Earnings Call: Q4 2013

Feb 3, 2014

This is Sandvik's presentation for the Q4 and the full year of 2014. 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 Thomas Nudal, Head of Sandvik Venture. But right now, Olof, please go ahead. Thank you very much, Magnus, and welcome everybody here to this presentation of our Q4 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 stock on them. Okay. We've called this report good progress towards 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 costs and how we're going to reduce sales and become more efficient going forward. And we've taken significant one off items related to that program now in the Q4 here. We have 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 Q4. 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 And then we began the year now 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. And Thomas 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 twenty twelve and the first half of twenty 13, a gradual reduction, especially in the mining sector of the market, but that has now stabilized and we found a new level here. It's maybe too early to talk about an improvement, but anyway in the Q4 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 year the full year 2013, we did have a decrease in top line. Our invoice sales came in at just over SEK 87,000,000,000 and this was mainly driven by the downturn we've seen in the mining area. Our adjusted EBIT came in just below SEK11 1,000,000,000 and we delivered just over 12% EBIT margin for the group. And we had a very strong operating cash flow nearly SEK 11,000,000,000 and that is before the payment of the intellectual tax case intellectual property tax case that we made during the Q3 of this year. So strong underlying cash flow and that's driven a lot by 6 now consecutive quarters of reduction of inventories in the group. And the Board has decided to propose an unchanged dividend to the shareholders meeting and that's then SEK 3.50 50 per share. Looking at more specifically at the quarter here, we have announced now closure of 3 units in our program in our supply chain restructuring initiative. 2 were announced last week in Sweden and before that the end of last year one unit in France was announced. So we are now taking the steps in this program that we started talking about at our Capital Markets Day, and this will now progress during 2014 where we will see further announcements in various countries around the world. And then as I mentioned, we announced the acquisition of Varela here. Our operating cash flow came in just below SEK 3,000,000,000 for the quarter and we had a significant inventory reduction also in the Q4 of this year, SEK 1,100,000,000 also in the Q4 of this year SEK 1,100,000,000. And adjusted EBIT came in just below SEK 2,400,000,000 but was affected very significantly by the about with these one off items that we communicated in December of last year. 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 very but still positive recovery here. And we had an increased sales compared to the same period of last year of 2%. Then 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 and this is of course mainly mining. And 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 with, of course, Africa is driven very much by sales into the mining industry. And 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 stable demand and the 2 sectors where we actually do see a slight improvement are automotive and the construction segments. So 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. And if you look at the bar chart, you can see that it's clearly leveling off now. So we do see this stabilizing environment that we already started talking about in the Q3 here. And 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. And our EBIT, as mentioned, our reported EBIT was SEK 590,000,000 but was heavily impacted by these nonrecurring charges. And excluding them, we end up at the EBIT margin of 11% and close to SEK2.4 billion in EBIT. And 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. So I think we have a better discipline when it comes to how we manage our investments in the company compared to preceding years. And 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 Samvik Group. Our operating leverage, we did have a drop in the invoice sales compared to last year. And 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 at 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. So we've found a new level for our mining business where we are right now. Adjusted EBIT excluding non recurring items came in at 10.5% of sales. And I think that's also good that we've managed to maintain our EBIT at this level despite a 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. And we have a strong focus now on restructuring 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. Also within Samik Machining Solutions, we are taking steps to improve the supply chain to increase our competitiveness and build more efficient manufacturing footprint for the future. And we have announced 2 closures of units in Sweden last week and this is the first step of the program that Machining Solutions is going to run them for the coming years in terms of optimizing its manufacturing footprint. Looking then at the 3 remaining business areas, Sandvik Materials Technology did see some signs of improved demand. So 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 great success that they've managed to achieve those kind of profitability levels. And we finalized a significant and very important investment into the primary system to create a more efficient supply of specialty rounds for tube manufacturing within the business area. So that was also a big step forward for the business. Also, semi 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 4th quarter compared to the same 4th quarter a year ago. So we do start to see some positive trends in the construction area. So while we were affected 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. And when it comes to Sandvik Venture, while we see stable market conditions, I would say very healthy margin of about 20% for the business area. So I think that's also very strong performance by Sandvik Venture in the quarter. And we announced the acquisition into Sandvik Venture of Orel International then. So to summarize 2013, I think we've made very good progress towards building a more efficient Samik for the future. We started our program of creating more efficient supply chain within the Samik Group. We have reduced our cost base when it comes to mainly administrative costs, A and S 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, and we've made an acquisition creating a platform for goods further growth into the oil and gas sector for the future. So 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. So with that, before we open up for the question and answers, I'd like to introduce Thomas Nordahl, who is our Head of the Business Area Venture and he will talk a few minutes about Varel International. So, Thomas? Good morning, everybody. So, I'm Thomas Nordahl, President of Sandvik Venture. I'll go through the strategy, how to thinking a bit about Varela International Services. As you know, this is a deal that we've signed, but not closed yet. So the financial details, we will not go through here to that extent. Okay. So if you take a step back, 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. And that's really what this is about. If you think about the combination here, Varela as such is a company that has been around for many years now, the last 20 years within 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. And as some of you might have read, also partly exposure to mining and industrial, but 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. And 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, but as you can understand a large share of the productivity for the drillers and oil companies. So 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. These are this is a company with good presence, good market position and a lot of, if you want, feet out with the oil drillers and oil wells. So we really get a company that knows this sector well. International presence, Varel is existing in roundabout 40 countries in terms of sales. If you combine that then with Sandvik, I mean, my humble self would say we are a global leader in the materials around carbide, diamonds and other hard materials. And of course, we have an extensive bunch of materials and also knowledge around that. Our R and D muscle is strong, not going to go through that here. I think we have accepted that. And in difference to Varel, the 40 countries, we are existing in 130 countries. So it's a really strong combination together. See if I push the right one here. So 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 and, 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. And we believe there are strong synergies with what Sandvik knows. As important, what can we offer in terms of being a relevant parent to Varell? I'd say, of course, it's all about how we can support the continued growth. Varel is a successful company, strong management team, but we can add to that. So the whole R and D engine, the materials knowledge is a strong part of the logic for this. And then, of course, 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. So Varell 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 what why do we think we have a good logic here. These are products that Sandvik develops and really manufactures well. So if you think about the diamond tip 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, so the mine, we can affect that. If you look at the trichone, this carbide cutter is the same thing as a diamond cutter, but made exclusively of carbides, drives the productivity very much on this bit and hits the ground and the rock. And then last but not least, all of these bits have a fairly big steel content here and here, which are machined. And again, I believe we know fair amount of that as well. So 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 and D on top of this with 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 sorry about that into Sandvik Venture, where I believe we have a, if you want, a management model that really allows the stand alone company to grow, but at the same time include the strength of Sandvik to facilitate that. Good. Olof? Thank you very much, Thomas. Thank you, Olof as well. 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 the time in order for everyone to have their shot. Okay. Good morning, gentlemen. This is my first question. Peter Filipe, Handelsbanken. On mining, could you please help us out to understand the different profitability in the different revenue streams, I. E, are you doing positive numbers on the mining machines? What happens to prices for consumables and service and so forth? So help us understand the profitability within the 4 different revenue streams in mining. Thank you. Yes. Well, I mean, we've chosen a model when it comes to segmentation of Sandvik and we don't report details beyond the five business areas that we report. So I cannot give you detailed numbers on the 4 legs within mining. What one can conclude is of course in the environment that we are in right now, we, of course, have a continued good profitability in our aftermarket business, but we do have significant effects of under absorption as a consequence of the big drop in sales that we've seen on equipment, especially where we have a lot of our own factories. In mining systems that's less of a problem since we maybe only have around 30% sandvik content in those projects. So we have a much smaller fixed cost base and smaller effects when it comes to volume on the profitability when it comes to mining systems. But equipment, we have a more integrated production and there we do get effects due to under absorption. But if you look at the book to bill and strip out equipment. Are you is the underproduction getting less in the coming quarter? Or are you still sort of touching the falling knife, so to speak? Well, we don't expect equipment volumes to pick up anytime soon. And I mean 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. So we're reducing our manning. In several sites we also have agency workers that we are reducing as well. And then on top of that, we have the supply chain restructuring program, which is not a temporary cost adjustment program, but it is will help us of course to reduce our cost base. And 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 Kieran Wopinj 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 duty stocking in Q4. It seems rather late from an it's an observation, but it seems rather late in the cycle to accelerate destocking when you sort of start to see the kind of signs of recovery. So I wonder whether you could give us some indication in which areas end markets and products when it comes to SMS you are actually destocking? No, that's more I mean, our internal destocking you're talking about within Sandvik. And I mean, we are still SMS is actually, I would say, leveling out now on a good level. But the Sandvik Group has a target of achieving net working capital as a percentage of sales of 25%. We were 27% in the quarter. So we still need to balance that. And that's creating a sort of long term model, which is more efficient when it comes to reducing the amount of capital we tie up in that. But 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. But want to find a long term sustainable level within Machine Learning Solutions now. Thank you very much. Operator, do we have any questions from the virtual audience? We have a question from Mr. Markus Almerud at Morgan Stanley. Please go ahead, sir. Markus Almerud at Morgan Stanley. Can I just ask about the mining equipment and systems which rose sequentially, if there was any seasonality there? And 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. Well, I mean 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. So but we have stabilized and 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. And then if I can just continue on Guillermo's questions on the destocking in SMESSA. Do I read you right in what you're saying that you think that we are you're pretty much done in a 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 for Mr. Lars Borsen at GMP. Please go ahead. Thanks very much. I'll try my luck with 2 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 over absorption and whether we should see that reverse in Q1? Thanks. Yeah. The effect we had due to over absorption of costs and this sort of one off release of provisions was roughly 1.5% to 2% on the EBIT margin for Materials Technology and that should be expected to be reversed into Q1, yes. And the provision reversal? Yes, that's a net effect of those 2. 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% to 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 stage 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 Schuszler, 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. And then overall We'll take that first, but when it comes to construction, well, we still see a need to reduce inventories in construction. So we need to keep production at lower levels there. What was positive was this, if you back out this Russian cancellation we had for construction, we actually had a year on year 15% increase in order intake. So we are seeing some positive signs in the construction industry. But so hopefully during 2014 that will materialize in higher invoicing and there are positive margin effects. Okay. And 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? And I guess you had a good strong ending in the process system. So, a little bit how we should look at this entity going forward? With that, Thomas here, might as well give you an opportunity to answer on that. Thank you. Since 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 improvement. So, of this improvement. So it's not really the process system used to have a good ending. It's not it's the more the It's actually the effect, I would say across all product areas within venture who actually had a good Q4. So it's I would say they all had a positive impact and it's not that one was the driver behind the whole development. So it was actually across the board. Okay. Thank you. Thank you very much. Let's have one more question from Stockholm. Good morning, Liam. It's Pierre 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. And I was wondering your comments are more for a flattening kind of outlook and probably improvement, which also do not sort of in a way combine well with these comments on emerging markets. And I was wondering whether you see an increase in risk in terms of demand from those regions. Yes. Well, I mean, 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 the investment levels in mining in these countries and potentially also globally. But I still my general view on the mining sector that it 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 Alexander White at JPMorgan. Please go ahead. Yeah. Good morning, everybody. It's Alex at JPMorgan. I'm just trying to understand the comments around the mining aftermarket being stable. I mean, if I look at the percentage of your invoicing that went to rock tools, then it looks like sales are down 13% year on year or perhaps 7% year on year in constant currency. And then on the customer services side, down 19% year on year or down sort of 13%, 14% in constant currency. I'd 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 of but the main effect that we've had on those areas is currency effect. So does this does the aftermarket segment then see a greater currency effect than the rest of the business? Because at the headline level, the currency impact on sales for mining is 6%. But yet we have the customer services down more like sort of 14% in constant FX or 19% reported. Yes. As I said, we have had certain drops, but part of that is currency related and a lot of those sales are in local currencies here. Yes, 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 and then we only see a very minor sort of correction, if you wish. And then you have the year on year figure as well. But since we have this big correction in the mining industry, probably the sequential trend is what is most relevant to look at right now and that's from where our comments come. Yes. I guess that was down 3% sequentially. But if I look at the history that we've got then normally we'd be up 7% sequentially in Q4. So it still seems like there's a bit of underlying deterioration there. But anyway, my second question is from the 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. I mean, is the market changing? Is there more competition? Just wonder if you can elaborate a little bit on what you think is happening there? Yes. 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. And I would say those two areas have been which are very important for us have been, well, moving more sideways than up. So it has more with our exposure mix into the market than anything else here. Okay. Okay. That's helpful. Thanks very much. Yes. Thank you very much. Operator, please could we have the next question? Our next question comes from Mr. Ben Masloom from Bank of America. Please go ahead. Yes. Thank you. Good morning, Olof. Just 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? But whenever companies have done this, of course, 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. And I think especially when it comes to mining since we're doing this change in an environment when the market compared to time when we have extremely high pressure in our factories. So I think the timing of the mining cycle helps us to do this in a smooth way. And 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. So let's have another one from there. Our next question comes from Mr. James Moore from Redburn. Please go ahead. Yes. Good morning, everyone, and thanks for taking my questions. Olof, I've got 3. 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'll take a one after one if that's okay, Jim. The first one is central costs. We did have I mean certain cost for certain projects that landed in the Q4. And as you say they did increase the costs in the Q4. Going forward we expect the level to be somewhere between SEK 3 100,000,000 to SEK 4 100,000,000. So we are generating cost savings but we do have certain investments and 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 in a number of these will draw certain costs during 2014 which will leave that at this 300,000,000 to 400,000,000 level. Thanks. And on mining, what can you say what proportion of your mining sales in emerging markets are invoiced in dollars? And what proportion is in local FX? Well, that's of course varies a lot. I don't have an exact split of that. But we of course try to minimize the currency risk as far as we can and invoicing in dollars more secure currencies if we see a big currency risk in such a country. Okay. And on 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? And I get a sense that you're trying to push a bit on Selects and R and D. And do you think that will 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. I think that also for Machining Solutions it is a highly profitable business area, but we need to maintain our competitiveness or improve our competitiveness there. So this continued restructuring of our manufacturing footprint is very important from that perspective. So I mean we cannot let being a premium supplier be an excuse to be a high cost manufacturer, so to say. So I think that initiative is very important for 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. But we will have certain increases, as you say, in R and D and so which we've talked about before. Then gradually during the year, we will start to see certain effects from the cost savings of this supply chain restructuring. So we have these two effects that will come gradually during 2014. Okay. Thanks. Yes. Thank you very much. Let us take one question from the floor in Stockholm. Yes. Forget it fully, Anders Banken again. On prices, please, given the FX situation and labor costs and so forth, could you please help us out with the price component by group, but more so by division, especially in mining, obviously? So price mix is 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 Q4 and we're talking maybe on a group level of something like 0.5% or something like that. But we are still not seeing deteriorate in pricing in mining. So actually we have a 0 to slightly positive effect in the Q4. Thank you very much. Another question from the floor in Stockholm. Yes. This is Daniel Smith from SAB. You stated a couple of years ago when it comes to SMT, sort of limited patients 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 sort of what's your thinking currently on SMT? Well, I think that they delivered very well on their turnaround program. And I think that's not an urgent issue for Australia 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 Wilke from Deutsche Bank. Please go ahead. 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 headwind in mining in the quarter. But 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 remained stable during the downturns and that the big drop comes from the volume lost there. So and I have no reason at this point in time to believe anything different than that. I guess 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 are outside of your portfolio and that's something we should necessarily be concerned about when thinking about your own mining business then? Well, I mean anything can happen in the future. But so far if you look during 2013, you can conclude that the concerns about price erosion and major drops, we have had some drops on the aftermarket as we're talking about earlier, but they have not materialized. And so far, we've managed to have a relatively stable aftermarket business. And previously we've had a positive price development. Now it's more neutral to slightly positive. But 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? Next question comes from Nathandri Kuebner from Credit Suisse. Please go ahead. Good morning. Thanks for taking my questions. Firstly, 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 1,400,000,000, a little bit about from acquisitions, but currency seems stable quarter on quarter. And your EBITDA down, so that's sort of over SEK 500,000,000 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? Well, I think that's maybe a detailed question for our IR to speak with you on later. But we do see certain mix effects in mining. Equipment has dropped a bit further as I mean 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. So there are a number of items affecting this. But I would say those are the main changes we do see in the 2 big business areas. Right. And maybe just a quick follow-up on Varel. Obviously, as you put it, it's your sort of entrance into oil and gas end market. What kind of end market growth expectations are you discounting for this business going forward? And 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 Varela's competitors as a result of doing that? Yes. Maybe to the first question, I don't think we now give out our sort of plans for it. But suffice to say that we think there's very healthy growth there. On the other question Just to I mean, there are 2 things we add Varel, which we think can drive positive growth and development for this business going forward. 1 is a technology portfolio that we have within the Samik Group, industrial diamonds, cemented carbide and a number of areas. And we have a totally different R and D muscle within the Samik Group than what Varel has. So that will add value to the business. And the second one is what Thomas 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. So by offering that to them, we think we can accelerate their growth further. Yes, sorry. No, no, no problem. And to the second question, I mean, I think you have to earn customer trust every day and that's probably no difference 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. So 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 Thomas actually. When you look at Varel and Sandvik, and I'm wondering whether it'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 barrels tools have actually other than Samvix technology. And can you actually provide Samvix technology through that through Adios platform already, I. E. Internal synergies? Yes. I think I mean, 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 to Are they already a customer of yours? They are a customer of ours. Thank you. So the main areas is 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. Okay. 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 Samvik Group. So we think that we can get leverage on both ways. And in mining there's for example talk about directional drilling, developing more, which is quite strong, I mean, important technology in oil and gas today. So there are also some potential technology synergies from Varel into Sandvik here. 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. I had two questions on Varel, please. So the first one of those, can you outline your plans for post acquisition management of Varell? And I'm particularly wondering whether Jim Nixon or any of the other existing managers will be retained. Absolutely. So 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. So we're looking forward to working together with them on this. Okay. Thank you very much. And then just a quick follow-up. Can you give us any kind of indication what percentage of sales for Varel go to oil and gas production and what percentage go to exploration? This one I will actually pass on given to what we said. We haven't closed this acquisition yet. So that would not be public info. Appropriate at this point. No. Well, I think it would be better, right? Okay. Well, I mean, we don't have antitrust approval and they're always between announcing a deal and actually closing a deal. I mean we still need to treat each other's competitors and be a bit cautious about what information we share between the 2 companies. And 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 because it's still I'm asking the question a different way. Could I ask if it turned out that oil and gas exploration expenditure expenditure in 2014 were to fall year on year as, for example, the Shell announcement last week suggested it might, would you expect Voral 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 has a would feel the exposure to that. Then I still think that this is a company that is very much in an opportunity phase of growth. So we would be able to we will or they will work with lots of other opportunities growth wise. But they also say that the biggest volume of Orel's products are onshore drilling. So 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 Ibbitson 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 100,000,000. Is there any chance you can steer us at all with regards to the most recent moves if you took end of month rather than end of quarter? And 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 100,000,000. What I could say where currency stand today that probably has increased that effect somewhat in Q1. But 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. So we'll have to monitor during the quarter. But if anything the moves that have happened since then I would say have a are towards an increasing negative currency effect. When it comes to our cost coverage, I mean 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. So 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, but is that fair to say that you're almost close to matched in those countries? Or are we talking 75 percent, 50% or was it even some of those where you have higher cost base and revenues? Well, we still import products into these regions. So we're not fully matched. But that does of course mitigate the effect that we do have local production. So if our currency drops, of course, our of 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. Sebastien Hrotel from Societe Generale. Please go ahead. Yes. Hi, good morning to all. First question would be on Machining Solutions. Sorry, maybe you already gave the numbers, but I would like to know the are the demand as developed for inserts through Q4 and maybe if you can give us the number or the gross 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 backlog you have today? And another question on mining, what is the current level? If I start with the inserts volume, we've seen a fairly flat demand in Q4 and what we said regarding what we've seen so far the January sales will continue on a fairly stable level here. So we do not dare to talk about any 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? No, I'm talking sequentially compared to Q4. We see roughly a demand on the same level as we've seen in Q4. Is it fair to expect the 4% volume growth you had in Machining Solutions to pick up because of a easier basis of comparison in Q1? Well, 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 activity level as we saw in Q4. And normally we don't have big seasonal differences between Q4 and Q1 in Machine and Solutions. Okay. Okay. When it comes to Mining Systems was your next question, yes. There I mean 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. So we do expect revenues to gradually tail off if we don't get an increase in order intake for mining systems. But 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 more or less come through into lower production. Okay. And a follow-up on mining. 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? Well, we haven't I think published in that detail. But I mean mining is still too high on inventories and we need to bring that down even further. So, yeah, we're still not happy with inventory levels on mining. But 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. Okay, many thanks. 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 the your comment around SMT revenue exposure. You say energy is about 40% of sales. And just to clarify, is that all oil and gas? Is there a broader definition of energy included in that? And if it is all oil and gas, can you give us an indication of what's upstream versus downstream? And then just on the margins in M and T, I presume that 13%, you've made a point that 150, 200 basis points of that is probably it's the benefits from the provisions. But I'm guessing that you obviously haven't seen any benefits from the new primary finishing line being commissioned yet. So to what extent do you think that coming in this year offsets some of the benefits that you've seen in Q4? Thank you. Well, first with what we call energy, we include petrochemical and it also includes several other types of energy sectors exclude beyond oil and gas sector for example nuclear. So 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 Q4 for us within the with the energy sector and especially within oil and gas. And I mean the most important product for us within oil and gas for materials technology is within umbilicals which is I mean in offshore applications. So is that Okay. And then the margin comment? Yes, the margin, well, I mean we did have a bit of an inflated margin. We will get positive investment that we expect we have a good payback on. And well, we do see potentially some good effects from good demand and orders we booked into the oil and gas sector here potentially being a positive effect. We've talked previously in the energy sector about the drop in nuclear affecting margins or profitability negatively this year. But there has been a resequencing of certain orders. So we don't today really expect that to have a material effect. So more or less 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. And until then, have a good day.