposure of 2.5 percent, about 50% is related to Machining Solutions. Okay. Thanks, gentlemen. I will get back in line. Thank you. And cautious of the time here and I know there are quite a few people still queuing up to ask questions. So I kindly ask you to limit yourself to 2 questions as we go from here on. Please, operator, put through the next question, please. Have a question from Mr. Ben Matlin at Bank of America. Please go ahead. Yes, thank you. Good morning, Olof. Good morning, Mats. First one please just on ventures. Maybe give a bit of color on how badly Varell has been affected by the oil drop so far? And 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 weaker drilling in the U. S. Until the second half of the year. That's the first question. Yes. I mean Varell has about 40% of its business in North America, which is of course, heavily geared to the drilling activity in North America. So 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 Barel potential to take market share on service. 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. So the immediate effect of a drop rig count in North America is affecting about 40% of Varel's business. And we're trying to, of course, impart mitigate that by increasing sales in other parts. And 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. And then on Sandvik Mining, the book to bill for the year 2014 was 87%, and 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 systems business? Or is equipment still running below 1% 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. But the big deviation in book to bill is coming from mining systems. Got it. Thanks, Oliver. Thank you. And we'll move on to the next question on the telephone line, please, operator. We have a question for Mr. Andreas Koski at Deutsche Bank. 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. So if you want the mining machine, we can supply 1 very quickly too, unfortunately. Okay. And then 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 mix effect we will have here when mining systems decline, will we have a very positive mix effect or Mining demand in mining equipment also depressed? I mean, of course, we have big under absorption issues in equipments given that, I mean, sales have dropped off some 70% to 75% from the peak levels we saw on equipment. Mining Systems is clearly below the average profitability rates for the mining business area today. So it's not it might be because of the aftermarket business. So it's mainly driven by the aftermarket. That's correct. And so Samik'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. Of course, 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, and that could lead to weaker aftermarket demand, rock tools demand in these areas. But we don't see that today. Okay. And then 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 20 15. And I think there are good opportunities if the European economy picks up with a very strong development that we see in North America that Machining Solutions could see good growth rates going into 15 now. Okay. Thank you very much. And 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. But just thinking in the long term to avoid restructuring costs and under absorption 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, certain product lines are operating on a higher level and others on a lower, there are better opportunities to use personnel between areas. It's easier to use temps for certain parts of the production and so. So by consolidating onto smaller footprints, that gives us more flexibility. We believe that net working capital is very important for us to have lower volatility in our earnings going forward, both because, of course, you face risks with stock obsolescence and so with the 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. And of course, this inventory management is also helped by having fewer manufacturing locations. So we're taking a number of measures to look at both structurally improve our cost base and through how we operate the company. Then 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. And 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 €600,000,000 at current rates for the first quarter, I'm coming out at around EUR 1,500,000,000 for the full year, EUR 15,000,000 at current rates. Does that seem fair? It's a ballpark figure that would be fair, yes, I would say so. Thank you. And I'm just trying to understand demand better. Yes. Just to qualify that, of course, year end currencies, given that they stay stable throughout the year. But I mean, we will have very significant 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. And just on demand, I see that orders have been just under SEK 21,000,000,000 for the last couple of quarters including Varel, which is a sort of times by 4 if you like an €83,000,000,000 year. And I see consensus is more like €93,000,000,000 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 a macro in the U. S. And Europe? Or 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 the weakness in order intake related mainly to Mining Systems and that we can expect lower sales going forward given that we've had such a low order intake and then in part to Materials Technology. Besides that, I mean, other parts of the company have been operating at more balanced book to bill. And there should be opportunities, of course for growth going into 50% now from those levels. And 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 in the end of the Q4 have been sustained into the beginning of the Q1 this year. So we see similar operating levels as the year started here. And sorry to be but I got the sense that the end of the year was the better part of the the end of the Q4 was the better part of the Q4 with a lot of companies seeing quite a strong December. Is that the case? And are you saying that January is up with a strong December? Or is that not the case? We continue to operate as December levels. And we did see a slight positive trend during the quarter, for example, Machining Solutions, where December was a strong month. That's correct. Very helpful. Thank you. And we'll take the next question please, operator. We have a question from Mr. Daniel Smith at ACD. Please go ahead. Yes. Hello. Good morning. I think most of the questions have been asked already. But just the 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? And 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 2 in house components that we already supply to the mining systems project. So there could be some effects in this area with a low continued activity level in mining systems. And with the lack of orders, I think you mentioned there was sort of 6, 7 orders that were pending in Q3 that didn't come. None of those have sort of surfaced yet. Is that correct? No. I mean the mining market is still quite hesitant. It takes longer time for investments decisions to be taken and placed by the mining companies. So we haven't lost any projects. No projects have been canceled or decided not to go ahead that we were hoping to get. So 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. And then just the final question on construction. In connection with the CMD in the U. S. During the autumn, you talked about sort of a substantial part of white collar workers in construction being sort of being let go in the next phase of the program, I guess. Is this sort of process being started yet? Or when do we sort of see that coming into sort of numbers? That is a process that will happen during 2015, yes. So there is a strong focus on the overheads, A and S costs of the business within construction and that was what Digi was talking about at the Capital Markets Day. And there's no changes in that plan now. Thank you, Olaf. And I think we have time for one more question from the operator. Please go ahead. We have a question from Mr. Daniel Conleyff 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 know it's a number of companies recognizing obviously the halving of the oil price structurally changing their outlook and earnings at valuations. This morning, I know Valerec has written down €1,200,000,000 in its oil and gas Explores business. So I just wanted to sort of how confident are you that you will not see any write downs to your oil and gas exposed business in particular Varel and S and T? Thank you. We don't see or feel that we have any such risks currently within the Samik group when it relates to oil and gas now. Great. Thank you very much. That was a quick one. We squeeze in another one, please, operator. We have a question for Mr. Peter Frohnen at Handelsbanken Capital Markets. Please go ahead. Thank you. A couple of very, very short ones. The FX guidance or calculation, what date are you basing those on? 2nd yes, take that first. That's year around. So it's the next Q and A in January. Okay. And see what date is it? The actual date? Around the I don't remember the actual date. We can I can check that and come back to you? I think it's around the 15th January or something like that. So it is a week or 2 into January. That's the base. Okay. Fine. You mentioned all of 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, I mean, we see a fair level of activity in automotive than 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 systems, this is nitty gritty, but at least according to my calculations, the systems order has been a bit of €1,000,000,000 or so the last couple of quarters except the Q3 and obviously Q4. Could you help us understand this? Is it even lower in Q4 than Q3? Or is it basically wiped out compared to previous quarter? I mean, yes, to understand the magnitude here. It's clearly below EUR 1,000,000,000 but we have been taking certain orders of course, so it's not 0 either. That's very clear. Thank you for that. Yes. Okay. Thank you. And I can just confirm to you that the date is on the 16th January. Okay. Thank you, Arcelor. And 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.