It's so nice to see so many of you here, and very welcome to you all for attending this presentation of Sandvik's Quarter Four Report 2010. Today we will follow almost the same schedule as we normally do, meaning that we will start with a presentation made by our today former CEO, Lars Pettersson, because he was still responsible for what happened in the fourth quarter. Secondly, we will have a Q&A session, but at the end you will also get the opportunity to meet our new CEO, Mr. Olof Faxander, and maybe also raise a few questions with him. So, with that said, and for your last time in the hat of Sandvik, Lars, please do the presentation.
Thank you very much again, all of you. Very welcome to this presentation of the fourth quarter, and it's impressive to see how many have turned up in spite of the beautiful weather outside. For the quarter we had a very interesting and now a very strong quarter in terms of increased sequential demand. All business areas improved sequentially, but of course mining and construction improved the most, and especially the equipment and project business. We saw an operating profit of SEK 3.1 billion, or 13.4%, slightly below my expectations for the quarter. It was driven up, of course, by higher volumes. A high share of project invoicing I would say diminished the margin with about one percentage point, but of course had, on the other side, a very strong positive effect on the return on capital employed.
We had a currency effect, which is now a bridge effect year on year from the fourth quarter of 2009 of -SEK 240 million, slightly more than expected. A metal price effect of -SEK 80 million, and then total items affecting the comparability with about SEK 200 million. The return on capital employed for the quarter was 17.4%, but if we look at the quarter alone it was 20%. We're very rapidly closing in on our long-term objective of 25%, driven not the least by higher volumes in all business area, but not the least by the high project invoicing within mining and construction. The net working capital, which is I think one of the most positive aspects of this quarter, is now for the first time ever below our goal of 25%.
We reached 22%, and this is an area where I think the organization has done an extraordinary job under the lead of Ola, who has focused very much on this since he came to Sandvik. I think we have now come to a point where we also generate a very strong cash flow in the quarter, driven not only by the operating efficiencies and the result, but also by continued capital rationalization. We have concluded now, given the final approvals by the authorities, the strategic acquisition of Shanghai Jianshe Luqiao Shanbao in China, which will make Sandvik the largest producers of crushers in the world and give us a very strong manufacturing base not only in China but for the entire southern hemisphere. I think something in the long run which will be a very important and strategic acquisition for Sandvik.
For the different markets we saw continued good development in South America, not the least in the project business, in Africa, in Australia in spite of the very negative effects we have had in the Brisbane area due to the flooding, but of course also in Asia. But most positive I have to say is that we now see a continued strong development in the United States and North America, but also in Europe, which is still a very important market segment for Sandvik, even though the share of our total invoicing is coming down here. If we look at the different customer segments, the picture is rather simple. Both on a sequential and a year-on-year basis we are now seeing a positive development pretty much everywhere. All segments, all application areas, all geographies are now showing a positive development.
If we look at the order intake then this was actually the highest order intake I think that Sandvik has ever had, driven not the least by mining and construction, the project business, as well as the equipment business, but also a sequential improvement both for materials technology and for tooling. We saw an organic order intake growth of well above 30%. This meant that now the operating profit came in slightly, as I said, below my expectations, but on the other hand that return on capital employed now is moving in a very good way towards our objective of 25% on a long-term basis. The net working capital, as I said, is now well below our objective of 25%.
Of course going forward now it's the challenge and the opportunity to stay below this level and continue to operate without giving up any delivery security or compromising on the business side. I have to say the organisation here has done an outstanding job in driving efficiencies here without losing business opportunities or service levels. I think, however, it's important to remember that in spite of the fact that we're seeing good growth, a continued sequential improvement for the Sandvik Group from the peak the blue bars in this graph to the trough the red bars the group is now pretty much 90% on the level of the peak levels that we saw in 2008. For Sandvik Tooling we are 17% below that level.
So in spite of the fact that we have seen a good recovery we still have quite some ways to go until we're back to the peak levels. With the current rate of sequential improvement we would be back somewhere in the end of this year or early next year. One should remember this when we look at the margins both at tooling and for the group, that we are at least one normal recession still below the peak level. So there is still some ways to go on the volume side here. For mining and construction the market has recovered faster, but even here we are on a volume basis about 7% below the previous peak level, and for materials technology about 10%.
So this picture illustrates that yes we have seen improvements, yes we have had a good sequential development, but there is quite some ways to go still until we're back to peak volume levels. If we look at the bridge analysis you can see that the structural one-offs on a comparative basis compared to the fourth quarter of 2009 is SEK 275 million. On the operating side it's SEK 175 million, and the profit margin improvement on increased sales is 52%. So we have still a very good result effect from increased invoicing, driven by a good mixed development, but also by the fact that we are keeping good cost control in the organization. If we look at Sandvik Tooling then I said before we have seen an improved sequential demand in most markets.
It's a sequential improvement in Europe, driven mostly by the Nordic countries and Germany, even though countries like Italy, U.K. and France are also showing a rather good rebound. Very strong demand from the auto energy sectors, a continued positive price effect, an operating profit of 19.5%, out of which SEK 90 million negative is a currency effect for the quarter. Very good strong cash flow driven both by operating result but also by the fact that in this quarter in spite of the growth we have improved capital efficiency and actually cut it down to an all-time low. Return on capital employed is now 20%, and the net working capital in relation to invoice sales is 23%. For mining and construction there was a very strong global recovery in this quarter. Mining remains stronger than construction.
Asia and Africa, of course, are the strongest and fastest growing markets as we speak. But there is very strong project business that we are now seeing coming back as a result of the fact that these are very big ticket items for the mining companies. They take a long time to get approvals through the organization. You all know they were announced already in the beginning of last year. They are now starting to materialize. And we could see this very clearly in the fourth quarter with an accelerated trend in the end of the quarter, something which has continued into the first quarter so far. We also see a very high demand for metals and minerals.
This, of course, is driven by the global GDP development in general, but of course also by the very strong development and growth that we see in India and China right now. The order intake grew 34%, excluding major project orders, and the operating profit improved to SEK 1.5 billion, or 14.3%. In this number we should remember that almost two percentage points is a mixed effect from the higher rate of invoicing of projects, though again it has a very positive effect on return on capital employed. We had an increase in invoicing and production volumes. We increased the productivity. We had a margin dilution, as I mentioned, and then we had currency effects negative of SEK 70 million in the quarter compared to the fourth quarter of 2009. Finally return on capital employed reached almost 26%, the highest number ever to my knowledge.
We are now above the level, the objective for mining and construction. The net working capital came down to only 21% of invoicing. For Materials Technology there was more of a mixed picture. We saw energy and mining continuing to be strong drivers for growth. The energy sector in general, in the nuclear sector, in the petrochemical sector, and in the offshore sector shows us a good opportunity for future growth. Europe and Asia were now the markets that improved the most, whereas additional orders we received about SEK 500 million now for the nuclear industry for steam generator tubes, but also for additional orders for other products such as cladding tubes and products for the rest of the nuclear plants. The operating profit was SEK 326 million, or 6.7%.
We had a positive price effect despite on the full volume, despite the fact that on standard products, which are now less than 20% of the volume, we saw a rather negative price development in the market, which has to some degree led to that we have stepped out of more business in this market rather than participating. We see a favorable product mix, and the currency and metal effects totally adds up to -SEK 120 million in the quarter. Return on capital employed was just shy of 10%, and net working capital 27% of invoicing.
So if we look at the quarterly finals we had an order intake which grew 37% in price and volume to SEK 26 billion, an invoicing of SEK 23 billion, a growth of 31%, an EBIT of SEK 3.1 billion, and a margin of 13.4%, and a free cash flow of SEK 1.5 billion in spite of the very strong growth that we experienced in the quarter. So if we summarize the fourth quarter we saw continued improved sequential demand, an operating profit driven by increased volumes and a high share of project invoicing, an increased return on capital employed, which is our overall objective, and a net working capital at 22% of sales. Strong cash flow and the fact that we could now conclude the acquisition of Shanghai Jianshe Luqiao Machinery, which I think again is very, very important for Sandvik not only in China but in the southern hemisphere.
So if we summarize 2010 we have seen a very significant market recovery, increasing on the order side 33% in price and volume, much stronger than I expected when we went into this year. It's a structural, geographic, and segmental shift towards the southern hemisphere and east. We saw an operating result for the full year of SEK 11 billion, driven again by volumes and operational leverage. Very good cost control in the organization where we have pretty much met all of our objectives, and a favorable product mix in all business areas.
The recovery in return on capital employed, of course, the total cash flow of SEK 12 billion, and something which I think is even more important: Sandvik has further strengthened its opportunities to grow on the growth markets in India, in China, in Eastern Europe, in the mining sector, and where we see an opportunity in the energy sector for the future. So with that I am ready to take your questions just when we have also said that the proposal from the board to the AGM is a dividend of SEK 3 per share, up from SEK 1 last year. OK.
Thank you, Lars. We welcome our CFO, Ola Salmén, up on stage. Yeah. And we are almost ready to take your questions. We will, as usual, have two microphones here in Stockholm on the floor. And I hope we are connected also to the international audience.
Everything OK with the international audience? Yes? And the mics here in Stockholm are almost in place. Maybe we should start with a question from the international audience. Operator, can we have some assistance? No? Silent from the international ones. So we start here in Stockholm instead.
Hi, it's Joakim Höglund from Carnegie. I have two questions regarding SMC. You said something about the running rate of the orders being similarly strong in the first quarter as the end of the fourth quarter. I just wanted to double-check that. And what do you see for the rest of the year? Is this a consistent level? We have quite significant project orders which tend to be a bit lumpy. Maybe you can talk about the base order end. And also, the second question is that you said you had 7% capacity left, so to speak, in theoretically.
But looking two years out, what could be a good level for deliveries? I mean, with this order intake, SEK 45 billion might be exceeded.
Well, first of all, I would like to say Sandvik Mining and Construction run rates. I said that we don't have the financial reporting for the month of January yet. That would be coming in during next week. So I am just based on what I have heard from the organization. The only thing they are saying is that the very strong demand for project business and equipment that we saw in the fourth quarter has continued into January so far. But you are absolutely right. This is a lumpy business. It will jump up and down a little bit from one quarter to the next.
I think the more important thing here is exactly what we discussed, I think, during previous quarters is that I mean everybody has been waiting to see the big statements made by the mining companies in terms of their investments to start to materialize. There is a very long handling time of these issues within the companies, given the fact that they are such big ticket items and of such strategic importance to them, that they started to materialize only in the fourth quarter. I see no reason, as we speak, to see that they will not continue to materialize, given the fact that the demand is growing. So for the future we don't make a projection. I can only say that up until today we don't have any indications that they have decided to discontinue or not pursue on their opportunities. I had to ask my question here.
I was slightly confused by your question about the 7% capacity. I said 7% back to the previous peak level. Already at that time we had a very significant additional capacity. On top of that, of course, during 2009 we added five new assembly centers in the southern hemisphere. We have taken decisions to increase our manufacturing capacity in Svedala. During 2009 we opened in Jiading our new manufacturing plant, which has the same capacity as our European units combined. We have added a lot of capacity in the meanwhile. I don't see capacity constraints being an issue in mining and construction going forward, in any foreseeable time, actually. As we now have increased our share of outsourcing and widened our supplier base, I think we are pretty flexible in terms of meeting an increased demand there.
OK. Thank you.
One more question in Stockholm.
Thank you, Peder Frölén, Handelsbanken Capital Markets. Just two quick points on SMC also. What are your sort of rules for sending out press releases for project orders? Secondly, you mentioned a 2 percentage point dilution on profitability due to project invoicing being 15% of the SMC invoicing. What is the 2 percentage point in relation to? Is it year-on-year or to a normal, say, 7% part of the revenues? Just a clarification there. Finally, on a group question, after the third quarter results you mentioned that the 70% operating leverage that we saw there were to be seen in several quarters to come. My question is really: Is your belief on improving demand still has forced you or led you to invest more in your business than you maybe thought at that point? A clarification there, please.
Well, first of all, the policy is on the mining and construction side typically to announce with a press release all major orders that are of a significant size. There are cases where the contracts and the relationship with the customer, in this case, can make it more or less complicated for us to announce it, which we have to adhere to. But anything that we think is appropriate to understand from evaluation of the share we are obliged to publish. So of course we are following that statement as well. The two percentage points in mining was on a sequential basis. On the—was it like 7% of the? Somewhere in that range.
It was 7% in Q3 and 15% of sales in Q4, and that gives the 2%, or more than 2%, dilution.
On the drop-through, of course, I mean it is affected by many, many specific items in a quarter. But I would say the 52% is still a very good number. I think cost control is still very tight. But you are absolutely right that as we have seen gradually the market conditions improve and our confidence that there is a sustainable market growth going forward, we have decided to invest more in headcounts, building up our sales force in China. We are strengthening our technical and sales capabilities for tooling in China. We have added about 100 employees in materials technology that will be there for the full year on training for the nuclear program going forward. They will start to create invoicing and profits only perhaps during next year.
So yes, there are some additional cost items that have been added as a consequence of a more positive outlook to generate future growth, actually. So that is absolutely the case.
OK. Thank you. We will take one more question here in Stockholm.
Yeah. Hi, this is Johan Eliasson. Sure. On your net working capital target that you have now reached, what was the main driver? Is it inventory reductions with the new setup in SMC? Is it currencies or are the prepayments playing a big part of that?
I think this is something which we have been working with for a long time. I think the second most important issue here is that the organization has. There has been a very extensive training program and a very extensive program of communication, understanding, setting goals, creating objectives, and acting on it.
The predominant part comes from inventory volume reductions, not only in SMC but in all of the product areas, actually. And I think as we work with this in a more constructive way, I think the interesting thing is that we are learning, even in an organization like Coromant that has been doing this for many, many years, we have understood that we can move further in the balance of delivery, performance, and stock levels by working even more intelligently with this. But you have been the general with this, Olof. So maybe you have a few more words to say.
No, but you are right there, Lars. Predominantly it is from the inventory reductions that we have done the improvement. But also in other areas of net working capital we have done more efficient work. We also have a positive effect from the reduced currencies.
But you should remember that we also have that on sales. And since we are measuring this in relation to sales, the positive effect is not that big. It is minor, but it is there. But predominantly it is from reduced inventories. And on top of that, of course, the increased invoicing in project orders helps in this quarter. In this quarter especially it helps. So maybe this quarter is a little bit better than it should be normally, but just a little bit. Still well below the target? Still well below, still well below the 25% target.
OK. Thank you. I would like to invite the international audience. Operator, please, can we have some assistance?
Ladies and gentlemen, if you have a question please press zero one on your telephone keypad and you will enter a queue. The first question comes from Mrs. Nicole Dill from J.P. Morgan. Please go ahead.
Good afternoon, gentlemen. I have two questions, actually. Number one is, Lars, you highlighted that the margins missed or the operating result missed your expectations slightly. Could you highlight in which area they missed your expectations? And two, if I think about the project mix going forward, really trying to get a bit of a feel around the margins within mining and construction, how should that develop going forward? You have 15% today as a percentage of the division. Where should we envisage that to go in 2011-12? Thank you.
Well, I think, again, if we look at the margin expectations, I think I would have expected to see a little bit, I mean, we had a little bit more one-offs and a little bit more currency than I expected. Those are, I think, the two bigger numbers that I looked at.
In terms of project business in mining and construction, that will go a little bit up and down. But it will be around maybe between 10%-15% of the mining and construction sales. That is where we will be.
Thank you.
Thank you. We will continue with one more question internationally.
The next question comes from Mr. Fredrik Ståhl from UBS. Please go ahead.
Hi, gentlemen. It is Fredrik here at UBS. I have two questions, please. First is a quick one, I hope. On your CapEx, you say it is going to be slightly above depreciation. But unless my math is wrong, it is 1.3 times depreciation in Q4. Is that the kind of run rate we should be looking at? Or do you expect further increases here to capture this growth? And the second question relates to SMC and the aftermarket and consumables.
The level of sales there is quite high on a historical basis. I was wondering if you can talk a bit more about that. Is there restocking behind this? And what is driving it? Is it the consumables, high production levels? Or is it spare parts? So a bit more color on that would be nice. Thank you.
If I start with the CapEx, you are right. We are about 1.3 times depreciation in the fourth quarter. We had very low depreciations in the first three quarters of 2010. Given the present development on the market, the very positive development of the market, we will increase our investment levels. They will be above depreciations for 2011 and maybe somewhere in the range of 120%-130%.
If you look at the aftermarket, I think it is three. First of all, this is an area which has been prioritised by SMC, of course, to increase the aftermarket sales, both in terms of services, consumables, and other products. I think it is driven predominantly by the activity level in the mining market. As the mining market needs to keep up with the demand of metals, the consumption is continuously going up. So I think that is the primary driver of it.
Do you think there is an element of stock building or inventory buildup here among the customers?
No, not really.
Thank you very much.
I think everybody is still very tight on cash.
Very good.
Thank you. We have a question here in Stockholm. Mats?
Thank you . Mats Liss, Swedbank. Just a couple of questions there.
First, the project orders. What is the content of Sandvik and equipment in the projects or orders you received in the fourth quarter compared to previous quarters? Is there any difference there? That is the first one. And secondly, about the currency impact going forward here in 2011, if you could indicate that one and also split it between the business areas. Thank you.
I think the project content is pretty much the same. I mean, this is an area which is extremely heavily outsourced. What we typically do is we do the design, we do the engineering work, all of the manufacturing, the assembly, everything else is outsourced. And there is not a huge difference here. When it comes to the currency impact, maybe you should touch upon that.
Yeah, given the strong Swedish krona, we estimate a negative currency effect for the first quarter of about SEK 150 million.
But that is based on the currency rates prevailing at the end of December. And the krona has continued to strengthen. So if we have today's rates for the rest of the quarter, it will be a little more than those SEK 150 million for the next quarter. And if you make a split between the business areas? I can't really do that. But it is out of my head. But it is about equal between tooling and SMC, a little less in materials technology. But that is out of my head only.
OK. And finally, just about the tooling production rates during the first quarter compared to the fourth quarter.
I think they will gradually go up. We continued to underproduce to sales in the fourth quarter, actually a little bit more than we had anticipated.
So we cut down net working capital and inventories a little bit more than we had anticipated. This actually impacted the margin a little bit on a negative side as well. But of course it is something that we can decide upon going forward where to put it. But the manufacturing rates were just below sales rates during the quarter. So I think in the first quarter they need to step up, not only to keep up with demand, but they also need to step up as we start to prepare for the vacation period.
Thank you. One more question here in Stockholm.
Johan Lavén, Captain management . Considering the urge that always the Chinese have to come into business that are important to them and are advanced, what is happening to the sort of market share and how is that developing in Asia, particularly?
In a specific product area or more generally? I would say the impact of Chinese producers we see in the Chinese market, especially on the mining side. And of course, there is a number of companies now starting to produce mining equipment in China, driven by the need to mechanise, to become more effective, but not the least to drive safety. So absolutely there is, especially in what is called the Tier two market, a number of players now in China that are very active. Some of them are growing very quickly from a low level. And some of them have started to act outside of China in this segment, most predominantly so in Africa. On the market share side, though, I think, again, that is a market where Sandvik has not been so far. With the acquisition of Shanbao, we will start to participate on crushers in that market.
We will, based on our capabilities in Jiading, start to participate also in the Tier two market one way or another with mining equipment for the rest of the market. So from a market share point of view, surprisingly as it sounds, as we are coming from a very low level in China, we are growing. But the entire market is growing. On the tooling side in China, by far the biggest player in the market is Sandvik. We are twice as big as the Chinese competitor. And we have a very good market share development there. Though of course they are acting predominantly, again, in the Tier two market and we are in the Tier one. The Tier one market is the one growing the fastest. We have not seen Chinese competitors to any significant degree outside of China.
In materials technology, again, we are on a very selective basis there. We sell flap valve steels. We sell strip steel products, razor blade steels. We have opened our factory in Shenyang to produce hydraulic and heat exchanger tubing there. We are starting to invoice a product which we have so far not sold in Asia. I dare to say this is probably the most qualified and sophisticated tube plant in all of Asia, Japan included. We see this not only as a Chinese venture but as something that opens the doors for us in all of Asia. It is still very much in its emergence. We have started to invoice there. We have still a very strong position in that area, I think.
But certainly, and not the least in the mining area, we must expect to see Chinese competitors in the market, as we have seen Japanese and other players.
Thank you. Let us go back and involve the international audience, please.
We have a question from Mr. James Moore from Redburn Partners. Please go ahead.
Hi there, everyone. I have got three questions. I just wondered if you could quantify the margin impacts in the quarter from the underproduction or quantify the underproduction. Secondly, I wondered if you could give us a hard number for current currency rates as to what the full year 2011 EBIT impact is likely to be. Are we talking as much as SEK 1 billion or SEK 500 million? What is the quantum at current rates?
And then thirdly, I wondered if you could give us a feel for the margin outlook in SMT and as to whether there are any particular mix issues with strip and medtech recovering or what the key issues are for the outlook for margin in the next year for SMT.
OK. I think the question about the margin effect of the underproduction in tooling, I do not really have an exact number. It is less than one percentage point, though. I think that is the best answer I can give you. But somewhere between 0.5% and 1%. That is somewhere in the range that I would give you, James. It is the best answer I can give you.
OK.
C urrency effects, again, as I said, for the first quarter is SEK 150 million. We estimate SEK 150 million based on the currency rates by the end of December.
It will be a little bit higher if the currency rates are as they are today. What they will be for the full year, I hesitate to really estimate on that because I do not at least know what the currency rates will be during the whole of 2011.
Sure. But if we just assume current currency rates, you must have some idea as to what your 2011 sensitivity is.
Well, you can take the 150 × 4, I think.
So other companies are suggesting that their first quarter impact may double or triple as we go through the year because the first quarter is protected from transaction impacts due to hedging. Is that not the case at Sandvik?
We are hedging a very small amount of our transaction exposure. Basically, we hedge our projects. Yeah.
So the first quarter impact of SEK 150 is a pretty naked impact with full transaction and translation?
With full transaction, yes. The estimate.
OK. Thank you.
About the margin outlook for SMT, I think that is something that Olof will come back to as he has gotten a little bit further into this company. In about 10 minutes or so. Right?
OK. Thank you, James. And thank you, Lars. We will take another question internationally.
The next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead. Yeah
. Good afternoon, everyone. It is Ben from Merrill Lynch. Two questions, please. Firstly, I think you said that CapEx is going to be 120% or so of depreciation going forward. Can you just say why you need to raise that so quickly, given that on the other hand you are saying you still have a lot of excess capacity?
You can still manage the growth quite easily going forward based on your existing footprint. So why is CapEx going up so fast? That is the first one. And then secondly, materials technology. It still sounds like it is missing your expectations. There are some problems in medical. Standard products are still very weak. Going forward, do you think the right way to fix this business is the kind of mixed focus you have had for many years now, changing ABC products, things like that? Or do you think that actually now the time is to do something a bit more radical, think about divestments or more aggressive cost-cutting?
OK. Before I let Olof Faxander answer some of the questions, I think if you look at the CapEx of 120%, I think it is more driven, first of all, by the accelerated pace in the nuclear sector, where actually the orders and the agreements we have now start to materialize into CapEx. So that is one very big driver. We are building a big super site in Australia for mining and construction, a decision taken which is not necessarily a huge capacity increase but a consolidation and a cost reduction and efficiency improvement measure. We are expanding and building a new facility in Svedala for crushers. Again, a decision taken to drive efficiency and to some degree actually to increase capacity in a segment which is growing and where we are starting to see bottlenecks unless we do something.
The 130% is not really allocated to the fact that we have a general increase in manufacturing capacity but even more so towards targeted areas of cost efficiency, productivity improvements, or in the case of nuclear, of course, to meet the demand. For materials technology, I think still that and of course, again, Olof will come back to this, but the mixed development is a really important factor. I think long term, as we have stated, we will get out of standard products eventually because this is going to be an area where there is going to be overcapacity in the market and a competitive environment which we do not believe will give us the opportunity to generate good returns, in spite of the fact that we are a cost leader in that market in many areas.
To continue or not continue, I think the strategic outlook for SMT is something I am sure that Olof will come back to, given his background and experience in that area. But I think up and until today at least we have not taken any decisions for a dramatic change but just to carry on.
Thanks. And Lars, maybe just a follow-up. If you are investing in the parts of the business where your utilization rates are very high, the nuclear and the mining and so forth, can you just say which parts of the business are most depressed at the moment in terms of utilization, where the excess capacity is greatest? Thank you.
I would say the excess capacity, surprisingly, is still in the tooling area for the production of cemented carbide inserts. We have a huge flexibility in that area.
So if you talk about the installed theoretical machine capacity, it is a lot bigger than even if we talk about a 15% activity today below the previous peak. We have an installed machine capacity which is not a huge cost. It is not a huge cost driver. But there is a huge capacity gap there still to be utilized if we were to see a fast growth.
Great. Thanks very much.
You are welcome.
Thank you. We will take a question from Stockholm, I think.
Yes. Anders Svensson, Ålandsbanken. Just one question regarding materials technology again. If you exclude the nuclear power order, you have an underlying order intake pointing at lower than sales, actually. So it does not look that positive for 2011. Again, I think you are absolutely right. That is dependent on the fact, as I said, we have decided rather than participating in this low-price environment for standard products in Europe to step out and focus that capacity and to reduce the costs in that area and then focus on the opportunities we see in the growth areas. So it is margin and profitability and return on capital employed over growth.
And also, Anders, if you deduct nuclear orders from the order intake, you have to do the corresponding activity with sales. We sell also to the nuclear plants already now.
Anyway, let us go back to the international audience.
We have a question from Mr. Colin Gibson from HSBC. Please go ahead.
Three questions, please. But before I ask them, thanks very much, Lars. And good job. Well done. Some of the questions from my side.
First of all, you made reference to the 17% volume gap at CT to previous peak anyway. Given that within the past week we have had purchasing managers indices in—I am trying to remember—China, India, and the States that all beat prior expectations, over what time frame do you think CT can close that gap to the previous peak? That is the first question. Secondly, could you just discuss in a bit more detail raw material costs and potential bottleneck issues for SMC in 2011? And lastly, could you just shed some light on the SEK 100 million of other non-recurring items that are mentioned on page three of the statement? Thanks.
OK. First of all, I think the volume gap as such, how quickly can we close it? I think you are absolutely right. One of the more positive surprises, I would say, over the entire year of 2010 has been the very fast and very solid recovery of the manufacturing economy in the United States, which is actually in our business back to peak levels. That really is a big surprise to me. I would have to say, though, that with the current sequential improvement that we have seen from Q2 to Q3 to Q4 and into the first month of this year, that rate of improvement would take us all the way up to the end of this year until that gap is closed. Things might happen in the meanwhile, but nonetheless, at the running rate basis, that is the rate of improvement that we are seeing. On the raw material cost, as you know, Sandvik is affected by two things, predominantly by nickel.
There we have in materials technology the price model with the alloy surcharges which are passed on to the customers with a one-month lag. In that area we are pretty much covered. In for tooling, the big ticket item is tungsten. Tungsten is, of course, still we are the world's biggest consumer of tungsten. Of course, it has an impact on our cost side. On the other hand, we should remember with the very high value added for cutting tools, it is still a very small part of the total cost of the component or the cutting inserts. As you may be remembering, in 2004, 2005, and 2006, we had a similar situation and there was a big concern in the market that tooling margins would be negatively impacted by this.
For those of you who remember, we actually, during that period of time, strengthened our margins year on year in a very, very good way, driven by growth. By efficiency improvements, but even more so by an aggressive price policy, I am quite convinced that the organization can cover the raw material cost increases also there. Finally, and I have to say that, I mean during 2009 we acquired Wolfram Bergbau, which is the only and the biggest producer of tungsten in Europe. We also own the Mittersill mine, which is the biggest and only mine in Europe today with the tungsten production.
I think from a point of view of strategic importance, I think this has already proven not only to be an extremely profitable acquisition but also from a strategic perspective as the Chinese now, who represent 70% of the production of tungsten in the world, are gradually tightening the export quotas. Sandvik is in a position now by recycling, by using our own mines, and the fact that we can buy ore from any mine in the world and process it in a very good position to keep this both on a cost-control basis, on a profitability basis, but also on a supply basis. So I feel very good about that. About bottlenecks, I think in mining and construction, we are starting to be a little bit concerned about the same issues as in 2008. It is predominantly hydraulics and a few other components.
Since then, I think we have learned much of the lesson. We have widened the supplier base, not the least in Asia. So I think at least we have more alternatives. But this is certainly an area that could heat up a little bit if the very strong growth that we are experiencing now will continue. But the organization is working very actively with finding additional substitutes or suppliers in that area. About the SEK 100 million extra charge, I think Olof will talk about that.
I think you are referring to the SEK 100 million, which is the extra variable salary provisions that we made this quarter as we did in the third quarter, based on the full year really. But the extra is SEK 100 million for this quarter. And then you have one more SEK 100 million item. That is right. Relating mostly to the change of CEO. To the change of CEO.
That is right.
OK. Thank you. I think we take one more question from the international audience.
The next question comes from Mr. Sébastien Grutter from Société Générale.
Yes. Good afternoon. Two questions, if I may. The first one will be on the project business. I think you achieved about SEK 1.6 billion revenues in Q4. And I would like to know what is the outlook in terms of quarterly revenues for the project business in 2011. Is SEK 1.6 billion revenues a good starting point? And a more general question next. On the business, it is about 10% the pre-crisis level in terms of volume, but margins stand at 13%-14%. I would like to know if you are still confident the company will be back to pre-crisis margin as revenue recover pre-crisis level, which is likely to happen in 2011. Thank you.
Well, again, it is very hard to project where the project business is going. However, I mean as we now have a very solid backlog in this area, it would certainly exceed the SEK 1.6 billion that we saw in 2011. I do not dare to, and I do not think I should make a projection for the full year, but it would be a significantly higher number. I am not 100% sure I understood fully your second question, but maybe you did. Was it around margins and if margins will come back?
I mean the volume is about 10% below pre-crisis level in Q4. The margin is 13%-14% today, while you achieved about 16%-16% margin pre-crisis. As the business recovers the pre-crisis level, the volume recovers the pre-crisis level, are you still confident your margin would be back to where it was in 2008?
I would say everything like. If you disregard the margin impact from the mix of project business, the margin will be higher. Then, of course, there could be currency issues and things in between that changes the prerequisites. But taking out the currency effects and disregarding the effect of the project business share, which is unknown, the margin will be higher and is already higher, actually. If you take out the project business and just look at it like for like and take out currency effects, actually mining and construction is already on that part of the business on a record level. So I think that is an important signal to send.
Again, though, I would like to stress that it is the return on capital employed, which is the true measurement here. That is where we need to look. We are already at the record level of return on capital employed, and that is how we drive the business, and that is how the board has set the objectives for the business. So I think sometimes it is important not only to look at the margin but really focus on the return on capital employed, which is in the end what generates value to you as shareholders.
OK. Thank you.
Thank you. I think we switch to Stockholm now and take a final question here in Stockholm.
Yes. This is Lennart Engström. I have a quick question. If you benchmark your performance on the tooling business with Seco Tools, what comes out?
I would say if you do that on a like for like basis, then there are only really two major areas within the tooling business that you can benchmark. And that is our company, Sandvik Coromant, in the tooling division, and also then, of course, the company we acquired in 2002, Walter in Germany. Like for like today, Coromant is well ahead of Seco Tools. We do not, as you know, distribute the specific numbers for the different areas, whereas Walter is slightly behind but catching up rather quickly. And I do not see a reason, given size, structure, market penetration, and channels, et cetera, that Walter will not be able to catch up with Seco Tools, which is a good way to drive Seco Tools forward, I think.
OK. Thank you. We have one final question here in Stockholm, and then we will end the first part of the Q&A session. Please.
I am Evely Bank. Just a couple of questions regarding lead times from orders to sales currently in equipment and project sales in SMC, and also a little longer perspective than for the energy business within materials technology. I heard that we already have some sales there, but how that could progress going forward?
I think the lead times on equipment are still pretty much in line with what the customers require. And we can deliver quickly if it is necessary, but it is not always the customer wants the machinery immediately. And it is the same thing for the project business.
So this is more on a scheduled basis, and I do not see we have any limitations or bottlenecks that are dragging delivery times out or customers that are being stressed because they are not getting their deliveries. I think it is pretty much the same thing in materials technology. Again, I mean the nuclear orders are scheduled from today up and until, I would say, 2018, maybe even today. Again, they do not want an early delivery because there is nothing there to put it in. So all of this is scheduled orders, and I think we are capable of keeping up. I think our investment program, which is really made now in four steps in Sweden and in the Czech Republic, is well on track. As far as I understand, we are on track with all of those investments.
The first step has already been commissioned and is working well.
OK. Thank you. We have a few minutes left, but at this point in time, I would like to invite Mr. Olof Faxander on stage as the first time for the CEO of Sandvik. Very welcome, Olof.
Thank you very much. Would you like to make your own introduction, or should we read it for you? Yes. I can just say a few words. I am not here to take part really in the presentation of the last quarter's result. It is Lars' final quarter, and it has been very interesting for me to participate here. And I will, of course, take on from the next quarterly report onwards. My background, to start with, well, born in 1970, turned 40 last year, so 41 this year.
I have a master's of science in materials science as my basic education. I also have done a business degree at the Stockholm University here and the master's of sciences from the Royal Institute of Technology here in Stockholm. My career and background is first about 10 years with the stainless steel industry. The company's name was Avesta Sheffield when I started and Outokumpu when I left. So I did not really change employer, but the company changed and evolved very, very much around me during those years. And during that time, I worked in several locations in Sweden, in the U.K. in Sheffield, and also in Helsinki and Finland. So it was also quite an international period in my life.
After that, I have been living in Sweden now for five years again and been the CEO of the Swedish steel company, SSAB, which is a specialized, medium-sized steel company focused on very much different kinds of niche products within the steel industry. As of yesterday, actually, then I am taking over as CEO of Sandvik. I see this as a fantastic opportunity. Sandvik is a fantastic company with really, really a strong standing in the product areas where the company operates. There are fantastic opportunities for this company to develop forward. It also feels as a good time to come into Sandvik. We have passed the financial crisis, and 2010 has been, again, an excellent year for Sandvik for a very, very strong result. It is a good platform to start building the future from.
I am looking forward to meeting many of you in future roadshows and future quarterly reports. It will be also interesting to get to know all of you who are following Sandvik and who have invested in the company. That will also be very interesting. I think I will open up. If you have any general questions, I will not comment on SMT's margins for 2011 or so quite yet. But if you have any general questions about my background or so, please feel free to ask those. Should we start with a polite question from the floor here in Stockholm to make Olof a bit happy? Oh, dear. That is not like you guys. Let's go to the international audience. Do we have anyone? We have?
I think we have a question from Mr. James Moore from Redburn Partners. Please go ahead.
Hi. Yes. It is James here. I just wondered if we could ask your initial impressions of the steel business, given that you have come from a specialty steel business yourself, as to whether you think there are big issues, obvious issues, that need to be addressed and whether you could share some initial thoughts there?
I think it would be wrong of me to start on my second day with the company making those kind of comments about any part of Sandvik. My time now will be spent visiting all of these businesses, getting to know the people, and trying to understand our position and the opportunities for it going forward. But at this point in time, I do not want to make any specific comments like that.
OK. OK. You tried.
Could take one more? I went through the rest of the questions. Sorry. It is a standard answer.
One more from the international floor.
We have a question from Mr. Colin Gibson. Please go ahead.
Well, if I had known how much success James was going to have with that question, I maybe would not have pulled for another one. But there he goes. Wish me luck. I have got to ask. First couple of days on the job, you have got a group which we have already heard is going to be spending 120%-130% of depreciation on CapEx this year on the background of a few years when CapEx has anyway been quite high. And that kind of underlines the vertically integrated nature of Sandvik, which is one of its great strengths. But the question has to be, looking at the structure of the group as you see it today, can you continue within one group to have so many vertically integrated companies going forward?
That is a very interesting question, which I am also not going to address at this point in time. But thank you. OK. You will probably have to do some investigations first. And we will get you sooner or later into the investor meetings and everything like that. I think we stop there for now. We will not get so much out of you anyway. I think, as said, it is my second day, which was a kickstart. We had a two-day boarding meeting Monday, Tuesday, and actually then even before I started and then a quarterly report. But I think it is much more sensible from my perspective here than to start to get into the business before I actually start commenting about developments for the various areas themselves. So I hope you can have understanding with that.
But I am sure we will get to those points and discussions also at some point in time here. I think we fully appreciate and understand that view, actually. Before we end this session, on the 3rd of May, we will come back with the first quarterly report. But that is a telephone conference, as most of you know, since we have the AGM at the same point in time. And finally, I would like to bring Lars back up on stage to thank you very much for nine excellent years, very good cooperation, and excellent presentations, and a very good ambassador for Sandvik.
Thank you . And I think I have already thanked all my colleagues here because without the guys on this bench here, this is a pretty scary, hopefully, thing to do unless you have a good backup here. And they have given me excellent services.
Thank you very much to you. But I would like to thank you all as well because it is your questions, it is your feedback, it is your issues that help us also to focus on the right things going forward. I think the dialogue with you and your colleagues around the world has been a great help to me and to the management group in developing Sandvik and growing the company over the years. Thank you very much, all of you. Good luck. Thank you.