This is Sandvik's presentation for the fourth quarter and the full year of 2013. I am Magnus Larsson, Head of Investor Relations, and you are very welcome. This coming hour will follow the normal routine. In just a minute, our Chief Executive will present the full quarter result, the full year result as well. The extended presentation this time will feature Varel International Energy, presented by Tomas Nordahl, Head of Sandvik Venture. Right now, Olof, please go ahead.
Thank you very much, Magnus, and welcome everybody here to this presentation of our fourth quarter results and full year results for 2013. Do you want to quickly sneak over, you guys, before we start to this side of the room? Just give you a quick moment to get seated here in Stockholm then. Okay. We've called this report Good Progress Towards a More Efficient Sandvik, and I think that really sums up 2013 in a very good way from our perspective working in the company. If you look at the full year highlights for the Sandvik Group, we've taken a number of very significant steps of creating a better, more efficient Sandvik for the future. Towards the end of last year, we launched our Supply Chain Initiative, which focuses on our manufacturing costs and how we're going to reduce those and become more efficient going forward.
We've taken significant one-off items related to that program now in the fourth quarter here. We had continued strong progress within Sandvik Materials Technology, which has been historically a business area with significant challenges, but continues now to display very good EBIT margins, and did so also in the fourth quarter. We've introduced several significant new products in our product range, and that's, of course, the most important base, I would say, for us for the future in the Sandvik Group, that we have a world-leading product program and that our research and development is delivering the products of the future that keeps us a step ahead of our competition. We have continued to focus on our utilization of group resources and how to get greater efficiency in our various group functions like finance, IT, indirect purchasing, and these areas.
We began the year, 2014, with announcing the planned acquisition of Varel International, which is, I think, a very interesting company, active in drilling in the oil and gas space. Tomas will talk more about the Varel acquisition a bit later on. Now, when you look at the demand throughout the year, it has clearly stabilized in the last two quarters here. We saw during the end of 2012 and the first half of 2013 a gradual reduction, especially in the mining sector of the market, but that has now stabilized, and we have found a new level here. It's maybe too early to talk about an improvement, but anyway, in the fourth quarter, you can see some signs of light within Sandvik Materials Technology and within Sandvik Construction, who saw year-on-year improvements on their order intake.
The full year 2013, we did have a decrease in top line. Our invoice sales came in at just over SEK 87 billion. This was mainly driven by the downturn we've seen in the mining area. Our adjusted EBIT came in just below SEK 11 billion. We delivered just over 12% EBIT margin for the group. We had a very strong operating cash flow, nearly SEK 11 billion. That is before the payment of the intellectual property tax case that we made during the third quarter of this year. Strong underlying cash flow. That's driven a lot by six now consecutive quarters of reduction of inventories in the group. The board has decided to propose an unchanged dividend to the shareholders meeting, and that's then SEK 350 per share.
Looking now more specifically at the quarter here, we have announced now closure of three units in our program, in our supply chain restructuring initiative. Two were announced last week in Sweden. Before the end of last year, one unit in France was announced. We are now taking the steps in this program that we started talking about at our Capital Markets Day. This will now progress during 2014, where we will see further announcements in various countries around the world. Then, as I mentioned, we announced the acquisition of Varel then here. Our operating cash flow came in just below SEK 3 billion for the quarter. We had a significant inventory reduction also in the fourth quarter of this year, SEK 1.1 billion.
Adjusted EBIT came in just below SEK 2.4 billion, but was affected very significantly with these one-off items that we communicated in December of last year then. Looking then geographically at our business and how it's developing in the various regions of the world. You can see now that Europe continues its weak, but still a positive recovery here. We had an increased sales compared to the same period of last year of 2%. You also start to see the big effects in our invoicing of what's been happening in the mining sector. Our sales in Australia were down 39% compared to the preceding year. This is, of course, mainly mining. You see the same picture in South America, which is down 22% compared to the preceding year here.
Africa has not dropped off as much yet, but will be affected going forward because, of course, Africa is driven very much by sales into the mining industry. Then looking more specifically at our various customer segments, the biggest drop in sales year-on-year is clearly in the mining area, where we had a more than 10% drop in our sales level. We also have negative year-on-year sales numbers in engineering, construction, and also in consumer-related products. While actually automotive, the energy sector, and some other areas like aerospace do display a slight increase compared to the preceding year. More or less the picture is during the quarter that we've seen a stable demand and the two sectors where we actually do see a slight improvement are automotive and the construction segments.
This is, I think, a positive sign for the future that we are starting to see some areas of Sandvik's exposure where we actually do see an improving trend compared to where we've been in the past. Our order intake was for the group net up 1% compared to the preceding year. If you look at the bar chart, you can see that it's clearly leveling off now. We do see this stabilizing environment that we already started talking about in the third quarter here. When it comes to invoicing, this, of course, lags our order intake a bit. We do see a drop still in invoicing, but this will, of course, also now stabilize as our order intake is stabilizing within the company. Our EBIT, as mentioned, our reported EBIT was SEK 590 million, but was heavily impacted by these non-recurring charges.
Excluding them, we end up at the EBIT margin of 11% and close to SEK 2.4 billion in EBIT. In cash flow, I think the most important area to point on this slide is our investment levels, which compared to the historic levels, if you look at the black line where we were pre the financial crisis and so, we continue to keep at a considerably lower level than what we have in the past. I think we have a better discipline when it comes to how we manage our investments in the company compared to preceding years. Net working capital continues to come down in absolute numbers.
As percentage of sales, we have not succeeded in achieving our target of 25% yet, but the total volume of net working capital, as you can see in the bar chart behind here, continues its decreasing trend, and this is, of course, influencing the good cash flows we're seeing from the Sandvik Group. Our operating leverage, we did have a drop in invoice sales compared to last year. On that drop, we had a negative leverage of 28%, which I would say is a fairly normal number for the Sandvik Group under these circumstances. Looking more specifically at our various business areas. For Sandvik Mining then, order intake, as I said earlier, stabilized on this low level that we've seen. We've found a new level for our mining business where we are right now. The adjusted EBIT, excluding non-recurring items, came in at 10.5% of sales.
I think that's also good that we've managed to maintain our EBIT at this level, despite the very dramatic drop in the top line that we've seen for the business area. We continue to reduce inventory and personnel within Sandvik Mining, and the reduction in personnel was 442 people here. We have a strong focus now on restructuring the supply chain within Sandvik Mining, which is an important part and an opportunity we have now in this weaker market conditions to really build a stronger business for the future. Sandvik Machining Solutions came in at an adjusted EBIT margin of 19.5%. We see stable market conditions for Sandvik Machining Solutions, where we can see some signs of improvement in regions like Asia and Europe, while we continue to see stable demand in North America.
Within Sandvik Machining Solutions, we are taking steps to improve the supply chain to increase our competitiveness and build a more efficient manufacturing footprint for the future. We have announced 2 closures of units in Sweden last week, and this is the first step of the program that Sandvik Machining Solutions is going to run for the coming years in terms of optimizing its manufacturing footprint. Looking at the 3 remaining business areas, Sandvik Materials Technology did see some signs of improved demand. There's some positive trend here. We saw very strong operating margin for the business area. Actually 13%, excluding metal price effects, which is a historically very high level for Sandvik Materials Technology, and I think a great success that they've managed to achieve those kind of profitability levels.
We finalized a significant and very important investment into the primary system to create a more efficient supply of especially rounds for tube manufacturing within the business area. That was also a big step forward for the business. Sandvik Construction did see some positive trends when it came to market demand. We had a cancellation of an old project order from 2010 in Russia, but if you exclude that, actually our order intake increased by 15% this fourth quarter compared to the same fourth quarter a year ago. We do start to see some positive trends in the construction area. Well, we were effective when it came to earnings of both non-recurring charges and under absorption effects due to the low invoicing levels that we've seen in construction, and this did affect the results here.
When it comes to Sandvik Venture, while we see stable market conditions, I would say a very healthy margin of about 20% for the business area. I think that's also very strong performance by Sandvik Venture in the quarter. We announced the acquisition into Sandvik Venture of Varel International. To summarize 2013, I think we've made very good progress towards building a more efficient Sandvik for the future. We started our program of creating more efficient supply chain within the Sandvik group. We have reduced our cost base when it comes to mainly administrative costs, SG&A costs, and these areas through the cost-saving programs that we have been running in the group. We have reduced our inventory for 6 consecutive quarters now as a company.
The turnaround of Materials Technology has been progressing very well during the year, we've made an acquisition creating a platform for good further growth into the oil and gas sector for the future. I think 2013 you can summarize as an eventful year, but a year when we've taken many successful steps forward of creating a better company for the future. With that, before we open up for the question and answers, I'd like to introduce Tomas Nordahl, who's our head of the business area Venture, and he will talk a few minutes about Varel International. Tomas.
Thank you. Good morning, everybody. Tomas Nordahl, President of Sandvik Venture. I'll go through the strategy, how they're thinking a bit about Varel International Energy Services. As you know, this is a deal that we've signed but not closed yet, the financial details we will not go through here to that extent. For us, this is really an opportunity to take our current capabilities into a sector that's, in our view, very attractive long term from a growth point of view and from a profitability point of view. That's really what this is about. Varel as such, is a company that has been around for many years now. The last 20 years, we had a very impressive growth track record. They are operating in the drill bits space.
They also have some other products relating to completion tools in the oil and gas sector. As some of you might have read, also partly exposure to mining and industrial, the big part is oil and gas. In the oil and gas space and in the drill bits, they have a very strong customer value proposition. With that, I mean it's a lot of customization to oil companies, drillers, and specific wells. It's typically a kind of a proposition where the actual drill bit is relatively small part of the cost structure, as you can understand, a large share of the productivity for the drillers and the oil companies. In that sense, it's a kind of business model that we are familiar with at Sandvik. In terms of commercial position, that has been important for us.
This is a company with good presence, good market position, and a lot of, if you want, feet out with the oil drillers and the oil wells. We really get a company that knows this sector well. International presence, Varel is existing in around about 40 countries in terms of sales. If you combine that with Sandvik, my humble self would say we are a global leader in the materials around carbide, diamonds, and other hard materials. Of course, we have an extensive bunch of materials and also knowledge around that. Our R&D muscle is strong. Not going to go through that here. I think we have accepted that. In difference to Varel, the 40 countries, we are existing in 130 countries. It's a really strong combination together. See if I push the right one here.
In a nutshell, why we're excited about this opportunity in itself, it will provide us with an entry platform into the oil and gas drilling, as I said, completion tools on the fields. It's a sector which we believe have long-term attractive growth, profitability-wise, attractive and also robust if you think about cyclicality. If you look at these companies operating in these industries, typically relatively robust margins. We believe there are strong synergies with what Sandvik knows. As important, what can we offer in terms of being a relevant parent to Varel? I mean it's all about how we can support the continued growth. Varel is a successful company, strong management team, we can add to that. The whole R&D engine, the materials knowledge, is a strong part of the logic for this.
The fact that we have infrastructure and basically backup systems for 130 countries will facilitate the commercialization of Varel continued growth. This is an attempt to make this a little bit more live. Varel sells drill bits, and as you see here, I think this is the right one. This is a diamond-tipped drill bit, and this is a tricone, which has carbide tips. Just to give a little bit of a flavor of why do we think we have a good logic here. These are products that Sandvik develops and really manufactures well. If you think about the diamond-tipped drill bit, we today manufacture these diamond cutters, which are really the pieces that hit the rock, if you want, and drive productivity of a drill bit. This part is a matrix combination of carbide, so extremely important to understand the properties of that.
As you know, we do a fair bit of products within carbide all the way back to Wolfram. The mine, we can affect that. If you look at the tricone, this carbide cutter is the same thing as a diamond cutter, but made exclusively of carbides. Drives the productivity very much of this bit and hits the ground and the rock. Last but not least, all of these bits have a fairly big steel content here and here, which are machined. Again, I believe we know a fair amount of that as well. Taking a step back, I really think we have a very, very good relevance as the owner of this company. We can contribute in materials know-how, R&D. On top of this, maybe more traditional part of accelerating the company geographically.
Moving forward, as Olof mentioned, the idea here is, of course, first to stabilize Varel, bring it into Sandvik, make sure we integrate it in a good way, but then use Varel as a leverage platform, basically, to expand into this drilling sector of oil and gas. We've decided to put this into Sandvik Venture, where I believe we have a, if you want, a management model that really allows the standalone company to grow, but at the same time, include the strength of Sandvik to facilitate that. Good. Olof?
Thank you very much, Tomas. Thank you, Olof, as well. Tomas, please remain on the stage in case there are any questions, because this is the time when we open up for questions and answers. We have the virtual audience. We have the audience here in Stockholm as well. I suggest we start here in Stockholm with one question over here. Please also take one question at a time in order for everyone to have their shot.
Okay. Morning, gentlemen. This is my first question. Peter, well, we don't expect equipment volumes to pick up anytime soon. We are still stabilizing with the sales volumes of equipment to our order intake. What we're doing now is to adapt our cost base to this new lower level of production. We're reducing our manning. In several sites, we also have agency workers that we are reducing as well. On top of that, we have the supply chain restructuring program, which is not a temporary cost adjustment program, but it will help us, of course, to reduce our cost base. It is also a good environment to do those kind of restructurings when we don't have a very high pressure when it comes to manufacturing in our factories. Okay. Thank you.
Thank you very much. Let's take one more question from the floor in Stockholm.
Hi, good morning. Thank you for taking my question. It's Guillermo Peigneux from UBS. It's a question regarding your comments on January demand to be flat for inserts and just basically coupling that or just putting that in the context of destocking in Q4. It's an observation, but it seems rather late in the cycle to accelerate this talking when you sort of start to see the kind of signs of recovery. I wonder whether you could give us some indication in which areas and markets and products, when it comes to SMS, you are actually destocking.
Our internal destocking you're talking about within Sandvik. SMS is actually, I would say, leveling out now on a good level, but the Sandvik Group has a target of achieving a net working capital percentage of sales of 25%. We were at 27% in the quarter, we still need to balance that. That's creating a long-term model, which is more efficient when it comes to reducing the amount of capital we tie up in that. I would say we're getting close to the target where we want to be within Machining Solutions. I think the challenges are greater in other business areas when it comes to achieving now that 25% target. We want to find a long-term sustainable level within Machining Solutions now.
Thank you very much. Operator, do we have any questions from the virtual audience?
We have a question from Mr. Marcus Almerud at Morgan Stanley. Please go ahead, sir.
Hi, Marcus Almerud here, Morgan Stanley. Can I just ask about the mining equipment and systems which rose sequentially, if there was any seasonality there? If you could talk a little bit about the product lines, any specific product lines sticking out that was behind the increase? That's my first question, please.
It was more effect of normal seasonality. I think we do not see a situation where we can talk about any improvement in the market in the mining. We have stabilized, I would say the sequential improvements we've seen in some areas are more related to seasonality than any shift in the market conditions.
Okay, thank you. If I can just continue on Guillermo's question on the destocking in SMS. Do I read you right in what you're saying, that you think that you're pretty much done in the destocking SMS and the under absorption, we should not see that going into Q1 and Q2? Is that the right interpretation?
I think that's the right interpretation, yes.
Okay. Thank you.
Thank you very much. Operator, please, do we have another question?
We have a question from Mr. Lars Brorson at DNB. Please go ahead, sir.
Thanks very much. I'll try my luck with two questions if I could, Olof. Just on Materials Technology, can you quantify the impact of increased production rates here and also the provision reversal that you made in the quarter, i.e. quantify the tailwind from overabsorption and whether we should see that reverse in Q1? Thanks.
The effect we had due to overabsorption of costs and this sort of one-off release of provisions was roughly 1.5%-2% on the EBIT margin for Materials Technology, that should be expected to be reversed into Q1, yes.
The provision reversal?
Yeah, that's a net effect of those two. We have not split them up into a greater level of detail than that.
Thanks. Secondly, if I just could, on your CapEx guidance for 2014 of 5%-5.5%, that's up about 30% from 2013. Am I right in understanding that it's primarily your investing in mining in new sites and expanding existing facilities that drives that ramp in CapEx?
It's mining and Machining Solutions related to the supply chain restructuring program, but also certain technology upgrades that we need to do within the Machining Solutions system as we need to stay ahead of our competition when it comes to our manufacturing technologies to really manufacture state-of-the-art products.
Thanks.
Thank you very much. Let's move back to Stockholm, if we have any more questions over here. We have one here.
Yes. Anders Roslund, Swedbank. One question regarding the construction margin. Was also down due to under absorption while sales was a little bit up. How do you see the production levels going forward in that division? That's my first question. overall for the-
Should we take that first?
Yeah.
When it comes to construction, we still see a need to reduce inventories in construction. We need to keep production at lower levels there. What was positive was is if you back out this Russian cancellation we had for construction, we actually had a year-on-year 15% increase in order intake. We are seeing some positive signs in the construction industry. Hopefully during 2014, that will materialize in higher invoicing and our positive margin effects.
Okay, the vice versa in Venture, the very impressive margins you had there, was it part also that you increased production levels and how is that going forward? I guess you had a good strong ending in the process system. A little bit how we should look at this entity going forward.
Since I have Tomas here, I might as well give you an opportunity to answer on that.
Thank you.
You have a good quarter behind you.
It's a combination of stable demand and being able to manage that. As you understand, part of our businesses are susceptible to that, so that's important. Ongoing work in adjusting, being prudent about cost, and that's really been driving quite a lot of this improvement.
It's not really the process system used to have a good ending. It's more the mining.
It's actually the effect, I would say, across all product areas within Sandvik Venture who actually had a good Q4. I would say they all had a positive impact, and it's not that one was the driver behind the whole development here. It was actually across the board.
Okay. Thank you.
Thank you very much. Let's have one more question from Stockholm.
Good morning. David Skjervum from UBS. A question on mining. I read some headlines from you highlighting the fact that emerging markets still pose a risk for mining demand. I was wondering, your comments are more for a flattening kind of outlook and probably improving, which also do not sort of, in a way, combine well with these comments on emerging markets. I was wondering whether you see an increase in risk in terms of demand from those regions.
Yes, well, there's quite a lot of currency concerns around several of the emerging markets and, of course, if they run into financial trouble, that could, of course, affect investment levels in mining in these countries and potentially also globally. My general view on the mining sector that it's stabilized. We're not seeing any negative trends at the moment in mining that's still valid and hasn't been affected by recent news.
Okay. Thank you.
Thank you very much. Operator, let us switch back to the virtual audience again.
We have a question from Mr. Alexander Whight at JP Morgan. Please go ahead, sir.
Yeah. Morning, everybody. It's Alex at JP Morgan. I'm just trying to understand the comments around the mining aftermarket being stable. If I look at the percentage of your invoicing that went to rock tools, it looks like sales are down 13% year-on-year or perhaps seven percent year-on-year in constant currency. On the customer services side, down 19% year-on-year or down to the 13%-14% in constant currency. I just wonder if you can perhaps talk a little bit more about the development here. That's my first question.
Yeah, those drops are mainly currency related. We do have a slight drop, but the main effect that we've had on those areas is currency effects.
Does the aftermarket segment see a greater currency effect than the rest of the business? At the headline level, the currency impact on sales for mining is six percent, yet we have the customer services down more like 14% in constant FX or 19% reported.
Yes. As said, we have had certain drops. Part of that is currency related, a lot of those sales are in local currencies here.
Yeah. I could add to this as well that we need to bear in mind if we're talking sequential demand trend, which is what we're doing. We only see a very minor sort of correction.
Yeah
If you wish. You have the year-over-year figure as well. Since we have this big correction in the mining industry, probably the sequential trend is what is most relevant to look at right now. That's from where our comments come.
Yeah. We've had certain.
Sure. I guess that was down 3% sequentially. If I look at the history that we've got, normally we'd be up 7% sequentially in Q4. It still seems like there's a bit of underlying deterioration there. Anyway, my second question.
If you go back to the peak.
Tooling or the Machining Solutions business.
Okay.
I wonder if you can talk a little bit about why we're not seeing growth there in North America, given the GDP growth that we're seeing. Is the market changing? Is there more competition? I wonder if you can elaborate a little bit on what you think is happening there.
Yeah. In North America, our exposure is very heavy to, for example, the construction equipment customers like Caterpillar, and also the good growth we saw in North America was driven a lot by us moving forward our positions within the aerospace segments. I would say those two areas, which are very important for us, have been moving more sideways than up. It has more with our exposure mix into the market than anything else here.
Okay. That's helpful. Thanks very much.
Yeah.
Thank you very much. Operator, please could we have the next question?
Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead.
Yeah. Thank you. Morning, Olof. On the restructuring program that you've announced in Q4. You've given us the charges and the savings you expect to get from that. Do you expect any other kind of additional negative operational effects as you add these extra sites in mining, close others, in terms of parallel production or inventory write downs? When other companies have done this, of course, there is a lot of volatility. Do you think that will happen, or do you think that's all covered by the charges you've taken? Thank you.
Well, of course, there are always risks when you do these kind of programs, but we still believe that we can deal with this transition in a smooth way. I think especially when it comes to mining, since we're doing this change in an environment when the market is actually quite weak, it is quite good timing to conduct these kind of restructuring activities compared to a time when we have extremely high pressure in our factories. I think the timing of the mining cycle helps us to do this in a smooth way. To date, I don't foresee any additional costs more than what we have communicated from this.
Got it. Thank you.
Thank you. I know we have many questions from the virtual audience, let's have another one from there.
Our next question comes from Mr. James Moore from Redburn. Please go ahead.
Yeah. Good morning, everyone, and thanks for taking my questions. Olof, I've got three. The central costs were high in the quarter. I get the sense that that might move up a bit going forward from HR and finance. Could you put a number on future quarters of central costs? Secondly.
I would say come one after one, if that's okay, James.
Sure
Central costs. We did have costs for certain projects that landed in the fourth quarter. As you say, they did increase the costs in the fourth quarter. Going forward, we expect the level to be somewhere between SEK 300 million-SEK 400 million. We are generating cost savings, but we do have certain investments. I would say 2014 will be a peak year for those kind of investments when it comes to outsourcing within finance, HR restructuring project that we have, and a number of these will draw certain costs during 2014, which will leave that at this SEK 300 million-SEK 400 million level.
Thanks. On mining, can you say what proportion of your mining sales in emerging markets are invoiced in U.S. dollars and what proportion is in local FX?
Well, that, of course, varies a lot. I don't have an exact split of that. We, of course, try to minimize the currency risk as far as we can, and invoice in U.S. dollars or more secure currencies if we see a big currency risk in such a country.
Okay. On Sandvik Machining Solutions, even if we add back a bit from absorption, the margin is sort of just over or around the 20% level. Could you say how that looks going forward and what your balance is between growth and margin? I get the sense that you're trying to push a bit on sales and R&D. Do you think that'll limit some of the operational leverage this year?
Well, it could to a certain extent, but at the same time, we are running our supply chain restructuring, and I think that also for Sandvik Machining Solutions, it is a highly profitable business area, but we need to maintain our competitiveness or improve our competitiveness there. This continued restructuring of our manufacturing footprint is very important from that perspective. We cannot let being a premium supplier be an excuse to be a high-cost manufacturer, so to say. I think that initiative is very important for Sandvik Machining Solutions to maintain or improve margins going forward.
Sorry, just to clarify, if the normal drop-through is 40%-50% in a normal year on a sort of return to growth, do you think this coming year will be the same as that, or better, or worse?
Well, I don't want to guide going forward. We will have certain increases, as you say, on R&D and so, which we've talked about before. Gradually during the year, we will start to see certain effects from the cost savings of this supply chain restructuring. We have these two effects that will come gradually during 2014.
Okay, thanks.
Yeah.
Thank you very much. Let us take one question from the floor in Stockholm.
Yes. Peder Frölén, Handelsbanken again. On prices, please, given the epic situation, labor costs and so forth, could you please help us out with the price component by group, but even more so by division, especially in mining, obviously? Price mix, is it positive? How much in SMS and in mining?
Well, I would say both SMS and mining, we've seen a slight positive price effect, but it is very marginal in the fourth quarter, and we're talking maybe on a group level of something like a half a %. We are still not seeing deteriorating pricing in mining. Actually, we have a zero to slightly positive effect in the fourth quarter.
Thank you very much. Another question from the floor in Stockholm.
Yes. This is Daniel Schmidt from SEB. You stated a couple of years ago when it comes to SMT, sort of limited patience with the performance of SMT. Since then, you've seen it perform quite strongly. What's your view on SMT now being part of the group or not, and what's your thinking currently on SMT?
I think they've delivered very well on their turnaround program, and I think that's not an urgent issue for us really at the moment. With the current type of underlying profitability of around 13%, that's very strong for SMT.
Thank you.
Thank you very much. Let us move over to the virtual audience again, please.
Our next question comes from Mr. Martin Wilkie from Deutsche Bank. Please go ahead.
Yeah, thank you. Good morning. It's Martin from Deutsche Bank. Just coming back to the question on pricing. You said that you've not really seen any incremental price headroom in mining in the quarter. When you're tendering for some of these projects and when we're thinking about into 2014, are you seeing, because of the sort of weaker demand environment over the last year or so, that pricing is becoming an incremental sort of threat or potential negative in 2014? Or are you comfortable that pricing has stabilized around these levels? Thank you.
Our experience from previous downturns is that the pricing more or less remains stable during the downturns, that the big drop comes from the volume lost there. I have no reason at this point in time to believe anything different than that.
If you listen to some of the mining companies, they are talking about trying to extract a little bit more from price. Do you think that's largely on products that are outside of your portfolio, and that's something we shouldn't necessarily be concerned about when thinking about your own mining business, then?
Well, anything can happen in the future, so far, if you looked during 2013, you can conclude that the concerns about price erosion and major drops, we have had some drops on the aftermarket, as we were talking about earlier, they have not materialized, so far, we've managed to have a relatively stable aftermarket business. Previously, we've had a positive price development. Now it's more neutral to slightly positive. So far, we've not seen any price erosion, and I don't to date have any reason to expect anything different than that.
Okay. Thank you very much.
Thank you very much. Operator, may we have the next question, please?
Our next question comes from Andreas Koski from Credit Suisse. Please go ahead.
Good morning. Thanks for taking my questions. Can I just take a step back, and can you help me to understand the margin progression sequentially in Q4 versus Q3? Your sales are up SEK 1.4 billion, a little bit up from acquisitions, but currency seems stable quarter-on-quarter, and your EBIT is down, so that's sort of over SEK half a billion swing with margins going down. Is it all due to the inventory reduction? And if it was, then does that mean that your production rates are down quarter-on-quarter versus sequentially, sort of seasonally weak Q3?
I think that's maybe a detailed question for our IR to speak with you on later. We do see certain mix effects in mining. Equipment has dropped a bit further in terms of underutilization in our factories here. We do have certain more one-off type effects in Machining Solutions, for example, in the quarter. There are a number of items affecting this, but I would say those are the main changes we do see in the two big business areas.
Right. Maybe just a quick follow-up on Varel. Obviously, as you put it's your entrance into oil and gas-
Yes
End market. What kind of end market growth expectations are you discounting for this business going forward? Also, just a quick one on this, it looks like for you, this is a move up the value chain from what other parts of Venture are doing already. Is there a risk of losing any customers that you're supplying, sort of basically Varel's competitors, as a result of doing that?
Yeah. Maybe to the first question, I don't think we now give out our sort of plans for it. Suffice to say that we think there's a very healthy growth there. On the other question-
There are two things we add Varel, which we think can drive positive growth and development for this business going forward. One is a technology portfolio that we have within the Sandvik group, industrial diamonds, cemented carbide, and a number of areas, and we have a totally different R&D muscle within the Sandvik group than what Varel has. That will add value to the business. The second one is what Tomas mentioned, is our global footprint, where we can help them from being more a regional supplier to grow into truly global business with our strong network, with daughter companies really all over the world. By offering that to them, we think we can accelerate their growth further. Yeah, sorry.
No, no problem. To the second question, I think you have to earn customer trust every day, and that's probably no different to this case. I would say, however, we do have, I think, at Sandvik, a fair amount of experience, actually, in serving customers internally and externally and doing that in a really good way, where we have earned the trust. I think we'll be able to manage that side of it.
Got it. Thank you.
Thank you.
Thank you very much. Let us move back to Stockholm and see if we have more questions.
Just one more question for Tomas, actually. When you look at Varel and Sandvik, I'm wondering whether there's an overlap in between the products they sell and yours in the sense of not whether you sell already their products, but some of the bits that you have on Varel's tools have actually other than Sandvik's technology. Can you actually provide Sandvik's technology through Varel's platform already, i.e., internal synergies?
Yeah. Clearly in terms of the cutters, the materials we have, what Olof talked about in terms of the development muscle, I believe there are lots of things that we will be able.
Are they already a customer of yours?
They are a customer of ours.
Thank you.
The main areas, diamond cutters, cemented carbides, technology, even the know-how that we have and also supply within the group, metal cutting expertise, and also general knowledge in drilling applications. They're more complex in the oil and gas sector than in mining, for example, but in a way, a number of the products are similar to what we're already doing within the Sandvik Group. We think there we can get leverage on both ways. In mining, there's, for example, talk about directional drilling, developing more, which is quite strong, an important technology in oil and gas today. There are also some potential technology synergies from Varel into Sandvik.
Good. Thank you very much. Operator, please, may we have the next question?
Our next question comes from Mr. Colin Gibson from HSBC. Please go ahead.
Thanks very much indeed. Yeah, I had two questions on Varel, please. The first one of those, can you outline your plans for post-acquisition management of Varel? I'm particularly wondering whether Jim Nixon or any of the other existing managers will be retained.
Absolutely. The reason we put this into Venture is that we are quite used to managing businesses relatively independently. I have the deepest respect for Jim and the rest of the management team, we're looking forward to working together with them on this.
Okay, thank you very much. Just a quick follow-up. Can you give us any kind of indication what % of sales for Varel go to oil and gas production, and what % go to exploration?
This one I will actually pass on, given to what we said, we haven't closed this acquisition yet, that would not be public info.
Appropriate at this point.
No.
Well, I think it would be, but all right.
Okay. Well, we don't have antitrust approval. They're always between announcing a deal and actually closing a deal. We still need to treat each other as competitors, and be a bit cautious about what information we share between the two companies. Varel has a business within, especially the tricones within mining, which is overlapping with Sandvik, and we need to get this kind of antitrust approval before we can, on a deeper way, start discussing market data between the two companies.
Could I try asking the question a different way? Could I ask if it turned out that oil and gas exploration expenditure in 2014 were to fall year-on-year, as, for example, the Shell announcement last week suggested it might, would you expect Varel to see significant revenue downside as a result, or would you not expect them to see significant revenue downside as a result?
I would expect that Varel would feel the exposure to that. I still think that this is a company that is very much in an opportunity phase of growth. We will, or they will, work with a lot of other opportunities growth-wise.
They also say that the biggest volume of Varel's products are onshore drilling. For example, if you see cuts in offshore production or exploration, that has a lesser impact than onshore developments have, for example.
Okay. Thank you.
Yeah.
Thank you very much. Operator, I know we have a few questions left. May we have one, please?
Our next question comes from Mr. Aaron Ibbotson from Goldman Sachs. Please go ahead.
Yes. Hi there. Two quick questions on FX, if I may. First of all, you're using sort of end of quarter FX rates for your EBIT guidance of SEK 100 million. Secondly, I was just hoping if you could give a more broad sort of guidance on your cost matching in some of these most impacted areas, so like, say, South Africa, call it LATAM, and maybe Indonesia or something, if you can give an idea of what your sort of costs relative to revenues are in those countries. Thank you.
I don't have a number for Q1. We guided for SEK 100 million. What I could say, where currency stand today, that probably has increased that effect somewhat in Q1. This will, of course, vary throughout the quarter, and the guidance we give is based on, to try to help you based on the picture we have at the end of the preceding quarter. We'll have to monitor during the quarter, but if anything, the moves that have happened since then, I would say are towards an increase in negative currency effect. When it comes to our cost coverage, in South Africa and Chile and Brazil, we have quite large manufacturing, while Indonesia, which you mentioned, we don't have any manufacturing at all.
There we don't have any balancing, while we do have quite a lot of actually manufacturing presence both in, for example, Brazil and in South Africa.
Sorry, is that fair to say that you're almost close to matched in those countries? Are we talking 75%, 50%? Is it even some of those where you have higher cost base than revenues?
Well, we still import products into these regions, we're not fully matched. That does, of course, mitigate the effect that we do have local production. If our currency drops, of course, that cost base relatively improves compared to other regions of the world.
Okay, perfect. Thank you very much.
Thank you.
Thank you very much. Operator, the next question, please.
Our next question comes from Mr. Sébastien Grute r from Societe Generale. Please go ahead.
Hi. Good morning to all. First question will be on Machining Solutions. Sorry, maybe you already gave the numbers, but I would like to know how the demand has developed for inserts through Q4, and maybe if you can give us the number or the growth rate for January. Second question will be on mining, based on your backlog for mining projects? What is the outlook for the business in 2014? Would you be able to maintain a flattish revenue level for that business in 2014, given the backup you have today? Another question on mining? What is the current level?
In sequence here. If I start with insert volume, we've seen a fairly flat demand in Q4, and what we said regarding what we've seen so far of the January sales, we continue on a fairly stable level here. We do not dare to talk about an improving demand, even though we have seen some positive signs in Europe and Asia for Machining Solutions. If we take your-
Basis of comparison looks a bit easier going into Q1. You don't see any pickup?
I'm talking sequentially compared to Q4, we see roughly a demand on the same level as we've seen in Q4.
It's fair to expect the 4% volume growth you had in Machining Solutions to pick up because of easier basis of comparison in Q1?
I don't want to guide on those kind of levels. What I can say so far coming into January is that we sequentially have continued roughly on the same activity level as we saw in Q4. Normally we don't have big seasonal differences between Q4 and Q1 in Machining Solutions.
Okay.
Okay. When it comes to Mining Systems was your next question, yes? There, we have multi-year projects. We have had a big drop in order intake, but it does take quite some time to consume the order book we have in the Mining Systems business. We do expect revenues to gradually tail off if we don't get an increase in order intake for Mining Systems. It's going to take time, and it's going to be much slower than what you have seen, for example, in the equipment business, where we now have a very short order stock, and the effects have more or less come through into lower production.
Okay. A follow-up on mining.
You had a third one. Yes.
What is the current level of prepayments in mining balance sheet, and could you give us the net working capital ratio for that division in Q4?
We haven't, I think, published in that detail. Mining is still too high on inventories, and we need to bring that down even further. Yeah, we're still not happy with inventory levels on Mining. Since we have been successful on bringing down the inventories, as we have during this quarter also, we are minimizing, or I would say, decreasing the risk of any obsolescence in the inventory there.
Many thanks.
Yeah.
Thank you very much. The next question, please.
Our next question comes from Mr. Alexander Virgo from Berenberg. Please go ahead.
Thanks. Good morning, gentlemen. One question just on your comment around Sandvik Materials Technology revenue exposure. You say energy is about 40% of sales. Just to clarify, is that all oil and gas? Is there a broader definition of energy included in that? If it is all oil and gas, can you give us an indication of what's upstream versus downstream? Just on the margins in Sandvik Materials Technology, I presume that 13%, obviously, you've made a point that 150, 200 basis points of that is probably the benefits from the provisions. I'm guessing that you obviously haven't seen any benefits from the new primary finishing line being commissioned yet. To what extent do you think that that coming in this year offsets some of the benefits that you've seen in Q4? Thank you.
First, with what we call energy, we include petrochemicals, and it also includes several other types of energy sectors beyond oil and gas sector, for example, nuclear. That's including all different kinds of products we have for the energy sector, not just oil and gas. We did have some good bookings of some interesting orders in the fourth quarter for us within the energy sector, and especially within oil and gas. The most important product for us within oil and gas for Sandvik Materials Technology is within umbilicals, which is in offshore applications there. Does that answer your question?
Okay. The margin comment?
The margin, we did have a bit of an inflated margin. We will get positive effects, of course, from the investment in primary, and it's an investment that we expect we have a good payback on. We do see potentially some good effects from good demand and orders we've booked into the oil and gas sector here, potentially being a positive effect. We've talked previously in the energy sector about a drop in nuclear affecting margins or profitability negatively this year. There has been a resequencing of certain orders, so we don't today really expect that to have a material effect. More or less a stable demand when it comes to steam generator tubes going into 2014.
Okay, that's helpful. Thank you.
Yeah.
Thank you very much. Those were actually the last words because our hour is up. You will hear from us again in April, until then, have a good day.