Ladies and gentlemen, very welcome to the presentation of the fourth quarter result for Sandvik. My name is Magnus Larsson. I am Head of Investor Relations, here at Sandvik, and together with me, our Chief Executive Officer, Olof Faxander, our Chief Financial Officer, Emil Nilsson. We will follow the normal procedure, which means that we will start with the presentation and follow up with the Q&A session as well. Without further ado, go ahead, Olof.
Thank you, Magnus, and, very welcome here, to this presentation for the fourth quarter for the Sandvik group, and also the full year result, of course. All in all, I think, one can conclude that 2012 was a very strong year for the Sandvik group. We had a record high invoicing at, 98.5 billion Swedish krona, and a very strong operating cash flow at nearly 12 billion Swedish krona. And that adjusted EBIT margin for the group, for the full year was 15%. 2012 has also been our anniversary year. We have been celebrating a lot around the company, our first 150 years, as we're talking about.
We also spent a lot of time working on our strategy, which is really about building the future, the next 150 years or so, that we want to continue developing the company. During the year, we've also had a successful implementation of our strategy, I feel. Both Mining and Machining Solutions displayed record invoicing, so a very strong development in these areas. And we also showed very good progress in our two turnaround business areas, Sandvik Materials Technology and Sandvik Construction. We took a number of steps in reducing our cost base, which, of course, longer term, is enhancing our competitiveness as a group, and during the year, our workforce was reduced by almost 1,300 employees.
So a lot of things happening during the year, and a lot of, I think, important steps taken in building the future for the company. If you look more specifically at the quarter, we had significant non-recurring charges based on the cost savings program that we announced in November last year here. If you exclude those, we report an adjusted EBIT of just over SEK 3 billion, and an EBIT margin of 12.6%. The rolling 12-month return on capital was nearly 20% for the group. The EBIT was affected, and also the cash flow, by a very significant decrease in inventories. We had a reduction of inventories of about SEK 1.4 billion in the quarter, and that led to a record high cash flow.
In fact, in the Q3 2012, we set the previous record for the group in terms of operating cash flow. But we beat that by nearly SEK 500 million in the fourth quarter, due a lot to the reductions we could do in our net working capital during the first, fourth quarter. But of course, when we have such a very significant inventory reduction, that does lead to certain underabsorption effects in the company. We are producing at lower rates than what we are invoicing at, and that effect we judge to be roughly SEK 400 million. So if we would have had a production rate at the same rate as our invoicing rate, then we would have had roughly SEK 400 million more in EBIT in the company.
The dividend, the board is proposing to increase from SEK 3.25- SEK 3.50, and this is, of course, proposal to the AGM that will finally decide on this. The 3.50 is more or less 50% of our EPS before non-recurring charges, and that is in line with the financial targets that we've set out for the group. The market conditions in the quarter were unchanged compared to the third quarter. We had a significant slowdown over the summer, and also in the month, which was clearly visible in the month of September, in the third quarter. We haven't seen really a further deterioration, but a continuation on that weaker level during the fourth quarter. And then we also announced some changes in the group executive management.
Jonas Gustavsson, who has done an outstanding job, I would say, at Sandvik Materials Technology, is going to get the opportunity to run Sandvik Machining Solutions. Petra Einarsson, who has been part of the management team at Sandvik Materials Technology, running Tube, which is more than half of the materials technology business, will succeed Jonas in that role and continue the work on the step change program and the development of SMT. If you look at our various markets, Europe continues to be the largest region at 34% of our sales, and for the third consecutive quarter, displayed a year-on-year decrease in invoicing. So the market conditions have been quite tough in Europe. North America, which has been very strong, actually, quarter-on-quarter, year-on-year, displayed a 5% reduction in sales here.
Well, you see the development in other parts of the world. In terms of order intake, the strongest region was really Africa, which continued to show a strong growth, while most other regions in the world showed a weaker development. Looking at our customer segments, we have growth year-on-year in the invoicing for our energy, aerospace, and mining sectors. While the other sectors actually show a decline compared to the same quarter the previous year. And if you look at the trends compared to the preceding quarter, it's more clearly mining and construction who have a negative trend, while the other areas of our business portfolio here are, or business segments are more on a stable pattern compared to the preceding quarter.
The order intake is affected by the weaker market situation, and you can see that we've had a considerable drop over the last two quarters in our order intake from where we were in the beginning of the year. The order intake came in at SEK 21 billion, roughly, which is a year-on-year change of about 10%. If you compare that to the invoicing, you can see that the invoicing was considerably higher than our order intake, so we are still, for the now, for the second quarter, operating with a negative book-to-bill. The invoicing came in at SEK 24.3 billion, which is still at a high level compared to the preceding quarters.
Our EBIT, we talked about a bit earlier, adjusted for the non-recurring items, we came in at roughly SEK 3 billion, and we had this effect of underabsorption of fixed costs due to the lower production rates when we reduced inventory, representing an effect of roughly SEK 400 million. The cash flow then was the positive, very positive development in the quarter. And as you can see, compared to the historical numbers, the Q4 cash flow was very, very high, and we beat the previous record set in Q3 2012 by over SEK 500 million. And this was, of course, strongly driven by the strong reduction we had in our net working capital in the quarter. Looking here at this graph, we dropped the net working capital as a percentage of sales from 30% to just below 27% for the group.
We still have our long-term target of 25%, and we've also put in the bars here, so you can see the absolute volume, and you can see there's a significant step in the absolute volume downwards of our net working capital. Looking at our bridge analysis, you can see that we actually had an increase in invoice sales, but a decrease in EBIT, in terms of price, volume, and productivity terms. And this is, of course, mainly explained by, or is explained by the underabsorption effects we have by the inventory reductions in the company. Currency did not affect EBIT, but did affect invoicing a bit, and then we had some structure one-offs compared differences compared to the same quarter last year.
But, well, and in terms of the development on the EBIT margin, in terms of the increased invoicing, it's not a relevant number, since we had a negative EBIT development and an increased invoicing here. Looking at, specifically at our business areas, Sandvik Mining had a very strong invoicing for the quarter, and that's of course, based on the strong order backlog that we have in the mining business. But the order intake was on a clearly lower level. We still see high activity in Africa, where metals like gold, for example, remained on a very high level. But we had declining demands in regions like Asia and especially in Australia, where the sales of mining equipment is slowing down very considerably. And the two minerals that are driving the slowdown mainly are iron ore and coal.
We have taken certain measures as part of the program we announced in November to reduce cost levels within the mining business, to adapt to the somewhat weaker market conditions that we're seeing right now. The EBIT more or less came in line with what the level we presented last year. Here we had some non-recurring items within mining of SEK 170 million. But we also had some effects due to this underutilization here when we were reducing inventories within the mining business area. Return on capital for the business area was very strong at 38.5%, and we nearly hit the 25% target within mining when it comes to net working capital as a percentage of sales at 26%.
When it comes to machining solutions, we continue to see stable market conditions, but on this lower level that we saw during the third quarter. We saw good demand in North America, and particularly the aerospace industry is developing favorably, but we see declining demands in other markets. The EBIT came in weaker than last year, in part explained by underabsorption effects due to inventory reductions, and also in some Sandvik Machining Solutions, we had some non-recurring charges due to the cost savings measures that we announced during the fourth quarter. Return on capital came in at 32%, and also here we achieved a net working capital as a percentage of sales of 26% for the business area.
If we look at our three remaining business areas, and start with Sandvik Materials Technology, we continue to see fairly stable demand in the oil and gas sector, and the energy sector has been the area holding up best for Sandvik Materials Technology for a considerable period of time. But we do see weakness in many of the other segments that we are exposed to from Sandvik Materials Technology. Despite the quite weak market conditions Sandvik Materials Technology has been experiencing, we did come in with an EBIT margin of 10.5%, which I think is a very strong result for the business area. And I think really shows that they're bearing fruit from all the efforts they have been making during 2012.
Sandvik Materials Technology had the bulk of the non-recurring charges that we took during the fourth quarter, SEK 670 million. Construction came in with a bit of a weaker result than they've seen previously during the year, and the EBIT margin was at 3.5%. One part of that explanation is underabsorption effects, but we also had a number of different one-off items that was affecting the results, none of them large enough to really comment on in isolation. And then finally, for Sandvik Venture, which is quite a mixed portfolio of different businesses, we had especially high activity for Sandvik Process Systems, but for Hard Materials and for our Wolfram Bergbau und Hütten, we had a slower market situation, which was so they were developing in a more negative direction.
The EBIT margin for Venture was 15.9%, so quite a strong EBIT for that business area here, then. I mentioned briefly the changes we're making to our group executive management. Jonas Gustavsson, which some of you have met at our Capital Markets Day, and so has done an outstanding job, I think, running Sandvik Materials Technology. He's a strong leader, has built a strong team around himself with a shared vision about how to develop the business area. And they've also, over the soon two years that he's been managing the business, really delivered very tangible results for the business area. So he's now going to get the opportunity to run one of our biggest business areas, taking over as president for Sandvik Machining Solutions as of first of February.
And he will be succeeded by Petra Einarsson, who has a long career with the Sandvik Group and is currently running our tube business within Sandvik Materials Technology. And she has been a key player in also the successful development of Sandvik Materials Technology over the last two years. So she will continue to develop this business area with a high level of ambition, and of course, in line with the targets that we've set out previously. So if I summarize the fourth quarter here, we see more or less unchanged market conditions compared to the third quarter. So the slowdown we saw, we have continued at that level, but we have not really seen a further negative trend compared to the third quarter.
We announced further structural measures to adapt to the weaker market conditions that we saw, and they were announced in November, and I guess you have all seen the press release here. We had a record strong cash flow, a lot driven by the successful reduction of our net working capital in the quarter, and we announced the previously mentioned changes in our group executive management. And then if you finally summarize the full year for the Sandvik Group, we had the highest invoicing in the company's history. We had a very strong cash flow during the year, and we have started a very successful implementation of our new strategy with a new organization and started to deliver on the targets that we set out in that strategy. The market conditions changed quite significantly for the group during the year.
We started with a very strong market, I would say, during the first half of the year, and that has slowed down somewhat in the second half of 2012. The dividend is proposed to increase from SEK 3.25 the preceding year, up to SEK 3.50 this year. Finally, let's see. I don't know what's happening here to your presentation, Magnus, but, well, we had... I don't know what's happening with the computer, but, we were also gonna mention the Capital Markets Day, which is moved, I think it was to the twenty-fourth of September. So, that, Magnus and I, Olof can inform you more about, later on here. So you're very welcome up to Sandviken in September and hear more details about what's going on within the group and within our business areas. Okay.
Okay, very good. And we'll kick off with the planning of the Capital Markets Day as soon as we're ready with this one. By that, we open up to the Q&A session, and I welcome our Chief Financial Officer, Emil Nilsson, as well. So we'll do it like this. We have questions from the international audience, and you are most welcome to ask questions here on the floor in Stockholm as well. We have got two microphones, and I think we will start with the international audience. Do we have them online? Yes, we do. Could we have the first question, please?
The first question comes from Andreas Willi at JP Morgan. Please go ahead.
Yeah, good afternoon, gentlemen. I've two questions, please. The first one, if you could give us maybe some indication on destocking in terms of the divisions. Are you done now everywhere? Maybe give us some indication of where you still need to do more in Q1, if so. And the second question on machining solutions, if we compare your performance to your main competitor, you start to outperform them in terms of the top line by a little bit more each quarter for the last few quarters. Do you attribute that to just different mix, different exposure, or do you see an underlying market share gain for Sandvik? Thank you.
... First, the destocking. I mean, we had a very significant destocking effect during the fourth quarter, and you should not expect an effect of that magnitude in the first quarter. So, a production level much more in line with our invoicing level for the first quarter. We still are somewhat, on the other hand, above our long-term target of 25%, so we do still have a need to reduce our inventory somewhat further for the group. When it comes to SMS, well, we have had, I think, a good market performance for SMS. Our brands are developing well.
I guess market share is different from different markets and regions around the world, but anyway, compared to our only public peer, I think we can be at least pleased within Sandvik for the development that we have seen so far. And I don't think I can really comment the Kennametal result any further than that.
Thank you.
Okay.
Another one from the international audience, please.
The next question comes from Mr. Andre Kukhnin at Credit Suisse. Please go ahead.
Good afternoon. A couple of questions, please. Firstly, on Japanese yen, you've got a couple of Japanese domestic competitors in tooling and in mining construction. How do you see the competitive landscape rolling out from here? Should we see this sort of weakness to be sustained going forward?
We have some competitors from Japan in the premium market for machining solutions, which is where we have our main Japanese competitors in machining solutions, where we have our main competitors. We don't really have any players in the real premium market. They are quality-wise normally, I think, in a somewhat lower part of the market. So our main competitors for Coromant and Seco are Kennametal and Iscar, not located in Japan. Then I should remember that we also have one factory in Japan where we are manufacturing inserts, so we get part of the benefit of a weaker yen. So I don't think that has a big impact on the competitive landscape for the Sandvik group.
Thank you. And, on mining, a broader question, trying to take a step back. Obviously, we've had a deterioration in the bookings, and you are taking a step to adjust your capacity to it. But, as I was taking a step back, thinking about it broader, are you seeing it as more of a structural slowdown and therefore adjusting your capacity to that? Or are you seeing it more of a sort of blip engineered by your customers looking to preserve cash flows?
Well, we're not analysts following the mining industry, and I'm sure you all read plenty of reports about that. I think the general consensus expectation is somewhat slowdown in the mining CapEx over the next 1-2 years here going forward. What we see today is a very different type of slowdown compared to what we, for example, saw at the time of the financial crisis. We do not have large levels of cancellations within the Sandvik group at this point in time, and the mines are continuing to produce at their current rates, as we see it. But they are slowing down the rate of investments in capacity expansions. That's what the market scenario is looking at like right now.
So it's not the falling off the cliff or a very sharp decline in mining production rates, but they are slowing down their investments in expansion of their business.
Thank you very much.
Thank you. Could we have a question from the floor here in Stockholm, please?
Yes. Thank you, Peder Frölén, Handelsbanken. If I start with machining solutions, I guess, Jonas move into, to MS is sort of an offensive one, and maybe you can update us on the sort of emphasis on the growth strategy. I think that would be in place. You mentioned in the report about the Carboloy, that is one leg. Could you share some thoughts about more in that? And also on MS, how much of the inventory reduction of SEK 1.4 billion is actually coming from MS? Finally, on mining, inventory to sales currently after this, I guess, rather significant reduction in the fourth quarter and a long-term attractive level for that type of business in your mindset.
Once again, the last one.
Inventory to sales in mining.
Yes.
End of Q4.
26%...
Yeah.
Or inventory. Okay.
Yeah.
Well, starting with Carboloy, and Jonas' appointment at SM S, I mean, we have, I think, established a good strategic direction for the business. And, the key challenge for Machining Solutions is to continue to grow the business. It's a very profitable business. We are the market leader in, in that area where we're operating, and, we need to continue to grow and expand and develop that business. This is not a turnaround case or, or so, and you should not see that this management change in any way means a significant directional change in our strategies. You should not interpret that in that way.
When it comes to SMS, the share of the inventory reduction, I can say out of the SEK 400 million in underabsorption, to try to give you a picture, about SEK 100 million, a little more, relates to Sandvik Machining Solutions in the fourth quarter. And then finally, net working capital to sales, if we look at that number, I think we still have this 25% target for mining. That's the first level we want to achieve. Then, of course, longer term, we may well set tougher targets than that, and believe that we can achieve that. But first, we have to sustainably establish us on the 25% level as a group, and then keep on working from that point.
Just follow up, the inventory sales in the fourth quarter of mining, do you have any sort of indication number to share with us?
I don't think we've disclosed that number, so.
Okay.
You'll have to settle with what we have.
Thank you.
Thank you. Another question from Stockholm?
Yeah. Hi, Johan Eliasson from Cheuvreux. Just a few questions on your guidance. You talked about net financial cost, SEK 2.2 billion next year. That's roughly 10% up from this year. What's the reason? How much is accounting changes from the pension debt? And the second thing is, you also guide for the CapEx that potentially could be up 20% over last year's CapEx budget, if you reach the high end. What do you want to invest in right now? Thanks.
Let's start with the CapEx maybe, and then I'll let you... Well, I mean, we came in considerably below our guidance to CapEx this year, and in part, that is related to projects drifting into 2013 from 2012. So that's really the effect. We have not raised our general ambitions in terms of CapEx in the company, and we are still clearly below peak levels we had before the financial crisis. So you should not interpret that necessarily that we are increasing the CapEx rates in the company. So, and then the financial items, I'll hand obviously-
Yeah, we had in the fourth quarter, and a net financial cost of a bit more than SEK 500 million, and you shouldn't take this as any significant increase. I think you should read it that the conditions will more or less prevail, the very favorable conditions for a company like Sandvik at the moment, and that we interpret that this will stay.
Thank you very much. Questions from the international audience, please, operator?
We have a question from Mr. Ben Maslen at Merrill Lynch. Please go ahead.
Yeah, good afternoon, gentlemen. Three quick questions, please. Firstly, Olof, just on construction, you said there were a few one-offs that were not very big, individually, but maybe could you give us the total, so we can just assess the underlying margin? Secondly, on China, we've seen some slightly better top-down data from China over the last month or so. Any signs of, sequential improvement in China across your group, either late Q4 or so far in January? And then finally, on mining orders, do you think we've reached a kind of stabilization now in terms of the demand level, that we saw in Q4? Or do you think it can weaken further from here, based on what you see, in terms of your tendering or pipeline, going forward? Thank you.
Well, construction one-offs, I cannot be really more specific than we have been, right now. So I'm sorry, I don't have any more information to share with you on, on that here. When it comes to China, well, I mean, that has been, there's been a slowdown in China, was especially an area that was especially slow, for, for example, mining. When it comes to going forward, I mean, we don't guide really markets and market expectations, so development forecasts from the Sandvik, group here, so I don't have any guidance going forward. One can hope that the new leadership change will lead to, a higher ambition in terms of growth and so on, and, but that's more a general, expectation than, anything specific for Sandvik.
When it comes to mining orders, well, as I said, we haven't really seen a very significant negative trend. I mean, it's stabilized at the lower level. We feel that we were a bit low on the aftermarket business and that there potentially is some destocking during the Q4 going on with our customers here. And since the mines, as I said earlier, are really continuing to produce at their ongoing production rates, they're not cutting production rates, the aftermarket business should really be stable in that environment for the Sandvik group. So once that destocking phase is coming to an end, there could be some potential for us to see some improvement in those in that area.
Okay. Thanks. So thank you very much. Thank you.
Thank you. Another question from the international audience, please.
The next question comes from Mr. James Moore at Redburn. Please go ahead.
Hey, good afternoon, everybody. It's James at Redburn. I've got two questions really. The first is on the underabsorption of fixed costs. Thank you very much for helping us with the SEK 400 million number in the fourth quarter. I just wondered if you could say what the full year impact was. I'm particularly trying to understand what the first half of 2012 was, because I think you built inventory in the first and second quarter, and I'm just trying to think about the year-on-year challenge to EBIT from that benefit dropping out in the next couple of quarters, and if you can help us a bit with that. My second question surrounds pricing in mining and construction. And I look at Ritchie Brothers and other sources of information out there, and I see some sharp deteriorations in the price of secondhand equipment.
Could you give us a sense for where pricing is at the moment for OE, in those two businesses, and how it's developed? I suspect it's turned negative against the 1%-4% positives we were seeing over the last 5-10 years.
I'll let you deal with the underabsorption question, Emil, but just commenting on pricing, in our order stock, of course, we have a lot of orders that were booked before a slower market environment. So there, of course, we have booked a lot of orders and still a more favorable pricing environment. It's not my belief that we are seeing or have seen in the fourth quarter any deterioration in our pricing. Then, I mean, that could change in the future, but we believe that prices are still at least flat or even somewhat positive in the fourth quarter here.
And then underabsorption, maybe for the full year, we don't really have—Well, the inventories year-over-year haven't changed that much, so you could assume that, you know, the effects are not that big in the total. I mean, the quarters when we are building inventory, of course, you have, you could say, an overabsorption effect, where we're running production at higher rates, and we are in invoicing, that does lead to an overabsorption, in the same way as we have underabsorption when we are running at slower rates.
But the reason I ask is you did SEK 1.4 billion of inventory reduction in the fourth quarter, and something like SEK 1.1 billion in the third quarter. And as you say, the full year is flattish. So if we had something like a SEK 400 million hit in the fourth quarter and maybe a bit less in the third, do we have SEK 600 million-SEK 700 million of positive in the first half of 2012? And does that mean we have a challenge when we compare against that first half of 2012 for the next couple of quarters of EBIT? Is that something you were cautioning us on?
I think it's reasonable to believe that we had a positive effect while building inventory during the first half. But if we look at the total year, I don't see the effect to be very significant. I could add to that as well. No, the effect should not be that significant. And also remember that the volume effect in Q3 was only SEK 150 million, compared to the SEK 1.4 billion in Q4. So we're looking at an effect in Q4, essentially, and not so much during the first three quarters.
Thank you. Thanks, Rex.
Okay. Next question?
Next question from-
Yes, please.
The next question comes from Mr. Colin Gibson at HSBC. Please go ahead.
Hi, good afternoon, gentlemen. Quick, two questions, please. First of all, order trends across the group were mostly fairly positive compared to Q3, but obviously, Venture was the opposite. Venture saw a sharp slowdown, and in the text of the press release, you mentioned Wolfram. In that regard, you also mentioned Hard Materials earlier in the call. Could you just give us a bit more illumination, really, on what was going on at Venture order rates? And should we see this as customer destocking having had an impact there, or how would you describe it? That was the first question. Second question, just going back to Jonas taking over at Machining Solutions.
I guess the restructuring at Materials Technology is still ongoing, but how do we then interpret the guy who's in charge of that restructuring moving over to Machining Solutions? Do you think Materials Technology is already achieving all that it can achieve in the current steel price environment, and so you think his work is done there, or how should we see that? Many thanks.
First, order trends in Venture, then Wolfram has been more significantly affected since they're early in the manufacturing chain, when there is a destocking going on, they get affected. I mean, it's normally the amplitude of the swings increase backwards in the chain. So they have had a sharp slowdown in their order intake, a lot due to inventory reductions within our group and outside of the group of tungsten carbide. When it comes to Jonas, I think, I mean, he's soon been two years at SMT. A lot has happened during that time.
I think in no way SMT is done with its strategic developments, but we have Petra there, who's been a key player, and she has been important part in shaping the ongoing strategy and within SMT. So her plans is obviously to continue with the development of SMT, and you shouldn't see that the plans that we presented and the ambitious levels that we presented for SMT have changed in any way due to this management change. And for SMS, I mean, it's not about implementing a step change program for SMS now that Jonas moves over there. The situation for SMS is, of course, dramatically different from that of Sandvik Materials Technology.
And here, the agenda is very much about growth, finding a good structure within our brand portfolio, creating an efficient supply chain in terms of manufacturing, and focusing a lot, of course, on future R&D and development of our products in this area here. So, I think in either case, for SMS or for SMT, you should assume that this means any dramatic deviation from our ongoing strategy in the company here.
Thanks.
Thank you very much. Questions from the floor in Stockholm?
Hey, Anders Roslund, Swedbank. I wonder about the nuclear market in China. When will that kick off again? And then, will you move the high-speed steel tools, Dormer to Machining Solutions from first of January, and how big is that sales impact?
Let's see. Well, when it comes to the nuclear development, I mean, the sentiment is improving somewhat in China, which is the main market for nuclear. But it, so some investments are probably gradually going to be released here. And, but it's gonna be nowhere close, really, to the ambition level that we saw before the Fukushima accident. So we think that we will see a gradual release of some reactors in China, but not at the rate that we were expecting before the Fukushima accident here. Dormer, I'll be guided on any numbers here. We haven't really done that.
I mean, Dormer is quite a small area when it comes to the machining solution, so it's not gonna have a material impact on EBIT, EBIT margin or so for the business area there. So it's a fairly small business, but it belongs more logically with machining solutions, as we see it, since it is drills for metal cutting applications, and therefore has a similar type of at least application base as many of our other products within that portfolio do. Okay? Yeah.
Thank you. New question from Stockholm.
Yeah. Kenneth Johansson at Carnegie. A question on the materials technology again. When I read your comments, you're getting more and more optimistic about the development in the area, and you also comment more that this business is not for sale, that might have been on the agenda when you started the restructuring. Do you feel that the organization is more embracing the change culture that you're trying to implement, and that's the reason? And secondly, do you would you consider other strategic opportunities for parts of that division, for example? Or what's your thinking now?
SMT has, during this year, had a drop in sales, but an increase in EBIT. So they have really managed, in a quite tough, tough market environment, to display very positive developments, here. And, as you say, I am, quite impressed with what has been achieved in that business area during 2012. And, I think they have a, a good agenda going forward and, can develop that business, even further. Then structurally, what this means, longer term, I think I, I cannot say anything more than what we've said in the past regarding that, so.
Okay, thanks.
Mm-hmm.
Thank you very much. Another question from the international audience, please.
We have a question from Mr. Sebastien Gruter at Société Générale. Please go ahead.
Hi, good afternoon. First question on the underabsorption by division, you gave us the number for machining solutions. Could you give us the numbers for the other divisions? Second question related to the mining project business, where we had a big step up in revenues in the last quarter, in Q4. And I'm just wondering, given the orders you have on hand, what could be the quarterly run rate for mining project revenues in 2013? And finally, on machining solutions and the Carboloy brand, I would like to understand if it will have a material impact on machining solutions top-line performance. Could we see the distributors building inventories for this brand, which will help the divisional top-line performance for a number of quarters? Many thanks.
First, the distribution, we could say we had roughly SEK 150 million underabsorption effects in mining, a little over SEK 100 million in Sandvik Machining Solutions. For venture and construction, we were around the SEK 50 million number, and for materials technology, it was a very low number. So that's roughly the split of the underabsorption effects for the group. When it comes to projects, I mean, we don't guide going forward, but projects are very much related to mining CapEx.
In the other parts of our business portfolio, we have a large aftermarket business, and so which is normally, in a slowdown in mining CapEx, much more stable than what you see, for example, in the projects business, where if CapEx budgets are cut, normally the projects are affected very directly by those cuts.
Let me rephrase maybe the question. I mean, could you just quantify the order intake for this business in 2012 and compared to revenues, just we understand, if you were able to match the revenues?
We have not given such a number of the order intake. I mean, in the reports you have for each quarter, the share of sales we have into this area. But we the larger orders we press release, but we don't give the exact split in terms of order intake here. And then if we move on to the Carboloy, I think, in the next couple of years or so, you cannot really expect a very material effect in the SMT, top line or EBIT, from Carboloy. I mean, we're focusing on China and India, and it's quite a long process to really establish a new brand, establish your relationships with new customers.
So this will be a gradual ramp up and build up of this brand going forward, and not a dramatic sales explosion very, very quickly from the Carboloy brand.
Just to fully understand, that will be-
... direct sales or indirect sales? Or are you going through distributors for Carboloy?
We're only offering this product. It's a low service product that's only offered through a distributor route to market, not any direct sales at all of the product.
Okay.
Thank you very much. Another question from the international audience?
We have a question from Mr. Aaron Ibbotson at Goldman Sachs. Please go ahead.
Yes, hi there. Got three quick questions remaining. First of all, just a straightforward one, what type of cash outflow are you expecting from restructuring in 2013? And then a second question on cash, which is just your net pension liability is going up quite a lot. I was just wondering if there's gonna be any cash implications from that in 2013, and indeed, going forward. Finally, I've just got a sort of bigger question, I guess, on structural versus cyclical costs and your latest restructuring program. So, you know, even if I add back your restructuring charges and your underabsorption, I get around 14% margins now for the last couple of quarters on an underlying basis. This is quite a bit lower than you've reported in the past, despite two finished, two large structuring programs.
So I'm just trying to understand here, if you think, you know, if you assume no under or over absorption, that this is the type of level that Sandvik can deliver on, on an underlying basis, or if you think that you can take these margins higher on a structural basis, because of this latest restructuring program? Thank you.
Well, if I answer the last one first, and then I'll leave the other two to Emil after that. But, I mean, the costs we are taking out, now, we believe are structural, more or less, all of them. The first program of the SEK 1 billion cost saving has had a gradually increasing effect during 2012, and by the fourth quarter, we had achieved the full effect of the SEK 1 billion cost savings, so roughly SEK 250 million impact in the specific quarter. The second program was, which is also for about SEK 1 billion, was announced in November and has had no effect in terms of reducing costs, really, in the fourth quarter yet. So that effect will come then gradually during 2013.
But net, after these two programs are completed, we believe that we will have reduced the cost base in our business with SEK 2 billion. But to fully achieve that, we're gonna need all of 2013, really, to get there. So that's what we feel. So we feel there's a lot of upside opportunity in terms of both reducing our cost base, but of course, also growing and developing our businesses when it comes to developing the margins in the company. Then with the other two questions, I'll hand over to you, Emil.
Yeah. So on the first one, in terms of cash outlays related to the new accounting standards or revised accounting standards, it will only increase the pension obligation and also reduce our equity, as we quoted in the report. These defined benefit plans are basically closed for new, or they are closed for new entrants. So it will actually reduce over time. So it's a non-cash impact. On the second question, you asked about cash outflows with respect to restructuring. We said that we would have a cash impact of about SEK 750 million for the plans we announced. It's reasonable to assume that most of that will come during 2013, where most of the cost savings will be realized.
Okay, thank you. Sorry, Olof, can I just clarify a little bit, just to understand your thinking here? So if you look at SEK 1 billion that's been taken out, and we haven't really have any negative effects or negative operating leverage, so what is it that drives these margins down, right, be flat then on an underlying basis? Is this restructuring program to offset, you know, price inflation that you have in your cost effects, so we should sort of see it on an in product basis, maintaining? Or are you expecting them to actually drive margins higher?
Well, I think we have some changes in mix of business within the, in the group. The share of, Sandvik Machining Solutions or tooling at the time in the group, before the financial crisis, was significantly higher than, what it is today. The mining -- simply because the mining business has been the fastest growing part of the company, and they have a high return on capital, due to, but due to a, a smaller capital base, and they make that return on capital and also in a lower margin than we do in, Machining Solutions for the former tooling. So these kind of shifts, so I think it's, wrong to just look at it simplistically or straight across the company.
You have to consider these, mix shifts from the different business areas and the rates that they are growing at. But, from a mix point of view, the faster we can grow Machining Solutions, as a share of the company, of course, the more the EBIT margin will grow as a company. But, if you instead of have the return on capital focus, and, you can see that, we have a higher return on capital rate in, mining than what we do in Machining Solutions, for example, despite the weaker margin.
Okay, I'll leave it there. Thank you.
Yeah.
Thank you very much. Do we have any more questions from the audience here in Stockholm?
... Some follow-ups, Peder Frölén, Handelsbanken. Growth in MS, again, I mean, acquisitions, tough market conditions might be acquisitions out there, or, and you have proven sort of an organic ambition when it comes to growth. Considering acquisitions within MS, is that something on the table? That's my first question. And secondly, do you think it's possible to try to quantify the destocking effect on the aftermarket for mining in the quarter? I mean, this has been something that's been discussed for a couple of quarters now, but it's a bit hard to really understand that effect. It's visible in the share of sales that you report, but maybe help us out there.
Well, with SMS, first, and acquisitions, I mean, we are the market leader, and the largest global player on this. So in terms of large acquisitions, it's unlikely that Sandvik could do any such due to competition laws and these kind of limitations that exist. There could still be sort of bolt-on, smaller type of acquisitions, which could create opportunities for us. But to see us buying a larger player is not something you can expect from Sandvik, within SMS.
Then when it comes to destocking and the aftermarket, well, what we're really saying is that normally the aftermarket is, as long as the mines are operating at their current utilization rates, which we believe that they have not really changed, those on a global basis, then our aftermarket sales should be stable. But due to, I guess, some parts of increased uncertainty, pressure on many of the mining companies in terms of cash flow, cutting CapEx, and so, we, we believe there is a certain destocking, going on there. We've seen a drop in aftermarket despite that the production rates are maintained, and that should be a temporary effect as long as the, the miners don't cut their actual production rates.
Do you have any figure to show us sequentially if Q3 is 100, is it down?
Not, not here, no. But you can call Magnus, and he can talk with you about that.
I certainly will. Thank you.
Well, thank you. Do we have any more questions from the floor in Stockholm? We have some left at the international audience. Please go ahead.
The first question comes from Mr. Guillermo Peigneux at UBS. Please go ahead.
Hi, good afternoon. It's Guillermo Peigneux from UBS. I just wanted to ask about further actions in terms of restructuring, apart from the ones that you have announced. Are you considering any, given the fact that some of your markets maybe are still weak and not showing much of a pickup in terms of activity, and in which segments? And then secondly, we've heard also, and in line with ourselves, so to the mining segment, that commissionings and mining openings are on the rise. So I was wondering, how can you reconcile an aftermarket figure that goes down with installed capacity being actually deployed to the market at the moment? Shouldn't we see aftermarket revenues up already?
So, first, I mean, in terms of further actions, I mean, we will, of course, if the market changes further, of course, have to consider those kind of actions in the company. We have on top of the restructuring measures, we have worked a lot with the time banks and trying to build this kind of flexibility into our company. That helps us to flex production without actually having to make people redundant. So we are using these kind of systems to adapt as well. If the market would deteriorate further or so, of course, we would have to consider maybe more significant actions. But with the current situation, we believe that we have taken appropriate actions. Then I'm not sure I really followed your last question here.
What I'm really asking is... Sorry. So what I'm really asking is where aftermarket is, in a way, picking up at the moment on the mining business, the way you see it on your, on your activity levels at the moment on Q1.
Well, I mean, I don't have any mining numbers even myself yet for Q1, because we haven't even closed the January books. I don't have any sort of guidance of views to give on, on how this year has started. The only number we normally share is our insert sales, which have started up in the beginning of this new year, roughly at the rate that we saw during Q4, during the first weeks of January. And that's the only market update data we can share with you really, regarding 2013 at this point.
Okay, thank you.
Thanks very much. Another question, please, from the international part.
We have a question from Mr. Alexander Virgo at Berenberg. Please go ahead.
Yeah. Hi, gentlemen. It's Alexander Virgo at Berenberg. I just wanted to run through, if you could, some more color in terms of construction. And just could you talk a little bit about how you saw the development of demand through the quarter, particularly, perhaps particularly in North America and Europe, given that we've focused a little bit more on China? And, perhaps any comments you can make on the size of that project systems business there or the systems business there, as you expect that to develop through this year?
Sorry, could you repeat the second half there, once again?
It should just be, just to understand how you believe the systems business in construction, which you called out explicitly as being postponed in, or the projects business that you called out specifically as being postponed in China. Is that something that we need to think about elsewhere, other than China, or is it predominantly China? You know, sort of the expectation as to how that develops through this year, just because obviously, that has a dilutive effect on margins.
Well, first, I mean, regarding the markets, I mean, construction is one of the areas, as I showed, where we believe we have a quarter-on-quarter negative trend. Actually, I mean, for the bulk of the company, we've said that we have more or less the same level. So we have seen a weak construction market in Q4. When it comes to development of the systems business, I mean, I cannot give any real guidance for you during 2013. All these, just as it is with mining, is very CapEx related and very strongly connected to the availability of capital. All these bigger projects are very connected to the availability of financing.
If the investment rates into infrastructure and so on pick up, this will, of course, help the systems business for our construction area as well.
Okay. I guess, I mean, I was just trying to understand, in particular in North America, the impact of fiscal uncertainties in causing hesitation in terms of demand. I'm assuming that that was more a December characteristic than otherwise, but I'm just trying to understand whether you feel, how much of that you feel was actually an effect of underlying demand, and how much of it you feel is an effect from uncertainties around the fiscal cliff and the drop-off of tax rates, et cetera?
If you look at the U.S. specifically, there's a big issue around the state of finances, both on a federal level, on a state. But most of the construction projects are found on, are funded on a town or city level or a state level, but they also have big debts and big financial problems. So the US construction market will depend a lot on the availability for funds in terms of private projects, where you build the road and charge a toll or however you finance that.
And that will be what will steer the development, I believe, much more in the U.S. construction market going forward than government funding, because the governments are, even though we've come past the fiscal cliff and so on, still in quite poor shape, and many of them, especially on the levels, also on the levels that are funding a lot of the infrastructure projects, in terms of towns and states, in quite poor shape. So, yeah, the development of availability of financing and these kind of private initiatives within infrastructure investments is a key to how the construction market will develop in the U.S. I hope that gives you...
Even though we're past the fiscal cliff, I don't think there will be big funds being released from government, states, cities for infrastructure.
Okay. Thank you.
Okay.
Thank you very much. I am being informed that we have no more questions, which is a good timing. The hour is up. I thank you for the attention, and welcome back when we present our Q1 results.
Thank you, everybody.
Thank you very much.