Greetings everyone, welcome to the presentation of the fourth quarter results of Sandvik. We will spend about the next hour together, and as we normally do, we will look through the presentation, and followed by a Q&A. With us today, we have, of course, our CEO, Björn Rosengren, and our CFO, Tomas Eliasson. Without further ado, I will let Björn and Tomas take over from here.
Thank you, Ancy. Hello, everybody. Good morning. Starting up with 2019, another remarkable year when it comes to earnings and cash flow. This is despite that we have big headwinds when it comes to our so-called short cycle business. I think it's building on a strong mitigation package, which was presented during Q3. If we look at the earnings for the year, 18.6%, and a cash flow of SEK 18 billion, which is, of course, both of them very high numbers. Tomas, there is one disappointment, and that is related to our financial net debt. I think we have EUR 40 million in net debt, and you promised me debt-free.
Yeah. We went from EUR 4 billion to EUR 40 million. Yeah, that's a big miss. I'm sorry, Björn, and I realize this will have a negative impact on our future relationship, the remaining, whatever, three days.
Exactly. I think we should be very happy. It's more or less debt-free also when we look at that, and that is, of course, a big achievement. I think the decision to separate the SMT was made in the quarter. We had also decided to dispose Varel, the oil and gas business, which is expected to be closed within short. Very positively, also moving from the stability profitability into the growth mode. We managed to do nine, or report nine acquisitions during the year. Let's take a little closer look at the Q4 report.
The Q4 is pretty similar to earlier quarter, meaning that we see a big headwind, of course, in the early cycle business, more driven by the automotive and Europe week, reaching an orders minus 6%, while we see continued strong demand, both in the mining as well as in the energy and oil and gas industry. If we look at the earnings for the quarter, SEK 5.1 billion, which is actually a record quarter for us. It's in line with what we saw during second quarter 2018 when everything was going our. I think that is despite a very weak market. We also see a record high cash flow, which is, of course, driven by big earnings, but also a dramatic reduction of net working capital, and that's mainly inventory, SEK 1.9 billion. That I think is a great achievement during the quarter.
We have a dividend proposal, which will be finally decided at the AGM of SEK 4.5 per share. That is actually an increase, if you look at it annually since 2016, of 18% per year. Shall we start looking at how does the demand look out there? I mentioned, yes, Europe is the weak, and I think it's the automotive in Germany which is really sticking out on the weak side. Also North America, this is becoming weaker. We see Asia somewhat better. We should also know that China, for the quarter, for the whole group, was up 15%. If you look at the SMS, which is the underlying, it's about minus one. It is a flattening out. If you want to be positive, you can see an improvement there. It's, of course, comparison with much lower number.
It is mostly the automotive industry, and it is also general industry, which has some connection there that are the weaker. While we still see a good development within the aerospace industry. Australia was also fantastic. I'd like to mention that because we had huge order from the mining industry there. A lot of orders and the good deliveries during the quarter, which is very promising. Looking at the order side, I think it's minus six in volume, down. That, of course, comparing to last year. If you look at the different businesses, I would probably say that you are around 10% on the SMS, and 7% on the mining. There was a big order during last year. I'll talk a little bit about that. I think overall, a pretty solid demand.
On the revenues, yes, it's -2%, That's of course driven by large deliveries on the SMRT business, which is sticking out to record levels. On the EBIT level, we are up 9%, That's of course driven both by strong currency as well as both metal price effects. There is also a saving under which is SEK 250 million during the quarter. If you analyze that actually ends up to approximately SEK 1 billion. You know from the program that we presented before, the full program would be approximately SEK 1.7 billion. There are more savings to come during the coming quarters. Anyway, reaching a 19.1% and SEK 5 billion in profit. I said that is a very high number for Sandvik. I'll take a little bit more deeper look into the different businesses.
Where we're seeing the most of the headwind, that is of course in the SMS business. I think you see a lower margin, which is natural, as that is a very vertically integrated business. We have also lowered the inventory with SEK 630 million, which is of course a record, when it comes to decreasing inventory. This means that we actually have been running the production 20% under last year. If you add two percentage point, that's about what the effects on the EBIT margin is, then you are around 22.2%, and I think that's where that business should look like. I think strong seen from that perspective. It is a challenging business, and it has been now for the last six months. We do expect that this will continue also, moving into Q1, where we have, of course, challenging comparison numbers.
Sticking up as really being the star of the quarter is Mining and Rock Technology. For me, this is of course very warming when I can see the EBIT margin reaching 21.6%. I think that's a fantastic number. Also, this business have done a good job when it comes to getting inventory down. Over SEK 1 billion in reduction of inventory, actually getting ourself under the 25% net working capital. That continues to develop in a very strong and good way. SMT. Yeah, Göran and his team, they promised that we should reach here, the 10% underlying profit. Congratulations, SMT, you've done a good job. We reached the 10% for the full year, and I think that's great. Orders are up 6%. In that, there is a large order within the energy sector that is supporting, of course, the growth numbers that you are seeing then.
If you would exclude the large order there from the energy sector, it would be -16%. There is challenges also in this business on the so-called early cycle business. SMT have reduced the inventory and also generated good cash during the quarter. Tomas, let's look at the balance sheet. How does it look?
Yeah. The balance sheet and some P&L numbers as well.
Of course.
Let's jump into the financial summary, as usual, and start at the top right-hand corner. The components of the top line. Organic growth, -6% for orders, -2% for revenues, as you heard. Currency +4 for both orders and revenues. Structure, +1 for orders and 0 for revenues. All in all, -2 for orders and +2 for revenues. If we look then at the quarter, profits were up 9%, SEK 5,066 million, which is a really, really good number. +9%, as we said, for the full year, +3% sorry, for the quarter, +3% for the full year. The margin, 19.1% compared to 18% a year ago. For the full year, 18.6%, the same margin as we had in 2018.
The finance net, SEK 274 million negative in the quarter, and SEK 1.2 billion for the full year, just as we have guided. We'll come back to that in a minute. The tax rate is a little bit, I was going to say weird or strange this quarter. I have a special on that one as well. The reported underlying tax rate, excluding items affecting comparability, was a record low 17.5%. I'll get back to that. Working capital below 25%. Cash flow, SEK 6.6 billion. We had SEK 6.2 or nearly SEK 6.3 a year ago. We thought it would be difficult to repeat that. It was even better this time. 6% up. Returns above 20%. Earnings per share had a healthy increase. If we look at the bridge first then.
Organically, -2% on revenues, that's -SEK 770. A negative leverage of -11%, which is not too bad, actually a positive accretion, 20 bps. Currency was big, 40 bps accretion. Metal prices was quite big as well this time, 80 bps accretion, and structure 30 bps dilution. That's the journey from 18%-19.1%. If we take a look at the tax rate, the reported tax rate looks strange, 118.5% in the quarter. That is because we had the big impairment of the Varel divestment. We had impairment of the excess values. If you take that out, the reported tax rate is 17.5% for the quarter and 23.5% for the full year. In that number in the fourth quarter, there is a lot of not items affecting comparability, but there are a number of positives like tax provisions that we have released.
We've had to release them because the outcome has been better than we had expected, we have also started to use some tax losses which were not valued, meaning that those profits are basically tax-free. If you adjust that just to understand where we're going when we're going into 2020, the normalized tax rate, as we call it, is 23.5% for the quarter and 25.1% for the full year. It's in line with the guidance for 2019, 25%-27%, although, as expected, in the lower end of that range. I will come back to the guidance at the end of this presentation because we're changing it now for 2020. Tax rate. The important line here is the one at the very top. The interest net is going down. We will end up somewhere between SEK 400 million and SEK 500 million, SEK 532 now for 2019.
We did a redemption mid-2019, SEK 5.1 billion. The cost was SEK 202 million, as you can see in the table here now. This means that the interest net will be reduced by 50% as per mid-year 2019. The full year finance net was SEK 1.2 billion, exactly according to guidance. Let's move to the balance sheet. You can see here the good development of net working capital at the end of the year, below 25%. 25% is the unofficial target we have. That's where we want to be. You can also see on the right-hand side that all three business areas are contributing to this very nice development. This, of course, has a very good impact on the free operating cash flow, SEK 6.6 billion in the quarter compared to nearly SEK 6.3 billion a year ago, so even better this year.
Profits, of course, are as usual the big contributor. Net working capital continues to deliver as well. CapEx is basically on the same level as last year. This leads us to this beautiful chart, and I'm sorry, Björn, but it's not zero. If you count billions, it's actually zero, but it's SEK 466 million. If you go back even back to 2014, this number was close to SEK 40 billion, or EUR 4 billion, and it's now down to SEK 466 million. We're basically debt-free financially. Financial net debt is basically zero. The net gearing, which is now on 0.18, is consisting only of pension debt, some actuarial losses, and the capitalized leases. We're entering 2020 now with a very strong balance sheet, which gives us freedom to operate, freedom to maneuver, and freedom to do the investments that we want to do.
Now, let's move to the dividend. As Björn mentioned here, the board is proposing to the AGM to increase the dividend from SEK 425 to SEK 450. That is an increase of 40% or sorry, the payout ratio is 40%, and the average increase over this period of time is 18% annually. Outcome of the guidance, we guided SEK 400 million in underlying currency effect. We ended with SEK 391. Basically according to guidance, the total currency effect, including all revaluations, was plus SEK 297. Metal prices SEK 174, not as much as we guided for the SEK 300, and of course, the nickel is coming down, so a less positive metal price effects here. CapEx SEK 4.1. Net financial debt SEK 1.2, we guided SEK 1.2, and the normalized tax rate 25.1% at the lower end of the range of 25%-27%.
As it is January and we're entering a new year, we have a new set of guidance here. Not targets, but guidance. CapEx we will keep at SEK 4 billion for 2020. Currency effects, we only talk about the next quarter, SEK 150. Metal prices, here also, we only talk about the next quarter, we say minus SEK 200. The interest net we have set to minus SEK 500, maybe a little bit conservative, but it will be somewhere between SEK 400 million-SEK 500 million. It is closer to SEK 400 million if you consider the redemption or the prepayments of loans, but the swaps are coming up a little bit, so somewhere between SEK 400 million or SEK 500 million for the full year. Just to compare, four years ago, this was SEK 1.6 billion. It will be somewhere between SEK 400 million-SEK 500 million, so a very good development.
At the very end, the tax rate. We're taking down the guidance again for the third time now to 23%-25% for 2020. As you saw, 23.5, that's the level we're running at right now. With that, I'll hand back to you, Björn, again for conclusions and summary.
Thank you, Tomas. It is a little bit emotional to sum up a little bit when it comes to Sandvik, where we are, and to reflect a bit on where we're coming from. I think besides that we financially are very strong, I think also this quarter and the year shown that Sandvik is a world-class company performing better than the most. I think that's fantastic. The other part is that I think Sandvik is a market leader within the businesses that they operate. I think that's very important, being number one or number two. We have a decentralized structure today, which makes us much quicker in our decision making and also more agile, which I think this quarter has proven. We have managed during this half year to reduce costs in line with the demand that we are seeing in the market and still deliver good numbers.
From my perspective, I think Sandvik is standing strong for the future, and I cannot more than wish Stefan, who's coming in now after me, and the rest of the Sandvik Group all the best and all the success in the future. I'm looking forward to follow the great developments. Thank you very much, everybody. Thank you.
With that, we'll open up for questions. Operator, we'll start with the question from the conference call, please, if you would put through.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Our first question comes from the line of Lars Bergström from Barclays. Please go ahead.
Oh, hi. Good morning. Thanks, Björn, sorry on your last conference call to ask you about near-term demand trends in machining solutions. I was struck by the comments, I think on the media call, where you suggested demand in January so far on a par with December. I'm assuming December was weaker than October, November, at least in the U.S. and probably in Europe. tracking down what low double. I just want to get a sense for what exactly you have suggested and what the commentary has been in January. Also just for clarification, did I hear you say China for SMS was down 1% in Q4, which of course within the context of APAC being down 7%, would mean that the remaining APAC, I presume known to be Japan, is still very weak. I just wanted to clarify that.
First, I say that December was not a negative month at all. I think it probably showed some positive developments. I would say December was not weaker than the rest of the quarter. I think it's been pretty average the whole month if you look. I mentioned during the last call, and we were a couple of weeks into that quarter, that we are running approximately on the same. I think sequentially that hasn't changed. It's definitely not weaker in December. Even though we ran our production very low during this period, we took a longer break there, which of course had a fantastic impact on the cash flow and the inventory level because we still delivered out there. We are not really seeing a weaker January than we did during the last quarter.
I think you probably remember that when we saw the weakening in the market was actually in June last year. That's where we saw the big drop. The comparison during January and the beginning of Q2 is of course challenging because we still saw a very strong market there. Sequentially, we do not expect anything weaker than we have seen during that period. That was on the SMS part. Yes. If you want to be positive in somewhere in such a weak market that we are seeing, because it is big numbers, of course, down there. I think China is probably showing the more positive when it comes to Asia, where you're seeing the improvement, especially in the end of the quarter. Yes, Japan is low, and India is also low in that respect. Not so big change there.
The more positive is actually China there, I would say from the Asian part. When we look at it is the automotive industry which is weak, and that is especially driven by the Germany and the European part that is keeping the numbers so low. I think the positive from my perspective here when it comes to SMS, they're taking down the inventory SEK 640 million. That is actually a record when it comes to inventory reduction. That means that they've been running the production 20% under the last year's demand and still deliver over 20% EBIT margin. I think that is good. That actually cost us a couple percentage points to do that. If you add that back, it's running around 22.5%, 22.2% approximately in the EBIT level. I feel pretty comfortable with that part.
They've done a fantastic job and taken out costs in relation to the demand and actually exceeded my expectations.
Can you remind me please of your SMS revenue exposure to the Boeing 737 MAX? Have you already seen an impact there in 2019 from the disruption to the supply chain?
If you look at the market demand here, we show that segment which is improving part of that. I wouldn't say that it be delivered going forward. That can have effect maybe in the.
It was up mid-
Yeah, mid-teens as of around 5%, so there's a lot of activity. We don't see any softening in the market. Some might say that, yeah, we were waiting for some orders during the quarter, but they came in in the end of the quarter also. I think it's not bad. I think no change actually in the demand, what you see. You also see the mineral prices work itself up a little bit when it comes to gold. Of course, our biggest exposure is gold and copper. It looks pretty good.
I didn't finish my question, Björn. I'm a little bit surprised. You write in the report that equipment orders are down low double digits. I appreciate that overall orders are down three extremely large orders, but I'm after the equipment orders.
Yeah, I'm sorry.
I appreciate that your crusher and screen business is doing relatively better, and your underground mining equipment has the largest decline, is what you write in the report. I'm wondering whether you're able to quantify that?
Yeah, 10%.
I presume that means underground mining equipment down in the 20s.
No. Mining equipment is around 10%. That is the equipment, is down 10%, if you compare to on the equipment side.
Okay. I just wonder, just finally, what do you read into that? How much of that is transitory? We've seen some social unrest in Chile and Peru. I think you mentioned that earlier. We've obviously seen maybe some more transitory issues around pausing, but do you see that come back in Q1, or do you think we're entering a weaker trend as far, specifically as your underground mining equipment piece is concerned?
No, I'm saying that again, and the demand from the mines are at a good level. It's not changed. I also said that it can vary a little bit about quarters when you get the big orders and so delivered. That's natural, but I think the same level as we also saw during previous quarter, these are the levels where the mines are replacing equipment. We have not had any cancellations or anything when it comes to equipment. If you say there's been maybe some delays, maybe in some markets, but I also think by the end of the year, we received a lot of orders also that people had been waiting for during the quarter. I don't feel so nervous. Australia is sticking out, which is the biggest mining market. That was extraordinary both when it comes to orders and revenues.
Also China was good during this quarter. It varies a little bit between the different parts of the world, but we do not see any major decline. It can vary between the quarters, and that's how the orders are being placed. Going forward, it's difficult to say how that is.
Thanks, Björn, and best of luck.
Yeah. Thank you.
Thank you, Lars. As a little bit of a reminder, I show that you can also put questions through online. I will actually ask a question that has come through online here with regards to SMS and the inventories going forward. Do you expect further reduction on inventories in the first quarter?
No, I don't think so. I think they're taking it down to a level where I think it's in line with the demand that we are seeing in the market. We should see production levels in line with the demand now during the quarter and the first half year, approximately. We have to, of course, make sure that we are not building inventory, which is always an important part, which we did a little bit during last year. I think the divisions are focusing very much not to end up in a situation where we are overstocked after the first half year. That will be important for the divisions to make sure that. I think they've done a tremendous job to get inventory down during the Q4 and still deliver good numbers. I think I'm pleased with that.
Thank you. Operator, could you put through the next question from the conference call, please?
Yes, the next question comes from the line of Ben Uglow from Morgan Stanley. Please go ahead.
Good morning, Björn. Good morning, Ann-Sofie and Tomas. First of all, my first question, and Lars, I apologize for focusing on SMS in the short cycle. Could you just contrast the end market and underlying trends that you're seeing between Asia and North America at the moment? If I look at the orders, Asia has improved from -13% to -7%, so getting better, and North America has gone from -4% to -11%. My assumption would be Asia is being driven largely by slightly better comps in autos and general engineering. Is that assumption correct? What is really taking down North America? Is this, again, autos, or is it something else? Is it more broad-based? Can you give us some sense on the North America decline, please?
Yeah. It's more related to the automotive there, and somewhat the general engineering part of the business. That's been the driver of this whole industry softening in all these markets. Yes, I mentioned if we should see some small lights, it is actually in China that we're seeing somewhat demand, especially in the end of the quarter that has gone in the positive direction. Otherwise, it's continued to be around soft, but Europe is the weakest.
Is it the case that, like China, North America has begun to bottom out, or were you taken by surprise at all during the quarter by that order evolution?
No, we are actually not surprised at all when it comes to this. I think we were expecting approximately a quarter which we ended up to. Yeah, I was maybe expecting a little bit weaker end, that people would go home during Christmas and not place any orders, but that didn't happen. The demand continued all the way out through the year. Rather, maybe a little bit better in the end of the part. Otherwise, I think it is what it is. It is softer in the market, and that's what they are adapting themselves to. Luckily, we're seeing, of course, the bottom out in China. I think that's important because that's an important market for us for the tooling. Hopefully we can see some improvements there going forward.
Now the Chinese New Year starts, and I think it's always exciting to see what happens after the Chinese New Year. Is it going to be a positive up or be weak? That's always the same big question.
That's helpful. Thank you. Then just one follow-up. On the SMS margin, I know that at the capital markets day, divisional guys were under pressure to give a trough indication, and reluctantly, I think they were sort of suggesting that 20% could be the floor. Given that production and demand are now much better aligned, inventory won't be coming down, is it reasonable for us to assume that that will be the floor in the coming quarters?
I think we've given the trough margin for the company, and we stand very strong into that. I think, of course, the last quarter with the December where we closed the factories more or less the whole month there, and taking down the inventory there, so the underlying is just over 22%, I would say on that part. From my perspective is, if you look 10% lower than the previous year in production numbers are huge numbers for SMS. If you look historically in ups and down, it's very seldom you see. I think the last time we saw this deep, you have to probably move back to 2009 in numbers. From that perspective is then, we also said that in SMS, when the market is weakening off, of course, companies are holding back inventory, producing a little bit more to come align.
It's always worst in the beginning of a downturn in a certain market. When the production comes up to an even level, then maybe go up a little bit. 10% is a huge number, and that we always said within SMS. If you look at last year, 5% was the full year, and that's more a reasonable number.
Another way to answer that question is that the personnel reductions has been rolling in in Q4 and also in Q1 2020. As from April, we will have full year run rate savings coming into SMS.
Also.
Yeah, also. Yeah.
I think you probably saw that the company totally had a saving of SEK 250 million. If you annualize that, it's about SEK 1 billion. We said SEK 1.7 billion is the target that we have set, which means that you have about 70% more savings to come in going forward.
In 2020.
Yeah. No, I think that's where it is. I think we realize that those savings came at the right time, and they are now being executed, and that's giving result.
That's great. Thank you very much, Björn, and best wishes for the new role.
Thank you.
Thank you, Ben. Operator, we'll have the next question straight away, please.
The next question comes from the line of Andrew Wilson from JPMorgan. Please go ahead.
Hi, good morning, everyone. I just wanted to ask on the Mining Rock side, actually on the construction exposure. I mean, just what you're seeing there in terms of, I guess a little bit of color by region and kind of how that develops against this time last year, just on the specifically the construction side rather than on mining for a change.
Yeah, I think it's probably a little bit up, flat, a little bit up, I would probably say on that part. Our exposure to the construction side is not that big, as you know. It's quite a small part of our business, mainly coming from the crushing and screening business. It's not down, it's probably flat. I think also our crushing and screening business are doing a good job both when it comes to delivering profitability as well as catching good orders. They have good equipment, which has been introduced also during the year. It is such a small part of our business. When you look at our numbers, mining is really the driving force there.
Maybe a quick follow-up just on the SMS side. Just perhaps some comments around pricing and, I guess specifically if you've seen any change in competitor actions, obviously market's been under a little bit of pressure. Just interested to hear if you're seeing any change in the market there.
I think the prices are being kept up in SMS. I think we said 1.7%, but for the tools, that's approximately where it is. Some of the divisions are lying over 2% and some are a little bit lower than that. The way you're seeing a little bit weaker is on the Wolfram part because you're seeing the APT prices has gone down. That is only a technical thing. That was negative on the pricing side. That pulled down, I think, SMS to pricing approximately 1% for the quarter.
That's great. Thanks, Björn. Good luck in the new role.
Thank you. Thank you, Andy.
Thank you, Andy. We'll have the next question please, operator.
The next question comes from the line of Gaël de-Bray from Deutsche Bank. Please go ahead.
Good morning, everybody. Björn, I think we all agree that both SMRT and SMT are better businesses today than they were five years ago. What about SMS? I mean, purely looking at today's numbers for SMS in terms of margins and inventories, doesn't look fundamentally different from what it was back in 2015. Could you elaborate on what has actually changed at SMS that makes it a better business today?
Yeah, I think that SMS has gone through a big change when it comes to fully decentralized, meaning that the divisions are today owning everything from their production to the end customer. That is important in the way they profile, but also how they run their profitability and how they drive their margins in the business. I think they're doing good. They are continue to introduce good new technologies into the market, which they are living to. They are always under volume pressures in the market, has always been on that, but they've been of course very successful in being able to charges for their solutions to the customers, and that continues. If it's a better or worse, I think, difficult to say. I think from my perspective, it's a good business.
They closed 15 factories during the last four years, and they have moved production over to more efficient facilities. Looking at Gimo is seen as one of the world's most efficient production facilities in the world. I think they got this special prize for that. They're doing a good job, I think, to keep up the margins. When it is tough in the market, it is challenging of course being vertically integrated, and they are, and they will always be. There are few businesses from my perspective that keeps up over 20% margin over different business cycles again and again and again. It's quite a remarkable business, and at the same time they deliver a cash flow which is 100% of the profit. They do that, and from my perspective, it is one of the most fantastic businesses that I have been working with.
They were good before, and they are maybe a little bit better now, or at least as good.
Okay. Thanks very much for this. Can I have a second one on, with the strong balance sheet you have now, I guess the future will be more about acquisitions, at least for your successor. So far in 2019, this year you did nine acquisitions, I think, but with a negative contribution to EBIT, in particular this quarter. Perhaps could you elaborate about this, why the contribution's been so negative and when you expect basically these acquisitions to contribute a bit more to the bottom line?
Yes, of course. You want to answer that too, Tomas?
Sure. Yeah, absolutely. You have a number of round tool acquisitions within SMS, OSG, Dura-Mill, Wetmore, et cetera, and these acquisitions are just sort of coming around. The business cases are very much built on integration and synergies and all that, so it takes a while to get to where we want to be. It's in the start. The SMRT acquisitions of Artisan, that's battery electric vehicles, and Newtrax is kind of little bit of startups, you can say, sort of, at least Artisan. Newtrax a little bit as well. That's also in the beginning of the business cycle. The total of that is a minus.
I would say that the key to the success when it comes to buying these small integrated companies is that almost all of these companies are underperforming if you compare to the Sandvik businesses. The key to success in value creation is to lift these companies up to the similar profit levels as you have in the other SMS businesses. That's always been the name of the game, and that's what we will continue, and that's really creating value from my perspective.
Okay. Thanks very much for this.
Thank you. We'll have the next question, please.
The next question comes from the line of Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Björn and Tomas. It's Klas from Citi. A couple of questions from me. First, coming back to SMS, we had expected North America to see incremental weakness. I just want to focus a bit on Europe. Europe came out weaker than we thought. I hear you're on Germany on automotive. To what extent are other major countries now adding to the weakness we saw in Germany? Could you, Björn, walk through the trading by different countries here, France, Netherlands, Central Europe, Nordics and so on? Talk a little bit what you see in Europe beginning of January, because I'm curious, as China getting better is typically a lead for Europe getting better through the years. I will start there.
Yeah. It's correct that Europe, I mentioned Germany because that is actually sticking out most, and it is the automotive and somewhat in the general engineering. Of course, many German companies have also been delivering to China during the years when it comes to fabrication machinery, which has been much lower, and they had, of course, a weak last year. Of course, if China comes up again, it takes a little bit of time before these deliveries and so will come. It's true, yes. I think Europe overall is weaker. I think it's both automotive and the general engineering that we have seen. It's being dealt with. We're delivering up there, and it is around 10%, and that's approximately when you're looking at the total is what we're also seeing going into January.
It is weaker, and it will take a little bit of time before that business start booming again. On the other hand, it is tough comparison numbers that we of course had, and when we come over after the first half year, the comparison numbers will be, of course, significantly softer. That will, of course, help when we look at comparisons at least. I think the important thing is that what we have done is adapted us to these demand levels, and that is what we deliver on today, and that's also where our cost structure is based on.
My second one is I want to come back to the operational gearing in SMS. There's a big debate in the market on this and the big destock. One way to look at this, is that you were running production maybe too hard, too late last year, and this is why we see this big production cut coming through from a high level. Some market observers say that you maybe were over-earning at the peak. Can I ask you in a different way, and maybe to you, Tomas, 15 factories, and I think there's about SEK 700 million of savings, and these are structural. Would you say that the underlying operational gearing has improved? Should you have been more quicker to respond on the production side of the business?
I can only say that what they are doing is they are protecting their margins by, of course, adapting their cost level and their savings base when you have these softer It has normally business with a big leverage. When volumes are going up, you get, of course, enormous leverage positive, which you saw during the pickup. This, of course, affects you also on the downturn, which makes you have to take tougher actions. It's always hard work. If you look at the underlying, I agree with you that during the first half year, they were overproducing somewhat, which they normally do because of deliveries out during the summer. Summer came weaker than expected, and they managed to get the inventory down during third quarter, but not good enough, and now they took it down there.
Of course, in an ideal world, we would love to see much more stable inventory also during the first. I think that's what they will be trying to work with. On the other hand, if you're looking at the margins that they are delivering around the 22.2%, that part is from my perspective, good margins for that business. In the upturns, of course, there will be an enormous leverage when we have adopted the costs, according to these demands. That is how the business is, and that's how it'll be going forward also.
Quick final one for you on SMT. Obviously well done on the 10%. You've done some M&A recently in SMT, and it's quite rare to see SMT engaged in M&A, that they get capital allocated for growth. Should we read this, Björn, as if the spin is closing in, the fact that they are doing deals now in high-margin areas could be seen as if they're now already working on the strategy as a standalone company. In short, is the preparation on track maybe even running a bit ahead of plan?
Our strategy is going from stability, profitability, and then to growth. I think they've really proven that their businesses have been both stable and profitable on this part, then we also allow acquisitions. Yes, the two companies that we looked at, one was part of the Kanthal business, that is these electric furnaces, which is a very exciting business going forward, where there are a lot of no big competitors, only small local ones in the country, which we would like to pick up. I mentioned that before, and I think also Göran have done that. The other one was actually tubing for the aerospace industry, this special high alloy tubing part. That's one of the area where we would like to strengthen ourself, to get more into the aerospace. Yeah. The SpaceX rocket that was sent up yesterday is loaded with Sandvik tubing.
We really like to be in that high-end market where the margins are good.
If I may just add to that, some people ask us, have you increased your pace in M&A activities? Not really. We've been running full speed ahead for the last three years. We have a shortlist of more than 100 companies that constantly look at. It's very difficult to forecast when does these acquisition happen. It can take six months, nothing happens. It's like a ketchup bottle, then suddenly you have six within two months or something like that. What you see now is just the effect of years of discussions and negotiations. Suddenly we had a flow of acquisitions. The control business, as Björn said here, that's been going on for years because they've been ready for acquisitions. We made a few acquisitions in that area. That's nothing new.
Yeah.
Thank you.
Thank you, Klas. We'll have one final question from the conference call, please.
The final question comes from the line of Sebastian Kuenne from Redburn. Please go ahead.
Hi, good morning to all. two questions on SMS. First, on the demand side, full year 2019 down 6%. You mentioned a lot the automotive industry as being a driver. Could you give us some color about how much automotive was down for SMS in full year 2019 versus the mid-single digit drop in automotive production? That's the first question.
I think the automotive industry has been weak now for quite some times, and that is what you are seeing. I don't think we are seeing any weakening, actually, in that industry. It has been, and that's of course affecting the production rate where we are delivering into, and that's what we've been adapting into. From my perspective, I think they are doing that well. 10% is a lot for this business. I think they've been adapting to this in a good way. The automotive is weak.
My-
Yeah.
My question was more SMS versus the automotive production down 5% in full year 2019. Was SMS down 10, 15% due to destocking and maybe a regional mix, which was unhelpful?
I think when it comes to the production levels compared to last year, I think we probably were overproducing the first half and underproducing the second half. If you're looking at the destocking has happened actually where we've been running well under 10%. That has been during third and fourth quarter, while we were probably overproducing somewhat during the first part of the year.
My question, Björn, was on the demand.
Yeah
Automotive has been a big driver of the demand weakness for SMS in full year 2019. Automotive production, your customers were down 5%. I'm asking how much SMS was down in automotive in full year 2019.
Of the full year.
Can you share that number?
No, we don't have that number to share. No, we don't have that.
Fair that you are much weaker than the automotive production because your customers have destocked?
Yeah. It's what I said before. It is when you go from overproduction, also in the automotive, when you are destocking and you're lowering your inventory of cars, which the automotive have done, that means that their production levels are of course much lower. It's always going from a good demand to a softer demand, where a lot of destocking among the customers has taken place. It really started dramatically as we saw in June. I think it has kept itself during these last six months. Nothing has been much more severe or much more dramatic after that. There have been some variations between different parts of the world, otherwise it is around 10% down compared to the good volumes that were before.
Okay. Again, on SMS, on the margin in Q4, you have about SEK 100 million lower revenues versus Q3, but almost SEK 200 million EBIT decline, while cost savings have ramped up. If we exclude the cost saving, it's almost a SEK 300 million EBIT decline in Q4, on SEK 100 million lower revenues. Is it just destocking Q4 versus Q3, or you have also some negative mix or other costs you haven't talked about?
No, it's related to destocking. Absolutely.
All of the SEK 300 million is destocking?
Yes.
Yeah. That's clear. Thank you.
Thank you.
Thank you very much. With that, we close the Q&A session for this quarter.
We don't close the call.
No, we don't.
No, because Björn, this is it. The show ends here.
Yes.
Yeah. You're really sure about this?
Yes.
Björn, on behalf of everybody at Sandvik here, we would like to thank you for four amazing years.
Thank you.
We wish you all the best for your next mission, where you’re going to tell all my former buddies at ABB how to drive decentralization. Good luck.
Thank you, Tomas.
Thanks, Björn.
I will miss the whole team. I think it's a great company with great people. I'm not going to let you go, guys. I'm still a shareholder. I'm going to follow the development going forward, and I have big expectations for you guys.
Okay, we'll do our very best, we promise.
Good.
Okay.
Thank you.
We are, however, not going to let you go, really not yet, because the communications team here with Jessica and the crew, and the investor relations team here with Nancy and Anna have prepared a little surprise for you. If everything works, then we should have something coming up on the screens now.
Trust me, it is real. But where do you start? I believe that Sandvik should be a 15% EBIT level company. Isak, let's slow jam the news. Colleagues, friends, it's time for summer party. Those bubbles again.
Do you know how to fly this thing?
Me? No. Do you?
I have absolutely no idea.
Today is a very special day for Sandvik. It is what we call an Insert Thursday, which is a direct translation of what we say in Swedish, skär torsdag. We had record sales, record orders, record profit, record cash flow. Surely you can't be serious.
Don't call me Shirley.
Lean back, relax. I think we should be market leaders in the business where we operate. I think we strengthen our core. Oh, do you feel how strong it is? Do you feel it in the room? It's so strong. It's great. The result in the end has turned out quite good, reaching 19.1%. I think this is a dream for me. I really like that. Thank you a lot. Thank you.
With that, we actually do close the call. Yes, it's sad to see Björn go, but we need to look ahead. Just as a little bit of a reminder, we do have a CMD in Austria towards the end of the year, and we hope to see you all there. Thank you.
Thank you.
Thank you.
Bye-bye.