Good morning, welcome to the presentation of Sandvik's first quarter results. As per usual, we will run through the presentation, which will be followed by time for questions and answers. I would just already now like to highlight that you can put through questions via online and also through the conference call later on. With that said, we will start off the presentation with our CEO, Björn Rosengren, and CFO, Tomas Eliasson. Please go ahead.
Thank you, Ann-Sofie, also welcome, I'd like to say to everybody, to this first quarter report. Also like to take this opportunity to wish you a happy Easter. 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, [Foreign language]. Let's dig into the report. First, I'd like to say that we are very pleased and happy to see that demand from all three of our businesses continues on a high level. We reached a growth, what we say, price volume of 6% for Sandvik. This actually gives a book-to-bill ratio of 111%. We are also glad to see some good large orders in SMT from the oil and gas industry. The earnings improved, and we had a margin of 18.3%.
As you know, we have a philosophy of, say, stability, profitability, then growth. We are in the growth mode, when we talk about growth, we talk about organic growth, we also talk about acquisitions. Last year, we managed to do five acquisitions, this year we have already now reported four of them. Two of them a little bit extra exciting from my point of view. One is the Artisan, which is the Teslas of the underground mining business, electric loaders and truck. That's in the business. We also yesterday announced Newtrax, which is a company supporting our automation business and make it possible for us to make our automation system agnostic, meaning that we can place our automation system also on all our competitors. It's a very exciting acquisition.
Also, during the quarter, we are happy that Standard & Poor's have recognized our financial performance, they have upgraded us to A- from previous BBB+. Look at the market development. This is a little bit exciting stuff as we see ourselves as being in a pretty good indicator of the demand overall in the industry. If we look at the pattern for this quarter, we can see it's pretty much in line with what we saw during Q4. We saw that North America, very strong, especially U.S., Europe, pretty flat, Asia, somewhat weaker, especially China, which is lower, but somewhat compensated by a very strong India, Japan, and Indonesia. If we are looking at the segments that we operate in, we see also a similar pattern as previous quarter.
All segments are flat or up compared to last year except the automotive industry, that is especially for the Chinese market, but also in Europe, especially Germany on that part. If you look quarter by quarter, we see the demand from the different segments is pretty flat. On the order side, I mentioned we were up 6%, revenues were 3%. That mean, as I said, we are building order stock. We have a book-to-bill ratio of 111%, which of course is positive for rest of the year when these deliveries will be done. On the EBIT level, we reached SEK 4,567. That is equivalent to 18.3% EBIT margin, and that's 7% up to last year. In these numbers, there are some positives, but there are also some negatives. If you look at the positives, that is of course, exchange rates that were very favorable during the quarter.
On the negative sides, we have some lower performance from our so-called Wolfram powder business. This is the division we call PBT, they are actually supplying the Wolfram powder to our tooling divisions, also externally. Too much inventory and powder have made that this division have really pulled down the production level during the quarter, and there what had a negative impact on the SMS totally. If you exclude that, also exclude the FX impact, I think the underlying EBIT margin is about 18.4%, and that's very much in line with our expectations from our EBIT margin. Looking in a little bit to each of our businesses. Starting up with the SMS, we see very strong order intake. It's actually the second highest we have had in the company.
I think the previous one on this level was back in 2012, it continues on a good level. You see it says a change here of -1, but if you exclude the powder business, which goes external, it's actually +1 on the price volume side. In other words, pretty much flat. Also the profit level is at 24.9%, then being impacted actually as much as 150 basis points this quarter by the lower profit in the powder business. This will gradually change during the rest of the year. We will see some effects during Q2, but during Q3, the volume should be up and running at the levels that they should be, those effects would not be negative. During the quarter, we made an acquisition of Wetmore, which is round tools specialized for the aerospace industry. Very exciting small acquisitions.
During the quarter, we also unfortunately saw that our Klas Forsström, our President for the business area, decided to leave us, he will be CEO in an external company. We have just started the process to replace Klas. The second business area, that is the Mining and Rock Technology. Here we see strong demand in the market, we see growth of 9%. That's actually 11% on equipment 8% on the spare parts business 11% on the rock tools. Good level. This is of course, driven by mineral prices. Strong copper, strong gold, but we also see other minerals developing in a positive way. We see EBIT margin that improved from 15%-17% here. There are some acquisition costs around SEK 30 million there, you would be on, if you took that out, about 17.3%.
You also know that we are in the process of divesting parts of the Varel business, the one that is actually targeting the oil and gas industry. If you take out the Varel out of that, it's actually 18.3% profit margin. I think we are on a pretty good level there, for the EBIT margin. Here I mentioned before two exciting acquisitions, both the Artisan and now also the Newtrax. Both of them is actually spot on when it comes to electrification and automation, which are the main focus for us going forward. We're also happy that we have announced during the quarter that Henrik Ager is our new Business Area President. He comes previous from our rock tool business. He has a long experience from the mining industry, we welcome him into the Sandvik management team. Moving over to SMT, our Materials Technology.
Also here we see a great development. Of course, sticking out here is the great orders of SEK 1 billion from the oil and gas industry. As you all know, a lot of this goes to the umbilical business, which is actually the key for the performance of the Business Area. Strong orders, which will be delivered out during the coming year. Very good. We also see good improvements when it comes to the profitability. The underlying margin reached 10.4%, which makes me, of course, very happy. We are very much in line with the targets of reaching 10% EBIT margin for the full year. A lot of credit to the three businesses and to Göran and his management team for moving in this direction. We feel pretty comfortable with the development here.
Tomas, tell us a little bit what's happening on the financial side.
Yeah. Thank you, Björn. Yeah, what's happening with the numbers? Let's start with the overview, as usual. Today we will go a little bit deeper into three areas. We will look at the leverage, of course, and not the least on SMS leverage. We will look at the finance net, we will talk a little bit about the tax rate. Starting with the top line, just to recap, you see in the upper right-hand corner, you see the 7% in orders and the 3% in revenues. Price, it was plus six for both orders and revenues, structure was minus two for orders and minus three for revenues. Moving into the income statement, 7% up on earnings or operating earnings, 30 bps up on the EBIT margin from 18 to 18.3%. We'll look at the bridge in a second.
The finance net looks a bit strange, close to minus SEK 400 million. We will dive a little bit into that. As Björn mentioned here, we have some temporary revaluation of hedges in it. Underlying, everything is exactly according to our guidance of SEK 1 billion for the full year. Tax rate 25% in the quarter. As you might recall, we lowered the tax rate guidance 3 months ago down to 25%-27%. In the 1st quarter, we came in at 25% exactly. At the very low end or bottom end of the range that we guide for. What is happening here is that we, as we move into 2019, we do really well in Czechia. We do good in Finland, which is a big mining production area for us. We do very good in Sweden.
We do very good in the U.S., driven by the strong U.S. economy. 4 big markets for Sandvik, all these markets have corporate tax rates of 19%-21%, which is far below the average for the group. That mix effect is driving the tax rate down. On the balance sheet side, working capital, still below 25%. I'll talk a bit more about that in a minute. Cash flow recovered nicely, SEK 3.4 billion returns above 20% and earnings per share up to SEK 1.50 . I should mention also when it comes to earnings per share, that if you take away that temporary revaluation thing of hedges, the increase of earnings per share would have been 10% instead of 6%. Let's jump into the bridge. This is the bridge as it is reported from 18%-18.3%.
We can start with currency, of course, SEK 1.3 billion on the top line, very much driven by the U.S. dollar. Of course, that's like 80%-90% of the currency effect, SEK 564 million on the EBIT line. That's an accretion of 130 basis points. Structure, minus SEK 612 million on the top line, minus SEK 324 million on the EBIT line. This is a mix of both divestments and of acquisitions. The reason why the number can be seen as quite big here, the negative number could be quite big, is that we have still Hyperion in the comparisons, compared with Q1 2018. You must remember that Hyperion was close to SEK 4 billion business. It is big, it will gradually move out after 2019. Okay, let's go to the organic part, to the price, volume, and productivity.
614 million on the top line and SEK 56 million on the EBIT line. That's 9%, -0.2% in margin dilution. However, we have to go one step further down into the bridge and understand what is happening. If you look at SMRT, the leverage is 36%, very good, higher than normal. If you look at SMT, it's 67%, fantastic development on their way up to 10% EBIT margin for the full year 2019. SMS looks a bit strange, of course. SMS, if you look at the brands within SMS, the premium brands, Coromant, Seco, Walter, Dormer, they're all doing fine defending the margins on a very high level, some of them actually even increasing the margin.
The drag is the Wolfram powder business, which was very much sort of on the way up a year ago and now heavily reducing inventories and having a huge impact on the EBIT margin. If you take out the Wolfram powder business, you get this bridge. We have four columns instead. We have the organic part, excluding the tungsten or Wolfram business. You have the Wolfram business by itself, and then currency, and then structure. You can see that the whole group has a leverage of 30% instead of 9%. If you just strip SMS, strip out the Wolfram business from SMS, the leverage in SMS is 15%. Is 15% good or not? If you defend the margin on a very high level with basically a flattish top line, then the leverage is zero, just mathematically. That's what it is.
15% is not bad, given the very flattish top line in the business. This is what it is. Let's move over to the finance net then, which I mentioned here in the overview. We normally don't go into the finance net, but this is what it looks like, Q1 over Q1. We have six items in the finance net. The interest net is very stable, as you can see, SEK 166 million, SEK 168 million for the quarter. This would be like SEK 650 million or something for the full year. This will not change. Pension charges or the interest part of the pension charge is very stable as well. Bank charges, nothing much happening there. Others is very insignificant. Then we have a new item, which is the IFRS 16 capitalized leases, comes with a SEK 25 million, SEK 26 million impact on the finance net.
That would be SEK 100 million for the full year. On the bottom line, you have FX and other asset classes. We abandoned hedge accounting a couple of years ago, which means that the hedges which you have in the finance net for orders, for commodities, for electricity contracts, which are not yet in the balance sheet, will be revalued temporarily in the finance net. Everything which happens in this line gets moved eventually over to the EBIT to meet the real balance sheet items when they appear in the balance sheet. This is a temporary thing. The SEK 131 will disappear gradually during the rest of 2019, a little bit would slip over to 2020. The electrical part of this revaluation is SEK 110 million, and the rest is commodities and commercial contracts.
With that in mind, we are keeping the guidance for the full year to SEK 1 billion, just as we said three months ago. That will not change. What the revaluations will be in Q3 and Q4, et cetera, we don't know. Of course, we don't know today. As it is today, as it stands today, with today's electricity prices, with today's exchange rates, et cetera, it is SEK 1 billion for the full year. Then also, we would like to give you a heads up then. We have a lot of cash in the balance sheet, as you might have seen, excess cash. We have a big gross debt. We are now actively entering into a process of prematurely repaying a chunk of the long-term debt. I'm, of course, not talking about public bonds now.
I'm talking about bilaterals, which we have quite a bit of in Europe and in the U.S. This, of course, will come with an interest difference sort of compensation to our borrowers. However, this will pay itself back in the third and the fourth quarter. For the full year, there will be no impact in the finance net, but there can be a little bit of a pickup in the second quarter, but that's just temporarily, just for you to know. Let's leave the income statement and move over to the balance sheet. Working capital below 25%. In the first quarter, we had a little bit of a weak delivery situation in January and February.
We had a huge invoicing in March, which means that we have a big pile of accounts receivables in the first quarter, which of course, will be paid during the second quarter. Inventories is pretty okay, actually. It's good. You can see that on the right-hand side, SMS is doing fine. SMRT had a huge invoicing month in March, that's why the relative number is picking up a bit. Under control. Cash flow recovering year-over-year. You can see it's SEK 3.4 compared to SEK 2.1. That's 60% up, driven by increased earnings, but also less working capital build up. My favorite slide, the financial net debt. Three parts these days. You have the grayish area, that's the financial net debt, which is really the important one. The blue one is the pension debt, and the new one is the debt side of the capitalized leases.
The financial net debt has gone from more than SEK 30 billion down to SEK 4.4 billion at the end of the quarter, it's quickly melting away into outer space, and will disappear during the year unless something happens. The blue one, the pension debt, will swim around SEK 5 billion, and the capitalized leases will probably stay around SEK 3.3 billion, SEK 3.4 billion for the rest of the year. Gearing 0.21, take away the capitalized leases, the gearing is 0.16 compared to 0.20 as we started the year. Of course, as Björn mentioned here, we are very happy to have a credit rating upgrade from BBB+ to A- with a stable outlook as a recognition of what we have done with the balance sheet.
Of course, we have sold assets to reduce the debt situation, but the majority of the journey from SEK 30+ billion financial net debt down to where we are today is operational. It's just operational cash flow from the business areas, more than SEK 25 billion. Let's finish off with the guidance. If we look at the first quarter 2019, underlying currency SEK 533, we guided SEK 500, very much in line. Metal prices, we guided SEK 150, ended up with -SEK 85. What happened here is that the nickel prices started to go up at the end of the quarter. You can see the effect of that in the guidance for the second quarter, where we say that the metal prices will be +SEK 100, and the underlying currency +SEK 300. Of course, as usual, it's the U.S. dollar that is driving this.
CapEx now for the full year. We are not changing the full year cash CapEx guidance that we have. That's SEK 4 billion. However, with IFRS 16, which is now sort of fully up and running in the income statement and the balance sheet, you get accounting effects. We will have something like close to SEK 400 million added to the CapEx line, but that's not cash CapEx, it's just an accounting treatment of our operating leases. SEK 4 billion in cash CapEx is still there, but SEK 400 million is for IFRS 16. The net finance, as I mentioned, the net financial items, we keep the guidance on SEK 1 billion. The underlying tax rate, well, 25.0, it's a good number, but we keep the guidance for the time being. With that, I hand back to you, Björn, for summary and conclusions.
Thank you, Tomas. If I summarize it, I think the demand continues on a strong level in line with what we saw during Q4. As we normally mention, how did the quarter two start? It starts also very much in line with what we have seen during the previous quarter, so very good. For us, it's important, and I think we trying to communicate that all our 30 businesses are working hard to making sure that our costs are under control, but also making sure that our inventories are at the right level. Strong focus on that operationally, and of course, to drive efficiency and productivity, which is essential for all the businesses. We are in a growth mode.
We have presented numerous of exciting acquisitions also during this year. There are a lot of more exciting to come. I think that's a good way to end my presentation. Maybe we should hand over to you, Ancy, and maybe we go into Q&As.
Yes.
Thank you.
Let's do that. Thank you. We'll start with the questions from the conference call, please. Operator, can you please let the first question through?
Yes. 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 Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Björn and Tomas. It's Klas from Citi. A couple of questions from me. First, on the drag on the margin from powder, you said that this will improve as the year progresses, obviously, could you be a bit more specific, please? Already gone completely from the second quarter, or to what extent will it be gradual through the year? It's pretty meaningful impact there. I will start there, please.
I think it will have its impact in Q2, it should be totally out during Q3. That's the signals we get from the division. The volume, they should be up and running in their normal levels in Q3.
Okay. Thank you. A question for you, Tomas, on the margin in Machining Solutions, here I'm leaving what happened this quarter. I'm talking about a potential stress test as we're approaching the Capital Markets Day. Am I right to assume that the supply chain savings cumulative in Machining Solutions since you started those efforts are around SEK 600 million to SEK 700 million, i.e. savings that are structural? On the underproduction, if we say that volumes fall maybe 10%, what kind of drop-through above the normal drop-through should we assume from underproduction? Is it perhaps 20%-30%? I just want to see if our assumptions make sense when we stress test the margin there.
600, 70. Yeah, that's correct. SEK 600 million, SEK 700 million from the structural changes within SMS, the big supply chain, the footprint program. That is correct. When it comes to negative drop-through, our ambition is to be able to defend the margin if the volume is flattish. Of course, if the volume goes down more, we will have a higher trough than we had before, Björn. That's the strategy we have.
I think it's pretty clear, I think this is very much part of our continuous plans, I think we'll give you a little bit of a guidance during the Capital Markets Day on that side when we come out with our new financial targets. I can assure you that each of the divisions have made their continuous plans, which means what kind of course, what kind of actions do you need to take. We are also continuously working, as you know, by closing more factories and moving our production into our larger, more efficient plants. This work will continue to drive. We do believe that we have a pretty good opportunity to mitigate lower volumes.
Okay.
We cannot verify in details, but I promise you we'll dig a little bit into that on the Capital Markets Day, we'll give you some indications where we believe we can be.
Sure. Sounds good. My very final is on mining. A strong bounce back when we look at key commodities. Have you sensed any changes already that some projects are now going ahead at maybe a faster pace? Then coming back to replacement, I know I ask it every quarter, but have we seen any further pickup here? Replacement is always there, whether you've seen any acceleration in replacement volumes in this quarter?
I've actually spent quite a lot of time out there during the last quarter also. I've been in South America, been in Australia, visit the customers all around, I think the mood is very good. Also say the opportunity, many of these mining customers, especially when we look in the copper side, I think they are very much optimistic in the long-term growth, where we've seen companies like Codelco investing huge amounts of money, both in El Teniente as well as in Chuquicamata. Chuquicamata to go underground in El Teniente to go to the next level, we're talking huge money investments. I'm really happy to say that on the Chuquicamata side, for the underground, they will go fully automation, during this quarter, we received a large order for automation and equipment for that going underground.
I feel that the mood in the mining industries is definitely very good, that's very much over. With the mineral prices that we have now, I think the majority of all the mines are actually making good money on these levels. When we look at the greenfield, there is not too many of those. Mostly of the instances is the brownfield, where you are actually extending the lifetimes of many existing mines.
Thank you.
Thank you. Operator, can you put through the next question, please?
The next question comes from the line of Markus Almgren from Kapitalmarknadsforvalt. Please go ahead.
Hi, Markus Almgren from Kapitalmarknadsforvalt. Can I ask a little bit about China and on SMS? On the demand in China, we know that automotive is horrible, but do you see any signs of stabilization at all recently? What is the mood in general engineering on the ground? You say that you see a slight decrease. If you could just help us, how much of the China business in SMS is automotive? That's my first question, please.
First, I say that the China side is pretty much in line with what we saw during Q4. We don't see any further deterioration of that market. That is moving on. Of course, we have other markets and maybe a little bit in the general engineering, but not that much that what we are seeing. That's what we are. The percentage is about 30%, the automotive of SMS in China. That's pretty much in line what you see with the rest of the business. China is what it is. I think when we look at Asia and the positive things that I felt from this part is that we saw Japan going very strongly for us, but also India and Indonesia was very strong to compensate somewhat the weaker Chinese market.
It is what it is, and I think we have to live with this weaker automotive market for some time. That's our view from that. The other segments seem to be pretty good, and the mood in China is not bad.
Okay. If I can just ask on SMT, I know it's a difficult question then, you're now at 10%, and this is the target, and it's just a quarter. This is not the full year, you're confident that you will reach the full year. There's been lots of discussions over the years about the long-term plans for SMS, SMT, et cetera. What do you need to see before you make an actual decision? Do we need to see a full year of recent target or-
I think I've tried to be very specific on this. I promised the market to give information this year. This year I will inform in what direction we'll go with SMT. I feel very comfortable with the SMT performance. I'm very happy with the management. I'm very happy with the actions that they are taking, I'm also happy with the demand that we are seeing in the market. They are showing a good stability, and we're seeing improving the profitability, and that's where you like to see a little bit of growth. Overall, that is part. I have promised that during this year, I will give you information in what direction we will go, and that will be a final information.
Okay. On SMT demand, you have got the large orders, the SEK 1 billion orders of which most were umbilicals. Were you also seeing signs of a pickup in the deep sea drilling markets? Have you seen a general increase in the number of discussions that you're having on that end? Is it too early?
No, I think oil and gas is very strong, but it's not only umbilicals, it is OCTG pipes also. That factory is now going full speed. There is a lot of project within. Of course, our production is full for the year, and we are probably all the way a quarter into year 2020. We haven't had these big orders on hand in many years in the past. Being a little bit pressured there also because activity is high in the market. They are working hard, and Chomutov is a very profitable and good factory for us.
Okay. Thank you very much.
Thank you, Markus. Operator, we'll continue with the conference call, please.
The next question comes from the line of Graham Phillips from Jefferies. Please go ahead.
Yes, thanks for taking my questions. First question is on Machining solutions. Could you contrast a little bit your comment around defending the margins? Particularly interested in here, if you could contrast sort of inserts around tools and the rest of the business there, holders and systems, and particularly what's happening with your move into powder there, if that's having impact in terms of margins.
Starting up with the powder. The powder business is not something new. We've been recycling old inserts. 50% of all our powder is actually coming from that. We have our own mine as you know, that are actually producing a Wolfram powder, and we supply our operations from that. It's also a pretty good export business of that. Many of the competitors are also being supplied from us. We keep that as a division. There are also some parts from the old Hyperion business. They made the blanks for our business. That's also part of that business. It is part of SMS, and it is not a bad animal or anything like that. The only reason why we try to explain a little bit about this powder business today to give you an understanding how the business is.
For me, when I follow these, I have my 30 divisions or business units that I care about. Sandvik is only a result of all this. I look at each of them and see what they do. What makes me happy is, of course, to see our four tooling divisions perform extremely well, even in these flat volumes. That is important. But you also know that we spent a year, we started these contingency plans a year ago, looking into what kind of actions do we need to do. We know when we look into SMS and this tool business going down, 10% is a huge drop in these parts. That is what they need to plan, and they adapt their costs and what kind of actions they need to do. All of them are working with this.
We're talking about insert, but you also mentioned round tools. When you look at the round tool business, of course, there's always been a fear, I think, among many investors as, "Oh, now you're moving more into round tools," which is the fastest-growing part of our business. The good thing with this is that we actually manage to keep the same margins when we also go into this round tool business. It doesn't vary much between these two businesses. That's the good. It will be very difficult to go into any details or give you any drop-through in these parts. I can assure you that the plans, and what we are following them up are pretty aggressive when it comes to adjusting costs in relation to demand and to protect the margins.
That's a little bit how we see it and how we work within the different divisions. I know maybe it doesn't answer fully your question, but at the same time, that's as much as I can say at the moment.
Okay. In terms of M&A, obviously, you touched on the couple of acquisitions you've made. Is there more to do, any of the particular areas there, inserts, round tools, digital, that we should be thinking that's still got some inorganic opportunities?
Yes. This is really the prime target for our acquisition. It is round. You have OSK, you have Wetmore, you have much more to come. This is an area where we can strengthen ourselves, where we have less market share than we do on the insert side. There will be a lot of exciting stuff there. Of course, the opportunity goes when the market is softening a little bit, the opportunities arise a little bit better for us. With a strong balance sheet and with this focus, at least I'm pretty excited about that development.
Okay. Thank you. Just finally on the Mining and Rock. I see your comment about the stationary equipment, so crushing and screening, seeing a better market. Could you contrast just how big that business is again and compare it to the mobile machinery, where clearly you have been much more profitable and had better prospects in the past?
Yeah. When we're looking at the division for Crushing, I don't know if we have gone into how big the sizes are, but it actually consists out of 4 different business units. 1 is the stationary, which is the most stable and the most profitable part of the business. Or maybe not the most profitable because hydraulic attachments is actually the most profitable part of that business. It's amazing. These are the Rammer business that we are making in Finland. So the stationary, it is the hydraulic attachments. Then we have the mobile crushers, which I talk about a lot, and where I get a little bit warm in my heart when we talk about because they have done a great job to improve their profitability, about 10% on that side.
Then we have the Shanbao, that's the Chinese middle market business, which is also going in a fantastic development. The size of this business is of course, significantly less than you have seen on our underground mining equipment when I talk about drilling and loading and haul and the surface part of that, it's still quite limited. It's sized somewhere between SEK 5 billion and SEK 10 billion, if I give you that indication.
Okay. There's still upside in terms of that business margins and revenue-wise?
We have had a tremendous development in this business during the last two years. We have a very strong management in place when it comes to crushing and screening. They launched a lot of new products. They managed to get the efficiency out of the operation. Maybe most of all, they managed to catch the aftermarket, which is quite huge for the crushing and screening. That's actually which drives the opportunity for new orders and so on. I think the aftermarket development has been one of the main reasons for the huge improvement in profitability from this business.
Thank you.
They are not a burden for us anymore. It's a really good contributor.
Okay. Thanks, Björn.
Operator, do we have any additional questions from the conference call?
We have one question from the line of Andrew Wilson from . Please go ahead.
Hi. Good afternoon. Good morning, everyone. It's mainly a quick follow-up, actually, on the M&A plans I wanted to ask about. It seems as if the policy has been very much around add-ons, and you mentioned the sort of five businesses over the last year. Should we just expect, I guess, what's been a relatively steady stream of add-ons across obviously the two larger businesses?
I think it's a good question. The acquisitions, the way we run the M&A part of Sandvik is that our 30 operating entities, they strive all the time to be number one and number two within their businesses. They know their competitors, they know the companies that are operating the market, and they are the ones initiating all these acquisitions. Normally these are small to medium size part. Looking for maybe a little bit larger opportunities. Yes, if they arise, if the valuation is correct and the part. We know, of course, we are on very high level and the expectations today for these big companies are high. When, if, and so, the market softens down and people are not performing as good, and we have a strong balance sheet, we will definitely be open for a little bit bigger sizes that could add good value to Sandvik.
We are, of course, very careful when it comes to the evaluations and what we pay for these, because we have no interest to jeopardize anything when it comes to the good performance and the financial performance of the group also moving forward. We'll talk a little bit about this also when we meet at the Capital Markets Day.
As we have said many times, we have no intention of betting the farm.
That's a good explanation. Yeah.
That's pretty clear. Thank you.
To be honest, my experience from previous part, these are the small and the medium size, where the businesses that are stable and profitable, they take them on, they integrate them, they become part of their businesses. For these small divisions that we have all around, when they're making acquisitions like this, it's live and die. They have to make it good, and they have to drive it in a good way so their total business continues to develop. The engagement that you see in all these operating entities is absolutely magnificent. I recently went to U.S. and visited this Artisan, these loaders and truck, I'm very keen about electrification within the mining industry because I think it makes very, very good sense. I was very much pro that we should make this investment, even if it was a little bit expensive.
When I came and met the people and saw the equipment that they are doing, this is actually the third generation, the way they both designed the loaders and trucks and this electrification, this is really the technology of the future. That's fun. That makes me really excited about these kind of acquisitions.
Thank you.
We continue with the next question, please.
The next question comes from the line of Andreas Koski from the . Please go ahead.
Yes. Thank you. Two questions on Sandvik Machining Solutions, please. Firstly, on the demand situation, I understand that it has been more or less in line with the first quarter in the beginning of the second quarter here, but could you talk about North America specifically? Because I think we have seen sequential growth both in Q4 and now in Q1 as well. Is that what you are still seeing going into the second quarter, or is that sequential improvement fading and it's more flattish also in North America?
No, I think when we give you a small flavor of how the first 20 days in the quarter have started, that just to give you, if there are any changes in any of the direction for the total business. That's what I'm saying is that it continues on these really good numbers that we have seen part, but I don't really want to break it down into different regions and so on. We'll talk about that when we meet in July after the Q. I will give you a little bit more insight on that. I can calm you down a little bit that it looks pretty much in line there as it was in the first quarter. I feel confident.
Okay. Thank you. The second one is on your inventories in Sandvik Machining Solutions. I'm sorry if I missed it. I came on a bit late, but what did you do with your inventories in this quarter, and what do you plan to do in the second quarter in Sandvik Machining Solutions?
Yeah. If you look at Machining Solutions, we are pretty much in line with the expectation. There's a minor increase in inventory. You see some increase in receivables, which in the part, but if you look at the percentage, we are 21.4% or something like that. It's pretty much in line. They managed to keep that under in a good way. What Tomas said during the conference was that, especially as SMRT, we saw a very big invoicing in March. It was a little bit slower of the invoicing side, not the orders, but the invoicing in January and February. We had a huge invoicing now in March. Of course, that doesn't turn into cash yet because it ends up as receivables. We feel very comfortable about that.
I promise you, if there is anything we feel uncomfortable about the inventory, I can assure you that's one of my most important, because this year we have to exceed the cash flow targets from last year, and I feel very comfortable about that. Where we are today, cash flow is 60% up compared to last year. Still, of course, trailing where we are going to do, but that always does during the first quarter because you have a huge Q4, so you have a lot of deliveries out there. I feel very comfortable. SMS is in line on the SMT and SMRT. SMRT is especially with the inventory they have, these are units that are on the way out, and you see in the huge ordering, it's 11% up for equipment. There is a lot to be delivered out during the rest of the year.
So that's-
Absolutely. I just wanted to understand what kind of impact the inventory or the productivity production levels in Sandvik Machining Solutions could have had on the margin, and what we should expect for the second quarter. Normally, I think you build inventory in the second quarter ahead of the summer.
Correct.
If I have correct numbers, you built inventories of around SEK 300 million in Q2 last year. Is that something you expect to repeat this year, or will you try to keep production in line with demand in the second quarter?
We will be working with the inventory levels and keep them on a much lower level than we saw during last year. We will be very, very hard on doing that. We do not want to repeat, as you know, Q2 and Q3 during last year when we built up this inventory that we had to reduce during Q4. That will not happen. We will be very, very hard on making sure that we are producing in line with the demand in the market. The good thing with this kind of business is that we actually get the demand numbers every day, every minute. Klas sometimes comes in with his computer and says, "Look at this. This is exactly the orders going out from our distribution centers around the world to the customers." We have a good sight of that.
We didn't see any effects in Q1, and we will make sure that there will be limited effects in Q2. There are minor builds up, of course, because there will be some closing of factories during July there. Little bit there will be, but we will make sure that those big numbers we saw last year will not occur.
Okay.
We actually mentioned here, we had inventory issues last year, and we were overstocked, and we had some issues in all three business areas. We're through all that now. It's all sorted out. End of the year in a very stable situation, we continue to run like that now.
Good. Thank you very much.
I can assure you that our business Presidents don't want to go through that
Nope.
That, what we did last quarter.
You don't have any business President there. I'm just kidding.
We have two divisions.
Yeah, I know.
The business area is only strategic. Our guys out in the 30 divisions, they are still there luckily.
Yeah. Thanks.
Thank you. We have one question coming through from online, and it touches on the mobile crushers again. If you compare the market situation now and maybe during the second half of 2018 compared to the first half of 2018, what would be your comment to that?
I think the crushers have had a strong development lately. Last year we saw a little bit weaker. If you look at the different businesses here, last year we had a little bit weaker orders on the crushing parts, while lately that has picked up. We have quite a good growth on the crushing side at the moment.
Thank you. Do we have one final question to put through from the conference call, please?
Yes. The final question comes from the line of Lars Zwaal from Barclays. Please go ahead.
Thanks. Hi, Björn, Tomas, Ann-Sofie. Just two quick ones from me. First, Björn, on SMRT, the huge invoicing in March, but a slow start to the year. Exactly were the bottlenecks earlier in the year, and how should we think about deliveries in Q2 and beyond for SMRT?
The thing was, Q1 is always the same. You see that we have a lot of deliveries out during Q4, which means that getting started after Christmas takes a little bit of time. You fill the pipe full up, before the things start popping out. We saw this is every year, so we are not surprised. The invoicing, the orders were good in the beginning, but what came out, and of course, Lars was pushing a lot to make sure that everything comes out. March we see during Q2 is a much more even. Production is running in full speed, and the deliveries are there, and the customers. Q2 is more a normal demand where the deliveries are more even than you see during Q1. Q1 is always.
Clear. Timing issues, but no supply chain or production issues as far as SMRT is concerned? Yeah. Secondly, if.
Okay, fine.
I could briefly ask to SMS. I know it's quite rare to talk about mix geographically there, you are seeing some quite divergent trends in China versus the U.S., I know historically some meaningful margin differences between those two regions. Do you have a little bit with the impact from regional mix on margins in SMS in the quarter?
I think China is a very profitable market for us. It's probably one of the most profitable regions that we have when we sell in SMS, U.S. is a little bit less on that side, that's more because it's a distributor market, while China is very much a direct selling market. There are some parts which they always have to fight with. Normally margins are a little bit higher in China than the U.S. I gave you this now. I'm not sure that I was allowed to say that, don't tell anyone.
I'll try not to. Thanks, guys. See you in a month time.
Thank you.
As we have a couple of minutes left, this will be the final question. It comes through online from Danske Bank, and it touches on our own capacity in terms of production. If demand picks up from where it is now, will we have issues with coping, or does that mean we'll have to make huge investments?
The good thing with the mining part, that we have introduced in the last years, still about 40% of all our trucks, loaders, and drill rigs are being produced by satellites. That's the trick. We don't expand our production facilities. If the demand goes down, yes, we bring it home, make sure that our factory is running without under absorption. This is part of the agility work that we are really enforcing into the SMRT. We can actually expand the business a lot without adding capacity. That's the key to the trick.
We haven't really made any capacity adjustments at all over the last three years, we have no intention of doing it even if demand picks up.
Yeah. Outsourcing is the name of the game.
Thank you very much. With that, we'll close this session. Thank you for calling in, and we'll see you all again in about a quarter's time. Until then, we will wish you Happy Easter. Thank you.
Yeah. Happy Easter. Take care.