Earnings Call: Q1 2019

Apr 18, 2019

Good morning, and 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. And 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'll start off the presentation with our CEO, Bjorn Rosengren and CFO, Thomas Leasson. Please go ahead. Thank you, Anssi. And also welcome, I'd like to say to everybody, to this Q1 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, Let's dig into the report. First, I'd like to say that we are very pleased and happy to see that the demand from all three of our businesses continues on a high level. We reached then growth, what we say price volume of 6% for Sandvik. This actually gives book to bill ratio of 111%. And we're 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 and then growth. We are in the growth mode. And when we talk about growth, we talk about organic growth, but we also talk about acquisitions. And last year, we managed to do 5 acquisitions. And this year, we have already now reported 4 of them. 2 of them, a little bit extra exciting from my point of view. 1 is the Artisan, which is the Teslas of the underground mining business, electric loaders and truck. So that's in the business. But we also yesterday announced Nutrax, 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 on also on all our competitors. So it's a very exciting acquisition. Also during the quarter, we are happy that Standard and Poor have recognized our financial performance, and they have upgraded us to A- from previous BBB plus So look at the market development. This is a little bit exciting stuff as we see ourselves as being 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 and Asia, somewhat weaker, especially China, which is lower, but somewhat compensated by a very strong India, Japan and Indonesia. If we're 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, and that is especially for the Chinese market, but also in Europe, especially Germany on that part. If we look quarter by quarter, we see the demand from the different segments is pretty flat. So on the order side, I mentioned we were up 6%, and we revenues were 3%. That means, 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 percent. That is equivalent to 18.3 percent EBIT margin. And that's 7% up to last year. In these numbers, there are some positives, but there are also some negatives. So if you look at the positives, that is, of course, exchange rates that were very favorable during the quarter. On the negative side, we have some lower performance from our so called Wolfram powder business. This is the division we call PBT, and they are actually supplying the Wolfram powder to our tooling divisions, but also externally. Too much inventory in 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 and also exclude the FX impact, I think the underlying EBIT margin about 18.4%. And that's very much in line with our expectations from our EBIT margin. So looking in a little bit to each of our businesses. So starting up with SMS. We see very strong order intake. It's actually the highest second highest we have had in the company. I think the previous one on this level was back in 2012. So it continues on a good level. You see a change there's a change here of minus 1. But if you exclude the Powder business, which goes external, it's actually plus 1 percent on the price volume side. So in other words, pretty much flat. And also the profit level is at 24.9, then being impacted actually as much as 150 bps 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, and those effects would be negative the 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 Vostrom, our President for the business area, decided to leave us, and he will be CEO in an external company. We have just started the process to replace Klas. The second business area, and that is the Mining and Rope Technology. Here, we see strong demand in the market, and we see a growth of 9%. That's actually 11% on equipment and eight percent on the spare parts business and 11% on the rock tools, so good level. And 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% to 17% here. There are some acquisition costs around EUR 30,000,000 there. So you would be on if you took that out, about EUR 17,300,000. Percent. 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. So I think we are on a pretty good level there for the EBIT margin. Here, I mentioned before, 2 exciting acquisitions, both the Artisan and now also the NuTrax. 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. So we welcome him into the Sandvik management team. So moving over to SMT or Material Technology. Also here, we see a great development. And of course, sticking out here is the great orders of SEK 1,000,000,000 from the oil and gas industry. And 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. So strong orders, which will be delivered out during the coming year, very good. But we also see good improvements when it comes to the profitability. And the underlying margin reached 10.4%, which makes me, of course, very happy. And we are very much in line with the targets of reaching 10% EBIT margin for the full year. So a lot of credit to the 3 businesses and to Joran and his management team for moving in this direction. So we feel pretty comfortable with the development here. So Thomas, tell us a little bit what's happening on the financial side. Yes. Thank you, Bjorn. Yes, what's happening with the numbers. Let's start with the overview, as usual. And today, we will go a little bit deeper into 3 areas. We will look at the leverage, of course, and not the least on SMS leverage. We will look at the finance net, and we will talk a little bit about the tax rate. But starting with the top line, just to recap, you'll see in the upper right hand corner, you see the 7% in orders and the 3% in revenues. Currency was plus 6% for both orders and revenues and structure was minus 2% for orders and minus 3 for revenues. Moving on to the income statement, 7% up on earnings, operating earnings and 30 bps up on the EBIT margin from 18% to 18.3%. And we'll look at the bridge in a second. The finance mark looks a bit strange, close to minus €400,000,000 But we will dive a little bit into that. As Bjorn mentioned here, we have some temporary revaluation of hedges in it. Underlying everything is exactly according to our guidance of €1,000,000,000 for the full year. Tax rate, 25% in the quarter. And as you might recall, we lowered the tax rate guidance 3 months ago down to 25% to 27%. And in the Q1, we came in at 25% exactly, so at the very low end or bottom end of the range that we guide for. And 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 United States, driven by the strong U. S. Economy. 4 big markets for Sandvik, and all these markets have corporate tax rates of 19% to 20.5 percent 21%, which is far below the average for the group. So 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, EUR 3,400,000,000 returns above 20% and earnings per share up €2.50 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%. So let's jump then into the bridge. And this is the bridge as it is reported, from 18% to 18.3%. We can start with currency. Of course, euros 1,300,000,000 on the top line, very much driven by the U. S. Dollar. Of course, that's like 80%, ninety percent of the currency effect. Euros 564,000,000 on the EBIT line, that's an accretion of 130 bps. Structure, minus SEK 612,000,000 on the top line, minus SEK 3.24 billion on the EBIT line. This is a mix of both divestments and of acquisitions. And the reason why the number is can be seen as quite big here or the I mean, the negative number could be quite big is that we have still Hyperion in the comparisons compared with 2,000 Q1 2018. And you must remember that Hyperion was so close to SEK 4,000,000,000 business. So it is big, but it will gradually move out after 2019. Okay. Now let's go to the organic part, to the price, volume and productivity. Euros 614,000,000 on the top line and euros 56,000,000 on the EBIT line. That's 9%, minus €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 S and T, 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. Now SMS, if you look at the brands within SMS, the premium brands, Coromant, Siek, Valta, Dorma, they're all doing fine and defending the margins on a very high level and some of them 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. So if you take out the Wolfram powder business, you get this bridge. Now we have 4 columns instead. So we have the organic part, excluding the tungsten or Wolfram business. We have the Wolfram business by itself and then currency and then structure. Now you can see that the whole group has a leverage of 30% instead of 9%. And if you just strip SMS, strip out the Voltan business from SMS, the leverage in SMS is 15%. Basically a basically a flattish top line, then the leverage is 0, just mathematically. That's what it is. 15% is not bad given the very flattish top line in the business. So this is what it is. Now 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. And we have 6 items in the finance net. The interest net is very stable. As you can see, SEK 166,000,000, SEK168,000,000 for the quarter. This would be like SEK 650,000,000 or something for the full year. This will not change. Pension charges, so the interest part of the pension charges, very stable as well. Bank charges, nothing much happening there. And others is very insignificant. And then we have a new item, which is the IFRS 16, capitalized leases, comes with a €25,000,000,000 6,000,000 impact on the finance net. That would be €100,000,000 for the full year. On the bottom line, you have FX and other asset clauses. 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. So 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. So this is a temporary thing. So the 131 will disappear gradually during the rest of 2019, a little bit would slip over to 2020. Yes, the electrical part of this revaluation is €110,000,000 and the rest is commodities and commercial contracts. So with that in mind, we are keeping the guidance for the full year to €1,000,000,000 just as we said 3 months ago. So that will not change. What the revaluations will be in Q3 and Q4, etcetera, we don't know. Of course, we don't know today. But as it is today, as it stands today with today's electricity prices, with today's exchange rates, etcetera, it is SEK 1,000,000,000 for the full year. And 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. So 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 United States. And this, of course, will come with an interest difference sort of compensation to our borrowers. However, this will pay itself back in the 3rd Q4. So 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 temporary, just for you to know. Okay. Let's leave the income statement then and move over to the balance sheet. Working capital, below 25%. We had in the Q1, we had a kind of a little bit of a weak delivery situation in January February. We had a huge invoicing in March, which means that we have a big pile of the cash receivables in the Q1, which, of course, will be paid during the Q2. Inventories is pretty okay, actually. So 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. So under control. Cash flow recovering year over year. You can see it's 3.4% compared to 2.1%. That's 60% up, driven by increased earnings, but also less working capital buildup. And then my favorite slide, the financial net debt. 3 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 30,000,000,000 down to SEK 4,400,000,000 at the end of the quarter, and 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 €5,000,000,000 and the capitalized leases will probably stay around €3,300,000,000 3,400,000,000 for the rest of the year. Gearing, €0.21 take away the capitalized leases, the gearing is €0.16,000,000 compared to €0.20,000,000 as we started the year. Of course, as Bjorn mentioned here, we are very happy to get have a credit rating upgrade from BBB plus 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 get to reduce the debt situation. But the majority of the journey from €30,000,000,000 plus financial net debt down to where we are today is operational. It's just operational cash flow from the business there. It's more than €25,000,000,000 So let's finish off with the guidance. So if we look at the Q1 2019, underlying currency, CHF533,000,000, we guided CHF 500,000,000, so very much in line. Metal prices, we guided $150,000 ended up with 85 minus €85. And 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 2nd quarter, where we say that the metal prices will be plus €100,000,000 and the underlying currency, plus €300,000,000 And 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 4,000,000,000 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. So we will have something like close to €400,000,000 added to the CapEx line, but that's not cash CapEx. It's just an accounting treatment of our operating leases. So SEK 4,000,000,000 in cash CapEx is still there, but SEK 400,000,000 is for IFRS 16. The net finance, as I mentioned, the net financial items, we'll we keep the guidance of SEK 1,000,000,000. And the underlying tax rate, well, SEK 25.0 billion, it's a good number, but we keep the guidance for the time being. So with that, I hand back to you, Bjorn, for summary and conclusions. Thank you, Thomas. So if I summarize it, I think the demand continues on a strong level in line with what we saw during Q4. The as we normally mention, how did the quarter 2 start. It starts also very much in line with what we have seen during the previous quarter, so very good. Perhaps it's important, and I think we're 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. So 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, and there are a lot of more exciting to come. I think that's a good way to end my presentation. And maybe we should hand over to you, Annecy, and maybe we go into Q and A. Yes. Thank you. Yes. Let's do that. Thank you. And we'll start with questions from the conference call, please. Operator, can you please let the first question through? Yes. Thank you. Our first question comes from the line of Klas Bergelind from Citi. Please go ahead. Yes. Hi, Bjorn and Thomas. It's Klas 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 Q2? Or to what extent will it be gradual through the year? It's pretty meaningful impact there. So I will start here, please. I think it will have its impact in Q2, but it should be totally out during Q3. That's the signals we get from the division. So the volume, they should be up and running in their normal levels in Q3. Okay. And then a question for you, Thomas, on the margin in Machining Solutions. And 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 around €600,000,000 to €700,000,000 I. E. Savings that are structural? And then 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. $670,000,000 Yes, that's correct. Dollars 600,000,000 $700,000,000 from the structural changes within SMS, the big supply chain footprint program. So that is correct. Then when it comes to negative drop through, I mean, our ambition is to be able to defend the margin if the volume is flattish. And of course, if the volume goes down more, of course, we will have a higher trough than we had before. Jan, I think that's the strategy we have. I think it's pretty clear. And I think this is very much of a part of our contingency plans. And I think we'll give you a little bit of a guidance during the Capital Market Day on that side when we come out with our new financial targets. But I can assure you that each of the divisions have made their contingency plans, which means what kind of costs and what kind of actions do you need to take. We're also continuously working, as you know, by closing more factories and moving our production into our larger, more efficient plants. This work will continue and to drive. So we do believe that we have a pretty good opportunity to mitigate lower volumes. Okay. My very final We cannot verify in details. But I promise you, we'll dig a little bit into that when you're on the Capital Market Day, and we'll give you some indications where we believe we can be. Sure. It 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? And then coming back to replacement, I know I ask it every quarter, but have we seen any further pickup here? I mean replacement is always there, but whether you've seen any acceleration in replacement volumes in this quarter? I think I've actually spent quite a lot of time out during the last quarter also. I've been in South America, I've been in Australia, I've customers all around. And I think the mood is very good. Also, I'd say the opportunity many of these mining customers, especially when we look into the in the copper side, I think they are pretty very much optimistic in the long term growth where we've seen companies like Codelco investing huge amount of money, both in El Chiquita as well as in Chiquita Chiquita Chiquimitiamata to go underground and in Argentina to go to the next level, and we're talking huge money investments. And I'm really happy to say that on the Chikajimata side, for the underground, they will go fully automation. And during this quarter, we received a large order for automation and equipment for that going underground. So I feel that the mood in the mining industries is definitely very good, and that's very much over. And with the mineral prices that we have now, I think the majority of all the mines are actually making good money on these levels. It's very I mean, when we look at the greenfield, I mean, there's not too many of those. They're mostly of the is the brownfield where you are actually extending the lifetimes of many existing mines. Thank you. Thank you. Operator, can you talk to the next question please? And the next question comes from the line of Markus Almerhoefer from Kepler Cheuvreux. Please go ahead. Hi, Markus Alenghrupp from Kepler Cheuvreux. Can I ask a little bit about China and on SMS? So on the demand in China, I mean, we know that automotive is horrible, but do you see any signs of stabilization at all recently? And what is the mood in general engineering on the ground? You say that you see a slight decrease. And then if you could just help us how much of the China business in SMS is automotive? That's my first question, please. First, I'd say that the China side is pretty much in line with what we saw during Q4. So it is we don't see any further deterioration of that market. So that is moving on. Then of course, we have other markets and maybe a little bit in the general engineering, but not that much that we are seeing. So that's what we are. The percentage is about 30%, the automotive of SMS in China. So that's pretty much in line what you see with the rest of the business. So 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. But 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. Other segments seem to be pretty good, and the mood in China is not bad. Okay. Okay. And then if I can just ask on SMT. And I mean, it's no difficult question. But I mean, you're now at 10%, and this is the target. And this is just the quarter. This is not the full year, but you're confident that you will reach the full year. And then there's been lots see before you make an actual decision? Do we need to see a full year of business target? I have to. I think I've been very tried to be very specific on this. I promised the market to give information this year. So this year, I will inform in what direction we'll go with SMT. And I think 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, but I'm also happy with the demand that we are seeing in the market. So they are showing a good stability, and we see an improvement in their profitability. And that's where you like to see a little bit of growth. So overall, that is part. But I have promised that during this year, I will give you information in what direction we will go. And that will be final information. Okay. And on SMT demand, have you seen any I mean, you have got the large orders, the EUR 1,000,000,000 orders, of which most were umbilicals. But we're 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? Or is it too early? Oil and gas no, I think oil and gas is very strong. But it's not only umbilical, it's this OCTG pipes also. That factory is now going full speed. But there is a lot of projects within. Now of course, our production is full for the year, and we are probably all the way in a quarter into year 2020. So we haven't had these big orders on hand in many, many years. So in the parts are are being a little bit pressured there also because activity is high in the market. But they are working hard, and Homotovis is a very profitable and good factory for us. Okay. Thank you very much. Thank you, Markus. And operator, we'll continue with the conference call, please. And 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? I'm particularly interested in here if you could contrast inserts, round tools and the rest of the business, their holders and systems and particularly what's happening with your move into powder there if that's having impact in terms of margins? Yes. Starting out with the powder. Powder business is not sorry, it's not something new. I mean, 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 Evolpheme Powder, and we supply our operations from that. But it's also a pretty good export business on that. So many of our competitors are also being supplied from us. So we keep that as a division. There are also some parts from the old Hyperion business that made the blanks for our business. That's also part of that business. So 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. And 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. So I look at each of them and see what they do. And what makes me happy is, of course, to see our 4 tooling divisions perform extremely well even in these flat volumes. That is important. But you also know that we spent a year I mean, we started these contingency plans a year ago looking into what kind of actions do we need to do. And we know when we look into SMS and this tool business going down, I mean, 10% is a huge drop in these parts. And that is what they need to plan, and they adapt their costs and what kind of actions they need to do. So all of them are working with this. We're talking about insert, but you also mentioned round tools. And when you look at the round tool business, of course, there's always been a fear, I think, among many investors that's, oh, now you're moving more into round tools, which is the fastest growing part of our business. But the good thing with this is that we actually managed to keep the good the same margins when we also go into this round 2 business. So it doesn't vary much between these two businesses. So that's good. But it will be very difficult to go in to any details or give you any drop through in this part. But 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. So 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. And in terms of M and A, obviously, you touched on the couple of acquisitions you've made. I mean, is there more do any of the particular areas there, inserts, round tools, digital, that we should be thinking that that still got some inorganic opportunities? Yes. I mean, this is really the prime target for our acquisition. It is around. So you have OSK, you have Wetmore and you have much more to come. So this is an area where we can strengthen ourselves, where we have less market share than we do on the inserts side. So that's there will be a lot of exciting stuff there. And of course, the opportunity goes. When the market is softening a little bit, the opportunities arise a little bit better for us. So with a strong balance sheet and with this focus, at least I'm pretty excited about that development. Okay. And just finally on mining and rock. I see your comment about the stationary equipment, so machining and crushing sorry, 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? Yes. I mean, when we're looking at the division for crushing, I don't know if we have gone into this how big the sizes are, but it actually consists out of 4 different business units. One 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 stationary, it is the hydraulic attachments. And 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. And then we have the Shambao, that's the Chinese mid end market business, which is also going in a fantastic development. So 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. But I mean, it's size somewhere between SEK 5,000,000,000 and SEK 10,000,000,000, if I give you that indication. Okay. And there's still upside in terms of that business margins and revenues revenue wise? I mean, we have had a tremendous development in this business during the last 2 years. And 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. And maybe most of all, they managed to catch the aftermarket, which is quite huge for the crushing and screening. And that's actually which drives the opportunity for new orders and so on. So I think the aftermarket development has been one of the main reasons for the huge improvement in profitability from this business. So I mean, they are not a burden for us anymore. So it's a really good contributor. Okay. Thanks, Mark. Operator, do we have any additional questions from the conference call? We have one question from the line of Andrew Wilson from Cision. Please go ahead. Hi, good afternoon, good morning, everyone. It's mainly a quick follow-up actually on the M and A plans I wanted to ask about. It seems as if the policy has been very much around bolt ons, and you mentioned the sort of 5 businesses over the last year. Can you just talk about sort of how you think about potentially larger deals? Or should we just expect, I guess, what's been a relatively steady stream of bolt ons across, obviously, the 2 larger businesses? I think it's a good question. The acquisitions the way we run the M and A part of Sandvik is that our 30 operating entities, they strive all the time to be number 1 and number 2 within their businesses. They know their competitors. They know their companies that are operating the market. And they are the one that initiating the all these acquisitions. And normally, these are small to medium sized part. Looking for maybe a little bit larger opportunities, yes, if they arise, if the valuation is correct and apart, We know, of course, that we are on very high level and the expectations today for these big companies are high. But 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. But we are, of course, very careful when it comes to the evaluations and what we pay for this 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 Market Day. As we have said many times, we have no intention of betting the farm. That's a good explanation. Yes. That's very clear. Thank you. To be honest, I mean, the one I mean, 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. And 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. And the engagement that you see in all these operating entities is absolutely magnificent. I recently went to U. S. And visited this Artisan, this loaders and truck. And I'm very keen about electrification within the mining industry because I think it makes very, very good sense. And I was very much pro that we should make this investment even if it was a little bit expensive. But when I came and met the people and saw the equipment that they are doing, this is actually the 3rd generation and the way they're both designed, the loaders and trucks and this electrification, I mean, this is really the technology of the future. So and that's fun. That makes me really excited about these kind of acquisitions. Thank you. Thank you. And we continue with the next question, please. And the next question comes from the line of Andreas Koski from Liberum. 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 Q1 and 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 Q2? Or is that sequential improvement fading and it's more flattish also in North America? No. I think what we when we give you a small flavor of how the 1st 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. And that's what I'm saying is that it continues on these really good numbers that we have seen in part. But I don't really want to break it down into different regions and so as we'll talk about that when we meet in July after the Q. I will be give you a little bit more insight on that. But I can calm you down a little bit that it looks pretty much in line there in as it was in the Q1. So I feel confident. Okay. And 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 Q2 in Sandvik Machining Solutions? Yes. If you look at Machining Solutions, we are pretty much in line with the actualization. That's a minor increase in inventory. You see some increase in receivables, which in the past. But I mean, if you look at the percentage, we are 21 point 4% or something like that. So it's pretty much in line. They managed to keep that under in a good way. What Thomas said during the conference was that in especially at SMRT, we saw a very big invoicing in March. It was a little bit slower of the invoicing side, not the order, but the invoicing in January February. And we had a huge invoicing now in March. And of course, that doesn't turn into cash yet because it ends up as receivables. And that's why it looks like. But we feel very comfortable about that. And 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 that, and I feel very comfortable about that. So 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 Q1 because you have a huge Q4. So you have a lot of deliveries out there. But I feel very comfortable. SMS is in line. On the SMT and SMRT, SMRT is especially the inventory they have, these are units that are on the way out. And you've seen the huge order intake, it's 11% up for equipment. So 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 Q2? Because normally, I think you build inventory in the Q2 ahead of the summer. If I have correct numbers, you built inventories of around €300,000,000 in Q2 last year. And is that something you expect to repeat this year? Or will you try to keep, yes, production in line with demand in the second quarter? We'll be working with the inventory levels and keep them on a low much lower level than we saw during last year. So 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. So that will not happen. We'll be very, very hard on making sure that we are producing in line with the demand in the market. And the good thing with this kind of business is that we actually get the numbers, the demand numbers every day, every minute. So 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. So we have a good side of that. But we didn't see any effect in Q1, and we will make sure that there will be limited effects in Q2. But there are minor builds up, of course, because there will be some closing of factories during July there. So a little bit there will be, but we will make sure that those big numbers we saw last year will not occur. Okay. We actually had mentioned here, we had inventory issues last year, and we were overstocked. And we had some issues in all three business areas, but we're through all that now. It's all sorted out, ended the year in a very stable situation, and we continue to run like that now. Thank you very much. Thank you very much. Our business precedents are don't want to go through that. That's what we did last quarter. You don't have any business precedent there. I'm just kidding. Yes. We have 2 divisions. The business area is only strategic. Our guys out in the 30 divisions, they are still there, luckily. We have one question coming through from online, and it touches on the mobile crushers again. And if you compare the market situation now and maybe during the second half of twenty eighteen compared to the first half of twenty 18? What would be your comment to that? I think the crushers have had a strong development lately. And last year, we saw a little bit weaker. If you look at the different businesses, last year, we had a little bit weaker orders on the crushing parts, while lately, that has picked up. So we have quite a good growth on the crushing side at the moment. Thank you. And do we have one final question to put through from the conference call, please? Yes. The final question comes from the line of Lars Brorson from Barclays. Please go ahead. Thanks. Hi, Bjorn, Thomas, Anssi. Just two quick ones for me. First, Bjorn, on SMRT, the Hughes invoicing in March, but a slow start to the year. Exactly where the bottlenecks earlier on the year? And how should we think about deliveries in Q2 and beyond for SMRT? I mean, the thing was during Q1 is always the same, and 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 feel the pipe full up and then before the things start popping out. And we saw and this is every year, so we are not surprised. So 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 much more even. I mean production is running in full speed and the deliveries are there and the customers. So Q2 is normal more a normal demand where the deliveries are more even than you see during Q1. So timing issues, but no supply chain or production issues as far as SMRT is concerned. Secondly Okay, fine. I could briefly ask to SMS, and I know it's quite rare to talk about mix geographically there, but you are seeing some quite divergent trends in China versus the U. S. And I know historically some meaningful margin differences between those two regions. Can you have a little bit with the impact from regional mix on margins in SMS in the quarter? I mean, in SMS in the quarter? I mean, 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, and U. S. Is a little bit less on that side, and that's more because it's a distributor market, while China is very much a direct selling market. So there are some parts which they always have to fight with. So 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, but don't tell anyone. I'll try not to. Thanks, guys. See you in a month's time. Thank you. And then 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. And if demand picks up from where it is now, will we have issues with coping? Or do we does that mean we'll have to make huge investments? The good thing with the mining part and that we have introduced in last year is still about 40% of all our trucks, loaders and drill rigs are being produced by satellites. And 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. So we can actually expand the business a lot without adding capacity, and that's the key to the trick. We haven't really made any capacity adjustments at all over the last 3 years, and we have no intention of doing it even if demand picks up. Yes. So outsourcing is the name of the game. Thank you very much. And with that, we'll close this session. And thank you for calling in, and we'll see you all again in about a quarter this time. And until then, we will wish you a happy Easter. Yes. Happy Easter. Take care.