Thank you for standing by, and welcome to the Sandvik conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone keypad. I must advise you that this conference is being recorded today, Thursday, the 5th of March, two thousand and fifteen. And I would now like to hand the conference over to your speaker today, Olof Faxander. Please go ahead, sir.
Thank you very much, and thank you, everybody, for calling in. We decided that we wanted to make a brief conference call based on the press release we put out this morning. And the information we shared this morning is about really the second phase in our supply chain optimization program, which is the program we originally communicated at our Capital Markets Day in 2013. And we're well through the first phase of that program, which entails closing 11 manufacturing units out of the total aim of closing 25 manufacturing units in the following years here. And of that first phase, all 11 site closures have been initiated, and by the end of 2014, we had completed closure of five manufacturing units.
That first part of the program will continue during 2015, and expected to be completed by year-end this year. Today, we have communicated the second phase in this program, which will entail a further 10 site closures, which will be gradually announced going forward here now. Based on this program, we are taking certain provisions, which will be booked against our Q1 results in the company. Beyond the supply chain restructuring program, we're also doing certain productivity-enhancing measures in a number of areas of the group. These are not related to any change in our view of the market sentiments going forward, but are about right-sizing the organization, and taking opportunities to really enhance productivity in certain areas around the company.
I won't run through all the numbers in detail. You have them in the re-release, but the big picture is about SEK 1.1 billion of savings to be realized by the end of 2016, and booked against realizing those savings, roughly SEK 1.9 billion provisions, of which SEK 1.5 billion are affecting cash flow. We will also make certain investments as part of this program, mainly within the mining business, as we are restructuring the footprint here. The most sizable closures and restructuring efforts that are related to our mining business, where we have a good opportunity to do these kind of changes right now with the slower market conditions. So with that, I think I will open up for questions.
Operator, if you could please administer to the questions that may exist here.
Certainly, sir. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. That's star one, if you wish to ask a question, please. And your first question comes from Peder Frölen from Handelsbanken. Please ask your question, sir.
Yes. Thank you. Good morning. My first question is related to the passive side of things on the working capital and the potential sort of improvement in the cash flow as well. Could you shed some light over that? I mean, you released a lot of cash in the third, fourth quarter. There is an ambition to release even more working capital according to the plan. Will this sort of emphasis this further, or will it just be a function of delivering on that working capital? That's my first question.
Yes. By restructuring our footprint onto a narrower footprint of fewer manufacturing locations, besides, of course, the communicated cost savings here, we expect to get other significant benefits, both in terms of, of course, when we have a more streamlined supply chain, opportunities to continue to manage down our Net Working Capital in the group. And, also, in the long run, a greater flexibility to deal with volume fluctuations when the markets change. Since, when we have fewer, larger manufacturing sites, it will be easier for us to have flexibility on production levels in years to come.
So should we see this as a possibility to reach the targeted working capital to sales, or should we think that this could provide an even further sort of asset-light model?
Well, I mean, gradually, we want to become a more asset light as a company and build a more efficient structure in the group. We still retain our target by the Q1 2016. We aim to be at the 25% Net Working Capital to Sales ratio in the group, and that's the target we have right now. It's a target we've had for a number of years, and before we put any new, steeper targets on, we need to first achieve that target, and I think prove that we can deliver on that level sustainably... but obviously, once we do that, we believe that there's further potential in the company to streamline operations even more.
Yeah, that's very clear. Thank you. My question, my second question, and then I get back in line, would be on the sort of total amount of savings. We have the program one and two, which is over and done with. I guess we have some savings yet to come from the first phase of the scope. We have the capacity adjustments from mining last year, and now from the other divisions. And then finally, we have what you alluded to on the Capital Markets Day last autumn, other savings in terms of outsourcing the different functions. Yes. So, when trying combining all of this, what do you think you could achieve? How much will the others be in terms of others?
Well, I mean, what we have quantified besides these programs that we have put out as press releases is an expectation of reducing administrative costs 2015 over 2014 by SEK 200 million as a consequence of these outsourcing and restructuring or efficiency programs that we've had in our administrative functions. Then, of course, beyond these programs in areas like mining, we have continuous ongoing steps to improve cost efficiency, which we don't need to take provisions for, but the sort of day-to-day productivity and efficiency work going on around the company. But we don't quantify it by that and in detail. So, beyond this, the main item is SEK 200 million of administrative cost savings that we talked about at the Capital Markets Day last autumn.
Yeah, that's very clear. I'll get back in line. Thank you.
Thank you.
Thank you. Your next question comes from Ben Maslen, from Bank of America. Ben, please ask your question, sir.
Yeah, thank you. Morning, Olof.
Good morning.
Just, you said that the additional measures to the cost base weren't a reflection of demand being weaker in any way. I just wanted to maybe follow up on that. I mean, firstly, on the oil and gas side of your business, we've seen some weakness over the last couple of months from trading statements of your peers. Are any of these extra actions in SMT a reflection of, you know, adjusting to what might come if those markets weaken? And then, I guess, a similar one on mining, where you haven't taken any additional adjustments to the cost base. You know, we've seen a further round of CapEx cuts from some of the mining majors. Would you expect that to get weaker going forward?
If so, you know, would you need to take a further round of measures to hit your medium-term targets? Thank you.
Yeah, well, first, with oil and gas, I mean, what I meant is that one should not read that, that we see any sort of new negative changes in the market, beyond what was, what has already been known or discussed, for example, at our Q4 report. But I mean, within the Materials Technology, we of course have certain elements which are, and especially, I mean, the Varel side of the business, adaptations to somewhat weaker market situation in the oil and gas sector. Within mining, we've seen a flat business during 2014. The most substantial part of the phase I of the program, and with that connected to right sizing efforts, and the most substantial part of phase II of the supply chain program are connected to mining.
So we are taking quite significant efforts of taking cost out of our mining business. I would like to stress that I don't really see the that we have much further downside in the development of mining CapEx to our profits levels in mining from where we stand today. Most of our equipment sales and so are related to pure replacements of worn out equipment and so on. We have very little CapEx related elements in the business activity levels that we see today, and equipment sales have, from the peak, dropped about 70%. So even with further mining CapEx cuts, we don't see or expect that that would have any significant impact on our business levels.
What would potentially have that is if the miners would decide to cut their output in the mines, but we don't really see that happening today. So, we, we continue anyway to expect the mining market to be flat from our perspective, from where we stand today. And then we have our opportunities in terms of self-help, when it comes to cost savings and opportunities to develop our market positions in the Aftermarket. That should be able to, in such a flat market, create opportunities for us to improve profitability from where we stand today.
Got it. Thanks, Olof. And maybe a follow-up just on obviously the footprint program, phase I.
Yeah.
Now, when you give us these savings numbers, are these, do you aim to keep, retain 100% of those savings? You know, are they gross or net? And when you look back at what you've achieved so far, you know, have you kept those savings, or have they been, you know, eroded by costs you've incurred elsewhere in the business or, you know, given away to customers? What's the retention rate been like so far?
We don't see a negative pricing development so that we're giving away cost savings in that sense. We see a fairly neutral pricing environment within mining. We are not losing margins as we see it, due to price erosion, as the market looks today.
Got it. Thank you very much.
Thank you, and your next question comes from Lars Brorson from Barclays. Lars, please ask your question, sir.
Thanks very much. Good morning, all three from my side, if I could. Just on the footprint, the cost savings, payback there, of SEK 600 million relative to charge of SEK 1.2 billion, presumably a reflection, and that, of course, compares to a much higher number from phase I. Presumably a reflection of where the site closures are coming. As you've started your preparations here, have you been perhaps, slightly surprised with the cost related, and the difficulty related to the site closures coming through now in phase II of the program?
No, obviously, we prioritize the fastest payback areas in the first phase. It's gradually becomes more challenging and more costly in certain countries where one decides to take these kind of measures. We have a focus on European sites in this. I don't at this point in time want to be more specific, or cannot be more specific about the individual countries or sites affected. But obviously restructuring or closing operations in many parts of Europe is more expensive than in many other parts of the world.
And just specifically on the CapEx, the SEK 350 million additional here, is that incremental to your year-end guidance? Does that change the SEK 5 billion CapEx guide you'd given for the year?
No, no, that's included in our guidance, so that's not any additional CapEx on top of what we have guided for already. And I've already said earlier, I mean, it's driving a bit of... This program is driving a bit of CapEx in the company, was 2014 and will 2015. But that's well within the frame that we've guided for previously. So you should not see that this is an increase in the CapEx levels in the company.
That's clear. Just finally for me on the write-down in Mining Systems, SEK 100 million project write-down. Can you give a little bit of granularity of where that's coming and why?
Well, it's an assessment of a project that we've done that will incur increased costs and lower profitability than what we have been expecting. Therefore, we're making this correction. I cannot be specific on what specific project or so that relates to.
Thanks.
Yeah, thank you.
Thank you. Next question comes from Andreas Koski from Deutsche Bank. Andreas, please ask your question, sir.
Thanks. Good morning.
Good morning.
So firstly, on the announced cost savings today, how much of that should we expect to come through already in 2015, and how much of it should come through next year?
Well, you should expect it to be, and especially when it comes to the part which is related to the supply chain phase II, to be back end heavy towards 2016.
Okay, but the cost adjustments should come through quite earlier?
I mean, the right sizing efforts, of course, are normally such efforts that one can do at a faster pace than the actual site, site closures and transfers of production to new locations. But, the full run rate of these savings that we've indicated in the press release will be achieved by round of 2016. But, the pace should be faster in the costed cost-based adjustments than in the supply chain program part of supply chain optimization part of the program.
Perfect. And then I take the opportunity to ask as well: Would you like to comment on the demand situation in Sandvik Machining Solutions? You said at the conference call a month ago that it stayed on the same level as you saw at the end of Q4. Has it stayed on that level, or are you seeing improvement in?
We don't have any more information to share than what we said at the conference call in connection with the Q4.
Okay, perfect. Thank you very much.
Thank you.
Thank you. Next question comes from James Moore from Redburn. James, please ask your question.
Yes, good morning, everyone. It's James at Redburn.
James.
I've got one question, morning, on the impact of savings on SG&A, and two on demand. I'm just looking at your SG&A expense, excluding Selex, and it's gone up from 6.5% of sales to 7.5% in the last year or so, at a time when you've been doing restructuring savings. Do you have a view specifically on that number, or SG&A in total, and where you think you can get it to through this plan?
Yeah, I mean, what also affects these numbers is currency changes in various countries where we have manufacturing ourselves. But we feel we're well on track with our savings programs and taking out the cost according to our plans.
And on demand, one on oil and one on mining. Just Varel, you mentioned Varel, and I guess it's related to the rig count collapse. Could you give us a sense for how cyclical, how big the amplitude is of the revenue of that business over time? And whether the cost base is variable like mining or more like SMS, given you buy raw materials to make drill bits like you do in SMS, so I could imagine some big operational gearing there. And then the other one is on the mining Aftermarket. You talk about being relaxed about CapEx down 70% and output is growing 2%-3%.
But can you explain why Aftermarket sales have fallen roughly 5% a year in the last two years, when production output was up 3%? And I get a sense that a quarter or a third of your Aftermarket business is linked to exploration and CapEx... which continues to come down, we need drill bits to make mines and explore for them. So could you just help me understand if I've got that wrong or whether there's something else we need to understand there?
Okay, long questions here, but let's see if I capture everything. But first, with the oil and gas and Varel, we have a more flexible cost base, I would say, in a light manufacturing footprint in Varel than what we have in areas like SMT and SMS.
Mm-hmm.
About 40% of Varel's business is related to North America and could be connected to the rig counts we see there. So of course, there is an impact on that part of the business due to the changes that we see in North America. But we feel that we have good opportunities to adapt the cost base. We're a smaller player, which gives us opportunities to look at market share gains, and we also have certain new product launches in terms of downhole products, which we can continue to develop and increase sales around. So it is obviously a market that is affecting us when rig counts move down, drilling activity slows in North America.
But, we feel that we're quite rapidly adapting the cost base in those parts of the operations, and looking at opportunities to actually move our positions forward in that market.
Mm-hmm.
But see, the mining Aftermarket, you said it's been dropping a bit. We've seen something like 5%-10% drop since the peak of our Aftermarket business in total. At the peak, I guess we most likely had some stock builds going on with our customers, and probably more lackadaisical behavior in terms of ordering extra parts or having safety stocks with the customers here, which has surely been tightened up with the mining companies. But the Aftermarket, we feel, I mean, has been stable in recent quarters, and we see no reason to expect that to drop with the sort of current production levels at the mines.
Okay. Thank you very much.
Thank you.
Thank you, and your next question comes from Frida Sundkvist from SvD. Please ask your question.
Hi, Frida from Svenska Dagbladet. I just have a really quick question. Just want to know how this will affect your business and your employees in Sandviken, please?
We haven't detailed any specific sites or so in this point in time, and the main effect will be regarding our operations in Europe, as we said. So we have not been specific at all when it comes to countries at this point in time.
Okay, but is it within your plan to also reduce the number of employees in Sweden?
I cannot comment on that any further at this point in time. But we have a heavier weight related to Europe, and I would say, as you can see from the cost savings profile, a larger focus on our mining operations than on the other parts of the company in this program.
Mm-hmm. Okay. Thank you.
Thank you.
Thank you, and your next question comes from Peder Frölen from Handelsbanken. Please ask your question, sir.
Yes, thank you. A follow-up. You mentioned at the Capital Markets Day, like two years ago, that the total sort of cost for this scope program would be in the range of SEK 3 billion-SEK 4 billion, and then lately, maybe more, closer to three than four. And if you now look at the 21 factory closures out of 24, do you think still it's gonna be as much as above SEK 3 billion? And I mean, it's not very relevant, but tied to that question, more importantly, is to look at the-
I mean, but I mean, we clearly will arrive at the lower end of that scope or maybe even below it going forward. So we are executing this program at lower cost levels than what we... somewhat lower cost levels than what we originally were anticipating.
Yeah. Thank you. And tied to that, the tempo of this, I mean, with all respect to the complexity to move production, all of that, maybe you could shed some light over this question, because some companies might just cut the production units, others want to really, really take this slowly. So could maybe you could sort of explain the why this process takes so much time? Yeah.
Well, I mean, basically, we are driving this at a fairly high pace. We now have plans to close production in 21 out of 150 units in the whole overall group, which is a quite large number and a quite significant effort in the organization to deal with production transfers, ramping it down in certain sites, up in other, and at the same time, of course, protecting our service levels to our customers, which is, of course, the most important, that we take care of them in the best possible way. We feel this is an adequate pace of combining the desire, of course, to get the cost savings as quickly as possible-...
And at the same time, not overstretch ourselves and cause problems in our production system. So this is a judgment we've done, and I mean, now we are up well over 20 sites, of which five by the year-round have been completed. So, it is. I feel quite a high pace, and it is a significant effort in the organization to deal with over 20 unit closures out of 150 units in the group.
Okay, that's very clear. Great. Finally, just a quick one. On the SMS business, while it's a small number, we're talking about charges of SEK 200 million, but maybe you could explain where those are, or is it front-end? Is it... Because it's not capacity, you mentioned that. Is it R&D? Is it admin? I mean, where do we find this?
This is more in the SG&A area of the business. But, I mean, in certain areas, we are investing and expanding, but there are other areas where we have found opportunities to enhance productivity and efficiency in the organization. And, there, yeah, we're taking opportunity to look at those opportunities. But, I mean, we still have a growth agenda and a focus on that within Machining Solutions. But, we need to have the right resources and the cost in the right place in the business to support that.
But this is more ongoing, and would it be fair to believe that if you hadn't a sort of a larger program, this would be in the ordinary SMS business, not sort of a pre-charge program?
Yeah. We have tried to consolidate this into to one package through this release. Simply to to be clear and transparent on how we're driving restructuring efforts in the company, instead of drip-feeding restructuring efforts sort of every every quarter. So therefore, we have looked at the opportunities we see at this point in time to to look at the restructuring efforts and combine them into into sort of one package here, to make it obviously for for you monitoring us as clear and transparent as we possibly can from the company's perspective.
We are grateful. Thank you so much for that.
Thank you.
Thank you.
I think we have to move to the last question here.
Okay, sir. Your last question will come from Anders Roslund from Swedbank. Please ask your question.
Yes, hello, Anders Roslund here. I have two questions regarding the different structure of those programs. Will the adjustment to cost base also be reversed once you see demand picking up? Or how is the long-lasting effects of this second part of the program?
Yeah, that's a very good question. The supply chain is obviously a program there, where we're building a long-term, leaner and more efficient company by having a much more focused footprint, the manufacturing structure in the group. The second part, the adjustment to the cost base, is a bit of a mix, but more related to adapting, I mean, resources to where we see current market demand. Parts of this could be areas if the market, of course, picked up significantly, where we would need to add certain capacity again in the future. But, yeah, the large part of that, I would say, is actually long-term structural efforts, like, for example, within construction and machining solutions.
And also, obviously, the group activities is a non-volume dependent part that we have there.
Okay. And, finally, just the overall picture again, you've taken out 21 factories. That means that it only remains some four factories to close. I guess that should be not very much additional cost to the SEK 1.9 billion then. You, you said it would be below SEK 3 billion, but you're almost there.
Yes, we at this point in time don't feel we can be more specific, but we will try, going forward, to be as transparent as we can, how we see finalizing this program and the final stages of that. But you, you shouldn't expect, I would say, in the next 12-month period, for us to come with that final stage. But as I said, we have 21 units, so we need to make sure that we have full traction and, and regarding this, before we increase the complexity of this project even further.
Okay, just to add on to this, so it could well be the third step, could be another 10 factories, adding up to 30. Is this 25 factories sort of a fixed absolute level, or is it just an indication?
We said approximately, very clearly when we communicated this originally.
Mm.
We will continue to review and look at-
Yeah
how we can continuously make Sandvik more efficient. And this is quite a natural process in a company that's like Sandvik, that continuously makes acquisitions and which again adds complexity to our footprint, and then gradually we need to streamline the company again. So I'm sure in the longer run, I mean, these kind of processes have to be continuous in a large group like Sandvik. So there's no real final end point of having to rationalize in the manufacturing structure in the group.
Okay. Thank you.
Thank you. Thank you, everybody, for calling in, and we appreciate all the questions and hope that you've felt you've got good communication around all of this. Obviously, I think coming back to Frida's question about effect on people, it's a high priority for us to take very good care of our employees and deal with these kind of restructuring efforts in a responsible way as a company. And we feel we have been very successful in doing that in the first phases of this program, and had a very good dialogue with our employee representatives and a good responsible process with our employees that have been affected by this programs here.
If you have any further questions about details or so, please contact Anastasia or anyone else in our Investor Relations department. Thank you very much.
Ladies and gentlemen, thank you for joining the conference. It does conclude for today. Have a good day. Thank you very much.