Very welcome to the presentation of the first quarter result for Sandvik. My name is Magnus Larsson, head of investor relations. As you have already noticed, we have made some changes compared to what you have been used to in the past. We are presenting the results at 10:00 Swedish time. We have made some interesting, and we believe, improvements to the interim report as well. We are making some changes also in the hour that you have ahead of you. The Chief Executive will soon present the presentation in a manner that you have been used to. We are adding an extension to the presentation of some seven, eight minutes that in an area of our choosing. First out is the Chief Financial Officer that will let you in on our thoughts on operational excellence.
The area will change, but the extension, we believe, will stay for the quarters to come. Apart from that, also in order for everyone to, or as many as possible to be able to ask questions, we kindly ask you to limit your questions to one at a time with one follow-up question as well. Without further ado, please, Olof, go ahead.
Thank you very much, Magnus, and welcome everybody here to this presentation of our first quarter results for 2013, also a big welcome to all of you watching this over the web. Looking first at some highlights for this first quarter. We had quite a mixed demand picture for the Sandvik Group. On one hand, we had Sandvik Mining, which continued to experience quite difficult market conditions. The gold sector is being affected by weaker gold prices and we have lower investment activity in mining. On the other hand, we actually see quite positive developments or at least stable to positive developments for the other four business areas. All four of those business areas actually had positive book-to-bills in the first quarter.
This slightly positive development we saw for Sandvik Machining Solutions, Sandvik Materials Technology, and Sandvik Construction actually had a very big pickup in order intake compared to the preceding quarter, 43%. We saw, roughly you could say, stable demand for Sandvik Venture. Our EBIT came in at SEK 2,557,000,000, and that resulted in an EBIT margin of 11.6%. This EBIT number included certain one-off costs, and if you exclude those, we came in on an EBIT close to SEK 2.7 billion. We also, in this result, had significant headwinds from the currencies. We had a negative effect of around SEK 350 million due to the especially strengthening of the Swedish krona against other key currencies here. Our return on capital employed on a rolling 12-month basis on the first quarter was 17.6% for the Sandvik Group.
Cash flow came in at SEK 2.2 billion, and we continued to see inventory reductions for the Sandvik Group. Not as large as the ones we saw in the fourth quarter, but still fairly sizable at SEK 400 million. This was though negated to a certain extent by an increase that we saw in our accounts receivables in the quarter. Looking geographically, actually we had our smallest drop in the areas where we had a negative trend in Europe. Europe has stabilized at this lower level that we have been seeing. Europe was, in 2012, the only continent for Sandvik where we actually had lower sales than the preceding year. We did have a positive trend in Latin America, but in all other parts of the world, negative sales or lower sales this quarter than the same quarter last year.
North America, we continue to believe or see a positive trend, and the drop of 12% in North America is more attributable to how certain orders or invoicing of certain orders fell out between the quarters than a big shift in the actual market sentiment in North America. Looking then at our various customer segments here, you can see that we had increased invoicing in the mining sector, in the aerospace area, and in energy compared to the same quarter last year. The other sectors where Sandvik operates actually had lower invoicing this quarter than what we saw a year ago. The most negative trend on a year-over-year basis was in the engineering sector. If you look at the sequential trends compared to the preceding quarter, mining had the most negative trends in the general market sentiment and development.
While the other areas more or less had a stable trend or construction, we even dared to put a positive arrow there where we think that we have the most positive trend of all of the sectors. Looking then at our order intake, year-over-year, it's a very significant drop, but as you can see on this graph here, we had an extremely high order intake in the first quarter of 2012. Sequentially, actually the order intake was up by 9% compared to the fourth quarter last year. That was a positive development there. We took major Mining systems orders of SEK 950 million in the first quarter. In our previous quarterly report, we were flagging for a potential cancellation that actually did not materialize, and that project will be delivered to the customer here.
That was not backed out of our order intake as we expected in the first quarter here. Invoicing was down sequentially, this is of course an effect of the quarters we've had with lower order intake in the company here. Invoicing was about SEK 22.1 billion for the Sandvik Group. In price volume terms, that was a change of -5% for Sandvik. Looking at our EBIT. As I mentioned earlier, came in at just below SEK 2.6 billion for the company. Adjusted for one-off charges, we came in at around SEK 2.7 billion.
Despite quite a significant drop in invoicing compared to the preceding quarter, we more or less managed to maintain the similar level of EBIT margin in the company, which I think is a strength that we are adapting in an effective way to the weaker market conditions we are seeing in the world around us. Our cash flow came in at SEK 2.2 billion, which was clearly lower than what we saw in the preceding quarter. We have had two very strong quarters in Q3 and Q4 last year in terms of cash flow, but still being a first quarter compared to our historic first quarters, this was still a strong cash flow, I think, for the company. Our net working capital was more or less flat. We had a continued inventory reduction, so we're continuously successful in adapting our inventories to lower levels.
That was negated by, amongst other increases in our accounts receivables. In value terms, net working capital was more or less flat. When it comes to percentage of sales, since we had a drop in sales, it actually moved up 1% to 28%. Our bridge analysis for the quarter looks like this. We had a negative operating leverage of 85%, and the reason for that is lower production levels in especially Sandvik Mining and Sandvik Machining Solutions due to inventory reductions and so on, and a general lower utilization rate in our production system. Plus the big drop we've seen in the Wolfram price compared to the first quarter last year to the first quarter this year, which has had a significant impact on Sandvik Venture's results. Currency effects were SEK 350 million on the EBIT line and SEK 1.3 billion on our invoicing line, on our top line.
Looking now more specifically at our individual business areas starting with Sandvik Mining. We continue to see fairly low activity in the mining industry. We did see some increased order intake compared to the preceding quarter and stable demand for our aftermarket business, our rock tools, our service business, our spare parts to our customers. The lower order intake and the lower investment level with our customers is affecting our sales of equipment and of course also Mining systems. EBIT for Sandvik Mining came in at SEK 1.2 billion and an EBIT margin of 14.6%. For Sandvik Mining, we had negative currency effects of about SEK 140 million. Return on capital employed, looking at the rolling 12 months for the business area, came in at 36.4%, and net working capital at 29% of invoicing. Machining Solutions started to see some slight signs of increased market activity.
We saw stable demand on a very high level from aerospace. Also this was negated to some extent by fewer working days in the quarter. Amongst other, Easter was in Q1 compared to Q2 last year. Our adjusted EBIT margin for Sandvik Machining Solutions was 18.4%, and within the quarter we had non-recurring charges of SEK 140 million. All the non-recurring charges we had in the quarter affected Sandvik Machining Solutions. Currency effects for this business area were SEK 125 million. We did have lower production volumes, which was also affecting our result in the quarter. Return on capital employed 27.5% for Sandvik Machining Solutions, and net working capital came in at 27% of sales in the quarter. Sandvik Materials Technology, I feel, continued to perform actually on a very good level here.
Their adjusted EBIT, excluding metal price effects, was SEK 373 million, actually resulting in an EBIT margin of 10.7% for Sandvik Materials Technology, which I think is a strong number in the current market situation that we experience today. The strong EBIT performance is, of course, a result of the continued successful implementation of the turnaround program that we have been running within Sandvik Materials Technology. Business conditions have continued to be strong in the energy sector, and also we've seen some signs of improvement for more standard products within the quarter for Sandvik Materials Technology. Sandvik Construction saw an improvement from very weak levels, as I said, order intake was up 43% compared to the preceding quarter. That was a very strong step up in the order intake, and we have a strong positive book-to-bill for Sandvik Construction in the quarter here.
Earnings were in part affected by a large share of systems deliveries or project deliveries within the quarter for construction. Sandvik Venture's EBIT came in at just over SEK 100 million, and there was a big effect compared to the preceding quarter here due to the sharp drop that we've seen year-on-year in the tungsten price here, affecting the results for Wolfram Bergbau und Hütten. We also announced in this quarter that we're going to close our Irish site within Diamond Innovations, one of the two main production sites we have in that business area, and consolidate all of that production onto one site in the U.S. This will entail one-off restructuring charges of around SEK 200 million that will fall into the second quarter as a consequence of consolidating these productions onto one site.
I will stop there and hand over to Emil, who will make some comments about his theme here, then I'll come back and sum up and take your questions. Thank you.
Thank you, Olof. As Magnus mentioned in the beginning, we will take the opportunity to give some brief updates to you in connection to the quarterly reports on some of the current subjects that we are discussing inside the company. An important one that we definitely have on our agenda at the moment is operational excellence. What do we mean by operational excellence? We believe that we have a tremendous opportunity as we are a global company, large company, and a global company to leverage all these different assets. When the strategy was announced, it was called One Sandvik to be Number One. To be number one, operational excellence will be a critical success factor. The opportunities we have at hand is to even better leverage our global scale and our global skill for the benefit of the company as a whole.
We can also leverage our global reach because we have access to different cost structures, different cultures, and different knowledge bases through being present in 130 countries. We also can generate value by better industrializing best practice sharing. Any good idea somewhere out in our company becomes quickly and easily available to their colleagues somewhere else. Of course, simplifying, automating, and making processes more scalable is very important, that will drive synergies, cost efficiency, and also help us to focus on our business differentiators rather than other things. The investment rationale and what we're looking for when we're looking at different opportunities to improve our operational excellence is, of course, that anything that we can automate or make more efficient or scalable, that helps us put more focus on our competitive edge is valuable.
Management attention will be focused on our customers, on our R&D, and other areas where Sandvik delivers incremental value as a company. Needless to say, we're looking for cost competitiveness long term, also in order to significantly change our working capital profile, we have to look at restructuring and simplification and harmonization among our supply chains, for instance. We do believe that operational excellence will help us become a more agile company, that is very adaptive to market changes. We look to become more flexible, transparent, and fast-moving. We also, of course, believe that people get motivated by working in a world-class environment where you feel that you are best in class in the areas you operate in. Workforce motivation is a very important aspect of this.
We have a couple of initiatives that were kicked off as a consequence of the new strategy in 2011. We have a group approach now to sourcing of indirect materials, where we try to leverage the company scale, in order to get more competitive terms and conditions. We have announced an IT infrastructure outsourcing together with IBM. We just recently announced that we will establish a global financial shared services model together with Capgemini, in order for us to both lower cost, but maybe even more importantly, improve quality and standardize across some of the more transactional finance processes. We are in the process of establishing a more global and consolidated HR function that has been ongoing since 2011.
We have implemented a more consistent approach to performance management, that involves both how we follow up our different businesses internally, set objectives and follow up, but also on an individual basis, how we then turn that into and connect that into personal objectives of our employees. We also have Olle Wijk that does a very important job in terms of facilitate R&D cooperation in order to get more on the total than we would get within each of the business areas. We have a number of examples that we have ongoing already, but we do believe we have more opportunities ahead. Here are a couple of examples that are driven either within business areas or on an overall perspective. Supply chain alignment and improvement and harmonization to make our delivery flow really simple and straightforward.
That will help us serve our customers better, it will help us improve net working capital, and it will reduce cost. Best Cost Country Sourcing. This is leveraging our global reach so that we make sure that we buy where cost is most competitive without, of course, impacting the quality of our input. Footprint Optimization, where should we be? How can we reduce the number of locations where we operate in in order to make fewer steps in our process? We're looking at possibilities to harmonize among our IT landscape and also to make sure that our IT systems become business supporting so that less time is spent on looking backwards and more time is spent on the analytics and the conclusions in a forward-looking perspective.
Simplification of governance structure so that we minimize the time we spend on administrative activities and become very straightforward and connect, make the company as close to the business as possible and connect all of us to the business. This will require some investments, naturally, but based on the benefits we see, we think it's both worth the time and the money in order to do so. Olof?
Thank you very much, Emil. Of course, driving continued operational excellence, I think is one key opportunity, of course, in the value we create to being one company together within the Sandvik Group. Will be a focus area for Emil and many people in the top management, of course, to continue to get these kind of synergies and benefits out of the group besides, of course, in general, just developing our business, which we also must do. To summarize the first quarter 2013, we saw mixed demand. Mining with continued more tough market environments, and really for the four other business areas, stable to possibly a positive development in their markets. We have continued to reduce our inventories, not as much as we did in the fourth quarter when we reduced our inventories by SEK 1.4 billion.
We did get a reduction of SEK 400 million, which I think is a further positive step of managing our net working capital, which is important in these times when we see weaker market conditions. I think we're doing that in a positive and good way. We've had very heavy headwind from the currency in the quarter, SEK 350 million hitting our EBIT due to mainly the strengthening of the SEK compared to other currencies. We're continuing to drive for operational excellence within the Sandvik Group, of course, to become even better in the future. I think many of the things that we are driving in terms of improvements in the group, like for example, the performance we can see in Sandvik Materials Technology, are really starting to bear fruit and to be really measurable and visible in our numbers as well.
With that concludes our presentation, and I would like to open up for your possible questions here.
Okay, thank you very much, Olof. Thank you, Emil, as well. We're steaming away with the Q&A session. Just a reminder, let's keep the questions to one with one follow-up questions, enabling as many people as possible to ask questions. Let's take the first question from the floor, and we have one over here.
Hi, good morning. It's [Guillermo Pein] from UBS. I think you started the presentation with the commodity prices dropping and the gold price falling, I was wondering whether is it too early to see any of your customers reacting to that, additional, let's say, cautiousness towards order intake going forward?
Well, as I said, the current market situation within mining is looking fairly weak. Preceding quarters, we've talked about gold being one of the areas which actually was holding up, while especially iron ore and coal is where it really started to be weak first. Of course, that's a further negative with the weakening of the gold price here. At the same time, I think you should remember, even though we do see reduced CapEx levels and CapEx plans for the mining companies. We're not seeing large amounts of cancellations today. Our customers are so far continuing to complete their projects and our aftermarket business is holding up, which means that they're continuing to run their production. They're not stopping production. We're not seeing a big downturn in volumes for the mining companies.
They're adapting their growth plans for the future, therefore reducing their levels of capital expenditure going forward. That's what we're seeing in our reduced order intake within the Sandvik Group.
Then the follow-up is regarding aftermarket, precisely. I was sort of hoping for a small up, given the fact that the mining companies are lifting production rates at the moment, and I think your comments were for more like in a stable environment. How do you see that progression going forward?
We're not experiencing an uptick in production rates, more stable production rates compared to the preceding quarter. That's our impression that we're getting from our customers right now.
Thank you.
Thank you very much. Do we have another question from the floor?
Yes, hello, Andreas Koski from Nordea. I have a question on Sandvik Machining Solutions. How much lower was your production levels compared to your sales level?
Well, we reduced inventories with about SEK 400 million in the group. That was mainly relating to Sandvik Mining and Sandvik Machining Solutions. We haven't split that up in detail like we did the preceding quarter. It was a SEK 1.4 billion inventory reduction. It was of a total different magnitude than what we're seeing in this quarter.
Okay. What would we expect for the next quarter? Are you aiming for inventory build-up ahead of the summer?
We will see in certain business areas, a certain inventory build-up like we always have, like for example, in Sandvik Machining Solutions, due to the summer shutdowns we have during July in Sweden, for example. For the longer term, we still have a plan to reduce our net working capital in the group, and we still have a long-term target of achieving a 25% against invoicing levels. Our ambition is to gradually continue to rationalize the amount of net working capital in the group. We will have a seasonal effect in the second quarter due to the summer period in Europe.
Okay. Thank you.
Thank you very much. Next question comes from the international audience. Operator, could we please have some help here?
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad and you will enter a queue. After announced, please ask your question. Our first question comes from Natalia Maksimova from Citi. Please go ahead.
Good morning, everyone. Natalia Maksimova from Citi. I have a question on the structuring program. Last year in November, you announced a plan to achieve over SEK 1 billion of cost savings, in addition to what you already have successfully achieved for the last couple of years. I just wonder if you can give us a bit more color on the timing and phasing of these cost savings. Were there any already in the first quarter, or the bulk of these cost savings is much more back-end loaded? If you can give us the color on the timing, how should we think about that SEK 1 billion coming through?
Yes. Well, we've only seen limited effects. We announced that program on the 28th of November last year. So far in the first quarter, we've only seen limited effects of these cost savings coming through. This, we expect to gradually ramp up with a full effect by the end of this year. I can mention just with the one-off charges that we took SEK 140 million, which was all related to Machining Solutions in the first quarter. Of the previous announced expected one-off charges, we still have SEK 180 million to come within Sandvik Mining, that will come gradually during the coming quarters here as we realize the saving efforts that we have planned for here.
Thank you. That's very clear.
Thank you very much. Operator, could we have another question, please?
Our next question comes from Mr. Andrew Kukhnin from Credit Suisse. Please go ahead, sir.
Good morning. Thank you for taking my question. I wanted to ask about the competitive landscape in construction equipment and the low end of mining equipment and crushing and screening. Are you seeing any changes there? Is there evidence of new competition?
No, I wouldn't say that we see any evidence of new competition in the low-end part of the market. It is quite tough in the Chinese market due to the lower level of infrastructure investments that we've seen over the last year or so within China. We have a strong position through the acquisition of Shanbao that we did, and we have a very good offering for that part of the market. We're now trying to build the sales from Shanbao into other regions of the world, into India, into Latin America, into Africa as well here. I think we have a lot of opportunity to actually expand when it comes to the mid-market within construction.
Got it. Thank you. A quick follow-up on the inventory reduction question. Looking beyond Q2, where understandably you'll probably not cut or in fact build inventory into the year-end, would you target to achieve, say, a similar reduction in inventory this year as you did last year? Is that too high, too low? Just to give us an order of magnitude.
Well, I think we had very high inventory reductions towards the second half. Actually, over the year, we didn't reduce it that much. We had a bit of an inventory build-up in the first half of the year. Our target is to gradually adapt our net working capital to this 25% level, and that's what we continue to work against.
Okay, thank you.
Thank you very much. Do we have another question from the floor?
Okay. Anders Roslund, Swedbank. I have three questions. First, regarding Machining Solutions. Could you talk a little bit about the production or sales level of Machining Solutions so far in April? Number two, the Chinese-
We'll take them one by one.
Okay.
Well, April has started sequentially stable or possibly somewhat further positive compared to the first quarter here. If anything, we see a slight positive trend going into the beginning of the second quarter here. What was your next question?
Thanks. Next question is regarding China and the nuclear tubes. There seems to be some positive order intake and some cancellations.
Yes. Well, there's a big retake on the whole nuclear power program in China, and this may lead to further cancellations for Sandvik going forward. We have frame agreements and certain orders in our order stock based on the original plans that China had to invest. As it becomes clearer which projects will go ahead and which won't, we may need to make adaptations there.
The net effect, was it that you canceled?
The net effect in the first quarter was roughly zero. We had cancellations which were roughly the same level as other orders that we got in.
Okay. Number three.
Thank you very much, Anders. Okay? Okay.
Third question. That is about restructuring. Could you just elaborate what we should look forward to for there? You mentioned the SEK 180 million here and the SEK 200 million. Are there other?
Once we decide, if we decide on any programs, we will of course communicate that. I guess SEK 200 million is the ones for Diamond Innovations, as you mentioned. That is something new that we are announcing now with this quarterly report. It will, of course, depend on how the market develops going forward. We might have restructuring initiatives in areas like Emil was touching on when we consolidate production in our mining business or other areas of the company onto fewer sites. We will be doing those kind of investments with the aim, of course, of getting a reasonably short payback on those kind of restructuring activities. You can never outrule future restructuring, of course, in a company like Sandvik.
Thank you very much. Another question from the floor.
Daniel Schmidt from SEB. Can I just continue a follow-up on the SMT question on nuclear? Your wording in terms of price pressure is, I would say, slightly more cautious than compared to earlier wording, and you are discussing the currency benefits from Asian competitors. Could you specify that in more detail? Has it to do with Japanese competition, or could you give us some details?
Well, in Asia, our main competitor on nuclear tubes is in Japan. Of course, they've had a big drop in their currency, and we've had a big increase of our Swedish krona, where we have our manufacturing facilities for our nuclear tubes. There, the competitive landscape has shifted against us due to these currency movements.
You've seen this in the past six months then, I guess. Is it increasing or stable?
Well, the currencies, it's difficult to speculate how they will move. Going forward, if the krona levels off from these high levels, that's of course a challenge for Sandvik with the production that we have in Sweden, for example, Gimo or Sandviken, when it comes to SMT and so. That, of course, gives us a competitive disadvantage compared to our competitors in the Eurozone or in the yen zone or so.
Thank you.
Thank you very much. Operator, could we please have assistance with a question?
Our next question comes from Mr. Lars Olsson from DNB. Please go ahead, sir.
Thank you very much. Good morning, Olof. Quick question on mining, on gold and copper, the two areas of strength in Q4. Clearly weak now in Q1. It seems weak commodity prices here very quickly translated into weak demand for you in these segments. Can you elaborate on where you're seeing the weakness here? Is it on the new equipment side, or are you seeing an element of weak aftermarket, i.e., consumables de-stocking?
I think I commented already earlier, actually, on that. In the aftermarket, we see a stable picture right now. We do not believe that our customers are, or see that our customers are reducing production rates. They are, on the other hand, reviewing their future investment plans and postponing projects or reducing the pace that they're planning to invest at. They're maintaining their production. They're not canceling, as we see, their current projects, so we're not seeing any material amount of cancellations. They are not booking new orders or starting placing orders for new projects on us, and that's resulting in a lower order intake for us, affecting equipment and affecting mining systems predominantly, but not rock tools, services, spare parts in these areas.
Thanks. Just on Sandvik Machining Solutions, if I could be allowed one follow-up. What did you see as the quarter progressed, Tim? You talk about a slightly positive development in Sandvik Machining Solutions.
Yes.
Can you talk a little bit about what you're seeing in North America, where you saw further deterioration year-over-year in Q1, and also in Asia Pacific, where, again, on a year-over-year basis, you did not see much of an improvement versus Q4?
Well, compared to Q4, we believe we see a stable to slightly positive development for Sandvik Machining Solutions. As I said, North America, we had a big drop in invoice, and we believe that is more timing of different projects and how invoicing fell that we had that more negative number. We have a quite positive view on the market in North America, and you can see that in our order intake numbers, that we have this quite strong positive book-to-bill for our business areas in North America.
Thanks.
Thank you very much. Another question from the international audience, please.
Our next question comes from Daniela Costa from Goldman Sachs. Please go ahead, sir.
Yes. Hi there. Good morning. I was actually curious about your comments on the sort of pickup in construction and relatively strong demand intake Q and Q. I wonder if you could elaborate a little bit on which areas you're seeing increased order intake. Then I have one quick follow-up on Venture.
Well, for construction, we actually saw, I would say, across the board, and that's where we, compared to the sentiment we've seen during this autumn, actually have seen the biggest shift towards a positive direction has been in with the construction business. They're affected by very low invoicing in Q1 due to low order intake in preceding quarters. As you say, had a very good order intake in Q1, and we feel that's a really positive indicator of the trend in the construction market. We see that in many areas, and it's not one of our product areas specifically that's picking up, but actually fairly much across the board that we see a good order intake for the various types of offerings that we have from our construction business area.
I could perhaps add to that as well that normal seasonality also has the first quarter being stronger than the fourth quarter. That, of course, plays into this.
Okay. Just a quick small one on Venture. This sort of SEK 100 million type level, is that something we should expect to continue, if you're not seeing a pickup in tungsten prices? How should we think about that?
Well, there was a very sharp drop if you look at the development of the APT price, which is the commodity that's traded for tungsten, between Q1 last year and the levels we've been at right now. Actually, lately, the trend has been positive again for the tungsten price. Hopefully we'll see a positive trend, but of course, when we have a big drop in the commodity price, we have inventories bought at more expensive levels, and then that translates into lower margins. That effect should ease out over a quarter or so.
Okay. Part of this drop was inventory write-down rather than.
Yeah, or effects that we.
Yeah
have higher priced materials that we're using for our production today than what we had in the stable pricing environment for raw materials.
Okay. Thank you.
Thank you very much. Let's take the next question from the floor.
It's [Guillermo Llaguno] from UBS. Another question, sorry. On SMT, regarding the new competitive landscape you were talking about, what is your policy should this sort of competitive landscape continues to remain the same, given the fact that you have the capacity to serve the nuclear markets? Would you be competing on price, or are you basically sticking to your price and just getting less volume?
Well, the challenge is not us losing market share or so. The challenge is that the size of the overall market for steam generator tubes is much smaller than what was anticipated when these investments were made. On a global basis, the pace of investment into the nuclear sector is much lower, and especially in China, it's much lower than what was expected previously. This means, already in 2011, we announced at our Czech facility that we also invested in for nuclear tubes. We took a write-down on that investment and actually have redirected the parts of that production that we can use to produce umbilical tubing towards the oil and gas sector. There we can sell the products, and we can have a good margin instead.
With the long term, lower capacity utilization, we'll also have to review potentially some of the capacity in Sweden if we try to redirect that to other profitable areas where we can sell these tubes other than nuclear, so to say.
Thank you.
Thank you very much. Let's have another question from the floor, if there is any. Not for now. Let's move, operator, please, to the international audience again.
Our next question comes from Mr. Martin Prozesky from Bernstein. Please go ahead, sir.
Good morning, everyone. A couple of questions, please. Just first on mining, given the weakness we're seeing in orders, should we expect a positive mix shift in margin over the coming quarters with more aftermarket service in the mix? First question. Second, in terms of the pickup we're now seeing in materials tech, do you think we are now in an uptrend, and if so, will you be more willing again to look at the disposal of those units?
I would say, let's see.
Yep.
Your first question was.
The mix in mining.
Yeah, the mix in mining. Sorry. Yeah. What will happen due to the current order intake level is that we have a very long order stock on Mining systems. Before the invoicing of Mining systems tails off and we're not getting any cancellations, that takes much longer to consume the order stock on equipment. It's likely that the share of Mining systems in our mining portfolio will increase somewhat going forward, given that the market continues in the same way that it has. Mining systems does have a diluting effect on our margins, since that's lower margin business than what equipment and aftermarket business is in.
How long is that expected in the backlog? How long will that work through?
These Mining system projects, they run over maybe two years or so.
Okay
while they're being constructed and gradually invoiced there. Mining systems could potentially be a higher share of our sales over quite a few quarters to come. Of course, depending on how the overall market for mining develops. It takes much longer time for the invoicing of Mining systems to tail off with a low order intake than it does for the equipment side.
Okay.
Okay.
The second question was on just Materials Tech and the pick up there, the sustainability and the strategic kind of view on that asset.
Well, I don't want to comment that far. We are quite happy, I would think, with the development of the Step-Change program, so far anyway, and at the 10% EBIT margin, roughly, underlying EBIT margin for the business. It is performing fairly well in the portfolio, and you couldn't say that it's weighing us down very significantly anyway when it's performing at these levels. I don't feel that's really an urgent problem based on the current financial performance of the business.
Thank you very much. Operator, could we please have another question?
Our next question comes from Mr. Colin Gibson from HSBC. Please go ahead, sir.
Hi, good morning, everybody. Can I ask first a question about receivables? You commented, Olof, a couple of times the increase in receivables in the quarter. If you could just give us a little bit more detail on why that was and whether there'll be any improvement going forward.
Well, it was an effect of increased invoicing and the mix of invoicing towards the end of the quarter that meant that we ended up with somewhat higher receivables in the group.
You'd expect that to normalize relatively quickly?
Well, of course, that would depend on if we have an increasing invoicing trend, then our receivables increase as well. That, of course, is connected to how the market develops.
Understood. Could I please just ask a follow-up question on pricing generally for the Sandvik Group in the first quarter of the year? As you look across the various business areas, has pricing generally been stable, or have you seen any areas of weakness? Thank you.
I would say generally stable. We haven't had a negative pricing trend in any part of the group. In those cases we've had any positive trend, it's only been very small positive movements with, I would say, Machining Solutions in the most positive end of the spectrum and Materials Technology more or less flat.
Thank you.
Thank you very much. Operator, please, do we have another question?
Our next question comes from Mr. James Moore from Redburn. Please go ahead, sir.
Good morning, Olof, Emil, Magnus. Could you help us understand the SEK 140 million organic EBIT drop in the Mining division on the SEK 290 million organic invoice increase? I think we might normally expect SEK 50 million, SEK 100 million with 20 something type drop through, it's obviously a lot worse than that. If pricing is flat and you're getting some savings in, what is driving that, given it's quite an assembly business? Is it mix? Is it something else?
Well, I would say the loss of volume. Having inventory reductions instead of inventory buildups means that we have a totally different over or under absorption situation in the business area.
Okay, could I follow up?
Yes
with a question about lead times? I wondered if you could just run through the mining division to say where we are, really, on project versus OE lead times, and within OE, whether you could comment on the lead times for the major product categories of crushing, screening versus drill rigs versus loaders and haulers, just so we can think about the mix of how the OE demand decline in the mining industry will affect you.
Yeah. Normally we've been working with a six-to-nine-month order stock during 2012. That has, of course, been shrinking now for equipment due to the fact of the weaker order intake, or the negative book-to-bill that we have. We have normally between, I would say, three to six months of order stock for equipment right now.
Does it differ for different areas?
No, I cannot go down into the specifics. If you want to call Magnus, he can try to give you some more color on that, but I don't think we're prepared to share those kind of very detailed information on our delivery times of our full product spectrum, yeah.
Thank you very much.
Thank you very much. Operator, please, another question. Mr. Joakim Höglund from Cheuvreux. Please go ahead, sir.
Hi. I have a question in regards to inventory reduction at your customers. You say that in Machining Solutions and Materials Technology, it's standard products and general demand that is picking up somewhat sequentially. Have you identified any way how your clients are handling their own inventories? Can these positive indications merely be an effect of slightly lower inventory reduction at them? Thank you.
That could be an element of that. In these areas, especially for Machining Solutions, we don't believe there to be very high inventories in between our delivery and the actual consumption of the product. There's not a big amount of inventory. For Materials Technology, there's a certain amount of distributor sales and so on. There could be some inventory movements. What we're saying we believe to be more a general underlying market movement and not any inventory movements with our customers.
Okay. You get these indications from customers when talking to them, or is it your general view of the?
Of course, we interact with our customers all the time. That's the feedback we're getting. Sandvik, in general, has a very high share of direct sales to our customers. We're very little that's going through distributors in our various business areas. Normally, we do not have a distributor building or reducing inventory between ourselves and our customers.
Okay. Thank you.
Thank you very much. Operator, please, could we have the next question?
Our next question comes from Mr. [Sebastian Growe] from Société Générale. Please go ahead, sir.
Hi. Good morning to all. I have one question. You have been CEO for more than two years now, and you have launched several restructuring plans that changed top management. Two years later, earnings are well below where they were in the first quarter of 2011 on more or less the same revenue level. Where do you think the Sandvik Group underperformed compared to your initial expectations, and how do you plan to fix this? Thank you.
Well, we see a considerably worse market situation today than what we did a year ago. That's, of course, impacting our results and we have clearly lower volumes. I think we've done very well with improving the results based on the market conditions in both Sandvik Construction and Sandvik Materials Technology, and there's very measurable and clear difference in the performance of those business areas compared to historical performance. When it comes to Sandvik Mining and Sandvik Machining Solutions, I think we still have a lot of work of improving and enhancing our profitability in these areas. In Sandvik Mining, in terms of restructuring our footprint, improving our supply chain, working with sourcing, and these are things that we will be working over coming years with.
In Sandvik Machining Solutions, even though we are a market leader in this area, I believe we also have quite a lot of opportunities still to improve both our manufacturing footprint and the efficiency of our processes within the business area. These are areas that we will continue to focus on going forward.
A follow-up, if I can, on Sandvik Machining Solutions. You said you're a market leader, but you seem to underperform in the emerging markets where you are declining faster than in developed markets over the last two years. What is driving that? Is it market share losses? Is it a weak development of the 10 big brands compared to local players? Can you give us some color on that?
Well, in emerging markets, I think we've been developing well and aligned with markets when it comes to our premium brands. I think a weakness in our portfolio is that we have not had a mid-market type offering in our portfolio. We have started by launching the Carboloy brand, which we did last year, and we will continue to look at different ways to address a broader spectrum of the market than we have been doing with our products, mainly focused on the premium segment in the market.
Okay. Thank you very much.
Thank you very much. Operator, please, the next one.
Our next question comes from Mr. Alexander Virgo from Berenberg Bank. Please go ahead, sir.
Thanks. Good morning. It is just a quick follow-up on the order intake in Construction and the mix effect, whether the systems business or the mix or share of the system business in the order intake is dropping, and whether that will have a proportional improvement or accretive effect on the EBIT margin. Thank you.
For Construction?
Yes.
We don't expect any big shifts in the share of systems compared to other parts of the portfolio going forward in the same way as we can see in Mining. As said, in Construction, the order intake is picking up now, which will result in increasing shares of equipment sales and so on now going forward. If anything, we should have a somewhat positive shift towards more equipment and less systems as a consequence of the current market sentiment that we're seeing right now.
Great. Thank you.
Thank you very much. The next question, please.
Our next question comes from Mr. Kenneth Toll from Carnegie. Please go ahead, sir.
Yeah. Hi. On the Mining side again, if we look forward, not just one quarter, but maybe two, three years, do you see a big risk of lower pricing on equipment as we see
Falling demand right now. Are customers getting more price sensitive already now, you believe? That's the first question.
On mining equipment?
Yeah.
Well, normally in recessions, that's not been the case that you've seen drops on the equipment. You see drops in investment levels, but not necessarily drops on the pricing of the product. That's not something that we are experiencing today or that we're expecting at the moment.
Okay. A follow-up. On the service side of the business, when you listen around to a lot of equipment manufacturers, a lot of them is targeting higher sales in service and spare parts. The risk is that competition may increase there as well, so that it will be price competition and more competition going forward. Do you see such risk in a two, three-year time horizon?
Not really in the aftermarket in that sense. I think the important thing is, we need to deliver a package to our customers. Actually often the service element is not only a profitable business, but also something that's very important for the customer, because they're going to look at owning this machine, the availability they're going to get from the machine. If we can support our customers with a high availability on that equipment, they will buy our services. I don't think the pricing is the main thing. The main thing is how well we will be able to service our machines on the various mine sites and what sort of availability numbers we can offer our customers through that service. If we can offer good availability numbers there, they will buy the service from Sandvik.
Okay. It has more to do with the production rates in the mine rather than anything else, basically, then?
I would say so. That's my judgment, yes.
Okay. Thank you.
Thank you. Operator, I know we have some more questions. Could we have the next one, please?
Our next question comes from Mr. Peder Frölund from Handelsbanken. Please go ahead, sir.
Yes, good morning. Thank you. When it comes to mining again, if anything, the demand has weakened further since your November restructuring. Could you explain really why you postponed the restructuring that you aim to take, and how you feel you're running in your cost saving production rate versus the underlying slope of demand? Maybe explaining that for us in more detail. Thank you.
Within mining, I wouldn't say that we have postponed, there are accounting rules for when we can take the restructuring costs, the SEK 180 million that we still have to take. I still believe that we're on plan with the restructuring plans that we announced in November.
That's very clear. A short follow-up, Olof, could you please share the magnitude of the tungsten price effect on the Sandvik Venture EBIT?
We haven't shared that number exactly, it's quite significant.
Okay. Thank you.
Just adding to your first point also, the restructuring charges that we took in the fourth quarter were also related to mining. We've met the actions that we've taken during the first quarter with the provisions that we took there. We're steaming ahead with the restructuring. Don't read anything else into it. Thank you. Okay, the next question, please.
Our next question comes from Mr. Peter Lindmark from DNB. Please go ahead, sir.
Hi. Could you just give some indications if there is anything that will swing the margin significantly going forward? You are at 12.2% adjusted margin in Q1. You had some inventory, de stocking, say around 12.5%. There will, of course, be some seasonal differences, but will also be a bit negative mix with more construction and less mining. Is there anything that will take up these margins significantly in the near term? I mean, okay, you get one percentage from end of this year, maybe beginning of next year, but until then?
To start with, we have a quite integrated business model within the Sandvik Group, with large amount of the production flow integrated. Volume is a very important aspect of our profitability, and in weaker markets, we will, of course, have a negative effect from having, in many areas, a fully integrated production flow. That will be a benefit we get back when markets pick up. Volumes is, of course, a big driver for us when it comes to our margin. Currencies, they hit us with about SEK 350 million in the first quarter. We expect very significant currency effects in the second quarter where currency is down today. If there will be any movements there, any strengthening in the EUR, weakening of the SEK, that's an outside effect that of course can have an impact. We continue to work with our efficiency programs.
Efficiency is in line with what Emil was talking about in terms of operational excellence through the group. The SEK 1 billion cost saving that we've only seen very initial effects of in the first quarter, the SEK 1 billion we announced in November, that will gradually feed in during 2013 here. I think there are a number of things that can move our margin in a positive direction here.
Yeah, I'm sure you will come with more efficiency programs if the market stays like it is. Assuming that it stays pretty much like this on the mining side, et cetera, when could we expect more restructuring programs announced there? Will you see this program coming through first and then make another step?
No, we're
Make a move faster
of course, reviewing the situation. It will depend on how we view the market. I think I would like to point to, again, that actually in four out of our five business areas, we did have a positive book-to-bill in the first quarter. We do not see, for those areas, any further deterioration in the market compared to where we stand today.
Great. Thank you very much.
Thank you very much. Mindful of the time also, that was our last question, and it concludes the session for today. I thank you for your attention and wish you a nice day. Thank you very much, everybody.