Good afternoon, everyone, and welcome to Sandvik's presentation of the first quarter results 2023. I am Louise Tjeder, Head of Investor Relations here at Sandvik, and beside me, I have our CEO Stefan Widing and CFO Cecilia Felton. We will do as usual. We start with the presentation where Stefan and Cecilia will take you through the highlights of the quarter, and after that, we open up for the Q&A. With this, I hand over the word to you, Stefan.
Also from my side, welcome to the first quarter report in 2023. If we summarize the quarter, it was a quarter where we saw continued robust performance from the group. We have good momentum. We saw solid execution and strong revenue growth and order levels at a record level. On the order side, we had order growth of 6% at fixed exchange rates, on of that 2% was organic. Revenue is up 18% at fixed exchange rates and 13% organic. If we exclude the impact from Russia, organic orders on revenues grew 5% and 16% respectively. Happy to say it's the last quarter we should have to make that comment, since we will have Russia out of our compares going forward.
We also see a healthy underlying margin, and happy to say that we can now say that all our business areas are fully offsetting cost inflation by their own pricing, including then at group level. The adjusted EBITA increased by 21%. This corresponds to a margin of 19.8% versus 20.2% last year. This, of course, we are not fully happy with. We want to be within our target range. It has a very specific explanation. We'll come back to that later on the call. The adjusted profit improved by 13% to SEK 3.9 billion. If we focus on our shift to growth priorities, we had number of highlights in the quarter.
First of all, of course, the very strong both organic and acquisitive growth in the quarter, very pleased to see. We also see very positive momentum in some of our focus areas, such as our automation solutions and battery electric vehicle solutions on the mining side. We also completed two acquisitions. I will come back to those as well later in this presentation. I always start with a slide on our latest innovations. This time I've selected a innovation from Sandvik Coromant called Y-axis turning. Turning is typically a relatively static process, so to say, but with this method, we can use multi-axis machines and take advantage of their capabilities to also do turning. This gives the possibility to do several machining steps with one tool.
It reduces tool change times, and there are also various aspects to the cutting process and the stability of the process that gives additional productivity improvements, and also reduced wear time. Explaining exactly what it is is very technical, so there I refer to you on to our website. What another interesting aspect with this innovation is that this is a fairly novel machining method, which means that operators typically don't have the experience to program it. It can be complex, so you need software support. So here, Coromant has worked with our GibbsCAM- Sandvik CAM solution to ensure support for this machining method in the latest version of GibbsCAM.
This gives it facilitates faster market uptake from Sandvik Coromant, and it gives GibbsCAM a unique feature and a differentiator in the market, or at least an early mover advantage. It's a good synergy between our cutting tool divisions and our software offerings. Going into the market development. If I start with a geographical perspective, Europe up 21%. We can say more or less across the board that Europe has surprised on the upside in the quarter. The only segment where we see more negative development is in infrastructure, and that we have said for a couple of quarters already. North America, more stable development, basically aerospace being the segment we would highlight as up.
If you look at our reported order figures for North America, in SMM, you might see it as slightly negative. We want to emphasize that we don't see that as an indication of the underlying market. We have in general engineering and aerospace some timing issues or timing impacts of orders being placed either in Q4 or that will come in Q2 instead, related to large distributors and also some key accounts on the aerospace side. The underlying market development in North America for SMM, we would consider to be stable. Asia, a bit weaker, -6%. Here we definitely see an impact from a weaker China in January and February. While on the machining side, we did see a good uptick in China in March.
March was positive in China, and that has also continued into the second quarter into April. Other parts of Asia, such as India, has been positive in the quarter. We have the mining markets following and generally positive. Australia, you see down. Not too much to read into that. It's related to timing and some big orders that they took in the same period of last year. If I go through this from a segment point of view as well a little bit, mining, we see continued very robust and good demand at a high level. The fact that some markets are up and some down, I wouldn't read too much into it. It's more related to when we get specific orders in specific regions. Underlying very positive sentiment, I would say.
General engineering, from an underlying volume point of view, more flattish, with a strong Europe. Europe is up in the double digits and also up in volume. More stable North America, more of a decline in Asia, driven then by the slow start in China that I mentioned. We see very similar development in automotive as we saw in general engineering, maybe slightly more negative in China, otherwise similar in the other regions. Energy is positive across the board, maybe slightly more flattish in North America. Infrastructure, we could say, has maybe weakened a little bit more. We used to more comment on a weak Europe. Now we also see that in Asia, while North America is still on a more stable level.
Overall, we indicate that as a softening market in infrastructure. Aerospace, strong, double-digit growth, strong across the board, and still not back to pre-COVID levels, we should say. I think, or they are about 20% below where they were in 2019, so there is more to get in aerospace as well in the future. At order intake and revenues overall, we have an order intake of SEK 34.4 billion, revenues of SEK 31 billion. A positive book-to-bill, which is really good to see, and in particular good to see this order intake in the light of the high compare we had in the same period of last year.
That we can continue to grow the order intake, in relation to that compare, we think is very positive, and it sets us up in a good way also for the rest of the year. Looking at this from a slightly different take, looking at the growth organically and through structure, we can see if we look at the revenue graph, that it's actually our eighth consecutive quarter of double-digit revenue growth at fixed exchange rate, which we think, yeah, is a good achievement and a testament to the execution of our shift to growth strategy. Coming then to the EBITDA development, we see an absolute EBITDA of SEK 6.1 billion, up from SEK 5 billion last year. It's an uptick of 21%.
The margin at 19.8% versus 20.2%, as I said, it's not where we want to be. Let's be clear on that. It's, we expect ourselves to deliver a better margin than that. We did see an impact from revaluation of unhedged balance sheet items that had 100 basis points negative impact in the quarter. This is related to currencies, and Cecilia will explain that a little bit more going forward. On the leverage side, as I said, price is now fully mitigating cost inflation in all BAs, that's also very positive as we go forward. Going deeper into each business area, starting with Mining and Rock Solutions. What can we say on the top line? Fantastic achievements. All-time high order intake level.
Particularly strong growth in Load and Haul, in Parts and Services, and in our Digital Mining business, which is really good to see. Total order growth at fixed exchanges was 2%, organic 1%. If we exclude Russia, it's up 6%, which we think is a solid number, given the compare we were working against. A margin of 20%, it's decent. It could have been better if we didn't have the 150 basis point dilution then from these balance sheet items. We should say that it's in quarter, it's a 120 basis point impact, so slightly less than the bridge effect. For the first quarter, we can also say that SMR is fully offsetting cost inflation with pricing also, so they have now caught up with that.
On our shift to growth priorities, you have seen the press releases, two new major orders on our BEV equipment, one to Rana Gruber in Norway and one to Torex Gold in Mexico, which we are of course, really happy to see. We closed the Polymathian acquisition, and we also announced the acquisition of Deswik Brazil. This was a joint venture that came with Deswik, where we had a minority stake. We have now acquired that full entity, which means that we now have a platform for expanding our mining software business into the Latin American market. Not a big acquisition, but a highly strategic one for the future.
If you look at the EBITDA development in the graph as well, you can see the very seasonal nature of the EBITDA development in SMR, where we tend to start low in Q1, it grows throughout the year. It's been like that for the past four quarters. Going into SRP, here we see strong contribution from acquisitions, 25% on the growth side, on the order side. We also see positive aftermarket development. If you look at the order intake at fixed exchange rates, it's up 15%, it's an organic decline of 9%. Excluding Russia is an organic decline of 6%, this is driven by a decline in the equipment, on the equipment side by negative 16%, while the aftermarket is up 5%.
We see strong revenue growth, up 43% both in the, let's call the organic or the organic growth, also then the addition of the Schenck business. If you look at these numbers, I hope you appreciate the enormous task it is for SRP to do this integration of Schenck. It basically grows their business by 25%. On the margin side, 14.5% versus 15.9%. Clearly below normal expectations for them, then impacted quite significantly by integration and carve-outs costs for Schenck of 120 basis points. This was not a surprise. This is something that is aligned with our plans. In hindsight, we should probably have been better at explaining this when we closed the acquisition.
We expect for the full year a cost of SEK 110 million for the integration of Schenck, about SEK 30 million then in Q1, SEK 30 million in Q2, and then around SEK 25 million per quarter in the second half of the year. Quite high cost, it relates to the fact that Schenck Mining is a carve-out. We basically need to rebuild a number of systems that we currently get as a service from the selling entity. SRP had some impact from these hedge revaluations, not as big as SMR. Another highlight for SRP was that they, for the first time in a long time, they launched a new range of hammers in the attachment tools business at Conexpo in the U.S. this quarter.
A successful launch with good innovative products that are also more efficient to produce for us in the smaller hammer range. That was very positive. Going into Manufacturing and Machining Solutions, I have to say a really good quarter from them in Q1. We see positive development in all customer segments, really, and especially driven then by very solid demand in Europe. Overall, we see double-digit growth in both aerospace and energy. At fixed exchange rate, the growth was 9%, organically it was 5%, and then if we exclude Russia from the organic order intake side, we grew by 7%. In the first two weeks of April, we see daily order intake being slightly up compared to the average of the first quarter. This is in particular driven by China.
As I've said, we saw a slow start in Q1 from China. We saw an uptick in March. That uptick has continued into April, we expect China to be a positive contributor then into Q2 and going forward. Margin 22.4%, up from 22%. We see solid leverage for our cutting tool divisions due to both pricing and good cost control, and on an acquisitive front, those were neutral to the margin. We also did an acquisition here, Seco Tools that acquired Premier Machine Tools on Ireland. A small acquisition, but strategically very relevant. They give us a capability to deliver more full solutions on the machining side for medical applications, which is a strategic growth area for us and something we expect to be able to scale globally.
With that, I will hand over to Cecilia, and then we'll come back, with the Q&A.
Thank you, Stefan. Let's take a closer look at the numbers. As you can see here in the main table, also as Stefan mentioned, order intake was higher than revenues in absolute terms, meaning a positive book-to-bill ratio. If we then look at the box on the top right-hand corner, you can see that order intake grew organically by 2% and revenues by 13%. Our acquisitions contributed with 4% growth and currency by 7% and 6%. In total, orders grew by 13% and revenues by 24%. Earnings were up 21%, reaching SEK 6.1 billion. Margin 19.8%. We will look at the bridge in a couple of minutes. Net financial items increased year-over-year, driven by the higher interest net.
Tax rate, 24.5%, in line with guidance. Net working capital, 27.8%, also an increase compared to last year, driven by the higher inventory volumes. Free operating cash flow at SEK 3.7 billion, corresponding to a cash conversion of 63% in the quarter. Returns 16.6% and adjusted EPS increased to SEK 3.07. If we look at the bridge then and start with the organic column, here you can see that revenues grew by SEK 3.2 billion, 13%, and that gave an EBITDA of SEK 234 million corresponding then to a leverage of 7% and a dilution of 1.5 percentage points.
Here, as Stefan mentioned, we had negative currency effect coming from reevaluations of hedges and accounts receivables and accounts payables. This was unexpected, and we had too many open position or a mismatch in terms of timing of our hedges due to the complexity that we're seeing on the logistics side. That in combination with movements in the currency rates then gave this negative effect. In terms of dilution, it was minus 100 bips, and the in-quarter effect was minus 90 bips. Currency still accretive, 1.1 percentage point. Our acquisitions contributed with SEK 1 billion of revenue, and they were almost margin neutral this quarter, slightly dilutive. All in all, that brings us from a margin last year of 20.2% to 19.8% this year.
If we continue down the P&L, looking at the finance net and starting with the first row, the interest net, you can see the increase year-over-year here, and that's due to both higher borrowed volumes but also higher interest rates. At the bottom, you have FX and other asset classes, -SEK 74 million, and that's due to temporary revaluations of our electricity hedges as sequentially energy prices have come down. The reported tax rate came in at 24.6%. If we exclude items affecting comparability related to M&A costs, we're at 24.5%. We had a transfer price adjustment related to a prior year. If we exclude that, the normalized tax rate was 23.6%, so in line with guidance for the year.
Looking at net working capital and starting with the graph on the left-hand side, you can see that both absolute and relative net working capital increased year-over-year and also sequentially, mainly driven by the higher inventory levels. On the right-hand side, you can see the development by business area, compared to a year ago, all business areas are at higher levels. Sequentially, SMR and SRP increased, whereas SMM came down slightly. If we continue with cash flow and starting with the table on the right-hand side, you can see that earnings were up compared to last year. The net working capital build-up of around SEK 2 billion was slightly lower than what we had last year, investment levels were higher. That gives us a free operating cash flow of SEK 3.7 billion.
As I mentioned, that corresponds to a cash conversion ratio of 63%. In the graph on the left-hand side, if you look at the orange trend line, you can see that our 12-month rolling cash conversion is at 57%. Financial net debt decreased slightly sequentially to SEK 36.2 billion, and our balance sheet target, financial net debt over 12 months rolling EBITDA, came in at 1.3, so below our target of 1.5. Capitalized leases were largely unchanged in the quarter. The pension liability decreased a little bit, driven by higher discount rates. That gives us a net debt of SEK 43.4 billion. Looking at outcome versus guidance, the currency effect came out at SEK 660 million. Here we guided SEK 600 million.
CapEx levels were at SEK 1.2 billion, interest net SEK 0.4, and the normalized tax rate also in line with guidance. If we look ahead then at the coming quarter and for the full year, we've left the CapEx guidance unchanged at SEK 4.5 billion. We still expect positive currency effects of SEK 200 million for the second quarter, and we've also left the guidance for the interest net and tax rate unchanged at SEK 1.7 billion and 23%-25%. With that, I will hand over back to you, Stefan, for summary and conclusions.
Thanks, Cecile. If we conclude, as I mentioned, we saw the eighth consecutive quarter with double-digit revenue growth, which we are really happy with, and it's a great achievement. We see continued good momentum, favorable demand, and also solid price execution. We continue to see strong contribution from our acquisitions. With a positive book-to-bill, again, we have strong backlogs in the long cycle business and a robust development in the short cycle business, which is a good way of continuing into 2023. We are also continuing to execute on our shift to growth strategy. We see high growth in strategic priority areas. We see really good traction in mining automation and mining Battery Electric Vehicles as examples.
As you might have noticed, we have also announced that we are increasing production capacity for BEVs, not only in our main factory in Turku, but we are also building a completely new plant in Malaysia that will initially focus solely on BEV and battery pack production to meet the market demand. Also, a couple of smaller but strategic acquisitions in the quarter related to mining software in Latin America and the medical machining segments. That's good to add to the business. Going forward, we'll continue to leverage on our strong and leading global positions. We see that we are leading the way in many of the strategic focus areas that we have with our good offerings. We're gonna continue to strengthen our value chain positions through acquisitions in the selected areas.
With the price leadership we have shown, in this quarter as well, we are enabling all our business areas to compensate for cost inflation in a very good way. Thank you for listening, and let's go into some Q&A.
Yes. Now to the part that you're eagerly waiting for, to ask your questions to Stefan and Cecilia. Just a gentle reminder, please, keep your questions to a couple each, so everyone has the possibility to ask their questions. operator, we can take the first question, please.
The first question from the telephone comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thank you so much for taking my questions. I have two. I'll ask them one at a time. The first one, and they are somewhat related, but the first one sort of regarding operating leverage across many divisions. It's sort of we're a bit below from where Sandvik used to be. Is it just sort of the M&A, the dilution of, like, heavy M&A over the last few years? Do you expect a recovery of that? How soon can we get back to the older operational leverage? Maybe, actually, my question was very similar on cash conversion, my second question, if you can address sort of like a sort of 60% is still relatively low compared to what you did over the past.
Do we have a uptick near term?
Yeah. All right. If I start first with the sort of longer term leverage question, here I think it's important to remember that what's considered good leverage is different for price-driven growth versus volume-driven growth. When we have price -driven growth, the ambition is to offset cost inflation, so being no accretion or dilution in terms of margin. Whereas where we have volume growth, we of course expect that to be accretive to the margin. I think the long term, when we will come back to the old leverage levels, that's partly impacted by the timing of how long we will be in this higher inflationary environment with a very high component of price-driven growth.
If I continue with the second question, the cash conversion rate in this quarter, as I said, we were at 63%. We are seeing supply chain and also the logistics challenges slowly easing up. We think that will continue for the rest of this year and potentially also into next year until we are back to our more informal networking capital target of 25%. For this year, we are expecting a better cash conversion compared to what we had last year.
I can just-
Thank you. On up.
Just one, add one thing to that on the leverage side. If we talk SMF in particular, which historically has had very high leverage levels, sometimes 60%, 70%, we should note that we have been working hard, or they have been working hard for the past two, three years to actually reduce that leverage. It might sound negative, why wouldn't you want the high leverage, but leverage goes both ways. We prefer them to be at the stable margin level or more stable margin level in ups, up and downs than a more margin volatility. They have been working on cost flexibility, which in a way will dampen a little bit the leverage, also on volume growth, but on the other hand, will make them more resilient in a downturn.
That's something you should expect to see going forward as well.
Maybe Cecilia mentioned pricing sort of has the dominant this period, and that's why also we didn't have much leverage. Can you clarify that inside your growth, how much is pricing this quarter versus volume?
Yeah. Sorry.
Yeah.
Yeah. We don't comment on that. Both at group level and all business areas, price offset inflation. Also for the core cutting tools within SMM, leverage was 27%.
That you can say if you look at the organic growth in SMM, excluding Russia, around 7%, there is an element of volume in that, but most of it is price. In relation to that, I think the leverage is where it should be for the cutting tool divisions.
Understood. Thank you so much.
The next question comes from the line of Klas Bergelind with Citigroup. Please go ahead.
Thank you. Hi, Stefan and Cecilia. Klas at Citigroup. The first one I had is on SMM and the growth, obviously very solid in Europe across all verticals. Stefan, can you please help us, as you normally do, with roughly how much each vertical grew in Europe, but also in total machining solutions? Also the comment of April being a bit higher than the average of the first quarter, whether something became stronger versus maybe something getting weaker. It would be really helpful just to get some ranges to start here.
Sure. I mean, if you start with Europe, I mean, stronger than I had expected when the quarter started, to be frank, so really good to see. For SMM, I mean, we see double-digit growth across the board in Europe. Aerospace and energy in the high teens, automotive in the mid-teens and automotive in the low teens. Really solid growth, and that also means good volume growth in Europe. If you look at the more total picture, aerospace and energy continues to be positive, with double-digit growth as we mentioned, also on a global level. While general engineering is more in the high single digits, automotive more in the mid-single digit growth on a global level.
If we look at China, specifically, as I said, we saw slow start of the year. First two months was weak, I would say. Uptick in March to positive numbers, overall the quarter still was negative. Good uptick or good development in energy, which probably shouldn't read too much into. It's China Energy is not a huge business, so there can be more fluctuations. Maybe calling out a weaker automotive in China, especially at the beginning of the quarter, was definitely seen. In the commentary in April, you should read that in the light of the comment on China. I would say excluding China, it's a stable development versus Q1 on average.
With the uptick we saw in China in March and continuing into April, that is driving a positive momentum versus slight uptick then versus Q1.
Okay, perfect. My second one is on revenues. You are delivering out more from the backlog this time. It looks like bottlenecks are easing now gradually. Can we talk about the lead times in SMR? You previously said that BEV lead times are over 18 months. Is that still the case versus perhaps lead times getting shorter now outside of BEV? I'm trying to understand how far we can model out the revenues here. Thank you.
BEV lead times, I think, it's still very much at a order by order, customer by customer basis, you know, managing individual units who can get what and so on. Some of the orders we have taken now, they have deliveries in this year, but it's very much a juggling. We're trying to meet demand. We're really leading that new factory in Malaysia to come online to fully resolve the BEV capacity bottlenecks we have. Overall, I wouldn't say lead times have come down for SMR. We continue to have a positive book-to-bill in Q1. You can also see revenues are ramping up. I think we are catching up, and I think we should, during this year, be able to normalize lead time. At least that's the ambition.
Thank you.
The next question comes from the line of Andrew Wilson with JP Morgan. Please go ahead.
Hi. Good afternoon. Thank you. Thank you for the time. I've got two, they're different, so I'll take them one by one. On the comments from China, very helpfully in terms of kind of Q2 versus Q1, and apologies for sort of diving into this again, but I'm interested in terms of whether you think this is a catch up on a slow start to the year or you think it's genuine underlying strength. I appreciate lead times are only so far and there's lots of different markets and customers, but could you get a sense of kind of the confidence around that continuing in China, at least from the customer indications you've got at the moment?
The indications I've got is not that we talk about a catch-up, it's more of a reopening. Meaning, I mean, last year was up and down, but averages was not good. We came in, Q4 was not good with lockdowns first and then sick leaves and so on. That slowness continued into over the Chinese New Year, January and February. You know, continued at a low level simply. Now we see more in March and going forward, more of a reopening. It's not that we see a boom in any way, which could sort of indicate a catch-up. Like for example, we saw in China during 2020 after the lockdown in February, there was sort of a boom in March, April. It's more of a reopening.
In that sense, it should be more sustainable as well.
That's very helpful. Then secondly, just on the aftermarket, on the mining side, I mean, it feels like every quarter it's just a very, very good number. Again, it was in the Q1 here, particularly in SMR, I guess. I guess this is the same question that you've probably had a lot of recent quarters. To what degree do you think we can be sustaining those kinds of growth rates? Is there a little bit of seasonality in terms of the ordering? Is there a little bit of, you know, concern around customers having built big inventories potentially through last year?
I mean, I know previously the commentary's still been pretty positive around aftermarket, but just some help around how to think about that and if there's any signs at all that, you know, the levels that we've seen could either slow or, I guess, to be fair, accelerate even further.
I'm happy you asked the question. I didn't think I had any credibility left in answering that question because I can tell you we continue to be sometimes surprised as well when we see the figures coming in every month. To give you an answer, I think there are, first of all let's be clear, there is a price component in this, of course, but there is also volume growth. We do see first of all, just strong, what we can call over-the-counter sales, smaller parts across the board, which indicates that what our customers really want to keep the machines running, which makes sense to have a maximum output considering the current mineral prices.
We also see stronger demand on refurbs, mid-life upgrades, extensions, and so on, which of course could be related then to lead times on new equipment, which means you extend the life of the equipment you have. You get that into the aftermarket sales instead. I think those are the two main points that we see. It's driven by maximum output from our customers and extending the life of some of the equipment they have.
Thank you, Stefan. Appreciate it.
The next question comes from the line of Mattias Holmberg with DNB. Please go ahead.
Thank you. I'm gonna follow up a bit on Daniela's question here, and sorry to dwell on this topic. When I look at the bridge for SMM and then consider the comment you made here that there was, I think, 27% operating leverage for the cutting tools, it seemingly implies that the manufacturing solutions business must have been quite dilutive in order for the numbers basically to add up for the division. Can you please comment or clarify on what's going on here?
SMF was slightly dilutive. SMM also had some impact on the revaluation of unhedged balance sheet items. A dilution of 40 bits and an in-quarter effect of around 50 bits.
And then-
Okay.
Sorry, just to add to that as well. The 27% is the core cutting tools leverage. We also have a powder business with a lower leverage. If you take that out, I think it's more like 20%.
Mm. Yep.
Yeah. If you look at the reported figures, you will see a different number.
Just to follow up, are you happy with where the sort of CAD and CAM business profitability is at this point?
Yes. Those are performing at a good level. Bear in mind that they are still small in relation to the overall SMM business. They have relatively limited impact on the reported profits, so to say.
Understood. Thank you.
The next question comes from the line of Max Yates with Morgan Stanley. Please go ahead. Mr. Yates, maybe your line is muted. We cannot hear you. We will move, if it's fine, to the next question coming from the line of Gael de-Bray with Deutsche Bank. Please go ahead.
Thanks very much. Good afternoon, everybody. Can I start with the bridge again and the impact from the revaluation of unhedged items on the balance sheet? Just checking, you know, the bridge you show on page 24, that this negative impact is indeed taken in the organic column. Shall we see this as sort of a one-off this quarter, or do you still have lots of open positions with mismatches which could play out negatively in Q2 or in the next quarters?
Yes. Starting with your first question. This impact is in the organic column. We changed that a couple of years ago. In terms of whether this effect could reoccur, I would say that we always have some effects every quarter. Sometimes it's slightly positive, sometimes it's slightly negative. This quarter, the effect was unusually large. We had a similar effect back in the first quarter in 2020, for instance, where we also had too many open positions. We are, of course, always working very hard not to be in a position like we were in this quarter.
Okay, understood. I have a second question about the SP Mining acquisition.
I mean, obviously we saw very high integration costs this quarter and this will apparently remain pretty high in the next few quarters as well. It also appears that the Q1 revenue was somewhat disappointing at least, you know, versus my own expectations and at least relative to the trend that we saw in Q4. Can you comment a little bit about, you know, what's going on there? Thanks very much.
Yeah, absolutely. No, you're right. They have a quite significant seasonal effect. They have a large portion of their business in Australia. Australia is basically on holiday in January, so very low revenues in January or the start of the year. Sequentially versus Q4, yes, you will see a decline, but it's like some a number of our SMR business, they start weaker and grow throughout the year. From an SP Mining point of view, Q1 was according to plan. I guess we also are learning a little bit that impact, so we will just have to get used to that normalizing during the first year. That's the reason.
Okay. That's great. Thanks very much for this. Maybe a very final one just to make sure I understand or I interpret correctly what you're saying regarding the daily order intake in April for SMM. I mean, you actually adjust for Russia into this. I mean, does that mean that the organic order growth in the first couple of weeks in April was basically a bit above 7%?
No. We all... Yes. In the well, yes to the question, have we adjusted for Russia? Yeah. We don't compare with any sales in Russia in Q1 of last year. Comments are completely clean of Russian business.
Okay. Thanks very much.
Thank you.
The next question comes from the line of Sebastian Kuenne with RBC. Please go ahead.
Yeah. Hi, everyone. First question is on SRP, where you had very strong revenue growth and where you say that, like in the other divisions, you caught up with the cost development, so pricing caught up with costs. If I run the numbers and I look at the 14.5% margin and I adjust for the 120 basis points from SP and the 40 basis points revaluation, I still only get to 16.1% margin. Last year you had 15.9%, so that looks fine, this is supported by 230 basis points currency. To me it seems that you caught up with costs, but only with the help of currency. Is that correct, or am I missing something here? That would be question number one.
Yes. We also have some larger projects within the SRP business, mainly on the IT side, so changing both ERP systems and CRM systems, so that also impacts the leverage.
It's higher costs basically.
Mm.
Just to answer specifically your question, no, we are not counting on the FX impact, the positive FX impact when we say that price has compensated for inflation. Those are two completely separate things.
You then can expect an improvement in the coming quarters or...
I think-
Is it a one-off now or?
I mean, as we said, the integration costs will continue to run during the year and also these bigger IT projects are also longer term projects that will impact the leverage also the coming quarters.
Okay. Second question is on the BEV, on the electric machinery. You now had a couple of follow-up orders and deliveries. Can you give us an idea whether the equipment is running at a similar margin to your IC equipment? The battery as a service business will give us a similar margin than conventional service business. I just want to get an understanding of the margin impact longer term from BEV. Thank you.
Currently the BEV business is dilutive to SMR. We don't have the same margin on the BEV equipment as the combustion engine business. We expect that to be corrected eventually. Today, primarily because of volume, the production line is not at sort of an industrialized level in the way that the well, the ICE equipment is. On top of that, it's new equipment, and it tends to take a little while before we can do cost downs and efficiency as well in the actual product design. The priority has been at this stage to expand the offering and capture the market with good innovations.
Over time, we don't see any reason why it shouldn't be at least as good, because it's a, it's a machine that provides more value, and in a way is a little bit simpler to build. Battery as a service margins I will pass on for now. I think that requires a bit more elaboration and probably is more of a capital markets day answer or question.
Understood. Thank you very much.
The next question comes from the line of Andreas Koski with BNP Paribas Exane. Please go ahead.
Thank you and good afternoon. I have two questions. The first one is on organic growth in North America for Sandvik Manufacturing and Machining Solutions. We saw a significant slowdown in year-over-year growth rates during the quarter. I know you touched on it briefly, but could you elaborate a bit more if you have seen a change in the demand pattern in North America during the first quarter, or a sequential decline month by month during the quarter or something like that?
Yeah. I think the answer is no. It's stable if we look at what we feel is the underlying market. The main drivers is as I mentioned, that on the aerospace side, we have some very big customers that where order timing can impact depending on when they place orders for the year. Also actually we had some of the major distributors that have changed order pattern in a way as they also a little bit adopt their ordering behavior at the moment. We have talked to them specifically, also they say no underlying change in their customer demand. It's more how they decide to place their orders from their side.
Okay, very clear. Then the second question is on your comment that your price increases are now compensating for cost inflation. Does that comment relate to the absolute EBITA, or is it relating to the margins you perform? If it, if it is the latter, which I thought it had been, when we have talked about this previously, I have a bit, yeah, it's difficult for me to reconcile that because we saw an organic dilution to margin in Q1 last year, and we continue to see an organic dilution to margins in this quarter. What explains that margin dilution on the organic side?
Yes. When we are talking about price offsetting inflation, we are talking margin, and we're doing offsetting both at group level and also all of our business areas. In terms of the leverage, I think we touched upon the unhedged balance sheet items. We talked a bit around the SMM leverage and the SRP leverage. On SMR, what's impacting their leverage is were also some inefficiencies in production driven by supply chain and logistics challenges. There's also a negative mix impact with a higher share of equipment revenue, and then we're also investing in R&D for future growth. Those are the key components.
Also then a reminder of why. Yeah, I agree. We had a challenge last year in Q1 as well. That was more related to that compared to Q1 of 2021. In Q1 of 2021, we were all sitting at home. We had no travel, no marketing costs, et cetera. We had a very high, I would say an inflated margin in Q1 of 2021, and that was a challenge last year, so that was a completely different dynamic.
Understood. Thank you very much.
The next question comes from line of James Moore with Redburn. Please go ahead.
Yeah, hi. Good afternoon, everyone. Stefan, Cecilia, thank you very much. I've got two questions. Firstly, can we talk a bit about price cost conceptually? You've come back to neutral, well done, but given your market share in the cutting tool industry and the mining equipment industry, one could argue for positive net pricing power across the cycle. With the current inflation levels that you see and the pricing actions you have done and plan to do in the near term, do you see the potential for price cost to turn positive at all during this year or next year, given your current plans? That's the first question. Maybe go one at a time.
Yeah. Shall I take that? Yeah. I mean, I think we have to differentiate here between what we can maybe do with the pricing power and what is wise to do if you run a long-term business. I think we could dial up prices more, and we could get it through. I don't think it's the right thing to do if you think about the long-term health of the business and also growing the business, because customers will remember, and they will react to that, and they will seek alternative suppliers if they feel we are taking advantage of the situation or overdoing it. My view is we, our task here is to offset the cost inflation, but not take advantage of the situation. We have such healthy margins to begin with.
I can tell you sitting in front of customers, raising prices when they have different margins than we have, it's hard enough in that sense.
Well, that's very helpful. Thanks. On the mining side, great order dynamics. A couple of points I'd like to try and understand. Greenfield versus brownfield and large versus small customers. I guess we're in a world of a higher cost of capital, which is probably squeezing out juniors and explorers, yet the world has massive need over the next five to 10 years, and yet projects are taking a very long time. To what degree do you think that there is a shift in the mix of your book- of -business as we move away from a classic CapEx cycle to one where growth may have to come from sweating the existing fleet harder.
Yeah. If we start with the first one, we have seen for a number of quarters a split roughly, 50% brownfield, 20% greenfield, and 30% replacements. In this quarter, we saw greenfields increasing slightly. With a couple of percentage points. I think it's too early to say whether that was just a coincidence or timing or not. It's too early to say if it's a trend. At least that's the split we saw. When it comes to large versus small customers, I actually don't have that data, or I don't think we cut the data in that way. Over time, though, if you take a couple of years, our top 10 customers has increased as share of revenue.
Both because we have, one, market share or bigger part of their business. Potentially, but that I don't know for a fact that you say that the bigger might sort of are getting bigger. At least what we can see on the M&A front, as I'm sure you follow as well, there is quite a lot of activity with, in particular, the bigger ones buying up, especially, for example, copper assets. They have been quite clear, some of them, that they believe that the current copper prices are not reflective of the future demand shortage. Means if you believe that, obviously, then it's a good time to buy a copper asset today.
That's very interesting. Thank you, Stefan.
All right, we can take the next question.
The next question comes from the line of Edward Hussey with Credit Suisse. Please go ahead.
Hi there. Good afternoon, everyone. Yeah, just a couple of quick questions for me on SMR. First of all, you framed China and China reopening for SMM. Just on SMR, I mean, clearly, you know, the largest commodity importer in the world. I mean, can we expect strong, you know, strong aftermarket acceleration in Q2?
You mean our SMR sales in China or just as a general demand question? I didn't quite get it.
No, no, just as a general, a general demand question really.
Okay. I know it's a good question. I think in general, I would say it's of course, positive with the reopening in China, especially if you look at, for example, iron ore demand. Not that that's our biggest exposure, but it provides some stability to the overall market. I think it's positive. I cannot answer to if it will have any direct impact on our customers. I would say at the moment, they feel pretty much that they're going for maximum capacity sort of already before China reopens. If anything, it could, of course, provide some stability to the current mineral prices, which would indicate that the trend can continue. I don't think it will have a short-term impact on the positive side either.
Okay. Brilliant. That's very helpful. Just quickly, just on sort of comments around commodities specifically, I mean, were there any commodities that particularly stood out which were driving the, you know, with particularly strong production driving aftermarket?
No, not in that sense, I wouldn't say. What we have seen over a little bit of time is that our share of exposure to copper has increased slightly versus, for example, gold and others. It's not that one commodity is driving more aftermarket than the other. Not what I have seen, at least.
Brilliant. Thank you very much.
Thank you. We'll take, one question, more, please.
The next question comes from the line of Max Yates with Morgan Stanley. Please go ahead.
Hi, Stefan. Can you hear me now?
Yes.
Yeah, excellent. Just the question I wanted to ask was around the aftermarket growth as well. So 15%. I think when we look at a lot of the mining companies themselves, they are missing production targets. What I'm trying to understand is how do we bridge the gap between low single digit kinda mine production volumes versus the kind of orders that you have been generating? Is a lot of it price? Is there aftermarket projects that are coming back, maybe more rebuilding? Are you taking some share? Is there anything outside of just the underlying sort of mine production that you would highlight that you're doing better now versus the past that is resulting in these sort of outsized growth rates that we're seeing versus underlying production?
As I mentioned, we are seeing an uptick in things like rebuilds on mid-life upgrades, which the main interpretation of that is long lead times for new equipment, so you extend the lifetime of what you have. This has gone on for a number of years now, and it continues. We are gradually increasing the share of aftermarket on our own equipment. It increases by a few percentage points per year, and we are steadily progressing on that. We're getting better and better as full sort of full service agreements.
You might have seen, we have announced orders on remote monitoring service, for example, it's now publicly announced that Barrick, I think it's the second-largest gold producer now in the world, is going all out with Sandvik remote monitoring service on their underground equipment fleet. The order value for that order itself is very small. What typically it means when we go into that engagement, we also get pretty much a full-service contract, because we help the customer with productivity improvements, but as part of that, they also go with Sandvik parts and Sandvik services and so on. We are inching upwards also in terms of the market share with these kind of agreements and work.
And-
Yeah, go ahead.
Maybe just a very quick follow-up on the new president of Sandvik Manufacturing kind of announced this morning. I mean, obviously, kind of the strategy, you've made the strategy quite clear of kind of what you're trying to do with this business. In terms of kind of what his priorities would be for that business, is have you sort of I mean, are you pushing, kind of do you wanna see more acquisitions? Do you want to see the margins go up? Would you like to see the growth accelerate? Kind of what have you sort of communicated and worked together that you would really like to see happen with that business?
Or is it, would you say it's more of, more of the same to what we've seen in the last two to three years?
No, I mean, I would phrase it like this. The strategy isn't changing, meaning his task is to continue to execute on the strategy as defined. I wouldn't call it more of the same because what we have done in the past years is we have acquired quite a few entities. The focus is on integration. We are investing in some of the businesses as well. The ambition is to achieve the targets we have set out, which is some additional revenue growth, majority of that being organic, some of it additional acquisitions. To get them up to the margin target where, as we have said, they are currently dilutive to SMM. The goal is that they should be around 20% as a first step. That's gonna be his task.
All right.
Well, we have already seen a, well, we've seen a good step in those margins this year, Stefan. I think they were at 10.4%. Are we kinda moving in the right direction already?
You will not see 20% this year. In terms of how we see that progressing, we expect to give you a much better view at the CMD in November.
All right.
Stefan, thank you.
Max, you were cheating. Three questions, long questions, and typical Stefan, long good answers. Now it's time to end this webcast. Thank you everyone for calling in.
Thank you.
Thank you.