Ladies and gentlemen, very welcome to this presentation of Sandvik's first quarter, 2012. It's a pleasure to welcome all of you here in Stockholm, and I hope that we have a good attendance also in the international audience. As usual, we will spend the nearest hour presenting the report and also offering you a quick Q&A session. Also, as usual, together with me here today is Olof Faxander, our CEO, for the presentation. Once we come to the Q&A session, we also invite our chief bean counter or, sorry, financial officer, Ola Salmén. So with that said, Olof, would you like to start?
Yeah. Thanks very much, Jan, and welcome everybody who's here in Stockholm, and welcome everybody who is following us on the web or over the phone. So I'll start with some quarterly highlights for the first quarter for the Sandvik Group. To start with, we had a very, very high level of order intake, which I think was very encouraging during the quarter. Nearly SEK 29 billion, which was the highest level that we've ever had for the company. Overall, we feel that we've seen strong demand during the first quarter of this year, and that goes especially for the mining sector and also for Machining Solutions.
When it comes to construction and venture, we've seen a stable demand level, and Materials Technology has seen a bit more of a mixed picture, which is more or less what we've also seen in previous quarters here for Materials Technology. The EBIT for the company reached SEK 3.8 billion, and that meant an EBIT margin of 15.4%. One contributing factor to this result is that the cost savings that we have initiated in the company are delivering, I feel, ahead of the plans that we've drawn up, so that's also a very encouraging thing, I think.
Looking at the return on capital over 12 months, a rolling 12 months, as we normally give the number, it's 16.6%, but that's, of course, heavily influenced by one-off items that we had during the second half of last year. So looking at, instead of an annualized number of the first quarter, we're at 23.2%, which I think reflects more the current performance level of, of the company. We have our new organization in place. Last year, and, the autumn last year, we spent a lot of time announcing our new organization and setting up our new structures. We also have had a plan to reduce our manning with about 900 people and save close to SEK 1 billion in, in costs. And now that organization is in place, so we've done the big part, of that work.
Of course, a lot of fine-tuning and trimming of the organization still exists during the year, but, the bulk of the work has really, happened by now. The integration of Seco Tools, since we bought out the minority in the company, is running according to plan, and I think that's, going very well. And also, as we announced earlier, our intention to sell, medical, the med tech business, we had Medical Solutions, that was completed, that transaction, during the first quarter, so that is now divested, that business. If you look geographically, how our various markets have, developed, you can see that North America continues to recover very strongly. Looking compared to the same quarter one year ago, we're up 23% compared, down to last year.
Europe is more modest in its growth numbers, only 3% up compared to the same year, same quarter the previous year. And also China and Asia in general is growing at slower rates compared to what we've been used to in the past, only 5% up year on year. In the Southern Hemisphere, in all those three regions, we have very strong growth rates in Australia, in Africa, and South America, and this is, of course, heavily influenced by the strong development we see in the mining sector for here, which is driving the strong development then. In our customer segments, we've had a fairly strong positive development across the board. The strongest improvement is within mining.
If we look on a quarterly trend at the arrows on this slide, we see that construction and mining are really the ones where we have seen the most positive development compared to the fourth quarter last year, and the other sectors are more or less on a similar level here. But so continued good, strong market demand for the sectors that Sandvik is operating within. The order intake, as I mentioned, nearly reached SEK 29 billion, and if you look at this graphical illustration here, you can see that is an extremely high level and by far the highest order intake we've ever had in the Sandvik Group, so far.
This represents, in price volume terms, an increase of 13% compared to the previous same quarter the previous year. Also, invoicing was strong, the second highest level that we've had in the group. The fourth quarter last year was the strongest quarter we've had so far, and we nearly reached SEK 25 billion, and this is an increase of 10% compared to the same quarter a year ago. It's also a very strong development when it comes to the invoicing in the group. When it comes to EBIT and return on capital, we had a strong result here also, SEK 3.8 billion. And, this is the second highest EBIT that we've had in the group's history. We had one quarter in 2007, which exceeded this result level.
The EBIT margin was 15.4%, and, as mentioned again earlier, the annualized return on capital was 23.2%, so pretty close to our, our target of 25% for the company. The disappointment I feel in the quarter, even though a lot of things went our way this quarter and fell into place, our working capital also increased, and, this affected, of course, our cash flow negatively. So, this is an area where I think we need to improve, further going forward, and we still have some, some work to do to get back to below the 25% targets we have set up for the company. But this is something we will focus on the coming quarters, and, we are not happy with the current level of, working capital in the company.
Looking at the operating leverage in the, in the group, it was 32%, which has to be considered a, a fairly strong number. The EBIT effect in price and volume productivity terms was an increase of SEK 800 million. Then we had some positive currency effects and some negative structure and one-off effects, moving the EBIT from SEK 3,271 million to SEK 3,819 million, and the margin lifted from 14.8% up to 15.4% for the company. If we look more specifically then at our business areas, the strongest performance really in the quarter when it comes to market performance was for Sandvik Mining. The order intake increased by a very, very high number, up 40%, compared to the same quarter one year ago.
We had a fairly good order intake when it comes to mining system orders, SEK 1.6 billion in the quarter, and profitability increased from SEK 1.2 billion to nearly SEK 1.5 billion for the business area. Also, the EBIT margin lifted somewhat, and the annualized return on capital for the mining business area was nearly at 40%, so also very high return on capital rates for the business. Machining Solutions also had a very, very strong quarter here. We saw strong demands from many sectors, but especially areas like automotive, aerospace, energy, and the general engineering sectors influenced the market positively here.
We had record high, both invoicing and order intake for the business area, and this led to an increased profitability from SEK 1.5 billion to nearly SEK 1.9 billion for Sandvik Machining Solutions, and also an increased EBIT margin from 22.4% to 24.6%. We nearly have the same return on capital levels for Sandvik Machining Solutions. Here, 33%-38.3%, so also here, close to 40%. The Seco Tools integration work is ongoing, and I feel that it started in a very good way and in a very positive way. We are running those projects according to the plans we drew up when we decided to acquire the minority in Seco Tools here. Sandvik Materials Technology continued to see a more mixed demand in the market, so not as consistently strong as we see in Machining Solutions and in Mining.
We saw strong demand in the energy sector, and then maybe especially in the oil and gas sector for Materials Technology, but weaker demand in areas like the consumer goods and more standardized products, less value-added products in the product portfolio. We had the first major order for steam generator tubes coming in since the Fukushima accident, an order for SEK 400 million. It was an order for replacement of steam generator tubes and not for a new investment, but it's still a positive trend that activity is picking up again in the nuclear sector. The EBIT level reported was at the same level as one year ago, but last year, we had a positive metal price effect for Materials Technology, and this year we had a negative metal price effect of SEK 50 million.
So actually, we had a clear improvement for Sandvik Materials Technology, and I think this was very positive. They're working hard on their Step Change turnaround program, and we are starting to see positive effects from the efforts that they are making within Sandvik Materials Technology. The annualized return on capital was 10% then for the Materials Technology business area. Also, construction had a positive trend. They're also working with their turnaround activities, and this resulted in a clearly improved EBIT for the business area from SEK 119 million to SEK 213 million. So I think that was a very positive development for construction. And we've seen a bit, again, a mixed market situation from the different regions.
In areas like North and South America, the market has developed very favorably, while Asia continues to be a bit more difficult when it comes to infrastructure investments in these kind of areas and sectors that affect our construction business here. The annualized return on capital employed for our construction business area was 14.1% here. Sandvik Venture we had a stable market development especially Sandvik Hard Materials and Sandvik Process Systems, so positive development in the market. And the EBIT for the business area also developed quite positively here, from SEK 228 million a year ago to SEK 355 million in this quarter. And that resulted in an annualized return on capital employed for the business area of 19%, so quite a reasonable return here.
Then, Sandvik Medical Solutions was part of the Venture business area, but that deal was then closed during the first quarter, so that has now been divested according to the plans that we have previously announced. So if you sum up the first quarter for 2012 here, we've had record high order intakes, so a very strong market situation in the first quarter for the Sandvik Group. We have improved our profitability, partially influenced, of course, by the strong market situation we've seen in the world around ourselves, but also that we're starting to see benefits from the efforts that we've made in terms of the restructuring activities within the company here. And I feel we are ahead of delivering on the cost savings that we have announced previously for the company, ahead of plan there.
The annualized return on capital for the group was 23.2%, so not that far off from our financial target. Our new organization is now in place with the setup of five business areas. It's a flatter structure. We had as much as 13 layers in the company between me as CEO and the most junior worker in the company. We've flattened that. We now only have up to seven layers in the company. We've simplified the matrix structure, and I think that is creating a much better platform for us to serve our customers and deliver on the targets, and make sure that people have the right situation and ability and tools, really, to deliver on the targets that we have set up for the company.
The Seco Tools integration is running well and according to plans that we've drawn up, and we have then closed the deal with the divestment of Sandvik Medical Solutions. So that, I think, sums up my presentation here, and I'll welcome Ola up here on stage, and we open up for questions then.
Yes, we do. And we will, as usual, have a microphone here on the floor, and we will. So if you raise your hand, Per-Erik will come running with the microphone, and you state your name, and so on. We will also have some questions coming from the international audience. I think during the morning session, Olav at Investor Relations, the absolutely most common question has been: Is this a sustainable improvement? What's your gut feeling about that?
Well, I think, I mean, we are on the beginning of a journey of change within the Sandvik Group. We talked at our last Capital Markets Day a lot about our plans for the future. We will, on the twenty-ninth of May, when we have our next Capital Markets Day, give more flavor to the progress and how we see these targets going forward. But we should remember that this is the beginning of a journey, and a lot went our way, I feel, in the first quarter. We are on the right track, according to our plans, but we should remember that we have a lot of work ahead of ourselves still before we hit the targets we've set up for ourselves.
A good start, but still a lot of work ahead of us, I would say.
That's the correct answer. Do we have a question here in Stockholm from the floor? No, very silent. We start with the international audience, please. Operator, can you give us some assistance?
If you have a question for the speakers, please press zero-one on your telephone. We have a question from Mr. Colin Gibson at HSBC. Please go ahead.
Hi, it's Colin Gibson from HSBC. Three quick questions if I can, please. First of all, could you comment capacity utilization and cost absorption in the first quarter? And if you could refer your answer both to how it was a year ago, i.e., Q1 2011, but also sequentially, so Q4 2011, that would be really helpful. Second question, you talked about the cost savings from restructuring in the first quarter. You said you're ahead of plan. Can you quantify that, please? And the third question, could you please comment on your inventories and also how you think your distributors' inventories look in Machining Solutions? Thank you.
Okay, for your first question, with the capacity utilization, it is higher than a year ago, so we've continued to see a growth in the market for Machining Solutions. But I don't have an exact percentage to give you regarding that, but we have had a continuously increasing capacity utilization in the business area. If you look into the second quarter, we normally have a seasonally higher production rate because we build inventories in advance of the summer holidays in the Northern Hemisphere, in Europe, especially. So, we will likely have higher production rates, since we are building this inventory during the second quarter than what we've had now during the first quarter, which is a normal seasonal variation we have in the Sandvik Group.
Inventory levels are normally not an issue within Machining Solutions. I mean, we have very short, a very short order book and a very quick delivery time, very quick turnover of that. So, we have, I would say, normal inventory levels, and haven't really had a change in that from the fourth quarter coming in now into the first quarter here. And then the cost savings, well, we said that we were aiming for around an annualized rate of SEK 1 billion in terms of cost savings. I would say that we, in an annualized run rate, have achieved more than half of that number during the first quarter already. So that's to give you an estimate of where we stand with those cost savings here.
That's great. Thank you.
Thanks.
Thank you. We can continue one more from the international audience.
We have a question from Peder Frölén at Handelsbanken. Please go ahead. Peter, your line is open.
Thank you, and good afternoon. A couple of questions, if I may. To tie on to the cost savings, you mentioned ahead of plan. Is it also more savings you saw in Q1 than planned, not only ahead? That's my first question. Looking at the inventory build in the quarter sequentially, you mentioned that you normally overproduce or produce for inventory in the second quarter. At the same time, you mentioned that you're not happy with the working capital. So if you look sequentially here, will it be less of a inventory build, Q1 to Q2 to Q1 than we normally have? And in that answer, is it possible to try to quantify this inventory build, how that has affected EBIT positively in the first quarter?
Yeah, just a detailed question, that's my third one. In your bridge structure one-off, that's negative on EBIT of SEK 375 million year-on-year, and if you add the divisions, it's barely SEK 135 million. So could you please explain that? That's it.
Yes. To start with the cost savings, we already had a plan, but we have not changed the plan, so the target of roughly SEK 1 billion in cost savings has not changed. But we feel that we are achieving those savings in a faster rate than what we originally anticipated. So it's the pace and not the absolute target that has developed favorably here. Then, when it comes to inventory, sequentially from Q4 to Q1, it's especially two business areas where we've had an inventory build. It's within Sandvik Mining and within Venture. And within Mining, we need to focus on this. We need to...
And that, I think, continues to be, if you talk about longer term operational improvements, an area that we need to focus a lot on the whole supply chain within Mining. And there we need to improve, and there are a lot of efforts going on within the business area to do that. The second area is Sandvik Venture, where we grew inventories between Q4 and Q1. And that's mainly related to our Wolfram business. And I would say that's due to certain destocking with our customers that led us to build inventory in Venture, and I think that's not a long-term issue. That will sort itself out over a couple of quarters here.
But that was affecting the other way in Tooling in Q4, right?
I don't know what you mean, no.
No, what do you mean another way? I don't think it was really another way in Tooling.
We built inventories from Q4 to Q1.
Right.
Yeah, but I thought that you had an effect on the profitability in the, the Tooling business in the fourth quarter, and if I remember correctly, that-
The good shipments there, yeah. That, that's right.
Yeah.
We shipped a lot from Wolfram.
Yeah, clearly. Okay.
Then the 375, do you want to comment on that as well?
Yeah, well, could you repeat that question? I don't know what question-
Yes. Hi, Ola. If you look at the bridge in your presentation material-
Yeah.
- On the EBIT bridge, structure one-off is minus 37-75 on group.
Yeah.
If I add the divisions together, I get to SEK -135. I just want an explanation what the big balance is here on group level.
Yeah, we have taken also some one-off costs on group that's mainly related to a few costs. It is the 150 years anniversary that we are spending today, this year, and it's the Seco acquisition, and it's some indirect tax provisions for indirect taxes in South America that we have done, and a few other smaller items as well that we are providing for on a group level.
So these are this normally high sort of year-on-year on group is somewhat non-recurring, or how should we interpret your answer?
Yeah, somewhat non-recurring, but we always have kind of non-recurring costs, if you like. This quarter, slightly higher than we normally have.
Great. Thank you so much for your answers.
Thank you. Do we have a question here in Stockholm? Yes, please go.
Yes, Anders Roslund, Swedbank. I have a question regarding Materials Technology. What is the most important explanation behind this strong performance? You're close to 10% EBIT margin, and sales figures weren't that boosted. So yes, that's the first question. And, yeah, I stop there.
Yeah, with the SMT, I mean, there we have the biggest proportion of our cost saving efforts, so that's, of course, influencing. They have a target to save more than SEK 500 million in terms of cost savings, and that, that's developing very well, that implementation plan. But they're also focusing on things like mix and other type of restructurings, as part of the Step Change program within Materials Technology. So and I think it's very encouraging, our two business areas working with turnarounds in terms of Construction and Materials Technology have both, I think, started that journey in a very positive way now, coming into 2012, so.
Thank you. I have another question, and that's regarding the Mining division. Given the strong order intake, and as you're claiming here that you're a little bit behind in production, should we look forward to a significant increase in sales figures here the coming quarters?
Well, I mean, we've grown our order book, of course, but we will not be able to grow our order intake 40%, every quarter, unfortunately. It's a bit, a bit extreme that we had, had that number here. But now we have to focus, of course, on increasing the production rates to deliver out this order book. But there's still a very, very strong demand in the, in the mining sector for equipment here, and that's what's driving this positive development. And for many parts of equipment, there are today very long lead times.
Okay, thanks.
Yeah. Thank you. Another question here in Stockholm? Not for the moment, so we turn out in the international arena again, please.
We have a question from Mr. Ben Maslin at Merrill Lynch. Please go ahead.
Yeah, good afternoon, everyone. It's, it's Ben Maslin from Merrill Lynch. A couple of questions, split, please. Firstly, on Machining Solutions, Seco, which we can't see now, struggled quite a bit, I think, with high input costs and product launches, and so forth. Can you talk about how that's developing within, within Machining Solutions? And are we seeing the benefits of synergies coming through there yet? And secondly, on Mining, obviously, a lot of speculation around kind of internal disruption at the business, and there've been floods and strikes in Australia. Can you say whether this is, is actually a clean quarter for you? And, you know, going forward, you're back to peak. Do you think, you know, do you think you can still improve the margins of this business? Thank you.
When it comes to Seco, I mean, it's a bit early to say that we are seeing the synergies, but we're working a lot on things like exchanging experiences, benchmarking, and so on, which I'm sure will help drive both the performance in Seco in a positive way, but also the internal performance within the other product areas within the Sandvik Group, like Walter and Sandvik Coromant. So gradually, I'm sure we will see improvements of learnings coming both from Seco into the Sandvik Group and from the Sandvik Group into Seco here. But it's a bit early to start talking about realized synergies. Our overall target was by 2014 to realize synergies of SEK 300 million, and to achieve a run rate by the end of this year of SEK 100 million.
But we still maintain that target here. Mining, if this was a clean quarter, well, for mining, they're more than half their business in the Southern Hemisphere. So, their summer holiday has, of course, been in this quarter. The month of January is a vacation period in many countries in the Southern Hemisphere. And seasonally, without any shifts in the market, normally, the fourth quarter is the strongest invoicing quarter for mining in the year. So, but besides these sort of seasonal differences, I don't see that we had any other extraordinary things affecting production, and we were not affected by the floods this year, as we were last year in Brisbane, for example, and so off.
Great, thank you. And then maybe just to follow up on a previous question on SMT. Can you say a little bit more about the nuclear tube order you won, and, you know, what the outlook is for, new business, what the tendering activity is like, and how the kind of ramp-up or loading of your nuclear tube facilities looks as we go through the year? Thank you.
I mean, we will be underloaded in the near term on our nuclear tube plants compared to our original plan, due to the effects of the Fukushima accident, as we have talked about before. I think it's very encouraging that this first order came. It is, however, a replacement of steam-generated tubes in a nuclear power plant, not a new build of a plant. We know that China is reviewing their nuclear program, and an answer on how they're planning to go ahead with their program is expected sometime during this year. It is my personal expectation that China will resume its investments, its nuclear power plants, but maybe at a slower pace than they originally had before the Fukushima accident.
But, so China's not yet released it, but we expect that that political decision to happen some time during 2012 here, when we will get to know then China's plan in terms of what pace it will resume the investments into nuclear going forward. But it has. The Fukushima accident has affected the Sandvik Group in terms of production rates, so.
Great. Thank you. Thank you very much.
Thank you. Let's continue internationally, please.
We have a question from Mr. James Moore at Redburn. Please go ahead.
Oh, yes, sorry, everybody, it's James at Redburn. I've got three questions. It looks like you did not take any restructuring charges in the quarter, and I get the impression that you're not going to to do that even going forward. What's the reason for taking less provision overall? Second question surrounds the SMT margin. I wonder if you could give us a feel, not numbers, but a feel and direction as to how that's developed by business unit, the good performance. Is this the late cycle oil and gas pickup in the tube business, in the margin there, more than, say, wire and heating and strip? Or is it a pickup across all the businesses? And I suppose a similar question for the Venture business.
Is this the weak margin parts of the Venture business catching up, or is this the strong bits moving further ahead? What's the dynamic between the business units?
Now, talking about the business part, I'll let Ola answer regarding restructuring charges later. But for SMT, I would say, I mean, we don't give the detailed numbers on margins or so for the various parts. But on a general note, I can say the tubular business is the strongest part, and of course, the strongest also connected to the oil and gas and energy sectors, where we see the best market conditions. So, that's where we see the best market environment and development from an SMT point of view currently. When it comes to Venture, I mean, it is we have the strongest development in process systems and hard materials from a markets point of view.
The Dormer business, which has been the weakest part, I mean, it's also developing favorably, but I think the biggest contributions are really coming from process systems and hard materials in this.
Yeah, and as to the restructuring cost, we said that, for, for SMS, we would have another SEK 200 million or so of restructuring costs that should be provided for, in the first half year of this, of 2012. We have not taken any more restructuring costs in the first quarter. We will take some restructuring costs in the second and the third quarter, but it will not be to the extent of the 200 that we, that we talked about, by year-end.
Thank you very much. Have a good weekend.
Thank you.
Thank you.
Let's continue interim, please.
We have a question from Mr. Martin Prozesky from Bernstein. Please go ahead.
Good afternoon, everyone. It's Martin from Bernstein. Just a few questions, please. The first on Tooling. Can you comment a bit on the strength in Tooling? Were you surprised by the continued good growth here? In your comments, you said the North America, Europe, was strong, auto, aerospace, energy-related. Can you just give us a bit more detail? Was it auto Europe that surprised? And a bit more detail, specifically on the strength in Europe, please. Then on mining, just to understand the flow between Q4 and Q1. Q4 was high level of orders, but relatively weak growth. It was comping a bit quarter, but you know, how much of the strength that we saw incrementally in Q1 was flow from demand that didn't come through in Q4?
How much of this was really due to the large orders? I think you pointed out there was a SEK 1.6 billion order for iron ore. Can you just give us a sense for, you know, the role that large orders played in the quarter, please?
Well, Tooling, like for the other businesses, I think North America, year-over-year, developed clearly stronger than Europe. And you listed the sectors where we see the strongest demand for machining solutions. So, I don't really have any more details to give you on that. When it comes to mining, as I said, Q4, which had slightly higher invoicing for mining, is seasonally normally the strongest quarter for the business area. So...
Then, I mean, a year-on-year 40% increase in order intake is, means that we had a lot of things fell in in a positive way into, into the first quarter, when we have such a strong, growth rate, and, we, we cannot expect 40% growth rates, every quarter going forward, of course. The mining system orders, if you look one year ago, if I remember correctly, we had SEK 850 million of, mining system orders in that quarter. And for the first quarter this year, we had SEK 1.6 billion. So it's been, it's been one factor that has been influencing the, the growth in order intake year-on-year, but not the, the main, explanation. We, we've had strong developments in, in many other areas.
Just one follow-up on the mining answer. To what extent did you see good demand in China coal? How did that perform for you?
Very well, and we announced SEK 500 million order in China during the quarter to the Chinese coal sector. And, China, which has been weak for the other four business areas, was very strong in the first quarter for the mining business area. So, mining in China has has been the exception, really. That has been very, very strong for us in the first quarter.
Thank you.
Thank you. Still looks to be quite soft here in Stockholm. We have a question here on the floor.
Hi. Just a quick follow-up on the mining orders. Of the order intake in the first quarter, how much do you expect to be delivered and invoiced for the rest of this year? And how much will flow into the next years?
I don't know exactly. No, we don't have that number right now, and it's also, you know, that we are not really wanting to give some guidance of invoicing going forward. So we don't really get into that discussion.
But I can say the Mining Systems orders will be gradually delivered-
Right, they will be.
up to 2014. So, I mean, these kind of orders or projects that run over several years.
Right.
So this SEK 1.6 billion we took in the quarter.
... Thank you. One more question here in Stockholm.
Thanks . On China, you mentioned that the other four businesses were fairly weak. What kind of linearity do you see during the quarter? You start off at a good level, and it gradually slowed down during the quarter, or did you, as many other capital goods company have reported, see a weak start to the year and then a gradual improvement? Could you add some more color to what you see in China right now?
I think we've been talking about weakness in China over the last three quarters or so for the company. China has tightened availability of capital quite strongly. They've had a big program to stem inflation in the Chinese economy. And this is, of course, showing effect, especially in capital-intensive areas like the construction industry and so. So this has been something that has been ongoing. It's not new for this quarter. Then, in the beginning of the quarter, you had the Chinese New Year, which always slows down business. So of course, from the Chinese market point of view, when you get past the Chinese New Year into March, that's, of course, a stronger month.
But that I would say is more related to regular seasonality and vacation periods and so in China than I would say a trend. And we normally get the question about the insert sales developments so far into the second quarter, and I would say there we are developing on the same level as in the first quarter, so the market continues at the same strong level that we've seen during the first quarter. So we haven't seen any downward shifts or so in the markets coming into April either here. So we continue to date to see a strong market development globally here, and no big differences from the trends we've seen in the first quarter.
Okay, thank you. Let's move back to the international audience, please.
We have a question from Mr. Alexander Virgo at Berenberg. Please go ahead.
Good afternoon, gents. Just a quick one from me. I think I seem to remember last quarter that you said you were reviewing the mix that you'd given us in terms of product mix at SMT. Is there any chance you can share where that might now lie?
Yeah, we will continue the discussion about the mix and, and give more flavor to that at our Capital Markets Day now on the 29th of May, so that will be part of the discussion that we will have at, at that event here.
Okay, I'll look forward to it. Thank you.
Thank you.
Thank you. One more international question?
We have a question from Mr. Sebastian Grütter at Société Générale. Please go ahead.
Hi, good afternoon. Sebastian Grütter from Société Générale. A few questions, please. First on SMT, what the mix impact in Q1 above your expectations, and if it is, if it was... I mean, is this mix sustainable in the coming quarters? On machining solutions, your U.S. competitors reported a positive effect of higher number of working days in the quarter. I would like to know if you experienced the same positive impact. And a final question would be on machining solution as well. I mean, when you look at your gross rates per region, I mean, emerging markets are reported the weakest gross rates. And I would like to get some flavor about how the competition in this market behaves in emerging market.
I mean, is it really the underlying trend of the market you follow, or are you losing market share in emerging market for machining solutions? Thank you.
Well, the SMT mix question, let's see if I understood them correctly, was that above expectation? We continuously work with our mix. I would say we didn't—I wouldn't put that up as a main factor for the positive development in SMT. It's more related to... But, I mean, we're partially continuously developing the mix, but, I mean, the main things I think are the cost-saving efforts, and so, within SMT in the Q1 here. Working days, if I understood you correctly, the difference between Q1 and Q2, well, that difference-
No, Q1, Q1 this year and Q1 last year. I mean, your U.S. competitor reported a 3% positive impact from higher number of working days, year-over-year.
I think they are the same in my impression, anyway, and Easter is in Q2, both last year and this year, so, I don't see any difference between Q1 last year and this year. And, the normal thing that normally influences that is if Easter is in March instead of April, and then, you get to move the working days between the two quarters. But, it's not my impression there's a difference.
No, it's not. It's not a big, it's not a big difference. It's not a significant difference between the quarters.
And then emerging markets trend, we have a very strong position in the premium market. I think a lot of the growth happening in emerging markets is in sort of tier two type of market environments, and that, I think, is one of our clear challenges, if and how we address the tier two market within machining solutions, but also in areas as, for example, construction equipment and mining equipment. And these are well-identified strategic challenges that the Sandvik Group has ahead and that we are working on and thinking about. And we will also discuss this a bit at the Capital Markets Day here in a month's time.
Just to follow up, have you seen customers doing trading down, going from premium brands to Tier 2 brands?
... orders in emerging markets?
No, I wouldn't say that. What is growing, though, is the Tier 2. I mean, from Tier 3, I mean, these very simple production facilities in countries like China and so are disappearing quite quickly, and customers at least moving up into the Tier 2. It's my expectation in the future that, due to higher labor costs, higher quality demands, more focus on capital costs in countries like China, that the premium market will start to grow more rapidly in coming years as these issues become more important, and productivity becomes a bigger focus area for our customers. And there, I think we have a lot to add with our premium brands like Walter and Seco and Coromant.
The Tier 2 is where it's growing a lot, but I would say it's more at the expense of the Tier 3 than on the Tier 1.
Very clear. Thank you.
Thank you. Let's continue with a new question internationally, please.
We have a question from Mr. Nico Dil at JP Morgan. Please go ahead.
Good afternoon, gentlemen. I'd like to ask three questions, please. First of all, I think the underlying question that I would like to ask is whether we formed a base here in terms of the EBIT margin, so whether we can move upwards from here, or whether we should still expect a lot of volatility going forward in fine-tuning and trimming the organization, as you flagged earlier on the call. So is 15.4% the base? Is the first question. Number two is the EBIT margin on mining. You highlighted a little bit of inventory production here. Could we expect this 70.3% EBIT margin as a base, or was there a favorable effect on the mix, or inventory absorption here? The third question that I have is on mining in general.
When you speak to your customers, what we start to see in the market is that mining customers, in general, start to worry about capital intensity and their cash flow, as the CapEx programs that they've had over the last few years have absorbed a lot of their cash. Wondering whether this comes up in the conversations, and how you expect this to impact you going forward?
First, with the EBIT margin, as we also wrote in the report, I mean, we're in the beginning of a journey here. We are coming through the cost-saving parts. We still have a lot of operational improvements that I believe the Sandvik Group needs to do to have the right level of competitiveness going forward. And these operational improvements will take much longer time, and we have a lot of work to still do with that over the coming years. So, we will surely see better, maybe, or stronger or weaker quarters going forward, as this is a journey of change in the company.
But, I feel we're on the right track, and our ambition is, of course, to deliver significant improvements to the group over the coming years here. Then exactly, if it will be a linear development, quarter over quarter over quarter, probably not. I mean, nothing is that simple when you're working with a large organization like Sandvik, so we'll surely have setbacks along the way, and so. When it comes to mining, you also had a question about the margin. Is this now the base?
Well, we have here again, I mean, we have a lot of improvements that we need to do in our supply chain, and I think we acquired a lot of companies in the mining business area, and we need to continue the work to streamline that supply chain in the company. So I think we have a lot of upside there, but there's still a lot of work to do until we really have realized all the benefits of that.
I think if I may also comment on that one. We, as you know, we have different business models in the business areas we have, and for mining, is really very much about outsourcing and assembly. So, the effect of over and underproduction are much less in that business area than it would be in the machining solutions and Materials Technology, of course.
That's a very good point, yeah. And CapEx, we haven't felt that much pushback on, that we would have to participate with financing or... So far, it could, in a different market environment, become more important, but, it's not something we are heavily involved in in terms of financing our customers' equipment, today anyway, within the Sandvik Group.
Sorry, just on the question on the mining side, what I'm referring to is the cash flow of the miners. The cash flow of the miners has seen a relatively significant impact over the last few years because of their large CapEx spending programs. I'm just wondering whether these CapEx spending programs could come under a little bit of pressure, or how they would affect you going forward. So has the capital intensity of the miners been in the conversations that you've had with the miners at all?
Well, I mean, they want to, of course, develop efficiencies. I think, there are many areas that will be important for the miners going forward. Of course, capital is one. Safety is, in at least the Western world, mining areas, and especially in areas like, Australia, a very, very important area. Automation is going to be an increasingly important topic because, the mines are in remote locations. It's very difficult to attract, the employees you need for these machines. The more you can automate the more you can reduce the number of people you need to run these mine sites. Energy will also be a very important factor, both from an environmental point of view and CO2 emissions, but also because of costs.
And here, energy efficient solutions like in-pit crushing and screening will become increasingly attractive in surface mining, for example, instead of trucks and shovels. So there are many, many driving forces, and the capital intensity is one, but I think there are many other areas when it comes to reducing costs. Automation may initially increase the CapEx, but give longer term benefits. So that could still be attractive for the miners. So, I would say the capital intensity is just one of several factors that is gonna influence how the miners are gonna look at developing their business going forward.
Thank you, Olof.
Yeah.
Thank you. No more questions here in Stockholm. We have a few internationally, so we'll continue there, please.
We have a question from Mr. Peder Frölén at Handelsbanken. Please go ahead.
Yes, a couple of follow-up, please. If you look at the backlog in the mining currently, you mentioned a lot that obviously some orders are for long-term delivery. Could you just help us with how large part of the backlog that is set to be invoiced to coming two quarters? And also looking at the mix in the invoicing in the next quarter, you mentioned that systems were about 18% of invoicing in Q1 and 15% in Q1 2011. What's those numbers for the coming quarter, and hence also for the second quarter 2011?
My final question would be also on construction mining, and there are a lot of actions in place to change the structure with less sort of less vertically integrated, but also even more sort of outsourced distribution. What do you think that leverage would be when all of these are sort of set and finalized, the changes? We see a very, very good leverage currently in mining. What do you think would be a good leverage for the type of business you want to have in the coming years?
Well, unfortunately, I don't think I'm prepared to answer any of your questions. We don't give those kind of forward outlooks for our invoicing in coming quarters, and estimates there. So, that's just a policy we have within the Sandvik Group. The 18% on Mining Systems is a bit higher than what we normally invoice in a quarter, and the 15% that we had one year ago is more normally the level. And the 18%, you can say, there was a question earlier about the margin. Of course, when it's 18% instead of 15%, that somewhat dilutes the margin for mining, because the mining system margin is clearly lower than for the equipment and spare parts and so on that we have.
Then the leverage, I mean, it's normally around 20%-30%, that level for the Sandvik Group, and I think that's what you can expect all things else unchanged for the mining business area going forward also.
Okay. Thank you.
Yeah.
Thank you. We have a question here on the floor, please.
Yes, one more regarding China. You have two major investments in China, one in the construction area and one in the mining area. Could you please tell us a little about how you are going to proceed in that area, in those areas?
With our Shandong investment, which is in the Chinese coal mining sector, JV, we have. That's developing very well, and that's—through that JV, we got this with the help of that JV, we got this large order for the Chinese coal mining industry also during the quarter. So that sector is developing very strongly, and the. A lot of the Chinese coal mines today are very technically underdeveloped, and it will be a focus area within China to lift up the level of mechanization, automation, to have a larger focus on safety within the Chinese coal mining sector. So I think the attractiveness for them to buy Western standard coal mining machines, they, they will have a big desire to, to look at that going forward.
Shanbao has, of course, been affected by the tougher market conditions in the Chinese construction sector. So, there, we have a tougher market outlook. Shanbao is China's largest manufacturer of crushers, which mainly are related to the construction sector there, so. But, I think strategically, that was a very valuable acquisition for Sandvik. It takes us into the Tier 2. We have now a second brand within the construction sector in the Chinese market, and we also look at growing sales of that product in other regions around the world, maybe Africa, maybe India, Latin America, and so where there's an attraction for a Tier 2 product.
So, longer term, I think we still have a good opportunity to develop that, but the domestic market for Shanbao has been, as for construction in general, tough lately, yeah.
... Okay, I think we can have a couple of more questions. We will invite the international audience again, please.
We have a question from Mr. Daniel Parisien at SEB Enskilda. Please go ahead.
Yes, thank you. I have two questions related to mining. Firstly, on the competitive landscape, is there a difference between, you know, the large projects, versus, let's say, smaller equipment and, and parts? I mean, I'm thinking here, are you seeing more Chinese competition coming in on the equipment side, but not really on the big project side? So maybe if you could compare the two, let's say, segments in mining on the competitive landscape. And then my second question is regarding component lead times in mining. What are you seeing there? Thank you.
Yeah, when it comes to equipment compared to Sandvik Mining Systems, we have. I don't think the competitive landscape is very different. But on the, well, on equipment, I would say, to start with, we don't yet see that we have any strong Chinese competitors threatening us in areas like hard rock underground mining or so, where we have a very, very strong position. When it comes to the systems, in these Mining Systems orders, a lot of our work is more around the engineering of these projects. It's maybe only the content of Sandvik equipment in such an order is only maybe around 20% or so.
So there we are buying a lot of steel structures, and so which we might source from areas like China for a project like that. So it's an industry or a market with a totally different dynamic. Of course, then the core parts, maybe a crusher or the core parts of a stacker reclaimer or so are still Western-produced. But when it comes to simpler steel structures, and so they can be sourced in lower-cost countries. When it comes to engineering and designing these whole projects and implementing them, I would say we don't feel that we have very, very strong Chinese competition, at this point in time anyway, there, either.
All right, on the component lead times and-
Yeah, component lead time, sorry. I think we, on and off, have had different disturbances. I don't think that, or feel that that has been a major issue in terms of building inventory this quarter. So most of those problems have been resolving themselves over the last few quarters. If you go a few quarters back, we still had considerably more disturbances based on component shortages, but I wouldn't say that's a major factor influencing us today.
All right. Thank you.
Thank you.
Okay. Thank you. I think we'll take one more question, and then we will end up this conference.
Mm-hmm.
So, we don't have anyone here in Stockholm, as what I can see, so we take it internationally, please.
We have a question from Mr. Mats Liss at Swedbank. Please go ahead.
Yes, thank you. Just a question on Machining Solutions. You mentioned the production rate had been raised during the first quarter, and that... Well, my question is actually, how much? And if you also could give some indication there, what the average, well, change would be in the second quarter, given current production rate.
I don't have any exact figures to share with you.
Just a ballpark, maybe.
Not even that, sorry.
No, not that. What we can say, though, as you know, Mats, is that seasonally, the second quarter would be a quarter where we normally, in Machining Solutions, are building up a little bit of inventory for the holiday period in the summer. That's the normal seasonal effect that you would see.
So we would expect an up, well, increased production rate, then?
In Q2.
Q2.
Yes, that's correct.
Should we expect the incremental margin to improve as well, or is it more steady state there?
That's another question.
We don't give this kind of forward-looking guidance here, but-
Look from the same way.
No. Well, I think just to wrap up there, I mean, we've gotten off to, I think, a good start to 2012. In some areas, we've clearly developed better than I expected here. But I think we should remember that we are in the beginning of a journey of change. A lot of things fell or came in our way during the first quarter. But and in some way, one can say maybe that the stars were a bit aligned this quarter, but we still have a lot of challenges ahead, and one should remember there's still a lot of hard work ahead of us in terms of our ambitions for the future. So, yeah, it's a good, good start, and we-
Good.
on the right way. But, one should also remember that we still have a lot of, lot of work and a lot of challenges ahead of us, in what we want to do within the Sandvik Group.
It's a good start on a long journey.
Okay, for sure. Okay, so with that, I think we can end this session. I want to thank you all for coming or listening in. The coming two sessions or points on the Sandvik agenda, I would like to invite you as well, and that is the Capital Markets Day on the twenty-ninth of May. There are still open spots for that, so you are most welcome to sign in. If you don't have got the invitation, please contact someone at the investor relations department. The Q2 report coming up in the middle of the summer as usual, so you bring your shorts, and you come back here, and we will be here on the nineteenth of July. So that's all for now. Thank you very much.
Mm-hmm.
Thank you.