Earnings Call: Q1 2014

Apr 25, 2014

Ladies and gentlemen, very welcome to the presentation of Sandvik's First Quarter Results. My name is Magnus Larsson, Head of Investor Relations, and I will be joined on stage by our Chief Executive, Olof Alexander and a little later on our Chief Financial Officer, Mats Backman. This coming hour will feature the presentation as per normal followed by the Q and A session and we have 60 minutes at our disposal. So with that said, Olof, please go ahead. Thank you very much, Magnus, and welcome here everybody to this presentation with our first quarter results. Spring is coming around us and maybe we can talk a bit about the spring for Sandvik as well. We have seen improved demand in actually a number of areas around the Sandvik Group. We have a strong positive book to bill for the company in this quarter and we've seen major orders from the energy sector within Materials Technology and also quite significant major order system orders to the mining business area as well. Our cost reduction program that we announced in the second half of last year within Samik Mining is running according to schedule and we feel that we've reached that run rate by the end of this Q1 of this year. In December, we also presented our plan to close down a number of production units within Sandvik And that first wave is well underway. We have so far announced 7 different closures or initiated those closures around the company and most of these units are located in Europe as planned. Our EBIT came in at around SEK2.5 billion and the EBIT margin at 11.9%. We continue to see quite significant currency headwinds. This is driven mainly by the mining related currencies, the Australian dollar, the South African rand, the Canadian dollar, but we've also seen effects from the what's happening with the Russian ruble as a consequence with the crisis in Ukraine. Our return on capital employed for the last 12 months was 12 0.7%. Looking then geographically at the markets we serve with the Samik Group. Year on year, we did see some decline in Europe, mainly driven by the mining sector there, while North America actually continued to see growth. There we also saw deterioration due to the what's happening in the mining industry, but that was more than compensated by positive developments in other business areas like, for example, machining solutions. Asia displayed some growth in the year on year numbers, 3% up compared to the preceding year And the weakest performing market also in this quarter on a year on year basis is Australia, which is fully driven by the weak developments in the mining industry. Yes, Africa was more or less flat and we did see some weakness also in South America. Looking at our customer segments, year on year, most segments displayed more or less a neutral development compared to the preceding year. While Construction and Mining did see decreasing invoicing compared to the preceding year, on the other hand, Aerospace did show increase in invoicing. And if you then look at the arrows, which display the sequential development in the various sectors, you can see that actually a number of sectors are showing now a positive sequential development compared to the preceding quarter. We see this especially in the energy, aerospace, automotive sectors, but also to some extent in the engineering sector. The exception from this trend with a somewhat improving demand is the mining industry. There we see a continued flattish development for both our mining systems and our aftermarket business, but the equipment side of the business has seen further deterioration in the order intake. So there we continue to see significant market headwinds as the market is developing currently. Looking down a bit at the numbers here, as I mentioned, we had a strong book to bill in the Q1 of this year and that increases both compared to the same period last year and sequentially compared to the Q4 of last year. This was driven by general improvements in the markets that we're serving within machining solutions, within materials technology, in sectors like automotive sector, the energy sector and the aerospace sector. But we also received a number of major orders in Materials Technology relating to the oil and gas sector. Those totaled SEK 1,300,000,000 and we see very strong demand actually from oil and gas at the moment. Mining was affected by further order delays and further weakness in that market. Our invoicing is affected by the shrinking order stock that we have had in the company and decreased year on year by 4% and also compared to the preceding quarter by 3%. We have some normal seasonality in the Q1, but this is, of course, also driven by the declining order backlog that we've seen for Sandvik Mining. Our EBIT came in at SEK 2,500,000,000 and I feel happy with the development that we've seen more or less across the board. I think the one exception where we do have significant challenges today is our construction business, which actually posted a small loss in the quarter. But we are addressing the weak results that we've seen in construction amongst other. We announced a significant site closure within the construction business in this quarter relating to our mobile crushing and screening business. Currencies continued to have a strong negative effect on our results. We had a negative effect by currencies of SEK 200,000,000 in the Q1 and the bulk of this was relating to mining and construction. And as I mentioned earlier, this is driven by what's happening with many mining related currencies around the world, which is affecting us negatively. Our metal prices actually moved slightly upwards in the first And looking And looking forward, we expect further positive metal price effects into the second quarter, about SEK 100,000,000 looking at the metal price levels and currency and inventory levels we had at the end of the Q1. But actually recent times, the nickel price has been driving up even further. So if that trend continues, we could have actually an even more significant positive metal price effect. Looking at our cash flow, it was quite weak for this quarter due to I mean, normally the Q1 is a quarter with weaker cash flow. We have a seasonality effect where the Q4 we have the lowest invoicing in the last month of the quarter. And in the Q1 we have the highest invoicing in the last month of the quarter. So we have built receivables in the company, but we've also built inventories in mainly Materials Technology and in Construction. In Construction, this relates to preparations for the transfer of the mobile crushing and screening business from one site in the U. K. Or in England up to Northern Ireland where we have our other manufacturing sites. Our capital expenditure, as you can see on the red line of the cash flow graph, continues to be at fairly low levels, especially considering where we were historically predating the financial crisis. Okay. Then we have today also announced, which I think was very positive, 2 changes to our group executive management. When it comes to our mining business area, Gary Hughes will go in and focus 100% on the sales and marketing part of the business where he has his biggest strengths and his biggest passion. And it's also maybe the most important area we have in this current market situations. And so we're strengthening the team with the addition of Scott Smith who has a long period of career behind him, especially with the Weir Group, serving the mining industry that are running that business area within Weir where he was for 11 years. Right now, he's working for a company called Solzer in Switzerland. So I think Scott brings with him very significant experience about restructuring supply chains which he's done in his previous jobs. He's also within Weir done an excellent job in building the aftermarket business and developing the strategy for that business area. And at the same time, we get an even stronger focus on the sales part in our mining business area, which is very important for us in the current market situation. Then Ursa Tumma will join us. This is part of a more natural succession. Our current General Counsel, Bo Severnin, is 59 years old and is approaching retirement. And Asa will succeed him. Bo will remain in a role as a senior advisor and help Asa to get started in the role here during that period and also work on certain specific projects we have on the legal side. Orsa is currently the General Counsel that secures us. Some of you may also have seen her in the current process going on around Skane where she's a board member and has been heading up the independent committee that has been responding to the bids by Volkswagen on the Skane Group. Let's see. Well, strategically, if we look further into the future for the Sandvik Group, we have a very clear way forward and a very clear direction. Our plan and our strategies aim to shift Sandvik towards higher growing faster growing markets and sectors, so we can enhance the growth rates in the Samvik Group to yield, of course, higher returns and improve our margins and to reduce the earnings volatility. We serve very cyclical industries, but we need to build a business model that is adaptable to the changes that we're going to see in these cyclical industries. So we get the lower volatility in the earnings of the Sandvik Group. Within Sandvik Mining and Samik Machining Solutions, we're adjusting our manufacturing footprint. We're doing quite sizable changes in terms of moving manufacturing from consolidating onto fewer sites, but also moving it closer to where we have our customers currently and in the future. We're investing a lot in our research and development, developing the next generations of products which will help us strengthen our market positions in the future and build an even stronger portfolio within the Samik Group. We're looking at within Machining Solutions certain bolt on mergers and acquisitions and also looking at how we can address the mid market segments which we have not effectively addressed historically within the Samik Group. Mining is, of course, focusing a lot currently but also adjusting its cost base to the current demand. Materials Technology has a clear strategy to continue to grow towards the energy sector and I think we see strong evidence in this quarter of that we've been successful in continuing to grow our business there through the strong order intake we've seen in the energy sector in this quarter. But we're also safeguarding our position in our core and standard products and securing that we have a good utilization of our especially primary system where we have a high fixed cost base. Construction is working strongly with reducing its cost base. We have significant site closures also going on in the construction business, but also here product development to make sure that we have the right product offering in the market because cost savings will only take us so far. And what's really key for us in future is that we build the right product offering for the business in the future. And when it comes to Sandvik Venture, we continue to selectively look at making acquisitions into high growth areas. The Barel acquisition for me is an example of that where we can use strength we have into in the Sandvik Group and increase our exposure to areas where we see strong future growth going forward. And we have set financial targets for the Samik Group. Right now when it comes to growth, we actually have a shrinking top line in the company. This is mainly driven by the development we see in the mining sector. But longer term, we do expect also that sector to continue to grow and we see good development in the other areas of the business. And growth will come both through certain acquisitions, but of course mainly through us strengthening our market positions by having the right product offering and making sure that we are the company markets that we serve. The growth target of 8% is ambitious and should be looked into the light of the general development of global GDP where we do see that we should be able to have a clearly higher growth rate anyway than what the global GDP growth rate is. Our return on capital is also below our target currently. This is driven by the weakness we see in the mining industry especially, but we remain confident that longer term a 25% return on capital is a reasonable target for the Samik Group. Our net debt is below our target of 0.8%. It will temporarily after the Q2 exceed this target due to the dividend payment given of course at the AGM which I think they will decide on the dividend and the closing of the Varel acquisition. But we believe in just a few quarters after that, we will below be below the 0.8 target again based on our strong cash flows underlying cash flows that we have in the semi group. And we have one of the most consistent dividend policies of any company that exists in the world. We have consistently paid dividends since 18/70 in the Samik Group and we have a very high share of dividend payment dividend payout in the business. And actually in 2000 and based on 20 thirteen's EPS, it will be 88%. But our long term target is to be around 50%. So these are our targets. We have strong plans which are aiming at achieving these targets and a strong focus on continuing to deliver on what we think will make Sandvik a successful company in the future. With that, I'm going to hand over to Mats who will make some more specific comments on things going on in the company right now and then I'll come back and summarize and take your questions. Thank you, Olof. I will give some additional comments on 2 key areas now going forward and that's the supply chain optimization program and also our efforts in order to improve our performance in terms of net working capital. Starting with restructuring our footprint. As already announced at the Capital Markets Day last year, we're down to 125 in the next 3 to 4 years. In the next down to 125 in the next 3 to 4 years. In December, we specified this program further with the first step, including closure of approximately 10 production units. And we are aiming for annual savings with this first step of approximately SEK 800,000,000 with full run rate by end 2015. We took a total restructuring cost in the Q4 last year of SEK 900 1,000,000 and the status as of today is that we have initiated a closure of 7 units, mainly affecting Europe, as Olav said, with 2 units in Sweden related to Machining Solutions 2 in U. K, 1 for constructions, 1 for Machining Solutions 1 unit in Italy related to Machining Solutions 1 smaller unit in France related to constructions and finally, 1 unit in South Africa related to mining rock tools production. We are aiming for reducing the personnel net with 550 employees by the closure of these 7 units. Overall, this program is running according to plan, but you should not expect any material savings coming through in 2014. We will see the savings coming through gradually in 2015 with a full run rate of SEK 800,000,000 by the end of 2015. Moving over to net working capital. Even though we have done a lot of improvements comparing to pre crisis, we're definitely not happy with the recent development and with the status we have today in terms of relative net working capital. We have a target of 25% in relative net working capital. And as you can see in this chart, we have been on target level only for 1 single quarter during the last 7 years. In order to understand the development as well as the potential on net working capital going forward, you need to look on the business area specifically. This chart shows the development of the net working capital the relative net working capital for our business area starting Q1 2007 until Q1 2014. And as you can see, we have a rather widespread in terms of performance between the different business areas. If we're starting with the most positive one, the blue line representing Machining Solutions. We are today on the level of 24%. And I would say given the integrated business model for Machining Solutions that is pretty much in line with the long term target for Machining Solutions. So you should not expect anything else but fine tuning going forward when we look at Machine Solutions. Materials Technology today on the level of 30%. Even though Materials Technology have done a lot over the last couple of years, there are still potential for further improvement. And I would say given the business model looking on Materials Technology, long term target is closer to the average of the group of 25%, so in that region. Constructions and Mining, I would say, is far above the levels we should see for this kind of business. Construction is on 32% in the Q1 and Mining on 33%. And given the business model, we have a long term target that is below the average for the group when we're looking on those businesses. And I would say that given that it's a lot of assembly driven and not that integrated, it should be lower than the other one. So, what are we doing in order to address the GAAP going forward? This is just a selection of very high level activities for the different business areas. But looking on mining to start with, it is essential that we are successful with the footprint project going forward done in order to fix the structural issues related to supply chain. So it's definite about inventories. But we also need to work with our internal processes when it comes to accounts receivables within mining. So that's also a focused area. And we are reviewing the stock replenishment factors because we need to get inventories down short term as well. And you can expect destocking going forward within Mining from where we are today. Machining Solutions, like I said, mostly fine tuning, but we will have a positive effect in terms of net working capital as well for Machining Solutions going forward with the supply chain optimization program because fewer production unit will have a positive impact on the inventory levels as well. We will continue to focus on sales and operational planning on the sales and operational planning process. We are already doing that, but we think we can do more. Materials Technology, the most important area in terms of inventory is to optimize the material flow from primary to tube. And I would say that looking on the current situation in terms of inventories, we are also reviewing the stock replenishment for Materials Technology. And you should expect de destocking going forward for Materials Technology as well in the coming quarters. Sami Construction, very similar to the situation we have within Mining. We definitely have structural issues within constructions when it comes to the complex supply chain. So we will benefit from the ongoing supply chain optimization program when it comes to constructions as well. We need to review our internal processes. And when it comes to the current situation, we are reviewing the stock replenishment factors as well. So you can expect destocking going forward for constructions as well. We have a little bit different focus when it comes to Venture. Given the different business model within the business area, we are focusing on the product areas rather than the overall business area for Venture. But we definitely have a potential to improve the situation for Venture as well. So what should you expect going forward then in terms of net working capital? If we're looking on the coming 2 years ending 2015, I'm convinced with ongoing activities and with the focus we have that we will be able to meet the 25% for single quarters. But in order to get a sustainable level around 25%, we need to address the supply chain as well. So our target to get sustainable on the level of 25% requires that we finalize the first step in the supply chain optimization program and that will be done by 20 16. Okay. Thanks. Thank you, Matt. So net working capital, a lot of challenges, but I think also a lot of very clear distinct activities going on in this area. So to summarize this quarter here, well, we do see improved demand in many areas for the Sandvik Group. So in general, we do see improving market conditions. The exception for this is the continued headwinds that we're seeing in the mining industry. We're progressing well I feel with our supply chain optimization program. We have initiated the closure of 7 facilities around the Samik Group and this will clearly both help us in reducing costs in the company, but also as Mats is talking about also help us to be more efficient on our net working capital since we have fewer units and a more streamlined supply chain in the company. So this strong focus on net working capital, it continues within the Samvik Group even though we're not at our targets right now though. And we've taken steps, especially when it comes to Sandvik Mining, to strengthen our management team. This does not change our direction for mining, but does mean that we put more senior management attention on both the sales and the restructuring activities that we have ongoing in the business area. So I think that will help us to be even more effective in achieving our targets going forward within Sandvik Mining. With that, we conclude our presentation and let's open up for questions. Thank you, Olof. Thank you, Mats. Yes, it is time for questions and we'll do this in the usual manner. We have microphones here on the floor in Stockholm. We have the virtual audience as well. I suggest that we start here in Stockholm and please restrict your questions to 1 at a time. Okay. Anders Rooslof, Swedbank. I have a question regarding Machining Solutions. Could you elaborate a little bit about the sequential development? You mentioned in the report about an improvement during the quarter. Was March stronger than the other month and is April. And the order intake was quite better than sales. Yes. To start with, we did have an improvement during the quarter most notably in North America where we did have effects on business activity due to the weather conditions and so that many companies have seen in North America. So there was a certain improvement during the quarter for Machining Solutions. The very positive book to bill which is not usual for Machining Solutions, normally we have close to 1 in book to bill, is due to that we secured a number of larger orders against the aerospace industry. And these will be delivered over time, but they came in now in the Q1 and that's what boosted order intake from Missionary Solutions in the quarter. And we continue to see, I would say, very stable demand development from what we saw in the end of the Q1 into the Q2 for Machining Thank you very much. May we have another question from the floor? Yes, please. Thank you. Peter Frillen, Handelsbanken, Capital Markets. On the gross margin, the gross margin is very strong compared to also a slightly longer historical perspective. Could you please share with us how the development of the OpEx is going to look in the future? Is there potential that the admin, that type of costs are unusually high right now? That is actually what is holding the EBIT margin down to? We've had a small reclassification from COGS to A and S cost, but that's more of a minor nature. Our COGS has been positively impacted by well, us the cost saving activities and so catching up with the lower market activity that we've seen. There's certain mix effects within business areas and between down considerably compared to the Q4 of last year, but they will vary between quarters. And I mean there are continuous activities which certain quarters drive costs extra in A and S that we have when we look at how we develop the business going forward. But to be clear here, if you look at the admin as such with the OpEx, if you combine those, they are quite high compared to history. Will that eventually be more effective or is it a new standard for Sandvik? We are driving both cost savings that affect COGS, but also our admin costs. So our ambition and in our plans is to have activities that should bring down admin costs looking into coming years. Thank you. Thank you very much. Let us move to the international audience. Operator, may we please have the first question? The first question comes from Sander Kussmann of Credit Suisse. Please go ahead, sir. Good morning. It's Sander from Credit Suisse. Thank you for taking my Firstly, on Mining, that sequential performance that you've seen declining, slightly different from other players I've reported. Could you just give us some more color on what's happening there? Is this subject is it because of your kind of geographical commodity or product mix or is there a market share issue and also that in the service and consumables as well, I think some other players have cited consumables growing? And then I have another quick follow-up. Well, I don't think we've been losing market share at all in the mining area. And at least my impression is that the weakness we've seen on the equipment side is very consistent with what other companies have been describing here supplying sub suppliers to the mining companies as well. Aftermarket, we see as sequentially flat compared to the preceding quarter. And also mining systems, we've actually had a reasonably good order intake. So we are seeing sustainability in that business at the current level. So I don't believe that Samik is performing differently in that sense when it comes to our equipment sales. Thanks. You had a follow-up as well? The follow-up just on the inventory buildup that you saw in SMT and construction mainly. Could you help us with how much did that help EBIT in the quarter? I would say marginally looking on Materials Technology because it's pretty early in the chain. And I would say that the same goes for construction, not material. Okay. Got it. Thank you. Thank you very much. Operator, may we have the next question please? The next question comes from Mr. Guillaume Opinha. Yes, please go ahead, sir. Hi, good afternoon, everyone. Thanks for taking my questions. I wanted to ask about the destocking component you mentioned during your presentation. Is that expected to have any under absorption impact on your margins temporarily, obviously, as you take those initiatives that would then afterwards will be offset by your streamlining and rationalization of the supply chain? I would say to some extent. But what we need to remember looking into the Q2, we will have a slightly stock buildup looking on Machining Solutions from a seasonal point of view into the summer holidays. But even for Machining Solutions, if you are comparing the second and third quarter, we have been able to bring down the seasonality quite a lot actually by having this control over inventory as we have today. So it will be a smaller stock buildup than normal. When it comes to SMT constructions and mining, we will have an effect of kind of under absorption when it comes to the destocking component going forward for the second and third quarter, but not as material as it is for Machinery Solution looking on the stock effects on the profitability. And also just to comment also on the I mean our supply chain program of course runs over a longer period of time. So the quarterly effects, we wouldn't expect to be large. I mean, this is going to be a gradual decrease in terms of the plans that Mats talked about earlier when it comes to gradually reducing that working capital. So the follow-up is maybe if I think about stable let's say that we have stable organic growth rates on all those divisions, would and then you have your actions and so on. Would you have impact on margins compared to Q1? Due to inventory? Yes. Due to this destocking initiatives, which again I agree. I mean they're healthy long term, but can we have a situation in a temporary situation in which our margins go lower because of this? I think Mats really answered the seasonality effect. I mean, we normally have a buildup in Q2 of inventories and an over absorption effect as a consequence. But especially then within Machining Solutions and Materials Technology to have a flatter development over the year, which we already succeeded with last year for Machining Solutions. And this year when it comes to Materials Technology, we are planning to try to compress the summer shutdowns which will reduce the requirement for inventory buildup pre the summer shutdowns that we have especially in Sweden. Fantastic. Thank you very much. I'll go back in line. Thank you very much. Let us move back to the floor in Stockholm. Any questions? Not at this point actually. Okay. Operator, may we have the next question from the virtual audience? We have a question from Mr. Markus Almerud at Morgan Stanley. Please go ahead, sir. Hi. This is Markus Almerud from Morgan Stanley. I'd like to come back to mining and just ask about the number of quotations in mining, if you have seen a change there or if it's virtually unchanged, especially in South America. I mean, Australia has been bad for some time, but South America has held up relatively well. Is there any change there? I mean, we continue and we've talked about that previous quarters. For us, the best performing mining region in the world is Africa. We've seen extremely sharp decline in Australia, but we also see a negative trend clearly in South America. So that's a correct observation. What is interesting, which is actually a bit normal terms to what we would normally expect is that we still have a reasonably good order intake when it comes to mining systems orders. And the large order we booked and press released earlier this quarter was actually relating to Australia. So what we've seen where we've seen the decline in the quarter in order intake is really related to our equipment sales, which are normally booked on shorter contracts and of course, the project business, which negotiated over a long period of time and then executed over often several years. Okay. And in terms of order intake, I mean order intake is down quite significantly. We can see that. But in the number of conversations and quotations that you have, is that also down or is it unchanged? Well, it's always difficult to judge. Actually, what often happens in the marketing department when you have a downturn and I know that from my steel industry days and I would say we see that also in the mining today is that actually the quoting activity and the discussions that you end up having with the customers often increase in these periods of time because they spend a lot more time getting in a lot of offers from many customers. And so I think it's difficult to measure just on that. But what has been clear in the quarter is that the number of these tenders or discussions that we've had out with our customers that actually have resulted in a firm order, that has been low in the quarter due to our customers delaying their booking of orders and their capital expenditure. I would say also I think as long as the demand for the metals and activity with the mining companies remains high or even grows as many people are projecting going forward, it's likely that we're more or less at an unsustainable level where we are standing right now because if metal outputs are going to be constant or even increasing, the miners will need to replace equipment, spend more on aftermarket business and gradually also invest in new machines. So given that that trend continues, I think there's some reason for optimism, maybe not in the very near future, but in the medium term anyway when it comes to the outlook for the mining sector. Excellent. Thank you very much. Thank you very much. Operator, the next question please. We have a question for Mr. Alexander White at JPMorgan. Please go ahead, sir. Good morning, everybody. It's Alex at JPMorgan. I've got a few questions, please. I'll take them one at a time. The first one was, you said that you're looking at how you can address the mid market better in Machining Solutions. Just wondering if this could involve further M and A or are you happy with the current brand and offering that you have? Just a bit more detail around the steps that you think you need to take, please? Yes, we are as you know, we launched the Carboloy brand. We're developing that. It's I mean interesting how we're filling a sector or a hole in the market with Carbelong and I myself actually a few weeks back visited in China mid market distributor as well as a premium market distributor. And I think we have a reasonably good offering to grow organically with Carboloy. But the issue is, of course, to build the brand and build up a business in the market. It does take time when you're doing it organically. So we will also continuously look at potential M and A opportunities in the mid market to accelerate our growth there. But it is a challenge, I would say, at the same time in machining solutions, but it is a highly consolidated industry and there are not that many targets out there to look at when it comes to acquisitions for Machining Solutions. Okay. Thanks. And then just coming back on mining again. If we look at the mining orders excluding the SEK1 billion in project orders, so just looking at the base business there, they've taken a fairly big step down as you piloted to the $5,100,000,000 from $5,900,000,000 If we think about normal sort of drop throughs on those lower sales, it looks like we could see fairly significant downside to the margins as the sales do come down. I guess sort of something south of 9% even. Can you talk about a little bit in terms of margin development going forward? And is there any additional cost that you now need to take out to adjust production lower? It's a very good question. And I mean, of course, these lower volumes, they are going to cause further underutilization or under absorption issues within our mining production system. So in the near term, that could mean something like a couple of percent even on the EBIT margin for the mining business area with those very low volumes that we're looking at. But of course, that can be affected by how the market develops within the quarter. We see stable demand on our aftermarket business sequentially from the Q4 and that is of course the basis of our current EBIT in the business area. And I think that's encouraging that we see that positive development. Yes. So that's on the spare parts. Can we have just a follow-up on that then? Just the I think the services and rock tools were down somewhat sequentially. Was the wording in the release? Are you able to quantify what that was? We're talking about something like in comparable items and unchanged currencies about 1%. So it's more or less unchanged I would say in that area. But of course, if you're over time investing in buying fewer machines, it's likely that that would mean something positive in the aftermarket after a certain period of time if you're running your current equipment longer. As long as, as I said, the production rates at the mines remain high or even increasing, it's not sustainable to not buy new machines because they wear out. They have a life of 5, 7 years, maybe 10 years, a machine like this. So there is a continuous replacement need as long as you're using the machines. Sure. Thanks. And the final question I had was just on Materials Technology. Are you seeing anything on nuclear demand? We haven't heard anything from that area for some time. Well, it's fairly stable at this low level. We have not seen any clear pickup on nuclear. We talked last year about the potential drop in sales 2014 compared to 2013 in nuclear. We don't believe in that or that's not going to be the case, I would say, in 2014 now because there were certain delays of deliveries in 2013. So we will see roughly a similar invoicing level towards the nuclear sector during this year as we look at the market right now compared to the preceding year. And that picture is unlikely to change because before an order is given, a project is started and so on and actually get to the invoicing point, it's quite a long lag there. So we know what we have in the order book and more or less what we're going to deliver in terms of steam generated tubes during this year, which is the main product. Okay. Thanks very much for your answers. Yeah. Thank you very much. I know we have a question from the floor in Stockholm, please. Yes. Hi. Follow-up here. On prices, could you please share with us the price component on the group and more importantly, I would say, on the different mining parts that we just talked about? Thank you. On a group level, we've seen roughly 1% price improvements in the quarter. If you look at the different areas, that's mainly driven by Machining Solutions, have seen a positive price progression. I would say in the mining business, we've seen more or less a stable pricing environment. So we've not seen prices slipping in the mining business currently. And a clarification on the minus 1% you talked about was that the spare parts? That was the octos and spare parts combined. Okay. And the consumables probably slightly more slippage Q on Q? Yes, that's correct. Somewhat better for the spare parts part of that. We have one more question from the floor in Stockholm. Hello, Daniel Schmidt from SAB. Can I just ask you on the lumpiness when it comes to the large orders in SMT, which were quite big in the quarter? And I think you were fairly optimistic on oil and gas in your statement. What should we expect going forward? Do you see a number of sort of awards being handed out in the coming quarters as well in the sort of same magnitude? Yes. I mean, when it comes to especially the umbilical side of the business, these which the bulk of these orders relate to, this is now for delivery 2015. And for us to increase sales significantly, we gradually need to start to build up our capacity for umbilicals within the Samik Group. But we're continuing to look at taking more orders and booking more within the oil and gas sector. But we're starting to build a quite considerable order stock now with this very heavy order intake that we saw in the first quarter. So the lead times for us to be able to deliver to the customers are starting to move out on these products. So that is basically limiting your sort of ability to take additional same size orders short term? Yes. But obviously, if we believe in the markets long term and the strong development, we will continue to look at debottlenecking our production processes and so to try to free up more capacity to meet that market demand. Thank you. I think just to put some more color onto that as well, we have come from a period where orders have tended to be delayed a little bit and they were not anymore. In fact, we got orders that we expected for the latter part of the year. So it was an unusually happy quarter from that perspective. Of course, from that perspective too, you shouldn't really count on this level being sustainable going forward, yes. The next question from the virtual audience, operator, may we have that one please? We have a question from Mr. Nick Wilson at Spiritus Santo. Please go ahead, sir. Yes. Good morning. Two quick related construction questions, please. Just trying to understand the difference in your performance, obviously, relative to Caterpillar, which you're now expecting 10% growth year on year. Is it because you're so much more European skewed? And on the subject of construction, I'm sorry to ask a quite blunt question, but when did your patients actually run out on this business given its underperformance literally over the last 18 months consistently? Well, I think we also are seeing improving market conditions. We had a positive book to bill for construction. And so the market is looking a bit more positive for construction within Samik as it is for Caterpillar. When it comes to patients with construction, I mean, if there's any EBIT in this report, I'm not happy with it. It's, of course, the one in construction where we made a small loss in the business area and that's not a performance we're happy with. We are taking very strong steps to reduce costs. Currently in the business, we're closing a large manufacturing site in the U. K. And consolidating the biggest problem area we have within construction is terms of mobile crushers and screens. So that closure is related to that product area and that will help us to improve profitability there. But we also need to see improved sales for that to be well, to bring construction up to a reasonable profitability level. Construction within Samik, I would say, is a business area which is very difficult for us to if we were divested to sell the whole business area because it does have a lot of interlinkages with our mining business. And we actually have certain areas which are performing very well within the construction business. So we're focusing right now on fixing the problematic parts. But of course, if we don't feel that we long term and sustainably can do that. We need to also look more broadly at our portfolio of assets within the construction area. Thank you. Thank you very much. Operator, may we have the next question? Next question comes from Mr. Martin Wilkie at Deutsche Bank. Please go ahead, sir. It's Martin from Deutsche Bank. Just coming back to the question of M and A. You mentioned a couple of times that there could be areas where you look to seek some acquisitions. Generally, given that there's obviously a lot of restructuring happening inside the portfolio and it is still quite asset intense in many areas where arguably adding new companies or new businesses to it could increase the complexity. Do you feel this is the right time in your point of restructuring to start doing deals even if from a market perspective it could be? Or do you think that you need to get some of this restructuring done before you can do it? Just to give us a sense as to how comfortable you feel that the businesses could get another business coming into them given that they're undergoing a fair amount of restructuring both on the capacity side and other areas? Thanks. I think it's a very relevant question. And we are not looking at high levels of M and A activity in the Sandvik Group currently. I mean, we're looking at certain selective areas that might fit our portfolio. We are probably going to close the Varel acquisition in the second quarter. That will occupy the Venture team. In Venture, we do not have large current ongoing restructuring activities. And I'm always in a broad company like Sandvik with activities in many areas, we'll have certain parts of the organization which are working very actively maybe with restructurings and other parts which are not doing that. And I would say venture is an area where we have had the management capacity to deal with an acquisition like Varel. But now, of course, we need to digest the Varel acquisition in venture first before we start looking at further steps. The other area, which I think is most interesting when it comes to M and A activity is Machining Solutions. If we can find attractive bolt on type acquisitions, that is an area that could be interesting for the Samik Group. And I agree, Machining Solutions does have a fair workload with restructuring and supply chain. But we think with those kind of which would be likely to be smaller types of acquisitions, we do have the management capacity to deal with that. Mining on the other hand is going through a major restructuring cost cutting activities. And so we don't foresee any near term M and A activity in that business area because the management team clearly has a lot on their plate currently and a lot to focus on. So it's a bit of a mixed picture across the business areas when we look at M and A. Okay. Thank you. Thank you very much. Operator, may we have the next question please? The next question comes from Mr. James Moore at Redburn. Please go ahead, sir. Yeah. Good morning, everyone. My question is on mining orders. Can I just clarify within the 4% organic sequential Q on Q drop you talked about, did you say service was down 1%, spares 0 and systems up? And so if that's correct, does that mean equipment was down? If you could help with that, what was equipment down? I guess somewhere around 15%. And I know you don't normally, but can you say what the absolute krona number is roughly for equipment orders within the SEK 6,000,000,000 or so just because it would be helpful to know where we are on an annualized basis. James, you've calculated correctly. I mean, the drop in equipment sequentially is roughly around 15%. So you're spot on there. And your picture of the other areas is I mean the 1% I referred to was related to the overall spares and consumables business. But as I said, it's slightly better for the spare parts and slightly weaker for the consumables in that. Okay. And then the just as a follow-up, the SMS, you saw good organic of 5% there. But the margin, 20.0 percent being overly fussy, maybe it's a touch light. Is there anything within that that you see that could explain it? But I would say looking on the operational leverage when it comes to Machining Solutions, it's about 50% comparing to last year. So I think it's a decent leverage on the additional volumes coming through there. Actually over 60%. Over 60%, 61%. I was thinking sequentially against what was it 19.5% and you felt that was maybe 500 bps from some of the issues. And so on a similar revenue, you might be 20, 20.5 was a feeling after the last quarter. And here we are with a slightly higher revenue and with 20.0 that was more what I was referring to. Okay. But I mean our year on year leverage if you look at that is above 60% and that has to be considered I think a very strong leverage for Machining Solutions. Okay, great. Thanks. Thank you very much for that one. We have a few more questions from the virtual audience. Operator, may we have the next one? The next question comes from Mr. Ben Marflin of Bank of America. Please go ahead, sir. Yes. Thank you. Good morning, Olof. Just a comment on the mining restructuring plan that you obviously laid out at the end of last year. Would you say it's on track at the moment with what you originally laid out in terms of the phasing of the savings? And will the change in management you've announced affect either the timing or the scope of the plan? Will Scott need time to settle in and review it? That's the first question. No. Our plans are unchanged by this and we're still committed to achieving the targets that we've set up. In mining, I think it's important to separate that we have 2 plans that we've announced ongoing within the mining business area. 1, a €500,000,000 short term saving which is about adaptation of the organization to the current business volumes. And we feel that we achieved that SEK 500,000,000 rate by the end of the Q1. The second part of this longer term supply chain restructuring plan where we're planning to close a number of production units so far announced 1 during the Q1. And that plan we feel we're on track with. It's going to run over this year and next year and we achieve the full run rate savings of that by the end of 2015. Got it. Thank you. Nothing has changed with those plans, but we haven't had from the site closures and so we haven't seen any effects yet coming through in the results. Got it. Thanks. And then on construction, can you just say how much of revenues actually share common facilities with the mining business? I'm guessing it's the tunneling and the surface rigs. And then does the margin in construction get negatively affected by the fact that your loading in mining is so much weaker given that I you're sharing overheads. Do the businesses end up sharing the pain from that? We have a number of areas where we have joint production like certain parts of the tunnel in drill rigs, parts of the crusher business as examples. And we have other facilities like mobile crushing and screening and breakers, but we don't share any common facilities with mining. But in the areas that are sharing production facilities with mining, of course, we have a joint under absorption problem due to the lower business volumes that we're seeing. So they do affect each other to a certain extent there. So if you said earlier, the weaker loading you expect to see on the equipment side in mining going forward that would impact the margin that would also have a drag on the construction business? Well, it depends on the balance between the two businesses. But I mean combined since they share certain facilities that will be a joint effect. I mean the Samik Group will have an under absorption to deal with there and well, we try to share that under absorption as fairly as we can, but they do affect each other to a certain extent. Got it. Thanks. Thanks, Alain. Thank you very much. Do we have any more questions from the floor in Stockholm? Not at this point. Operator, may we have the next question, please? The next question comes from Mr. Colin Gibson at HSBC. Please go ahead, sir. Hi, good morning everybody. Just a quick question following up on everything that's been asked so far and that is, Olof, in September 2011, you stood up and talked at the Capital Markets Day about Materials Technology and Sandvik Construction. And you said you were going to give them a 2 to 3 year, if I recall correctly, window to significantly improve their operating performance. Of course, we've seen a slight divergent outcomes when it comes to that. When do you expect to give the market an update on the status of Materials Technology and Sandvik Construction with reference to what you said in September 2011? Thank you. Yes, very good question. And we will continuously of course talk about that. I think we've had 2 quite different performance patterns in these two businesses. Materials Technology has seen actually a very strong margin development and a strong performance. So I think the urgency in terms of looking at that business area is reduced compared to 2011. When it comes to construction, we have a different pattern. But I mean here we need to see near term very clear steps on how we bring up the profitability in this business area. But of course, a loss making business also has very limited value if you look at divesting or so. So even if one longer term would take a different view on construction, having a sustainable underlying profitability is I think a basis before we really have clear options for that business. I completely agree with you. But could we apply the opposite logic to Materials Technology? Is now the perfect time to divest that asset? Well, you could ask that question. I don't have any more information to share with you regarding that at this point in time. But we'll talk more about that, for example, at Capital Markets Day later on this year. Thank you. Thank you very much. Operator, may we have the next question please? The next question comes from Mr. Sebastian Gutter at Societe Generale. Please go ahead, sir. Hi, good morning. Thank you for taking my questions. On Mining, I'd just like to come back on the consumables and service. I mean, it's both are underperforming commodity production, which I think is quite strong at the moment. Have you seen any insourcing from miners in terms of service? And have you seen some consolation of your cost per meter contract in the consumable business to extend that underperformance? Or for the consumable, are we just talking a bit destocking? Well, I would say we've seen I mean there are no big changes sequentially compared to Q4. When it comes to if customers are in sourcing or outsourcing service, I would say you see both examples currently in the market. Some customers feel that they can drive cost savings through in sourcing. And others are looking at if they can drive cost savings by outsourcing more service. So I think you see flows in both directions there, which different customers taking different top line is up 3% year on year. The top line is up 3% year on year, but order intake ex large order is down 5%. I just would like to know if there were some inventory buildup at customers given inflated a bit demand in the quarter. We if you compare us to other stainless steel producers, we have a fairly low share of distributor sales and often high value products where there's a smaller element of speculation due to shifts in nickel prices. But I would not say that there's a material effect as far as I see it on inventory buildup with customers driving this development. Okay. Thank you. Very clear. Thank you very much. Our hour is almost up and I just want to draw your attention to a small but significant detail in our report. It is that we have changed our date for the Capital Markets Day. It is now 17 November and it's going to take place on our premises in Fairlawn in the USA. So please reschedule. But with that said, from all of us here to all of you, we wish you a pleasant day and we will see you next time. Thank you very much. Thank you.