Thank you, Ansi. Once again, everybody, welcome to the Sandvik Capital Markets Day, and also here to Sandvik. We are a little bit excited to be here in Sandvik. You know, it all started 154 years ago, just here in Sandvik. Also today, Sandviken is an important part of the Sandvik Group. Today we have approximately 6,000 people here in Sandviken, and we actually host all businesses from all our business areas, so it is an important entity. We have planned a long day, a full day, with a lot of activities. You all know that our investor relations team, Ansi and Anna, and the whole team has prepared this day and done an excellent job. With me today, there will be a number of presentations.
I will have our pretty fresh CFO, Tomas Eliasson, who will help us to dig a little bit into the numbers, even though he has only been in the company for two months. We also have representing Machining Solutions, which I will be referring during the day as SMS, that is Jonas Gustavsson here in the back. We also have representing Materials Technology, which I will be referring to SMT during the day, and that is Petra Einarsson. As the last presenter, we will have representing the new business area, Mining and Rock Technology, which I will be referring as SMRT during the presentation, and that is Lars Engström. Good. I have now been in Sandvik for seven months, almost seven months. Before then, I spent 13 years in Atlas Copco competing with this company every day.
And the last four and a half years I spent in Wärtsilä, in a Finnish industrial company, which is also part of the investor group. So maybe some of you wonder what the hell are you doing in Sandvik then. You know, besides that Sandvik is a great Swedish global industrial company, I also have a small secret to tell you, if you promise not to tell anyone. When I was a fresh graduate from Chalmers University, you know, this was an awful long time ago, I applied for a job as a trainee here in Sandviken, at Sandvik. Do you think I got the job? No, I didn't. So this is a little bit of my revenge. By that I'm telling my children never to give up. Now I spent seven months trying to get myself into the business.
As you know, I'm pretty much familiar with the mining and construction business here as I spent 13 years in that business. But, of course, the SMS business, SMT business, is very new for me. So I spent significantly time out in our different operations globally, and I've met a huge amount of customers, I met colleagues, and looked into each of the businesses to try to get myself a good picture of it. And then comes the question, so do I regret that I started at Sandvik? And the answer to that is no, I don't. I think Sandvik is a great company. It has great products, good technologies, and a lot of exciting businesses. But there are also things that I do not like so much, and especially the way this group has been structured during the last past years.
And I will come back to that a little bit more moving forward. So what is Sandvik then? We are actually operating in three different industries. SMS, or the metal cutting industry, Sandvik is the world leader with approximately 20% market share within this business. We are in the rock handling, rock excavation, in comminution business, through both in relation to mining and construction. The part that we are operating is actually the most exciting part of the mining and construction business, and we are very happy that we are just in this segment. We'll come back to that a little bit more during our presentations. And then we are in the specialized high alloy steel industry. And that is, of course, a small niche within the stainless steel industry. It is also a shining star within the steel industry when it comes to performance.
We'll come back more about that later on, Petra. Yes. So recently we announced that we are moving from five business areas into three business areas. So we are merging the mining and construction business into a new business area with the name Mining and Rock Technology. We removed the construction name because I think it's giving the wrong signal. We are not really in the construction business, only in a really nice, profitable niche of that market. And we do not have any ambition to move further into the construction part of the business. We'll talk a little bit more about that later on. And then we are dismantling one of the business areas with the name Venture. And you know, sometimes I've been referring to Adventure. I have it a little bit difficult to understand this business area within the Sandvik Group.
But we took some of these businesses, the Wolfram business, which is actually a strategic part of the SMS business, and moved it in there. And some parts, the blanks parts of the Hyperion business, and moved it into the SMS business. And then we took the Varel. Today, maybe you know we call it drilling and completion, but I think during the day I will refer to Varel because we all know that. And that business was, is being merged, or will be merged from 1st of June, into the mining business. I will come back why we are doing it and what kind of logic sense that is. Then we have two businesses left, and that is the Process Systems and Hyperion. And both of these businesses we will divest. I will also come back to that a little bit further.
That ends up that we have three business areas which are very much aligned with the industries that we are operating in. In all of these industries we are world leader, and we have built this up through the capabilities that we have in Sandvik. Then comes the question, what are the capabilities? Our capabilities are actually the foundation of what Sandvik is offering our customers. That can actually be summarized as productivity. We are creating value by making our customers more productive. Our capabilities are actually material technology and application knowledge. Our capabilities are our knowledge about our customers. Many times we know our customers better than they do. The third part is our ability to industrialize, to industrialize our products and solutions that we are developing. In that way we are creating value, both for our customers as well as for Sandvik.
That was one too many. Whoops. There are a number of leading indicators that actually follow our businesses that we are operating in. One of them is the industrial production. Another one is the mining CapEx and the pricing of the minerals. It is the price of oil and gas, and of course also the GDP development, as we are global and in the most industries in the world. If we are looking at the industrial production, we can see since 2012 Sandvik growth has been actually lower than the industrial production. And that is, of course, very much related to some of the industries that we are operating in. If we are looking at the mining market, this is no news for you guys. It's been a challenging market since 2012.
The mineral prices have fallen down, the CapEx investment has gone down, and that has actually followed the prices of the minerals. At the same time, as you can see on the picture, that actually the output from the mines has continued to increase, which very much reflects our opportunities in the aftermarket. Oil and gas prices, we don't need to say. I mean, going back just one and a half years, the prices of oil were over $100, and we all thought that this would continue in the direction. But, of course, a dramatic drop, been down to approximately $26, but today we see some enlightenment up just below $50 per barrel. Do we say that the crisis is over? No way, absolutely not. We do not see any changes in the investment behavior by our customers.
The only thing I just checked up before I came to this meeting is that for the first time in a very long time, the U.S. number of drill rigs has increased, but only with a handful. So it's not a lot, but it's the first time that it is not actually decreasing further. So maybe that is a small indicator. Then referring to the GDP development of the world, which is of course important to us. And if you look into the last three years, the GDP prognosis or forecast has been downgraded every year. And now you can see that the 2015-2016 is that we do expect some increase. If that is true or not, I think the future will tell. So it's about creating value. That's why we are here. We need to create shareholder value.
Looking back during the last five years, I think our financial performance has been not in line with expectations in the market. So we have underperformed. And that has reflected itself on our share price, which has been flat, almost going down during the last five years. We need to create value also in a tough working environment. And we will talk more about that moving forward. I mentioned to you all that I've been spending some time out in the market getting to know Sandvik. And I said that I love the products, I love the technology, I love many of our businesses. But one thing that I do not like is the structure, the central structure that has been driven during the last five years. And I've been very open and clear from that, also from the beginning.
During my working life, the fundamentals of how I've been running businesses are in a decentralized model, with the priorities in the direction of stability, profitability, and growth. This is important in our strategic agenda. What do we mean with stability? It means that we need to get the fundamentals right. We need to have the right structure. We need to have the right people. We need to have the right management and the right processes. That is a stable business. The next stage is driving profitability. We need to deliver, as I mentioned, good profitability also in tough market conditions. To be able to do that, I'm convinced that we need to give our business manager the full accountability for their businesses. They need to own their costs as well as they own their revenues. We'll come back a little bit more onto that.
The last part is growth. Growth can be done in two different ways, organic, which is always the most healthy way to grow, and then also through mergers and acquisitions. So if we are looking at Sandvik, we need to, before we start driving growth, we need to make sure we have stabilized businesses and profitable businesses. To grow, unprofitable and unstable businesses do not create value. So you need to get this before you drive growth. When we look at Sandvik, we have a lot of different businesses, and I will come back to that during my presentation. But one thing in common to drive profitability is that we are going to do it in a decentralized structure. We are going to have a strong focus on capital and cost efficiency.
We are going to drive the aftermarket to improve our profitability, but also to mitigate volatility in our earnings. We are going to have a strong focus on price. I think price is neglected in many of the industries when driving profitability. Of course, not least, we need to be sustainable. That is important, I mean, for Sandvik employees, for our customers, but also for the environment. So if we are looking at our different businesses, they are in, they have different challenges and opportunities, and they are also in different levels in the S-curve of stability, profitability, and growth. We all know that our SMS business is the shining star. It's delivering profitability above 20%. It has a return on capital employed around 27% with more potential. In this business, you need to drive growth.
Then we have SMT, which actually is a stable business, but from Sandvik perspective, we are not delivering the profitability that we need. So we need to drive profitability, especially in the number of those businesses, but we will come back to how that will be done. And then we have the third business, which is actually in the stabilization phase, and that is the Mining and Rock Technology. As you all know, we are moving from a centralized business to a decentralized business with this, where we are actually creating product areas with full accountability. This will take a little bit of time before we put the structure in place, the management in place, and the people, and then we will drive profitability in this business. It is important that the businesses that we operate in are number one or number two.
You have listened to me during years, you know that I feel that this is extremely important. So why is this important? Because there is a relation between profitability and market share. We need to be our customer's first choice. When the customer is going to invest, he has to think Sandvik. If he thinks about our products, our solution, we get the pricing power that we need. Sandvik will never be a low-cost supplier. At the same time, we also get the economy of scale in our production, which means that we have the ability to have low costs. And we will be spending more money than any of our competitors in product development. And in the end, the company who has the best products will win. A lot of bubbles. Each bubble represents one of our businesses. This is the business of our old structure.
You will see some difference from that going forward. The size of the bubble is actually the size of the business. Then we have on one axis, we have the market attractiveness. That means how attractive the business where this business is operating in. The other one is the Sandvik core capabilities. What do I mean with the core capabilities? Maybe you remember what I said before. That is actually what Sandvik can add to driving these different businesses. As you can see on the lower line there, there are a number of businesses which have very low Sandvik capabilities, so level of Sandvik capabilities. One of these businesses you recognize, it's mining systems. You know that we are selling this business, so that's in the process.
You also see Sandvik Process Systems, which is a highly profitable business, but it's very different from everything else we have in Sandvik. We do believe that there are better owners for this business than Sandvik. Then we have the Hyperion part, the part which is not transferred to SMS, which actually consists of Diamond Innovation and Sandvik Hard Materials. Also, this business is not a core part of the Sandvik business industries that we are operating in. We also do believe that this business will develop better with a different owner. So these businesses will be sold. Then maybe some of you wonder, yeah, but if I'm not wrong, there are a couple more businesses that are underperforming in the market. So why are you not selling those businesses? Reading some of your reports, this is the thought of many of you.
Mobile crushers is one of the areas which have been discussed during a long term. Why don't we get rid of that business? And that was also my thought when I looked at these, you know, from a theoretical point of view. I spent a little bit of time to get to know our mobile crushing business. I went up to Northern Ireland, and the one who has followed the story of the mobile crushers knows that this is actually two companies that were bought in 1997. One was Fintec and one was Extec. And these two were merged together to what we called Sandvik mobile crushers. We spent a couple of days together with some customers because the customers, they give you the reflection of how your equipment is operating and how the business that we are driving is really performing. And they were really happy.
They say that Sandvik has the best products in the market. I visited our production facility and our management and looked at all the products, and we have a very strong product base. We also have good people in the plant, and we have a world-class production. I would say it's really one of the top production facilities. And then you ask me, why the hell are you not making money then? And that was the question I was asking the management there. Why are you not making money? You know, if you're not making any money, you guys will be sold. And then they said, you know, you know what the issue is? And looking deeper into the numbers, I was shocked when I saw that the S&A cost was 20%.
You know, a company that is selling its products through a distribution network should have S&A costs around 6%. So why the hell do we have 20%? And the management was a little bit embarrassed, but they said, you know, we are not really accountable for all the costs here because they distribute a lot of costs coming from above. And Sandvik Construction has a beautiful sales network around the world that we have to carry on our shoulders. And I said, why? Yes, because that's the Sandvik rules. And I said, fuck the rules. Sorry. Don't quote me on that, please. If the rules are bad, we need to change them. So from my perspective, I believe we have to give the mobile crushers the right chance to perform. So I told them, if you need to get out of our sales company, you just make the deal.
Just do it. I'll give you a year. Show that you can perform and you can deliver your profitability and your place in the group will be secured. If you're not, and this is really an unattractive business, this business will be out for sale later on. But we need to give the management the full accountability for the business. We have to give them the chance. And that is what we're doing. Moving to the other business, the Varel business. So we also know that that is an unprofitable business for Sandvik. It was unfortunately bought when the oil price was over SEK 100 and the business was hype. Of course, we know what happened. Today, it's an unprofitable business. We have a huge amount of goodwill. I think we have approximately SEK 3 billion of that. Then we have another SEK 2 billion in capital in that part.
So it's pretty heavy. And it's not producing any profit. So why are we not selling that? From my perspective, that would be destroying value for Sandvik. Why sell a business when you are really down in the bottom? I do believe that the oil and gas market will come back. It will take a little bit of time. I think Varel has a good position within that business, and it should have the possibility to grow and to get back so we get the profitability back in that business. And at the same time, approximately 30% of that business is related to mining because they are making these, what they call, bits for surface drilling. We call it tricone bits. That's the name of them in Swedish, rullborr kronor. And they have a strong market share.
And if you're moving actually these tricone bits together with the mining business, suddenly we have 40% market share when it comes to tricone bits in the world. So it's very strong then. At the same time, they have one of the best production facilities or low-cost production facilities in Mexico, which we can use for the other products in mining. So we move it in, we hide the goodwill for a number of years, and then we'll see in the future if this is core business or not. Then we move on. So we call it back to the future. I'll tell you a story, and I will tell you why I tell this story. And some of you might have heard me tell this story before.
But when I was newly recruited to Atlas Copco in the end of 1998, I became president of a division, a small unprofitable division for exploration drilling called Craelius. I was a very proud president. And we had a big meeting like this where all the managers from Atlas Copco worldwide were actually sitting in the room. I think we were 400. And I was one of the most proud guys in the whole group who just got to be a division president in Atlas Copco. At that time, Giulio Mazzalupi was the president. He was very focused on the division. He said divisions are the highest operational level. Never talk about anything above. That's only cost. And then he started to go through each of the Atlas Copco businesses. So he started to write up the most profitable business, and he wrote up industrial compressors.
Do you know who was president for that division? Johanl Molin, yes. Our chairman. He was the big star. And then he worked himself down. And then he came almost to the bottom. He took a black chart and he just pulled it over there and he said, "Then we have one division that has never performed. And we need to sell the business." And I said, "Jesus. Here I'm sitting proud and now they're going to sell my business." I was shocked. I went out and I met my Freek Nijdam, who was my boss, and I told Freek, "Why didn't you tell me? I could have got a job in another company if you're going to sell the business." He said, "Don't worry. Go home and do your job." Why do I tell this business? Why do I tell this story?
It's because at that day, I said, "I will never go into a meeting and be on the bottom again." So I got a lot of energy. I went back to my management team and said, "Guys, we have work to do. And you know what? We had the same problems as mobile crushers. That's why I feel so much for those guys. I was carrying costs for all fancy sales companies, which you only can do if you're selling Boomers or beautiful drilling equipment. But the business where I was into, that was exploration. These were guys with tattoos, strong guys working in the woods. No fancy offices. So we have to adapt ourselves to that business. So we, of course, got ourselves out of all the sales companies and we were focusing on setting up a distribution network just to these contractors selling. Guess what?
We didn't end up as high as Johan Molin, but we were just under three years later. That was because we were driving the business within our business. That means by giving this accountability to the different businesses, we, the guy running the mine, cannot blame anyone because you need to be accountable for your business. Your revenues, your costs have to be related to your revenues and you have to own them. That's the importance. Going from a centralized structure, moving over to a decentralized structure, saying, "Yeah, but now you're going back to where Sandvik was before." No, we're not. Because before, Sandvik was actually focusing on the business areas. We are driving it one step further down. We are pushing it down to the product areas. The product areas are accountable for the businesses. The business areas, they are only strategic.
They are helping them, the PAs, the product areas, to put up the strategies to go forward. So it is one step forward, not one step backwards. When we're talking about group group functions cost. The last years we've been building these up, costs have been exploding, and we've been transferring these costs down to our business. And I can assure you that anyone of our business leaders out here are frustrated because a big part of their costs, they cannot control. They are being distributed from above. Our job is to make sure that the group and the business, and we have something that we call today also cost side, but we are minimizing these parts and moving all these people and all these costs into the operations where the business managers can own the costs. They can decide what is necessary to be successful in the different businesses.
That's how we're going to drive the business going forward. So what are we actually doing? We are giving the PAs full accountability. It gives a very transparent way of structure. It would be easy for me because if a PA is not delivering the result that they should, there can be two reasons. One can be, it's bad management. So what do we do? We change the management. Or it's a bad business to be in, the market attractiveness. What do we do then? We sell off the business. So we need to make that. It's a very easy and transparent way of driving the business going forward. So what kind of implication do these have in our different so-called business areas? Starting with SMS, Machining Solutions.
In the beginning of this year, we decided to break out the common production stability into each of the PAs, each of the brands. And you know the brands in SMS, it's where we are today, Sandvik Coromant. It is Walter. It is Seco. And it is Dormer Pramet. Each of them now owns their own production also, which means they are fully accountable for the part. And then we have added one more product area, and that is raw material and blank technology. That is actually the pieces that are coming from the Hyperion and the Varel business. So on the mining and rock technology side, as I mentioned to some of you, we have created eight new product areas with full accountability. Lars will talk more about that.
Within, under there, we have also seven business units, which means that within crushing, for instance, mobile crusher is a business unit. So they own their own costs. So we actually have more than just the product area, but also the business unit to drive the efficiency. That business will be in place by 1st of July, and from that on, we will be driving a lot when it gets profitability. And in some of the PAs which are profitable, we will go for growth. And the third part is the SMT business. SMT has actually had this structure before. So they have three product areas with full accountability. But under there, they also have a number of business units which also have full P&L responsibility. So here, it's about focusing on driving profitability and return on capital employed. Those bubbles again. We love bubbles in Sandvik.
This is the new structure. This is the new structure. This is all our PAs and BAs. BUs. PAs and BUs, I don't know. I have to remember all these things. And the size of each bubble is actually the size of the PA. But we are tricking you a little bit because we know that all of you are now taking photos, and then you're going to be measuring our biggest business. So now I know which business it is. But we are not going to tell that. But if you're looking here on the speed side there, we don't have a PA which is that size. That's actually three PAs. That is Sandvik Coromant, that is Seco, and that is also Walter in A1. Because if we only would have put one then, you would be shocked to see how profitable this company is.
So we didn't do that. So you can see that varies a lot between these parts. And unfortunately, we have a little group down here. A little bit disturbing from my side. I can tell you this pointer is very strange. You know about that. But if you look at those businesses, they are not performing. So what would happen if these businesses moved up to zero profitability? Do you know how much that would affect our EBIT for the group? 2%. We would immediately be a 14% company. So what would happen if we got rid of those businesses? Do you know what our EBIT level would be then? Any guess? 16%. Wow. That's an easy way of creating profitability, isn't it? But that's not the way we do it.
We think there is a lot of important businesses here that have a lot of potential, and that is what we are going to grow. We are going to make sure now that one of the businesses here is mining systems, and I can tell you that we sell off. But there are also some other businesses around here that we are actually going to make sure that they start becoming profitable. And that's the way we're going to add value into Sandvik, create value. So all of these businesses, they need to drive profitability. So what do we need to drive? Yes, I said we need to be number one or number two in the different businesses there. So the net new sales ratio, we say, yes, new products gives us pricing power. That's important. So we measure what the sales on new products.
Each of our businesses has to generate 3% efficiency improvement per year. We measure that. They need to do that. If they don't do that, they will get no bonuses. And then, sorry, and then we have the, I'm not good in this. And then we have the last one, the net working capital. We've been working it down, and our target is to get to 25% and below. We are around 27% today, so we have a little bit more work to do. And it varies a lot between our different businesses. Some of them are already there. So being a decentralized company, what keeps the company together? What is the glue that holds the group together? Not that everybody's running in all different directions. Yeah, that is what we call the Sandvik way. That is all the common processes and policies together.
The way we run, the way we follow up the part, it is the core capabilities, it is the governance, but also our common values in the group. But this, the Sandvik way, all our business units need to follow and is non-negotiable. This means that they need to, even if they are fully operating free, they need to follow the Sandvik way. We educate them, and we will be educating them even more that they stick to this. One of the processes I like best is our HR policy, and that is the one, the internal job market. This means that every job in the group is actually coming up on the internal job market, which gives, I think, a really good way and a decent way for all employees that they can all apply for any job in the market in Sandvik.
Maybe except not my job because that's the board, but any job that I'm responsible to have. And the one who decides who will have the job is actually the recruiting manager. And I think this is the best way to drive diversity in the group because everybody has the same opportunity. So when the company is stable and profitable, we focus on growth. And as you saw, there are different businesses and different ways to drive growth. But there are a number of actions which are common for all our operations within Sandvik. Number one is that we will run it decentralized. Number two, it's a focus on capital and cost efficiency. Number three, drive the aftermarket to improve the profitability, but also to mitigate the volatility of the earnings.
The third part is actually the pricing, value-based pricing, the pricing power which is many times neglected by our companies. So if we're looking at new products that need to be run, that is actually, I mean, all our business entities are focused on. We are spending today more than 3% of our sales to drive new product development. Each of our business units, or PA, are focusing on new products. If we're looking just at SMS, last year we introduced 15,000 new products in SMS, and this year 11,000 products. In mining, there is a lot of new products, and also in SMT. So big focus on digitization. You will hear more about this when we talk about the different businesses. I said focus on the aftermarket.
Then somebody said, "Yeah, but how do you focus on the market in SMT because that's a steel business?" Did you know that 30% of the revenues actually end up in the aftermarket and consumables business? Well, it's actually surprising to me too. In mining and construction, or mining and rock technology, 72% of the revenues comes from the aftermarket. SMS, 100% of the business is consumables and aftermarket. So I think Sandvik is pretty much an aftermarket company. So, the last, mergers and acquisitions. Yes, the entities that are profitable and in the growth markets, yes, focus on finding companies or products and that can be added to the businesses. The mergers and acquisitions will be driven from the businesses, not centrally. It will be driven from each of the businesses, and it has to strategically fit into each of our PA. Then we'll do the acquisition.
We expect that each PA are monitoring the market and have a long list of potential acquisition candidates. But they need to be in a profitable mode before they drive growth of acquisition. We have the emerging markets. My belief is, and I know this is the same viewpoint from all my business area presidents, and that is that you cannot call yourself world leader if you are not world leader or the leader in China. If we're looking at Sandvik's development, this pointer, Jesus Christ, there I am. If you follow here, you can see since 2012, our sales in India and China is around 10%. It has been flat. I can tell you, this is not lack of activities. There's been a lot of activities, but we haven't done this good yet.
So each of our businesses, and you will hear also from them, will be focusing on the Chinese market and the Indian market going forward. Then, of course, when we're talking about this market, we're talking about mid-end market offering. And this is one of the areas where we haven't been very successful. We'll come back to that in each of the product presentations. Then, now we're going to go to the fun stuff. I move over to the financials, so I invite Tomas up on the stage. Please. So our group targets today is, I think over a business cycle, we should grow with 8%, including M&As. We should have a 25% return on capital employed. Looking at those numbers, I'm sure all of you said that it was quite a long time ago Sandvik was delivering on these numbers. So maybe they're not really realistic.
So maybe we need to work out some numbers that are realistic that we can commit ourselves to. We also then decided to present the following numbers. What we said, because of the uncertainty about the market and the development going forward, we have, like Tomas said, we are not expecting anything from the market. If we get something from the market, of course, things are going to be much, much easier. But we do not expect that we get any help from the market today. And we decided to put our targets with a three-year perspective because I think this is a time range that we actually can control. So during these three years, we have promised you that we will grow our EBIT with 7% per year, per annum. We will improve our return on capital employed by 3 percentages during these three years.
We will drive down our debt and go to a lower gearing. Then you said, "Yeah, but it's still 0.8," and that's what the same you had before. Don't you have any kind of ambitions? But if you look a little bit closer, this includes our net pension liabilities. So if you actually take the pension liabilities out, you end up approximately on a gearing about 60%. Is that correct, Tomas?
Yes.
Okay. So it is a little bit ambitious. We need to continue to work that. And we have decided to continue to be generous in our dividend, so approximately 50% there. So it's about driving profitability. So going back to profitability, stability, profitability, and growth, the group is going to be focusing on driving profitability. If we get growth, that's fine. So if we say that we're going to improve with 7%, you say, "Yeah, but where do you start?" You have to know where you start if you promise. Otherwise, we're going to fool you guys. So we're giving you the numbers. We are comparing with year 2015 when our EBIT level was SEK 10.4 billion. So we have ambitions to grow this company to SEK 12.7 billion, and this is equivalent to a 15% EBIT level company. I believe that Sandvik should be a 15% EBIT level company.
If we're looking at our return on capital employed, we are moving actually from 14% to 17%. And then on the net debt, yeah, we can see that moving down. Yeah, we actually have higher ambitions. I mean, we need to get the gearing because we know if we have too high gearing, our freedom in making acquisitions will be limited. So we actually need to get this down. So we need to continue to work it down. So if we summarize our business, we can say that we are driving the business toward a more decentralized business. We will have many profit units that are owning the P&L and balance sheet. Each of our business units has to work with continuous improvement. Remember that. Don't expect any quantum leaps. Continuous improvements in all businesses.
If all our businesses are delivering a little bit better every year, Sandvik will be a great company delivering great value. By that, I think because now we want to listen to the real business people. As I said, the great leaders are in the operations, not centrally. Shall we have a couple of questions and answers before we jump into the businesses?
Yes, let's do that. Starting here.
Thank you, Peder Frölén, Handelsbanken Capital Markets. During the presentations, we all could sense sort of a good improvement possibility in the overhead costs, so to speak. So maybe you could try to help us to see how much of the profitability improvement will actually come from that part of the P&L. And tied to that, you don't expect any help from the market. Does that mean flattish volumes from these levels, or actually, we are some markets that are deteriorating still, right?
We're going to do everything we can to get growth in these companies. We are not going to stop growth. That's important. If we get the growth and the market helps us to come, there's no one more happy than we are. But we said that if we're going to give you the target levels, we have to commit ourselves to these levels. That's what we're doing. If you expect that we are going to get market growth and we don't get market growth, we will not be able to reach the numbers. That's why we said we are planning for a flat market and hope for the best. That's how we drive it. The important things that our action is, of course, to improve our margins, but it's also, of course, improving our cost structure.
With the decentralized structure, we will have, as you saw, maybe 27 management teams driving efficiency. That's better than one management team, I think.
Yeah, and I understand your question, Peder, but we're going to go from, let's say, 12%-15%. All right, so what is it, 1% gross margin and 2% S&A? Well, we haven't split the target like that. There will be a reduction of S&A and hopefully a gross margin expansion, but we have not communicated any specifics on that. The important thing here is that we move the decision power and the control of the costs as much as we can to PA level, to the business leaders who can make the right decisions. We can't really do it. Well, we can say go down, but they must make the right decision. What's the right size and sort and type of cost that the businesses can carry?
We are also including some of our business units that are related to the oil and gas industry where we believe it's going to be challenging in the coming years. So that is, of course, also included in these numbers. So some businesses will have a great development and some will have a tougher, and that is included in these. These numbers we are committed to. Yeah.
James Moore from Redburn, just three small questions on the cost-saving action in the business. You've given a timeline for the EBIT, but nothing's a straight line. Do you have a sense as to how long it's going to take for these actions to kick in, or should we think of something of a straight line? That was my first question. The second one surrounds the formal savings program that you've inherited, where we have some specific numbers and a shape of that saving program. You haven't really put a hard number on the saving as such. So should we think of a change in the way in which you're going to communicate the savings from this or how we can calculate that? And the third one is on incentivization. You talk about all these decentralized teams. What does it mean for their back pocket, and how does that change?
Yeah. I can assure you that without reaching these targets, there will be very limited compensation for all of us, unfortunately. But we are going to reach them, and then it will be different. But of course, we will be following each of the businesses. But it's correct that when you are a big centralized group, you run these big efficiency programs, and you're going to take out billions here and billions there and so many people. Now we're going to be running this business decentralized, which means that each management team will adjust its cost level depending on the revenues and the forecasts going forward. It becomes a much quicker way to respond to the customer's part. So there will be a lot of actions in all our different businesses. Maybe we will not go out with any big programs in this part.
There will be a huge amount of programs in our different operations. That's how we will be driving efficiency and performance improvement.
Hi, Klas Bergelind from Citi. So it's a 15% margin and ROCE of 17%. So that is 1.1 turns on the capital. So it feels like more cost-cutting than improvements to capital efficiency. So what kind of working cap and CapEx assumptions do you pencil in going forward? I was hoping maybe that you could do a little bit more on the capital side.
Yeah, I agree with you. There varies a lot from our different businesses. But to be honest, and you will listen to Lars before, and he will also tell you that on the inventory side, for instance, in mining, there's a lot to be. I think we have 180-190 days in inventory. So there is a lot of done. But also there, you will get these business units, eight business units. Each of them has to drive performance, which means that they will be concentrating on their business to make sure that their capital efficiency is lower. So we will be I mean, these are the numbers. If we can improve it even better, we'll do it. But these are the numbers that we are committing to.
You're talking about the return target from 14%-17%? Yeah. It's like 2/3 is the numerator and 1/3 is the denominator. Yeah, so that's absolutely correct. But yeah, we have more to do on the capital side, of course.
We all agree on that.
Yeah.
That would be more if you don't have the question. We will have after we finish that we will have all the businesses and us up here, and we'll have a more extensive Q&A.
One second. Can you hear me?
Now we hear you.
Hi, yeah, it's Andre from Credit Suisse . Can I just double-check your top-line assumptions under that 15% EBIT margin and 12.7% EBIT absolute? It looks like you expect revenue to come back to the 2015 level. So mining systems is out, and we're down this year in terms of just how the run rates are running and where the order books are. So there's expectation of a recovery in 2017, 2018. And I think you've also got a couple of divestments that will take that top-line down. So I just want to double-check what you're assuming for because you said no growth, but it sounds like there is some growth expected.
We are actually not going to give you the forecast on the revenue side. So we decided that we give it on the absolute time on the profit side, but not on the revenues. So it can be better, or it can be worse. And that is what we need to adapt to. And that's what we have promised to do.
The base is, of course, done on an apples-to-apples basis. Yeah, so it's a base is adjusted, so.
You'll take out the disposals from the.
Yes, of course, in the base. Absolutely. Yeah, absolutely. So it's kind of you can say it's restated from everything that we have announced will leave the company and be divested and all that. Yeah.
How much of the margin improvement comes from just disposing the lower margin businesses, and how much is underlying improvement of the remaining businesses?
We are not expecting that the selling off any of the part of the 7% improvement. These are all the underlying improvement of the businesses. We are not going to cheat you guys by selling off a lot of businesses and reach the 15%, as I said. That's not the way we're going to do it.
No, everything is operational.
Everything is operational, definitely.
Yeah. So the units that we had, we'll have in 2018. What did they look like in 2015, and what would be the underlying development of that?
That's very clear. Thanks very much.
Good.
Hi, it's Guillermo Peigneux from UBS. I wonder just specifically on R&D. Given the times that we live in with an increased amount of competition coming on the mid-market, I was wondering, what are your thoughts on your R&D budget going forward? Is it going up or down? Do you think you need to accelerate or actually cut costs there? Thank you.
I think we have one thing that I really admire with this company and from all my predecessors, that is they have never stopped investing in product development in technology. That's, I think, one of the strongest parts of it. I'm very happy to that because if you have the best products in the end, you have a good foundation to build. I'm very happy with our product portfolio that we have in the different and the amount. We are investing about 3%-3.5%, and that's the level where we will be keeping it. But of course, the R&D will be not so more centralized part. It will be part of the business units, but we will make sure that we are investing.
Some businesses might invest a little bit more than they need to, and some a little bit less, but that's depending on where they are. With the new structure, it's very transparent for me and the business area presidents to actually follow each of the businesses. We have also, I mean, our CFO here, Tomas, has only been in the company for two months, but he has already introduced the scorecards system, which is the best way of following every business. So now both of us are back. We can go into any business through our scorecards. We can actually evaluate each business, the performance, and what is wrong and what is good. So Tomas is working with high speed in that part. You need these tools when you're driving a decentralized operation. But I think we both come from that environment, so that helps a lot.
Maybe just a follow-up regarding pricing environment. When you look two years out, three years out, what do you think about pricing for Sandvik's products, or what do you think about the pricing power that Sandvik delivers to the table? Thank you.
I can approach it. Each of our businesses that we have are working with value-based pricing. We are putting all the efforts. Traditionally, of course, SMS is the star when it comes to pricing. In each of our other businesses, we are working very hard in focusing on the pricing. So there will not be a single PA that is not focusing on that part. To be honest, as I said, it's very much neglected in many companies. This is really the best way to drive performance, not least in the aftermarket. So we will have a strong focus on the these are one of the areas in driving profitability where we will keep a big control. I mean, it has a relation to the number of products. We have seen SMS introducing 15,000 new products.
It gives you the pricing power that you need when you're launching these new products. If you don't do that, you will lose margin. That's pretty clear. But as Tomas showed, I think our gross margin has been very stable, and that is showing that we are keeping the prices on a good level.
One last question, guys.
Yeah, hi. Bo Selling from Alecta. You mentioned that these mobile crusher guys were moaning about 20% being allocated on S&A costs. And then at the same time, Tomas, you showed that the group cost was 26%. So there must be a lot of moaning in the group. But I wonder if these costs are not visible to these guys. They're allocated. Where are they sitting? Where are they coming from?
First, I have to say, when you look at the Sandvik Group, that's why I said you cannot actually look at the S&A cost for the group and say if we are good or bad. Because if you look at the SMS business, our S&A cost is up here, but they have also huge margin. If you're looking at other businesses, of course, depending on how you're operating, they vary a lot between the different businesses. So the only way to evaluate if you are on the right level, you have to look at each PA. You have to see what kind of business. Are you selling directly in the market? Are you selling through distributors? What are your competitors doing? So you have to dig further into that.
What I'm just saying is, when you are selling through distributors, then they are actually that's what they're getting their 20% margin from. So if you have the same S&A costs that you have in a direct sales business, of course, you can't make any money. That's what I said, and that's important. So we said they have to own the cost. And today, we are distributing a lot of costs in the group, and that is going to change.
Yeah. And when the CEO says distributing, it means we're allocating it in big chunks just to the businesses. And I think to get more flavor to your question, where is the cost sitting? Well, the number of people in the group that does not belong to any BA or PA is in the mid to high single digits in terms of percentages on the number of employees. And that's, of course, completely outrageous. And that's what we're going to change now. That's where it's sitting.
Okay.
Thank you. And with that said, we'll take a little short break. There's going to be more opportunities to ask questions later on this afternoon.
Good morning, everybody. Oops. It's good to be here again. Back to the future. Just referring back to what the CEO said here at the beginning of his presentation about revenge, one of my friends, who today runs a big, huge listed company in Sweden, said to me once that never underestimate revenge as the main motivating factor for you. So okay, let's have some revenge. So what I will do now is that I will give you a run-through of the income statement and the balance sheet over the last three years, tell you what has happened, give some reflections on where we are, and maybe, most importantly, talk a little bit about the future as a preparation for the new financial targets that the CEO will present directly after my presentation. So let's start with the income statement and the top line.
As you can see here on the left-hand side, this has been three tough years. We are trailing right now on SEK 80 billion in sales or revenues, coming down from SEK 90 million only three years ago. On the right-hand side, you see the organic growth. It has been negative through all these three years. This is, of course, tough, especially if some of your businesses are highly vertically integrated. It's easy to lose a lot of money in a situation like this. The good thing, though, is that the gross margin is pretty stable overall for the group, 38%. So we have been able to mitigate this huge decline on gross margin level, which is good because 70% of the cost is contained within the gross margin.
This is not like a mix of some businesses doing really good, some businesses doing really bad because you see this pattern in all the business areas and most of the PAs throughout the group. So good job done. The problem is this, S&A, including R&D. You can see here how it has gone from 24% to 26% in three years, a little bit more than 200 basis points. We have not adjusted the S&A and R&D cost in accordance with the volume drop. This is the challenge we've had. There is some traction. There's some movement lately, let's say, over the last six months. But overall, the three years, this is not acceptable. This is not good. We do have structural programs running, so there is hope. We see some traction already. The CEO talked about the business area consolidation. That will give synergies.
We've seen that already, some of it. Merging or reducing from 5 to 3 business areas will give a lot of synergies. We talked about decentralization. We talked about country organizations and group functions, etc., etc., etc. And just going back to what Björn said here, we will move as much as we can out to the PAs, to the product areas, because there is no better way to control costs than to give full responsibility and decision power to the business leaders in the group. And that is what's going to happen. I mean, if you look at the PAs and the BAs today, look at the S&A that they have. It's like between one-third and a quarter of the total cost that they have in their income statements, which is just allocations. There's nothing they can do about that.
And that, of course, would drive me mad if I was a PA head. And I can assure you, it drives them mad as well. So we'll move that down to the PAs, and then they can decide what to do with the money. Okay. Talking about cost programs, just a few highlights. We have announced cost programs. We have one which will give SEK 2.1 billion when it's done at the end of 2017. We are on SEK 1.3 billion year-to-date now at the end of March. We have closed 15 sites out of announced 23. We started at 150, so going down to 127. And if you look at the bottom here, you can see that we have taken out 3,500 employees over the last three years, which corresponds to around 7% of all the employees in the group. And of course, 7%, that does not match the volume drop.
And you see that on the A&S curve as well. So this has not been enough. But there's more action to come. Okay. So let's look at the EBIT margin, of course. EBIT margin has come down, of course. Now we're running on around 12%. And of course, as you saw, this is due to the underabsorption in A&S and not to a gross margin decline. So the summary of it is that we have a significant decline on the top line. We have maintained the gross margin, but we do have underabsorption in A&S. So moving forward, improving the performance of the company, we will not bet on any help from the markets. That's not in our plans, if I use that word. We have to continue to defend and improve the gross margin. We will have to do something about A&S going forward. And we'll do that.
It's part of the way forward over the next two to three years, the development here. So we don't bet on any market help. If it comes, it's nice. It will be an add-on. But we must be able to fix this without increased top line. Okay. Now, let's move over to the balance sheet. Here we have working capital. On the left-hand side, we have CapEx on the right-hand side. Working capital has been reduced. We're not at our ambition level yet. It's 25%. We are on 28%-27% right now. But anyway, it's SEK 4 billion over three years. Good progress. CapEx, we've been prudent on CapEx. The guidance we've given you is SEK 4.1 billion, around 5% over revenues. That's kind of a long-term target. So we'll continue to do that.
Moving over to the net debt development, we ended the first quarter on SEK 33 billion, approximately, in net debt. The gearing is just below one. Of course, it has come down from the peak. The peak was Q2 2014, SEK 7 billion down. So that's quite a bit. But it's not enough because this balance sheet is not strong enough yet. We need to invest more. We need to, or we want to, acquire companies in the businesses which are profitable, etc., etc. So the balance sheet has to continue to improve below the 1.0 gearing level. We have an idea where we want to be, but Björn will present that in a minute just after this presentation.
So to round it all off, we can do it like this with a, let's say, chart on cash flow and the allocation of capital, where we have been in 2015 and what will happen in the future. So if we start on the left-hand side, the operational cash flow plus non-cash items was SEK 13.8 billion. Then we had a nice reduction of working capital with SEK 3.1 billion. So SEK 16.9 billion, that's where we start. What do we do with the money? Well, finance items and tax, around SEK 4 billion, of course. You can't get away from that. CapEx, SEK 4.1 billion. That gives us a record cash flow of SEK 9 billion for 2015. Dividend was SEK 4.4 billion, and then the rest was basically used for debt reduction, SEK 3.6 billion. Now, going forward, what will happen? As you know, the only way to drive long-term cash flow is to drive EBIT or EBITDA.
We will do that. So we'll increase the EBITDA level. The net working capital is not yet on 25%, so there is more work to do here. So there will be more on this side. The financial items will go down as we reduce the debt, of course. Taxes, we assume to be flat on 26%-28%, but of course, if you make more money, you pay more taxes. So it'll go up, let's say, proportionally to earnings. CapEx will stay on 4.1%. And the dividend, well, the dividend for this year will be SEK 3.2 billion because it was reduced with SEK 1.2 billion. So it will be SEK 3.2 billion. And as these various items continue to develop in a nice way, we will make or create headroom for more net debt reduction so we can continue to deleverage the balance sheet.
The balance sheet can be stronger so that we can release more funds for investments and for acquisitions in the businesses which are ready for growth, which are stable and profitable today. With that, I'd like to hand over again to the CEO.
Good morning, everybody, and welcome to the part of Machining Solutions. I have been in the company. It's my ninth year in Sandvik. I've been head of SMS for a bit more than three years. Before that, I had a few years in SMT then, so nine years in Sandvik. I will talk a bit today about SMS, and then I will spend a bit of time on explaining the structure, how we're operating. As Björn said, we are going to a more decentralized way of doing things, even though we have had that also in SMS before. I will also talk a bit about the market or the industry dynamics that we're operating in. Then moving into the strategy, what's the plan for us then to meet the it's a bad microphone, is it? It's okay? All right.
So what's the strategy moving forward then and to meet objectives that we have set up for the Sandvik Group? So that's pretty much what I will cover. As you know then, metal cutting, we are operating with four product areas, which is also our four brands. And that's basically then Sandvik Coromant, and it's also great. It's not so fantastic. Change? Now? Okay, let's hope it's better. So again then, we have four product areas, and in these product areas, we host, I would say, the leading brands in this business. And it's great to have you here today. I mean, we are in the center of Coromant, and you will later on see the technology center. And still, Coromant is the leading brand in metal cutting. So together, this frames, I would say, the leading metal cutting group in the world then.
If you look on the metal cutting market as such, it's around SEK 160 billion. So in a way, it's a small niche. It's a very nice niche, and you know that over years it's been carrying quite high profitability. And we have been able to, I would say, this year, sustain our global market shares around 20%. And if you look on the market over the last year, it actually has been shrinking a bit. We have also had a negative development on top line because of the slowdown on industrial production. But I would say that we have strengthened our market shares globally a bit. So I'm very happy for that. So 20% represent the global market shares of SMS. And on top of that, 20% represents also the margin that we've been able to sustain.
So we keep our margins about 20% EBIT, despite then that we have had like five, six quarters now of a decline, which is due to the fact that the whole business has seen a reduction, both from value as well as from volume then. And you will see later on then the reason why we've been able to keep our profit level about the 20 is actually that we see effects from many of the saving program and the restructuring program that we have started up a few years ago then. So SEK 160 billion is the market, 20% is our market shares. If you would cut our products into different product groups, one is round tools, and that represents around 30% of the total market if you look on the product side. The other one is inserts.
Around 40% is inserts, and then remaining part is tool holders and other parts then. We are very, very strong in insert, and you know that, that both Coromant and Seco Tools actually are born from the insert know-how. So there we really have very, very strong market shares. In round tools, we have a relative, a bit lower market shares. And lately, we have also seen that round tools, due to some technology steps in new machines, high-speed revolution machine, five-axis machines, new components, we have actually seen that the round tool segment has been growing a bit better than the inserts. So for us, it means an opportunity.
We believe that we will be able to grow a bit faster into the round tools, and that's also one reason why we see the importance of bringing in Walter together with the two sites that develop the blanks, the raw material, the raw parts that we use for the round tools. But that's how you could slice the products. If you look on our end segments, around 50% goes to general engineering, and then we have 27% to automotive, 12% to aerospace, and 10% to oil and gas. But clearly, the engineering part, a big part of this one is, of course, going into the other segments. And we have seen that, especially on the oil and gas segment, that when we saw the drop in the U.S. in oil and gas, that actually affected the general engineering more than we maybe thought.
So we have a strong relation between some of the general engineering because many of them are sub-suppliers into some of these segments. But this is pretty much our exposure. Looking at the geographical exposure, we have more than 50% in Europe, 20% in Asia, 25% in America. This has slightly changed over the last, I would say, couple of years because, as you know, Europe has been pretty stable, flattish, while we have seen a decline, especially in China and the U.S. over the last year. So the share in Europe has increased slightly then. If you're looking at the industry dynamics, there are a lot of things happening also in our business. And to highlight a few, of course, we are operating in a slow growth environment.
Björn talked a lot about how raw material, oil, and gas, the general industrial production is trading, and of course, that has affected us a lot. We are very much depending on industrial production, global industrial production. So of course, that's one thing that has affected us, China slowing down, the oil effect on, I would say, the U.S. We have seen interesting growth areas like Brazil or Russia not developing as we thought just a few years ago. So for sure, we are more operating in a slower growth environment that is affecting us. The second one that is also something that we see is the changed customer behavior.
And here we are actually helping to, I would say, affect the growth potential a bit because when we launch, I always, by the way, bring products to our presentation, and I know Lars Engström is a bit jealous because he has difficulty to bring his mining machines on stage. But anyway, when we launch new products, and we launch a lot of new products, in the past, many customers used those products to take out more pieces per hour. I mean, if you were a crankshaft manufacturer, you love to get a new insert because you could produce 13 crankshafts instead of 10 per hour. Now, in this slow growth environment, many customers use our products to extend the lifetime of the products. Actually, they're optimizing the tooling costs. And we have seen that trend affecting us a bit.
So that's also a way where the customer starts to look more on the total cost base. We are still able to offer productivity, but sometimes customers use that productivity more in optimizing their cost base. Digital manufacturing, and you will hear more about that also when you move into the Coromant Center because of our brands, Coromant is the leading brand that spends most of the money investing into the digital space. And I firmly believe that we are in the beginning of quite a big change into also a machining business. And I think for us, it means a lot of opportunities because we have a quite big R&D base, and we are spending a lot of money looking into what should we, could we do more in digital. So I believe for us, that is a very interesting growth opportunity.
And the fourth one, which is actually also something that is creating dynamic in the industry, is the whole channel structure where we see distributors are becoming global. We know that there's a consolidation among big distribution companies also. So we are always working to refine our model, working with distributors and also with integrators. So these are four areas that we are looking into, of course, with all the different sub-areas when we are setting our strategy. And looking on how, I mean, the overall business climate has been for us, we see this picture. Before the financial crisis, we were operating in a high growth environment. I mean, our business, the metal cutting business, were growing 6%-7% year-over-year. So we were basically growing with that, and everybody was happy, generating good EBIT growth and also a lot of cash.
Then we had the financial crisis and the rebound. Since that, we have had, I would say, a slow growth environment. But looking ahead now, coming back also to what Björn and Tomas said, we are not basing our plans on growth. We see basically flattish if you look on the next three years. And again, if we get a bit help from the market, that's fine. But looking on all the macro indicators, bringing in the dynamic in the industry with some technology shifts, the lifetime of insert, we are basing our plans on flattish. If the market will develop better, that will be really great for us. But we have committed ourselves to deliver the EBIT growth based on that scenario. So coming into how we operate, I mean, we have our four brands, four product areas.
That's also something that you know about, that we are operating in a multi-brand model, which means that the three brands basically, Coromant, Seco, and Walter, they basically compete on the premium segment. That's a model that we have been driving for many, many years, and it's been proven to be successful. We know that more than 80% of all customers carry more than five metal cutting brands. We have many customers saying, "We don't want to put all the eggs in one basket, so that's why we buy from Coromant, Seco, and Walter, and of course, we love those customers." On top of that, we have Dormer Pramet, and Dormer Pramet, you will see later on, it's a brand family that we have introduced to meet more the development in the mid-market. I will get back to that.
So if you start with Sandvik Coromant, then you will meet Klas later on here talking a bit about the development. That's, of course, our number one brand. That's the leading brand in the business, still having, I would say, the biggest market shares of all brands in the metal cutting area. More than 8,000 employees, and we are investing a lot, not least, into digital in Coromant. The change we have done is also that Coromant now owns their own factories. So Klas is responsible from production all the way through R&D, marketing, and the sales. We have had that model for many years, except the production part, because we have always had, and we will continue to have, completely separate sales channels for all the different brands, of course, because they really offer a different offer compared to each other than.
Walter, a bit different than, based in Germany, outside Stuttgart, which gives us a great opportunity because it's basically in the center of the automotive area where Walter works very heavily also into the German automotive industry. They have a bigger share of round tools, so if you look on the portfolio, they really complement us in a good way because they have a bigger share of the round tool. And if you remember, I said that round tool is one interesting growth area moving forward. Seco, you also know, we have been a majority owner of Seco for many, many years, and a few years ago, we decided to bring in Seco into the group. And Seco is also a global company, and they have, if you look on the product offer, they have a lot of the same range as Coromant, but a slightly different offer.
And finally then, we have Dormer Pramet, which we introduced a couple of years ago and actually meeting the development that we saw on the mid-market. It's a smaller product area, and we took the Dormer round tool part and a Czech Republic brand, Pramet, and merged it together. And it's the beginning of a journey. We have just been operating this structure for a couple of years, but I see good development of that product area. We see also that the mid-market that we talked a lot about and we talk about it is also changing slowly, and I see that, I would say, the top mid-market, from my perspective, is moving into what we could maybe call low premium instead. So there starts to be an interesting space also for us looking at the lower part of the premium.
But I would say Dormer Pramet is doing very good on their journey. Even though we have this full accountability in each of the product areas, we do a lot of things. Sorry, this is the fifth product area that we are bringing in now, which we call Powder & Blanks Technology. And Björn went into that, that Wolfram was a natural part for us to bring in. You all know that tungsten is a scarce resource and a strategic part of our business, so we have brought in that. And we have taken two sides out of Hyperion, that is developing and producing the blanks, these, which is actually the raw material or the raw part for making round tools. And it is actually a technology.
We believe by bringing this into SMS, we get now again full control of the value chain of ready-to-press powder, as we used to have before we brought it to Venture. And not the least, the recycling. And you know that more than 50% of our insert are recycled, which has been and is a strategic advantage for us, where many competitors are trying to copy that. So we get the full control of the ready-to-press powder, and on top of that, we will also have more focus on developing the best blanks to our four product area to make the best round tools, to grow into the round tools segment. And I believe this has been an area where we have not focused enough, having it in a different part of our structure.
So it's a smaller product area, some 600 employees, and they will basically feed into the four front-end brands. And what I was coming to is to say that even though we have a decentralized model where each of the product areas own their own destiny from production all the way to sales, we still work together, of course. So if you look on the platform development, we share IT platforms. We have spent quite a lot of money in developing good technology platforms, and we are leveraging from these platforms today. So we are able to create unique signature products in each of the product areas by using the same technology platform across, and that is a great scale advantage where we can use to outcompete competitors.
Production footprint also, even though we have dedicated factories, there is also a sharing of production among the factories, as well as on the sourcing side. And I would say the last thing I would like to highlight is the way we share distribution center. We have five global distribution centers in the world, so we have two in Asia, two in Europe, and one in the U.S. And we were the first one out allowing our customers to get the delivery in 24 hours. And we are constantly optimizing that model. And also here, many of our competitors are also today able to offer 24-hour lead time, but I still think that we have an edge with the scale we have on our centers then. So these are things that we, even though we have product areas separate, are working together.
And I think we have been able to refine the multi-brand model, standalone brands, covering the maximizing the part in premium, still back-end doing smart, clever sharing of technology and platforms. And that's what we will continue to do. Now, moving over to our strategy. And if you look on our, I mean, we are a leader. We are not a niche player in metal cutting. We are a leader. And there are three areas that I fundamentally believe that we have to lead in and be the best in the world in. One is to have the best technology offered to our customer. The second is how we work together with the customer. And I know that Klas will touch upon that later on also in the presentation here in the Coromant. These two have traditionally been the strongholds of our business.
I would say that with the strong growth that we have had, industrial growth for many, many years, we did not have to spend as much time on our operational excellence. But in the current environment, we have had to catch up on that part. So drive operational excellence in our production area, but also on the white-collar side. And just a few things, what we have done. And as you all know then, that we have started this supply chain program a few years ago. We have implemented Lean. We call it SMS production system in a structured way in all our factories, and I hope you have the chance, and I know some of you have, to visit many of our factories. I see that over the last years, we have done big steps in how we operate our production. Many of the machines are still the same.
We have really high-end machines, but the way we drive the business, the way we use Lean principle is very different than. We drive more and more white-collar productivity, and on top of that, we have a rigorous sales and operational planning. And some of the effects is that we have reduced over the last year our number of employees with more than 1,000. And we have closures of 13 production units. Now, seven of those units are related to the announced programs because I know you will ask about that. So we started already in 2012 to close a few units, and some more units are on the way. And that's a big part of us to change and restructure the whole footprint. And the effect of the cost base last year was more than SEK 1 billion, whereof SEK 480 million was related to the announced programs.
But of course, when we saw the volume dropping, we started to take action both on the S&A side and also on the production side. And that actually has helped us to keep our EBIT margin about 20%, even though we saw a quite significant drop on the top line where the market started to slow down then. So I'm quite happy with the fact that this program now really bites and supports our EBIT. Now, technology. And Björn talked a lot about the technology and the importance of introducing new products. In our business, it's really the key. I would say product is still king. We talked a lot about services, and we talked more about that and Digital, but products are so important for us.
And we have, over the last years, and I think I talked with you about that on the last Capital Markets Day, we lost a bit of focus in some important areas. Automotive as one. So I'm happy to see that these products that we have launched now are actually biting and start to help us regain the position in core areas and in important segments as automotive. We know that automotive have gone through quite a big technology step. If you look on the engine part, they go from cast iron to aluminum. And actually, for a period, we lost a bit of focus there and did not have the best offer on that side. But for example, Coromant have launched a lot of new products in, for example, into the milling, regaining the position into, for example, automotive. So I'm very happy with that.
We have also decided to have a center of excellence back-end to support a different brand with different development areas into Digital. So this is also ongoing. Now it comes to this part where I will talk about our product a bit because we see a new sales ratio, which is product newer than five years, improving. We actually dropped a bit, and we see now a slow pace improving our new sales ratio, which is extremely important for us moving forward. I will not show that curve, but I brought in some quotes from some of our customers. I will start with a Coromant product called 390. It's a small end mill, diameter around 10 mm, and this is an interesting tool, but it's actually our way of using insert holders to take back a bit of market share from round tools.
So it's a very small end mill, and as you see on the result here, with using insert, we have been able to improve the metal removing rate with 55%. So that's an interesting signature product from Coromant. The second one, and you know about Duratomic, which is the kind of core insert from Seco. And I like this one because this is when we take a top-end product going to China, offering that, I would say, to a customer that I talked about being a high, mid, or low premium, training them how to use this insert, and they get some fantastic improvement in their production process. So this is a Duratomic grade that has been very successful also on the market.
The last one, and I learned that when you handle sharp drills, you need to wear the gloves, otherwise, you end up in trouble because they are very sharp. This is a long drill, 780 mm, and it has an interesting feature because if you look on the length-to-diameter ratio, it's 65, so it means that it's very long and quite a small diameter. Inside, there are cooling channels. And we believe that we are unique to have this opportunity to have this length and that diameter, and that application for that specific customer has actually changed the way they do their turbines, so they are drilling long holes into turbines. So these are three examples of our products helping customers to drive productivity.
We don't have 15,000 products like these only. These are some signature products, but a big share of the products that we have launched over the last years have given us a great focus into some of the core areas, and I'm happy to see that many of those platforms will be used for launching the 11,000 products that we are launching this year too. So I get frequently questioned, "Are you happy with your new products?" and I would say, "I am." Some of those areas, we have even a problem today, even though the market is tough, to cope up with production because we are selling out. Not always, not enough. We are not selling out enough. So launching new products will always be important, and I'm happy that we have actually increased the pace in that.
Finally then, the way we work with customers, and we have a lot of activities, and I'm happy to see that even though this tough environment and competition is clearly increasing, we have been able to maintain and even strengthen our market shares. And we talked about pricing. SMS has always seen pricing as a key, and we have both pricing processes in the product areas. On top of that, we have a central pricing coordination, and we still keep a positive net price change, and we have that as a clear ambition also moving forward. So to strengthen and keep our global market shares, and on top of that, have a positive net price change in this current tough environment, I think is quite an achievement, and this is also an ambition moving forward.
I'm sure that the reason why we can do this is because we have launched a lot of new products helping customers to get the productivity. We are developing the partnership with a lot of machine tool builders. We have intensified the cooperation with many OEMs. Clearly, there were a few automotive players where we were not in, and we are fighting our way back now with new products, among others into automotive. The indirect sales strategy is one area that we are working with, and on top of that, we already start to have a digital offer that we are working with. We have Adveon, which is our digital tool library that Coromant has developed. TDM is a tool data management system, and you also know that a couple of quarters ago, we acquired a small company in Germany called Prometec, and they are specialists in monitoring solutions.
And this is what we will also use that expertise to increase the pace of developing our intelligent tool where you actually can measure and understand and follow what's going on on the cutting tip. So these are what we have done. Now, moving forward, if you look on a core product organically, I would say we need to do the same and a bit more of the same. So, of course, on operational excellence in a slow-growth environment, to continue to work with the supply chain, to implement Lean, we will use the Asia footprint even more. I mean, we have a fantastic setup in India, both from insert tool holders and round tools. We also have a footprint in China, so we will use that even more.
White-collar productivity is, of course, a bigger focus area for us now in a slow-growth environment, and on top of that, we are working to increase our flexibility and agility. We are vertically integrated, but of course, we are looking even more close to some of the production or some of the tool holders, for example. What should we produce internally, and what could actually be outsourced, having a bit of flexibility in our production structure? Again, I can't say that enough. To introduce new product, new technology, new offer to our customers' core, we have a very strong launch year also this year. And so many of them are focused into core, some into niche areas. I talked about round tools.
That's one area where we will also spend more of our R&D, and I'm also happy, and Klas will maybe talk about that, that at the end of this year, we will actually launch the first intelligent tool. This means that we actually have a tool that can measure and understand what's going on at the cutting edge, and by collecting that data, we will start to use that more into the digital space and offer solutions to our customer. And it's really, really exciting, and we are looking forward to that. Because digital, it's more than just a technology or a customer offer, and right now, we are working on combining the technology all the way up to the customer offer, and we already start to have things like, as I talked about, the intelligent tool, tool data management system, and the Adveon tool selection.
So this is something that we will spend more on, creating platforms, and the brand will then get the opportunity to have a unique offering that fits the Coromant brand, Seco brand, and Walter brand. Then finally then, if you look on the customer interaction, which again then has been since many years a stronghold for us, of course, to move into a solution provider. We see more and more the customer ask for more than an insert or a tool. They want to have a solution helping them to optimize cost. The digital I just talked about, we will always look on optimizing our go-to-market strategy, where distributors, among others, are becoming more and more interesting or important. Then we talked about the markets, and I will just highlight three markets for you.
And actually, starting with China, Björn said, "If you want to be a leader, you have to lead or you have to be strong in China." That's the word I heard Björn said, and I'm happy to say that Coromant is the leading brand in China. So today, Coromant is the number one player in the metal cutting in China, and that shows also the potential of premium in China. And we had a couple of years ago a fantastic development in China; now it has been, due to the slowdown in China, we have a tough year behind us. But I say that we are fighting our way back with a lot of interesting opportunities also in China because China will remain a very important market for us, and it's one of the top three markets for us.
We have a lot of activities focusing on segments, distribution networks, and also targeting new customers. So clearly, we see opportunities also in China, even though it's not as fantastically favorable as it used to be a few years ago. Another one is Germany, and of course, you all know that metal cutting in Germany is really, I would say, still the number one engine in metal cutting. A lot of automotive, so for sure for us then to launch all this new product in Coromant and regain the position in automotive is one thing that we will continue to do. We are refining our sales model and also looking at how we can come closer, working together with many OEMs. And then I think Germany is one of the countries that are the first one, the most mature, to talk about digital offer to the customers.
So we have started now to talk with many of our customers on how could you use and benefit from an intelligent tool, combining it all the way up to, for example, a tool library. What would it take for us to step into a bigger space and offer a total solution? And finally then, the U.S. You all know the U.S. has been in trouble some over the last year, affected from the oil price, but still it's a big market for us, and we are looking a lot on sales channels. Growth in aerospace, we are continuing to invest a lot in aerospace, and it's been also favorable over the last years. Round tools is one area, and then we are working more and more together with machine builders.
Machine builders for you guys are basically the guys that develop the machine, and more and more the tools are integrated in the machine. 10, 15 years ago, 20 years ago, when I started in ABB with metal cutting, when you went to an exhibition, you visited the tool area, and then you went to the machine area. Now more and more of the whole thing is integrated with each other, so to work together with machine tool builders is very, very important for us. So these are activities that we are doing in three of our key markets, and we have the opportunity with our different brands to tailor-make, I would say, strategies fitting each of these different regions then, using our brand families in a setting it up in the best optimal way.
So that's basically the three areas that we are kind of focusing a lot on, ensuring that we can meet the EBIT growth that we have talked about. And then there's a fourth area that we will increase the focus on, also because I also believe, as Björn said, that we are both stable, and I would also argue that we are profitable, about 20%, and that's really to find acquisitions then. The market is quite consolidated, but still I think there are opportunities, and if you want to slice it, there is one which I could call core and niche, where there are opportunities on interesting technology bolts on. We have done a few small ones, but hopefully we will see some increased focus or increased pace in that area from our side to find interesting targets. And the other one is, of course, moving into digital solutions then.
We know that we can do a lot internally. We have a big R&D engine, but we also know that we are brought into this from a hardware thinking perspective. Many of the capabilities we need, I think we also need to acquire them. So when you look on the whole value chain from the fact that we start with a CAD/CAM simulation where you do a lot of tool selection, moving into a factory where you have the presetters and the tool data management room all the way to the metrology part, that value chain offers interesting opportunities for us, and that's also what we are looking into. So these are also complementing, I would say, the strategy.
So for us at SMS, to continue to work with operational excellence, I would say that's a part of the hygiene factors to keep a good control of your production, and on top of that, white-collar productivity, to constantly launch a lot of new products, work with our customers, on top of that, drive M&As. So that's what we see as the core part of our strategy. The last slide, being a bit more specific, but maybe not from your side specific enough then, what will really drive our EBIT growth? And I think there are three areas then, because we put aside basically the M&As, as Björn said, this is more driven from an organic perspective then. One is operational excellence, meaning keeping our cost under control, both from a production side as well as on the S&A side.
We have a model with high NS because that's the way we work with our customers, to train and help our customers to use our tools then, and that is a part why we have high margins. But of course, we need to get even a better, I would say, performance in some of those areas facing the slow-growth environment, so that's one. The second one is pricing. So if you look on our bridge, pricing is a significant component. But pricing, you can't just increase prices because today the competition is extremely tough. But if you offer constantly new solutions to our customers, helping them to drive productivity or take out costs, there is, and I promise you, there are pricing opportunities out there. That's why we are able to keep a positive net price change also in the tough environment we have today.
So I know that if you look on many competitors, so you talk about volume and market shares, there is a price competition out there, but I'm very happy with the way our brands are driving the pricing process. But again, you get pricing power from new products and new offers. And the last one is, of course, to take market shares. We have ambition then also using our new products. Round tools I mentioned, I think round tools is from us one of the most interesting organic areas that we can grow in. So these are the three major parts in our EBIT growth bridge in the next three years. If we get tailwind from the market, hooray, that will be a bit easier then, but we are not counting on that in our plans.
All right, that was it, and I managed not to cut myself, which was better than yesterday. All right, that was all what I had to say. Thank you.
Thank you, Jonas. Shall we make room for some quick questions before we let Peder loose, if there are any? Yes, we have one here, please.
Thank you, Peder from Handelsbanken . You mentioned product launches as a big driver, not only for volume but price. I wonder a bit, the 11,000, that's far lower than 10% of the total SKUs. Could you talk a bit about the number of SKUs, the tail, and how we should think about the product launching from a slightly longer-term perspective? I think 16,000 is basically back on track in the rule of thumb of 10% of the SKUs. Thank you.
Yeah, you're right, Peder, and I think our ambition has been over the last year, we know that we have, I would say, a bit too long tail, so we want to cut the tail. But we also knew last year, and two years ago, maybe it was even two and a half years ago, we decided that we have to spend and increase the product launches. And you're all aware that we even increased a bit the spending in R&D to get our product out on the market. We had a few important projects in Coromant, the 4325, the new platform generation for insert, and we had to get that product out. We were a bit too late with that one.
Now we are gaining from the technology platforms that we have done, and I would say it is a bit like this, Peder. It's a bit up and down, but 15,000, 11,000, but I still think we will continue to see maybe not on those levels also moving forward. We will constantly launch new products. Now, the interesting thing will be moving into digital. What is a new product then? Is it a hardware product only, or when you launch a new. I think Klas will talk about the InvoMilling, which actually is not a hardware product, it's the way you use our products. It's basically a software, which is a product.
I don't want to talk about a specific number, but I will say to you that we will have high ambitions for constantly launching a lot of new products because we have seen that it helps us to remain on market shares, gain them, and also having the pricing power.
Yes, Graham, sorry, Graham Phillips from Jefferies, just two questions. Can you talk about the development of the whole market? Sorry, I'm in the back of the room.
There you are, sorry.
Can you talk about the development of the whole Machining Solutions market? I notice you obviously have gained market share, but it's very IP dependent, but with new technologies around coating, additive manufacturing, solid carbide, not so much replacement inserts. Can you just talk about what the whole market's doing? I think you said it's going to be flat. The second question is just on the S&A costs, as part of Björn's initiative to reduce costs. Will you be changing the way you distribute through either more independent or more direct selling?
Yeah, I mean on the first one, you are absolutely correct. If you look on the underlying industrial production as one side, and then you look on some technology drivers, we have seen, for example, quite a big technology driver from cast iron engine blocks into more aluminum that has changed a bit the dynamic in how much insert you need to produce an engine for once. We see near-net shape actually affecting us a bit. We see the additive manufacturing in one way affecting us, even though some of those additive manufactured parts need a final machining. And that's also a driver for round tools in the new space. When we take those together, we see that it shows more a flattened out pattern moving forward. Some of the technology step in automotive will not be as strong in the next three years, we believe.
So clearly there has been a lot of these, but I believe also that if you look on a three, five-year period, many of those technology effects we have already seen in the metal cutting. There are a few more, but not as many as, for example, when the automotive went from cast iron to aluminum. On the second part, clearly we are always refining our distribution channels, and in some areas we are increasing the use of distributors, but I still think it will not fundamentally change the way we work with our customers. We sell a value, and we spend time with our customer. What I believe, though, is the way digital can help us to be active at more customers, because we will be able to connect the customers.
If you think of a tool where we really understand what the tool is doing, we could work closer to our customer, but maybe not spend time out at the customer.
Thank you, and cautious of time, I think.
Yeah, because time's up.
I think we'll cut it there. There's going to be room for questions, like we said, this afternoon. Thank you, Jonas.
Hello everybody, I'm Lars Engström, responsible for Sandvik Mining and soon Sandvik Mining and Rock Technology, which is born on July 1st, the new business area. As Jonas said, I have quite bulky products, so I couldn't bring a product, but I brought a product area president instead, Henrik Ager, and he will support me in taking care of part of the presentation today. So let's get into it. Well, maybe a few words about myself first. I've been in Swedish multinational industries for 27 years prior to joining Sandvik, and actually 12 of those years were in Atlas Copco in the mining and construction business there. That was between 1994 and 2006. So I'm extremely happy to return to this business because this is a fantastic business. It basically has everything when it comes to technology within it. It's a global business. It has a fantastic market opportunity.
So I think this is probably one of the most exciting things you can do to head up a business like this. This is what I will talk together with Henrik. Henrik will present himself when he comes up on stage, and I'll start to talk about the new business area, Sandvik Mining and Rock Technology, give an overview of that. Then I'll go into a little bit of the market outlook and our strategy. Then Henrik will do the fun part talking about aftermarket and data-driven productivity, automation, and innovation. And then I'll come back to sum up a little bit with an EBIT roadmap where we're going to focus on improving things and a bit of a summary as well. So if we look at it now, you heard it a lot, decentralization here.
What we're doing now is merging two business areas, mining and construction, then we move in Varel into this as well. The whole idea is that we really create now eight product areas where really the business will be done. They will have end-to-end responsibility. The meaning of doing this is, of course, to get accountability close to where the business is done, and we're sure that we get a transparent way of running the business. We're going to be very fast on taking decisions to the benefit of our customers. You heard the word decentralization. I worked in that model for 12 years then in my previous job, and I really believe in running a business like this. On the sales side, we keep a global sales organization. The product areas meet in a sales area.
We have 14 sales areas, and that's, of course, to get synergy in front of the customers. Here we have been very keen on making sure that we don't interrupt our contacts with the customers. We've been very keen on that the customers should initially not see when we're in the mood of changing here, and of course, then they should see the benefits. Common functions in the business area, we're going to keep to a minimum. The business is run in the product area, so you will only have a few guys like myself, like a CFO, HR, and so on for the governance. This is a big improvement to how we're going to run the business. This is my team. I basically spent the last month interviewing people. It's not very often you get such a beautiful chance.
Of course, you always select who you work with, but given this opportunity, I really got a chance to start fresh and forming the management team, the PA presidents, and others in the new business area. This is fantastic. I'm really pleased with this team. We're not going to introduce them all to you. You will meet Henrik, as I said, but I haven't had to compromise anywhere. So this is really for me great to have this team. They are in place, assuming responsibility and accountability already now, even though the new business area comes into effect July 1. It's really running according to plan as well. This is just to illustrate how the business is done with a not very big common function at the top with me there, but the business is really run in the orange boxes here where the eight product areas are.
Then they meet with global sales where we really global sales is really an extended arm for the execution out in the sales areas. And this is where we run the business. If we look a little bit about figures on the new business area, if we use mining as the base, mining was a bit more than SEK 22 billion last year. We add on around SEK 8.5 billion that comes in with construction, and then around SEK 2 billion from Varel or Sandvik Drilling and Completion. So we get a little bit more than SEK 33 billion. That's the pro forma for 2015. Profitability-wise, mining was at 14.7% EBIT. Construction comes in with 4.5% roughly, and then Varel is running at a loss today at -8.5%. So that gives the starting point of the new business area 10.5% EBIT. So that's where we're starting.
So that's the figure we have to get used with. That's the figure we're going to improve from. These are the different businesses we are in, from underground to surface drilling for crushing and screening or communication, and oil and gas, soft rock mining. We are in tunneling and oil and gas, I think I said that, and mineral, the exploration part of the business. If we just talk a little bit about the businesses, we can say that on the hard rock side, underground, with our drilling offering, load and haul, rock bolting, consumables, aftermarket, we're really in a strong position. Even though the market is not giving us that much tailwind right now, I would say here we definitely improved our already strong position last year, and we really have a chance to continue and develop this.
Very strong momentum for us, even though the market is not crash hot, but strong momentum for us there. If we look at surface drilling, communication, demolition and recycling, tunneling, those businesses, the market is basically a little bit sideways, but we still have good opportunities here, and mainly so in the aftermarket business to further develop that. If we talk about the oil and gas, you heard about it, the market is very depressed. The rig count, even though it's up a little bit in North America, in the U.S. here, as Björn mentioned, it's still down 75%-80% to two years ago. So this is a business that's running on quite a low level. The rig count outside North America is down some 15% to a couple of years ago. So oil and gas, we don't really see any major changes here for a while.
Quite frankly, I believe that the business activity that was back in 2013, 2014, we probably have to wait to 2019, 2020 maybe. But I would like to point out that oil and gas is somewhere between 3%-5% in the new business area as well. So we should understand, put it in perspective in the new business area. When it comes to soft rock mining, that's a market, that's coal and some other potash and so on, and that market is really weak now. There are pockets of opportunities, for instance, in India for us, but it's really a soft market there right now. This is another way, as the different business areas are in different phases when it comes to stability, profitability, growth. Of course, the PAs of the new business area are as well.
We can see underground drilling, load and haul, rock tools, that's really where we can focus on growth. Stable, profitable businesses focus on growth, while in surface drilling we have a little bit to do. In crushing and screening, we have quite a bit to work on stability and profitability. We have a few businesses which are in a turnaround phase there. You heard about the mobile crushing that has been talked about by Björn, and definitely there we have a stability issue, and the focus is not growth, it's to restore profitability. Of course, the mechanical cutting with a low activity in the market is trying to find the right shape and form in this very slow market environment. If we then look at the market outlook, what drives the business of this business area? It's very much, of course, GDP. That's important for infrastructure.
GDP also has an impact for the consumption of metals and minerals, so GDP is an important thing. We have seen that the GDP forecasts have been downgraded for quite some time now. The advanced economies will have about 2 percentage points growth, and the lion's share will come from emerging or developing economies, but it's very uneven spread among countries, and quite frankly now, the outlook is probably the lowest in a couple of decades here. So it's not really something that will bring a lot to the business for us. Also, the infrastructure spendings, the projections for the world is following this, so they've been downgraded as well. If we move to metals and minerals, it's easy to follow the large mining houses. They come out when they have their quarterly reports.
They come out with CapEx forecasts, and those have been downgraded now for quite a few quarters in a row. So definitely 2016 and 2017 will be quite low when it comes to CapEx from mining, and hopefully then there's a pickup at 2028 and beyond, but that's, of course, far out from today. So you can see there's 2016, I'll see if I can shoot with this. Here you see the, this was difficult, 2016 to 2017 pretty flattish. Oil and gas, I talked a little bit about, and you can see the drill rig count there as well, but we should remember that this is only 3%-5% of our business, but you see the big drop there where I talked about North America and so on.
I don't believe that this business comes back to a decent level in a couple of years' time, maybe, but not in the near future. Looking a little bit then on the metals and minerals exposure, the pie chart to the left, that's really where we were back in 2011. You see the Sandvik basket, how our sales are distributed over these metals and minerals. And that's with mining systems. In 2015, when we take out mining systems, that is in the divestiture process, you can see that gold and copper are becoming even more important commodities for us. And that's good because that's where we have a strong offering as well. So I think that makes us even stronger. And a few words then on commodity prices here.
I'm sure you all know that there's been some people refer to it as a rally in the last couple of months or year- to- date, and gold and iron ore and platinum are among the metals that move the most. And yeah, that's true, but it's still from very low levels. And if you look, actually, it has to do with the U.S. dollar development as well. If you look in local currency over the weighted basket, it's probably only 2%-4% gain since the dollar has weakened as well, and we express this in U.S. dollars. So it's not really that, and most people, analysts that make a living out of forecasting the metal prices, they all, no one has upgraded their medium and long-term forecast on the metal pricing. They believe this is a short-term rally, and this theme will soon leave the boat, the engine.
So we'll see. I prefer it to be at this level compared to where it was at the end of last year, but it's probably too early to share hooray here. And if you look at the activity, well, you might see a little bit more happening on the gold side with some of the contractors in Australia and so on, but it's really not anything we can see. And exploration expenditures, which is to start on mines, of course, still forecasted to be down with some 15% this year compared to last year. Moving into the business that comes a little bit then from the construction part we're in, the main thing there is the aggregates, followed by demolition and recycling and the tunneling. So you see the business size here. And aggregate still has a good outlook.
It has a CAGR of 4% or 5% up to 2019 in the world, very much related to China. China is consuming 50% of the world aggregates. When it comes to demolition and recycling, that's also what's driving that a little bit down the road is legislation, that a lot of buildings that are torn down, there are legislation, I think it's by 2020 or beyond, that 70% should go back to be recycled. Of course, that drives mobile crushing and so on, and breakers and so. Tunneling, that's a little bit, of course, very much related to infrastructure. There are some places there will be a lot of investments, like Norway, for instance, they're going to run a big, big program up to 2023 involving a lot of tunnels.
If we summarize all these things then, we can at least for the foreseeable future, this year and next year, we're not going to get any tailwind from the market really. I think it's going to move pretty flattish, up somewhere, down somewhere. So we have to find another way to propel EBIT improvements and so on, which we will. The strategy, that's really not changing. We're going to focus on the same things as before, which basically have been the focus in the two business areas. Safety is always our priority number one here. Last year, for the combined business, we had a lost time injury frequency ratio of 1.1. That's pretty good, but we want to do better, of course. Next step is to go below 1.0, so that's a big focus within the group.
On sales, we're going to continue very much about account management and value selling in front of our customers with a new business area set up. The merger, we're going to be even stronger in our territory management with the people we have out there. So as I said, no disruption to the customers in the change process and benefits from the new structure. On the capital efficiency side and costs, of course, the decentralization, we expect to, as an evolution, play in where the new PAs take charge and start to work with this. Having control, accountability close to the business, that should drive further cost savings on the sourcing side for the bill of material and also should give impact on the net working capital.
Aftermarket, as Henrik will talk about, that's a big focus for us, and that we have spent a lot of efforts into developing systems to keep track of the fleet, to be able to estimate market shares and so on. I believe that the rubber will meet the road now here. We have done a lot of things, and now it's time to harvest. So that's a very important thing. The offering, we're focusing on game-changing products like products that will enhance safety, be less brutal, not brutal, be more environmentally friendly, and of course, increase productivity for the customers, and fill some gaps in the range. Our manufacturing footprint will continue. We're finalizing things within the PA Rock Tools here. We have some moves that they are communicated before, so that's something we focus on and also continue the Lean journey in our factories.
No presentation is complete without talking about China, I think. For China, it's challenging. We have issues there. We have issues in terms of that the market is not very strong, and we want to improve our business. This is for local premium and mid-market products. That's a lot of our focus going into. For mid-market products, it's very often in partnership with other people. We have some success here lately on the underground side where we did a good year last year and some breakthroughs on some surface drills that we developed for the local premium market. We also launched a soft rock assortment specifically tailored for the Chinese market. This is all good things, but it's a challenging market. Another place where we have to be successful is in the crushing and screening in this market.
As I said, 50% of the aggregates are used in China, and we still have a little bit of work to do. Just a few words, net working capital. You heard Björn saying that we were, I think the word was weak on return on capital employed, and we don't become stronger here with all the goodwill coming in with construction and Varel. But that's something we're going to work on. This is just to illustrate what we did in the new business area, pro forma. You can see that sales, it's indexed at 2014, that basically sales inventory, receivables, payables, advances, all went in the right way thanks to good work. So we got down from 35% to 31% in net working capital, 2014 to 2015, but here we have a lot to do, and here we expect the product areas to really drive this much closer to the business.
This is a very focused area for us. With that, I hand over to Henrik, please.
Thank you, Lars. Oh, it's working. Excellent. I did not bring, well, I did bring a BA president, and I brought a rock tool. I am in the current structure, I'm head of strategy and head of global equipment, but in the new structure, I am the new president of Rock Tools, and as such, I really want to extend a warm welcome to Sandviken. This is the home of Rock Tools, or one of the strong homes of Rock Tools. Here we manufacture currently about 45% of all the Rock Tools that we sell, and soon about 55% when we complete the move from the closure of Köping and the move of that production to Sandviken. This, and now I'm going to get a bit nerdy, and I'm going to get even nerdier soon, is the biggest advancement in top hammer underground drilling in the last 20 years.
I'll leave that for now, and I'll come back to it soon. You have to be a bit of a mining nerd to realize how big this is. A few years ago, we decided to really step up our game in aftermarket. You've seen that the lion's share of our revenue is from the aftermarkets. It's above 70%. Even more of our margin comes from aftermarket. This is also the biggest touchpoint with our customers. Here's where we meet our customers. Here is where they tell us how well we're doing or how well we're not doing and what we can improve. But we're far away from 100% market share of the aftermarket going into our products. That's a big opportunity for us, to capture more of that aftermarket, both parts, services, and consumables.
Where we started, which we described a year and a half ago, I'm sure some of you were there, or I know some of you were there. We started building our installed base or our database knowing exactly what equipment do we have where, which model, how old is it, with what customer, etc. Construction has been going through the same effort, and we now have a solid database of about 25,000 pieces of equipment out there in the market. We feel that we're now at about a 90% accuracy of that installed base, and that allows us to be a lot more focused in our aftermarket activities. We can go after the customers where we have the biggest opportunity. We can tailor the offering to each of our customers, and we can also enhance how we develop the offering in aftermarket. So what aftermarket products do we develop?
These can be rebuild kits, etc. Now, this is only the foundation, really. It allows us to do other things, but it doesn't create any value in itself. On top of this, we're building and are now rolling out both basic and more advanced services. So I'll start with the more basic ones. So it starts with the easy solutions for our customers, just giving them easy access to product information, putting all our equipment and parts and consumables catalogs in electronic format, so it's easy to access for customers. They can order electronically. Some of us feel that that should have been done 20 years ago, but this is mining, so we're still working on getting some of these things in place.
Now, the second thing that we're doing is using the installed base platform to put additional, call it software or intelligence on top of it, to enable our service organization to sell more proactively. So move away from being order takers to being order makers, if you want to be a little bit catchy around it. But it's really around being proactive. How long has this machine been operating? How much parts have we sold? What's our opportunity out there for electrics, hydraulics, the rock drill spare parts where we have really good margins? Where are the opportunities to be a lot more targeted towards our customers with the offering? We're also putting remote monitoring on our equipment. Our more advanced equipment, we're putting more of that technology in there as it's leaving the factory.
But for all of our installed base, we have a program in place to retrofit remote monitoring, so we don't know only that the equipment is there, but we know how long it's been running, how many engine hours, how many drilling hours, etc., etc. That allows our service organization to be a lot more, again, targeted in how they approach our customers. Now, doing this, we already see some benefits. So now we're a little bit more advanced in mining than construction, which means there's bigger opportunity in construction. But from 2013 to 2015, we managed to increase our part sales per unit, per active unit, by a little over 8%. So it's a good start, but there's a lot more opportunity out there. Now, these are the basic services. We're also working on more advanced services.
So there's a lot of discussion around the Internet of Things, digitalization, Industry version 4.0, I think it's called. All it means is we have a lot more capacity to process information than we did five years ago, 10 years ago. And we are now building the services and the applications to be able to both collect that information and analyze it and turn it into value for our customers and subsequently to us. So I'll show you two examples of what we're doing at the moment, and these are not the only two examples, but there are two of them. So you see in the title here, it talks about predictive maintenance, and that's the most obvious example. Collect more information from the machine.
You know not only how long it's been operating, but more about its components and which components are more likely to break next week, next month, etc. Same as you have with your car. Now, they collect a lot of information from your car to tailor your service. Same thing here. And the example here on the left is a loader fleet where, and this is just a pilot that we're running, collecting, just looking at the oil pressure. This is an easy example. And you see towards the end of month three that value is dipping, and about three weeks later, you have an engine failure. And the predictability of that for this particular mine is north of 80%. Now, we have predictive maintenance today that will predict that engine failure, but not with that accuracy because every mine's different. Every set of operators is different.
So whether the machine lasts for three months and three weeks or six months, the predictive maintenance, the basic one, will say you should take this out for repair after maybe two and a half. If you can extend it to three and a half, if you can know exactly which loader I'm supposed to take out after three and a half and repair it, do it in a planned way so you don't screw up a shift on the mine. It's much better. You save cost, and you produce more volume. The other example on the right-hand side is of a crusher. This is in the construction world. This is a cone crusher. We collect information for how much material we're crushing, what's the hardness or density or harshness of that material, compute that, and say, well, what is the expected consumption of wear parts and spare parts?
We can then more proactively approach the customer and say, here's what you need. These are two examples of more advanced services. We call this data-driven productivity. There are lots of words for this out there. This was a little bit around the aftermarket, the foundation, the basic services, and the more advanced services. I also have the opportunity to talk about innovation and three areas of innovation. I'll talk a bit about automation. I'll talk about what we're doing in drilling and get back to my drill bit here and a bit about hard rock cutting. If we start with automation, when you think about automation in the mining world, most of us think about automated equipment, fully automated equipment, driverless equipment.
But if you translate this again into our own cars, we're working on driverless cars, and I'm sure maybe not my grandchildren are going to think it was really funny that we drove our cars ourselves, and probably the same for the guys that are mining at the same time. But you have a lot of automation features in your cars already, and I do as well. I mean, the cruise control was the first one, not a very intelligent automation feature, but an automation feature. The sensors for backing up, now we can even press a button, and the car will park itself for some cars. So all of these are automation features, and we're working with these automation features also for the equipment. Call it operator assist features, but going all the way to full automation.
If we then go into our automation offering, and I'll try to explain a little bit of this, and then I'll show you an example of an actual mine and a little movie. There are the enablers that you see here on the bottom, the equipment with the right sensors and technology on them. Call it the intelligent equipment. The automation systems that allow us to track not only a single piece of equipment, but a fleet of equipment and do traffic control, etc., and the services around it with the training and support and so on. Now, this all gets fed into the new way, the new cabin, if you will, for how you drive the mine.
So instead of sitting inside a vehicle driving the mine, you're now in an operation center, and there are information and management systems helping you to schedule which piece of equipment goes where and what should it do. Now, we do this, of course, to drive benefits in mining, and this is benefits around production and more volume, around cost reduction. Maintenance is a good example. Now, machines tend to be a lot more gentle, or computers tend to be a lot more gentle on the machines than people are. So, well, if you don't automate, the best thing you can do is actually replace the men with women to reduce your maintenance cost because women are a lot better drivers than men, at least for mining equipment. I won't say anything about cars, but for mining equipment, they're a lot gentler on the machines. But computers are even gentler.
Of course, health and safety. With no people in the area, nobody can get hurt. I'd like to show you three examples of the benefits of automation, and you can derive benefits in a host of different ways, but I'll show you just three examples. On the left-hand side here, you have the Kidd Mine. This is a Glencore-owned operation. They had a bottleneck in loaders. The loaders weren't being enough utilized. We automated them, and we managed to get a doubling or a little more than a doubling of the productivity of the loaders. So this allowed them to remove that bottleneck and increase production. If we move far right, it's a diamond mine. It's Petra Diamonds, and the mine is called Finsch. And this mine was actually automated from the start, and instead of using they did the modeling.
If we run this without automation, or we run it with. Without, they would have needed 10 trucks. With automation, we run it with seven. Now, we also run it with two operators for seven trucks instead of 10 operators for 10 trucks. Or if you do that, then on four shifts or five shifts, we're talking eight to 10 versus 40 or 50 operators, so cost savings. Compared to the modeling, we're at 60% lower maintenance cost for this operation. And all in all, this comes out to a cost per ton at about half of what it would have been. Now, the one I'd like to go a little deeper in is Northparkes. This used to be a Rio Tinto-owned operation. It's now owned by a Chinese mining company. It's a block caving operation. They have eight automated loaders.
They were manual to start, and then they went all the way to full automation, and they've achieved a 24% cost saving. I'd like to show you a little bit of what they do, and then there'll be a movie. But they are in a block caving operation. Now, for most of us, that doesn't mean much. I'll try to show a little bit of what it is. Block caving is you have often a very deep vertical ore body. You develop tunnels underneath it. You drill upwards, and you blast it, and this starts to what's called caving, so the actual mountain cracks and falls down into these draw points. All of these points you see here are the same as that, and it's called the draw points where the rock comes down, it cracks, and the loader goes in there and gets it.
North Parks got 250 draw points, and you have to go with the loaders again and again and again and spread out across all those draw points and get the volume out. And so that's how it works in theory. Now, I'll show you a little bit of how it looks in practice.
At the beginning of the project, we investigated what automation packages were available to us, and Sandvik's AutoMine was the only package that met all our needs and a fully integrated production system for a mass mining technique like block caving. So now we can come straight in here. There's no travel time. Everything's set up for us. We just come in, sit down, and get to work within a few minutes, really. A normal day for us is a shift change meeting just to get our tasks for the day. We'll come in here.
The boggers are already set up for us. So the specialist just enters the draw points for the day. We'll get on here. All we have to do is bog the draw point. We'll send it on its way. It'll get to the ROM and tip by itself automatically, and it'll turn up at the next draw point that's needed, and we just go from there again. Yeah, it's a lot more simple. I'm surprised at how well it does work, actually. It's a lot of technology involved. It's really easy to use from an operator's point of view. Yeah, it's a lot safer up here. You're out of harm's way. There's no chance of any sort of hazards because we're in here. The interactions with people and boggers are eliminated. People cannot be in the area with the boggers running.
Up here, more social interaction when you can talk to the person next to you. Less noise, less vibration. You're not sort of bouncing around. Always air-conditioned or heated. So the key business driver for us to automate the loader fleet was to increase the utilization, and we do that by being able to operate across shift change and through blast clearance times. It means we get more tons out of the mine. More tons means more copper produced.
All right. That was a little around automation. Now, I'll talk a little bit around drilling and some of the investments we're doing into drilling technology. Now, the drilling technology is both around the equipment and around the rock drills. And the challenge of advanced drilling is around drilling and blasting the right section of the rock or the mountain. So think about you're building a tunnel.
If you blast too much, you've got more rock to remove than you really want, and that costs money. Second, you want to do this quickly, as quickly as possible. You want to do it at low cost, and, of course, you want it to be as safe as it possibly can be. And some of the areas that we're working in, which we have then put into action into our newly released underground drill called the 422i, is you have on the upper left tunnels visualization and automation. A year and a half ago, we talked about the visualization with 3D scanning. We've now put this actually into operation, so we're using it. So creating a 3D model of the mine and being able to position the drill exactly at the right place automatically. We can now drill over a shift change.
So once the drill is parked, the operator can leave, and it will drill for half an hour, 45 minutes over the shift change automatically. Now, we're introducing battery technology into our rock drills so that they can be emission-free. So we're, of course, doing that in load and haul as well, but also in rock drills. We have the onboard analysis of what we're drilling into. So are the holes straight? What are we drilling into? How hard is the rock? And we're able to adapt to blasting with that technology. And then maybe not most importantly, but very importantly, the drill bit technology. So let me tell you a little bit about this, and please don't fall asleep. This got a new design that allows us to fit more of these little buttons.
They are actually what cuts the rock, and we're able to fit more of them so the drill bit lasts longer. Second, this is a new carbide. So this is made out of tungsten carbide, which is really hard. Usually, you have a trade-off between it being really hard and tough, or seg in Swedish. But we managed to make this so it's hard on the surface and tough or a little bit gluey in the middle. So this thing actually drills about 50% faster, and it lasts 60%-70% longer than another drill bit. So we're really excited about that. We launched this last week. Now, we put all of this into action, and we have a customer example here on the right-hand side from Byrnecut. Byrnecut is a contractor in Australia. Well, they're global, but they're Australian-based.
Using the 422i drill rig with this technology on it and the drill bit, they're achieving more than 15% productivity gain. You can see the profile improvement that they're getting. What that simply means is that they're blasting the right rock and removing the right rock and leaving the rest where it should be. The last technology area I wanted to talk about is hard rock cutting. This is when you don't have to drill and blast. You're actually just cutting into the rock mechanically like you do in softer rock like coal and potash. But now, being able to do that in hard rock environments, this can be an amazing productivity gain for some mines, not for all mines, but for some mines. Big block caving operations like Northparkes or the Grasberg mine in Indonesia owned by Freeport.
Freeport, in developing that mine to the next level, they're going to make 850 kilometers of tunnels. So if you think about that for a second, that takes you to Copenhagen from here and then some more, or you almost get up to Kiruna. That's how much tunnel they're going to build. So with hard rock cutting, they can do this in a safer way, but they can also do it much faster, 2-4x faster. Now, the development time for this mine is 15 years. With conventional technology with us, it's likely to be less than seven. And also, the tunnel profile is better, so you need a lot less cement in the mine, which saves cost. So put all of this together, it can multiply their net present value by three to five. And in Swedish money, that's SEK 30 billion-SEK 50 billion for them.
It's a big opportunity in this particular mine and something that we're very excited about. We have our test rig running in Austria, and we're going to put a test rig into operation early 2017. So we're really excited about to see how that does, and it may be something that does get used for Freeport, but that we will see. But a very big opportunity for us. It won't revolutionize mining, at least not in the next five years, but it could create a lot of value for us.
Thank you, Henrik. A lot of exciting things there. So now, my little summary is between you and lunch. That's an interesting place to be in, but we'll make sure we get to lunch. I think it's pretty clearly understood now that we are sort of reforming this new business area. So we're working on creating the stability here. And then the next thing, following the circle of life, no, but the circle of Björn, is to get into profitability. And that's what we're going to focus intensively on in the new business area through driving the execution in the product areas. And this is sort of a roadmap. I don't think you can measure and do things here to understand what is what, but I guess it gives some kind of indication where we see the big building blocks. Of course, we don't bank on volumes coming back.
As you understand, we believe it's going to be a pretty tough market here in the next couple of years. But the aftermarket, you heard Henrik talk about it, data-driven productivity, what we've been doing here to develop products and systems, that's something that should really start to deliver here. We invested a lot, and we are, as I said before, the rubber meets the road now. So that's going to be an important factor. The merger of the business areas and the decentralization, it's not the revolution, but if we call the merger revolution, there come savings, and then we have the evolution as the PAs start to work, taking care of the cost base, becoming more efficient. That should really contribute to the EBIT enhancement. Cost efficiencies, also again through the execution of PAs, we expect to see better results on procurement side, on what we buy in.
We also have businesses that we have a turnaround mode of, and there's a lot of work that we can do there to be more efficient. On the footprint side, we're still moving factories according to the initial plan that's been revised a little bit before, but in line with communication. We have a few moves inside Henrik's area, rock tools, that we're going to conduct here within this year and next year and finish them off. And that's an important part to continue and drive lean. Lean has a lot of positive impact so far on our operation, but that's a never-ending journey. Then we have new products and technologies. That is really the game changer that we talk about. And of course, going to market with value-based selling, one can believe that that's a little bit shy, but I would say you need a cushion somewhere, right?
But definitely, that's an area where we should be able to do more, I hope. So we have stretched targets there. And since we're thinking more aftermarket on new products, part of it falls in the aftermarket, but it looks a little bit. I looked at the slide, and it looked a little bit modest there, but I can assure you that we're trying to reap the benefits of the productivity that we provide to the market. So this is the name of the game. Focus a lot on profitability. Hopefully, we move as soon as we can through that phase because it's much more fun to be in the growth phase with all businesses, but that will be an evolution. So just to summarize what I said, we don't expect any tailwind in the near-term future from the market. I believe it's going to go pretty much sideways overall.
Decentralized organization, extremely important to get that up and running, and we're making good progress. That's really going to be. I can't underline it enough, how we're going to drive the business and the business area through these eight product areas. The aftermarket, solid foundation where it's all about increasing the sales of parts per unit, per active fleet out there. I mean, this business is really about gaining market share on new equipment and increasing the participation on the machines in the aftermarket. If you do those two things and then you drive the business well, then you deliver results. We know where our fleet is. That's important. We basically know the market share almost per part, per fleet. We are closer to the customers now. We have a lot of e-solutions where we make life easier for the customers, customer service centers that are proactive.
The data analytics, a very interesting thing that you heard Henrik talking about. Automation and innovation. There's been a lot of automation and innovation talks in this industry for a long time, but I think now we are probably there. Customers are seeking really to find ways in this tough market to be more productive. So I believe we're going to see more of this. And again, finally, for the, I don't know, the fifth to sixth time, we're going to drive this through the product areas. That's really the key of this game. That sums up the presentation. There you saw the back end of a 63-ton truck running away. Been very successful in Australia, and that's how we like competition to see us from the behind taking off as well. So thank you. That concludes the Sandvik Mining and Rock Technology presentation.
Thank you, Lars and Henrik. Shall we squeeze in a couple of questions? I suspect we're probably all hungry, but a couple of questions.
A couple of quick ones. Last time I spoke to management of Sandvik, the penetration of the installed base was mentioned at 25%-30%, and others maybe more like 50%-60%. I wonder if you could just give us a more accurate picture of where we are on that because I know you're a bit behind on creating the service organization. On the other side, on the OE business units, you talked about sort of surface drilling, crushing screening, mechanical cutting being at the bottom end. Could you give us an idea as to where they are relative to the top end versus the peers, trying to benchmark the potential from turning the bottom two or three BUs around?
Would you like to go on the aftermarket, the participation on our fleet?
Yeah. I think the numbers you had there, 25%-30%, they're slightly improved, but it's not a dramatic change. Now, it varies a lot depending on which equipment we look at. We have a lower penetration for crushing and screening. And there, I would say we are well behind competition, maybe not as far behind as you indicated, but far behind. Whereas when we look at underground drills, load and haul, we're, as far as we can tell, roughly on par with our main competitors. There's still a lot of opportunity out there because you have all kinds of third-party providers of parts and tools into our equipment. But compared to competition, I think we're roughly on par.
Hi. I'm just Guillermo from UBS. Maybe we got actually some very detailed expectations about CapEx evolution in the future, but I was wondering what you think about the aftermarket and market, so to say, in terms of growth going forward. Is it going to be different from the overall investment level?
Yeah, I think so. As soon as you see there's still a decent output from the mine, so as long as it's actually growing a little bit. And as long as there's output, of course, there's drilling, so then there's need for hauling, and there's need for consumables and parts and service. So that's definitely, as long as there's a decent output, there's going to be a better sort of market for the aftermarket. And then again, with the market share we have on our fleet, there's always room for improvement almost regardless of the mining output, I would say.
Should we say in line with production, aftermarket, and then the?
I think you can't really do that. We see, for instance, that our active fleet is smaller today than last year. I mean, even though total output, our fleet is down a bit, and we have control of that, you also see that customers are really seeking productivity. So in different ways, that diminishes it a little bit as well, I would say. And equipment being parked up are also used for stripping parts and components. So you can't really say equal. If it's equal output, I still believe we see that the potential is down. But again, having 40%-50% share on our own equipment, definitely there is a potential anyway.
Can you quantify the overlap between now that the business makes sense and the structure is going to be a lot more sensible, can you quantify the overlap in terms of operations, production operations of construction and mining, and whether there are actually any independent construction entities that will not cause underproduction or, sorry, cause over-absorption on your investments in the future?
I'm not sure I understood the question.
Yes. How much of the construction capacity is there by mining and construction together?
Okay. Inside our business area, well, I think we can clearly say it. Today's market conditions, we've been working on the capacity thing, but there's still, I would say, we have plenty of capacity in this group as well. So definitely, we have things to do there, I think, over time. But that will be driven in the product areas, of course, where they will assess what capacity they need, regardless if it's for mining and construction, and then we will adjust over time depending on how the market develops as well.
Thank you. Now it's time for lunch. You'll have to wait, Pedro, this afternoon. You'll get the opportunity. Sorry. Lunch will be served. If you just make a turn around the screen here and make your way into the productivity center, there will be lunch there. And we'll meet back here at 10:00 A.M. to 1:00 P.M. sharp.
Welcome back from lunch. I actually joined Sandvik as a trainee 27 years ago. So far, I have spent my entire career at Sandvik, the first part in finance positions where I have also been the CFO of SMT, and the second part as general manager where I have been the product area manager for Strip and for Tube. Right now, I'm on my 27th year, actually, with Sandvik and as my fourth year as the President of SMT. I would like to share with you today, starting off with this is Sandvik Materials Technology, what SMT is all about, and after that, share a little bit with you what I believe will happen in the near future. As you're probably aware of, that is very much about managing a weak demand.
At the end of the presentation, I will take the opportunity to let you in on some of the opportunities that I see, but starting off with what SMT is really all about. So SMT is a world-leading developer of value-added products in advanced materials such as stainless and super alloys for very demanding segments. Another way of saying that is that we can actually do what no one else has actually done before or also that we do things that very few other people do. And this, in turn, requires, of course, a lot of R&D resources, but also in our vertically integrated system, it requires a lot of capital in the production and also highly technically skilled salespeople. In the last years, we have focused a lot on building up a presence in the energy segment.
Today, we actually have 40% of the total turnover of SMT in energy, whereof actually 40% is half of that is oil and gas. And that is maybe something that you can think, is that really wise to have such a big share in energy? But we believe that this is a good thing for SMT. And as we go forward in the next coming years, we believe that there will be a way for us to contribute in energy, and especially looking at the climate challenge that is in the world right now. We believe that that will, to a large extent, need technology shifts. And that is exactly bullseye what SMT is all about, R&D, knowledge, materials, technology.
But I must admit that right now, it is a bit of a challenge to have a big part of that in oil and gas, but I will come back to that. I hear a lot of people referring to SMT as a steel company. Just to elaborate for that for just a few seconds, you could say that looking at the total steel production in the world, we actually have 1.5 billion tons of steel production in the world. If you take out of that 1.5 billion tons and look at the stainless part of it, the stainless part is, as you can see here, roughly 50 million tons. To put things in perspective, the melt shop that SMT has here in Sandviken is actually 300,000 tons. It's 0.3 million tons. That is a pure fraction of the production capacity in the world.
So another way of phrasing it could maybe be that the melt shop here in Sandviken is more like a pharmacy that produces customized steel grades for the world. So you cannot always take what you hear about the steel production and translate it into, "This is what will happen with SMT," because that is not, at least not always, the case. I would say that the importance of being number one or number two in the world is very much highlighted from Björn also in his position. And I think that is valid, of course, for Sandvik as well as for SMT. And if you look at the total turnover of SMT, it's definitely so that we have a leading position in more than 50% of the turnover in what we do.
On top of that, I would say that we also take a very strong responsibility for the next generation of material coming up. We do that, of course, in close relation, working together with our customers. If you look at some of the examples here that you have on the screen, it's, of course, umbilical tubing, and that is a flagship of SMT. All umbilical tubing today is made of SAF 2507. That is the umbilical steel grade, and that is invented by SMT. We also have the next generation of umbilical steel grades on the way, of course. It's 3207. That is also something that it takes quite a while to develop new steel grades. We don't have SMS thousands or thousands of new products coming up every year. To develop a product such as 3207, that takes a decade, maybe two.
It takes definitely more than five years just to certify a product like that. So it's a totally different business if you compare from an R&D and a new product development perspective. But on the other hand, of course, it's very high entry barriers. It's not so that you can start competing with SMT overnight. You need a lot of competence and resources. And talking about competence, it's also so that the highly integrated production that we have in SMT is also very much key to us. It's not only R&D and the know-how in people's heads. I think it's also very much the integrated production that we have. And that is something that we have developed during these 154 years that we have been Sandvik and that we have really worked here in Sandviken.
What we do is that we take recycled materials, we add some virgin elements to that, and then we produce products in a shape of tube, strip, wire, powder forms. Very often, that takes 30, 40 process steps until it's finalized. In each process step, we have unique competence. On top of that, we test the products in all kinds of ways to make sure that we really satisfy the need of the customers. That, of course, is a good thing for us, and it's definitely one of the competitive advantages of SMT. But also to that, you have a flip side, and that is that it is costly. You need to have R&D resources. You need to have a manufacturing footprint that consumes capital.
That is also something that you need to make sure that that is kept up to a decent level with reinvestments and things like that. So that is quite important to SMT. So we definitely have a high leverage both up and down. This is how we set up the business. And also here, I would like to say that probably the decentralized model that Björn has in his head talking about decentralization was very much in place in SMT already when Björn joined Sandvik. We have three product areas, as you know. Tube is by far the largest product area. And then we have strip wire heating technology and primary. And looking at the business division, that is where we have at the business units. So we have actually nine business units in SMT.
If you look at these different units, you can divide them whether or not they have a focus area on strategic growth, if they are focused on core and standard, or if they are focused on specialized. The business units that we have focused on strategic growth is nuclear, oil and gas, heating systems, and powder. I would say that if you look at nuclear heating systems and powder, the development and performance is really, really good. The focus area for that part is to grow the business. Oil and gas is a little bit more a balancing act right now, and I will come back to that on the next slides. Looking at the core and standard part, here we have tube, strip, and wire. In that part of the portfolio, it's quite fierce competition right now.
It's very much here that we also have a big leverage, maybe not to reach the highest points in profitability, but also to improve from zero to five helps a lot. So here, it's about operational excellence, lean business models, and things like that. But to highlight one really positive thing here is the strip business, actually, in core and standard, strip, and wire has been a problem child for us during the last years, but that has actually delivered above double digit now for the last months and last quarters. So there are also positive signs. If you take the specialized units, you need to be number one or number two in the marketplace in order to be kept as a specialized unit within SMT. We have divested a big part of the specialized units during the last years, roughly SEK 1 billion.
Now we only have parts that are number one and number two in the business. So here, we have aerospace focus, titanium in tube, and we have fuel cells medical in specialized units. We also have the service focused parts in SMT in specialized units. Another way of looking at the same thing that I have been talking about, and to give you a little bit more numbers and to put things in perspective, is to look at what does the portfolio look like for the last three years. And here, you can clearly see that the strategic growth products consume only one quarter of the total tonnage, but it contributes with more than 2/3 to EBIT. And that is, of course, where we have umbilicals, nuclear heating systems, and powder.
And if you look at the flip side of the cone, you can say the core and standard part, you can see that that is the reverse part. We have a large dependence on core and standard. So if you look at the standard products amounting to 3/4 of the tonnage, but only contributing with some 1/4 when it comes to capital, this is, of course, a challenge. And I think this is also very much where we can put the leverage on SMT. It's not only about umbilicals. It's also to lift up the core and standard part. But here, it's very much to put in perspective the importance for the whole vertically integrated system and the importance for the scaling primary or the scaling at the melt shop. But here, it's to put a lean business model in place.
But I also think that in the next coming years, we will most probably see some selective exits in core and standard. And thirdly, then the specialized units where we have no connection, I could say, to the primary system. It's more standalone units where it's important to be number one and number two in the market position. And as I said, here, we have aerospace, medical, fuel cells, and also services. So I think that is what I would like to say about the product portfolio and what it looks like. And hopefully, you have some sort of big picture of the tonnage and the EBIT contribution. So moving into more managing volatility, this is what the performance looks like for the last years. And we launched Step-Change in 2011 when Jonas Gustavsson was the business area head of SMT. I was the head of tube at the time.
And if you look at what we have done since Step-Change was launched, we have actually reduced manning by roughly 20%. So every fifth person in SMT has left since 2011. It's a reduction of 30% in white-collar and 20% in blue-collar. And I would say that after that, we have managed to have quite stable performance on a double-digit level. And looking at last year, 2015, we had also a double-digit performance in the first quarter and the second quarter. Looking at the third quarter of roughly 6%, that is seasonally what the third quarter looks like if you look in perspective. It's roughly around 5%-8%, 5%-7%. And then in the fourth quarter, we had a quite weak EBIT performance. It was 7%.
But then you also need to keep in mind that that was the quarter when we did a lot of reduction to net working capital. We actually managed to reach 25% in net working capital during last year, and that hit to some extent on the fourth quarter. This graph also shows that despite the heavy drop in oil price, we have managed to still deliver on a 10% EBIT margin the first quarter of 2016. The reason why we have done that is very much due to the mitigation program that we put in place already in 2014. So here, we have reduced costs of roughly SEK 500 million. And that is round about 3 percentage points-4 percentage points of EBIT. And this is an ongoing mitigation program, but so far, it has delivered SEK 500 million.
It's also so that we have reduced some 450 people since we learned about the oil price drop to mitigate the effects. And so far, I'm quite happy with the good job that everyone at SMT has done in mitigation. But it is also, unfortunately, so that we need to prepare for even tougher times. And that could hit both on our sales level, but also on the profitability because it is quite a fierce competition out there when everyone needs to fill up the capacity in the manufacturing. But if we take a little bit of a closer look at oil and gas, then this is our oil and gas exposure. So out of the turnover last year, 22% was oil and gas. And here, you can say that we have a strong dependency on CapEx. So it's like 20% CapEx-driven and 2% OpEx-driven.
If you put that into perspective, looking at the total of SMT, I would say that we have an OpEx-driven part in the total company of some 30% and 70% CapEx-driven. But in oil and gas, it's definitely so that we are offshore and CapEx-driven. So let's take a look then on the CapEx-driven subsea project chart. So also here, we have some bubbles in SMT as well. And we also have orange bubbles and blue bubbles. And the orange bubble is oil and the blue bubble is gas. So these bubbles represent the projects in the project list, actually, as we speak, in subsea. There are names in all these bubbles.
It also on the x-axis here, you can see that sort of roughly, it takes 12 months from a project being in the engineering design phase until it actually reaches us to be an awarded umbilical project, for instance. So if you look at this chart, then we had quite many awards here, actually, in 2015, which has helped to keep the backlog on a quite good level up until now in 2016. You can also see that looking at this chart, it looks like it's actually, if you're an optimist, that it looks quite good. It's actually quite a lot of activities going on here. But if we fast forward this, because this chart is January, and if we fast forward to May, you will see what happened. So you see here that almost all the bubbles go this direction.
But the good thing was that at least one big blue bubble was awarded, and that was what we communicated in the first quarter, SEK 600 million in order intake for umbilicals. But it is, of course, so that it is very difficult to predict what will happen in this industry. And as Björn said, the oil price increase to $50 per barrel is not something that we see any increased activity in our business so far. But it is also so that some of these projects are more politically driven than actually really business case-driven. So it's also so that it is very difficult to predict, and of course, it's extremely difficult to influence. So being the head of the business, how can we handle the situation? And that is, of course, to just prepare for the worst.
So we have continuous plans in place for the worst-case alternative, and that is also to a large extent in 2017. In 2016, we have had some awards, as you can see here. So I would say that the backlog in umbilicals, control lines, OCTG is round about six months. So it's a scary situation, but it's also so that a change will not happen overnight. We will have some time. We will also have some time to communicate with you if we see that the backlog is actually shrinking a lot. But otherwise, we have quite extensive continuous plans in place. And I would say that even if we were to lose a substantial part of the oil and gas business, I believe that we, with the help of the mitigation program, will be able to have black numbers. We will not be loss-making.
But it's an interesting time to be a part of. And this is something that we monitor almost every day. These bubbles, they flow around, and it's like, but unfortunately, what happens between January and May, this has been sort of the pattern that we see, that the projects are delayed. So that is what I would like to share with you when it comes to the subsea project and how we handle that. There are some opportunities also that might kick in to outbalance the effects of oil and gas. And Iran is one of those. Here, we have a largely untapped potential, and it's very much in the bullseye of the competence of SMT. We have heat exchangers, fertilizers, OCTG, production tubing, and we also have very strong alliances with partners in those areas.
So Iran is something that we hope a lot of and that will, to some extent at least, help to mitigate also a severe downturn in oil and gas. And then we also have India and China, as Jonas and Lars have also talked a lot about. And here, we have a quite good position. And especially looking at from an SMT perspective, it's very much looking at nuclear. Both in India and China, the nuclear capacity will increase. And they are both very much influenced regarding the climate challenge. And when it comes to nuclear, SMT has a leading position when it comes to steam generator tubing. That is also one of our most important products. And also when it comes to China with the new coal plants that need to be put up in China, we have the materials, Sanicro 25.
That is the only material that is actually certified for those purposes in China. So once again, it's a lot in energy that we see the growth in SMT. And looking at further away, more of a long-term opportunity, you can see that this is the picture of the climate change. And with the energy demand expected to almost double from 23,000 TWh to 40,000 TWh at the same time as the CO2 emission, we'll actually decrease from 32 gigatons to 20 gigatons. That is also something that will not just happen. You need technology shifts. You need products to help with this. And here, we have a lot of research. We have, like I said, Sanicro 25. That if you install Sanicro 25 in the new coal-fired power plants, you can reduce actually CO2 emission by 25% or 24%, to be exact.
And we also have Sandvik Sanergy, the fuel cell solution that we have. That is also something that we have put research into for a decade that hopefully will fly. And then another example, of course, is 3207 umbilical tubing. And here, if the world needs to explore ultra-deep water, oil, and gas, they will need 3207. But this is on a little bit longer-term opportunity. So this will not be part of mitigating a dip or a hit of SMT 2017. Then I think it's more to the business in Iran that could be such an example. So there is definitely so that this is a balancing act for SMT. And we are prepared to do what needs to be done. And it's very much preparing for the worst and hoping for the best.
So to summarize, I would say that who we are and what this is all about is that we are a world-leading developer of advanced stainless steels and special alloys. We have a very challenging market right now, and we do expect it to continue. But we also have continuous plans in place. But also to at least take with you that the long-term fundamentals for SMT materials technology and the DNA that we have is very much also solid looking at the climate challenge and what we need to do to change the world. So that was all from me. So then, Ansi, what do we do now?
Thank you. I think we'll squeeze in a couple of questions before we head off for the logistical exercise for the tours. We'll have one question here.
Thank you, Peder from Handelsbanken. A couple of ones, if I may. What do the revenue profile look like given the backlog that you updated us as? Are revenues okay from umbilicals this year? And what are you actually planning for? You talk about the worst case for next year. And onto that, you're talking about the actions, but could you give us some examples? I mean, we are seeing quite dramatic changes in demand patterns.
To take the first question first, I would say that we have a backlog right now on around six months in umbilicals. And what we can do is, of course, sort of a sliding scale. Of course, we have a lot of flexibility solutions in place, time banks. We have also the opportunity to mothball units. We can move around the capacity. We have a customized production in Chomutov right now. And that is also, of course, to elaborate with shift forms. But we have the full sliding scale of what to do and which action to take. The balancing act, of course, is that we need to protect the competence because we are customized to produce these types of products. So we also need to make sure that we still have the competence if we are awarded a project quite quickly.
But that is to have several flexibility solutions like time banks and things in place, but also to concentrate other types of productions to the umbilicals production. You can also produce other types of tubes and then maybe move to other units. So there are a lot of things that we still can do.
Could you also clarify not being a loss-making in the worst case? Are you talking about the oil and gas business alone or the entire division? And finally, what's your target on the EBIT given the group financials?
When I said that I think that we are capable of mitigating this, not to end up loss-making, I meant for SMT. I do not want to elaborate exactly on the EBIT target. I would suggest that since Björn will come back on stage soon, that maybe he can elaborate on that a little bit more. But I have tried to be transparent in what we see and the balancing act. Of course, that is part of the target.
Klas from Citi. When it comes to sort of the balancing act, how much are you betting on other end markets recovering such as nuclear to fill up capacity and offsetting that in oil and gas?
Nuclear looks actually quite promising. But that is a different production route. We have a customized production also of steam generator tubing and cladding tubes. So that is something that we push. We also push things like service offering, digitalization, and to really make sure that but you could take all these solutions. But if really worst gets to worst in oil and gas, I think it is something that we will severely be hit, and we need to mitigate that. So that is what we really concentrate on doing. But Iran is quite a big opportunity. That is also within fertilizers and heat exchangers. So there are also other alternatives.
Then on core and standard, it's obviously important for the scale, and this will be part of SMT going forward. But you alluded to some exits. Is this the SEK 1 billion type of exit we're talking about? If you could sort of help us a little bit with the size and be a little bit more specific.
I really don't want to go into that. But I think that we have core and standard products that are much more in a competitive environment, such as, for instance, wire, strip are much more competitive than the standard part of tube. And I think that it's also to look into if we can find suitable owners that are a better parent for these businesses. But it's also so that we need to safeguard the capacity in the total systems because otherwise, we cannot only sort of get rid of those parts because then we will destroy the opportunities for umbilicals, steam generator tubing, and those kinds of products. But powder is one thing that we are really putting a lot of efforts into that is not so much dependent on the scale in primary.
Powder is sort of more of a separate business that has also increased quite a lot the last years.
Hi, Petra. It's Lars here from Barclays. Just a quick one on those big projects that have moved to the right. Can you give us a sense for where the bigger projects are on the cost curve and to what extent 2017, if we move back to a $50-$60 a barrel oil environment, do they move back to the left and does therefore 2017 become a bit of an air pocket after which you recover, or do you position yourself with these contingency measures, shall we say, for a structurally lower demand environment beyond 2017 as well? Thanks.
I think that is more or less the million-dollar question. And I think it's also sort of exactly correlated to the oil price because it's also, as you said, it's like 12 months before the decision phase when we are actually awarded. So it's also so that the oil companies need to have engineers in place. It takes a lot of efforts to design a project. So even if we sort of bounce back in a situation where it will actually be profitable, it will still take a while before the project is sort of ready to be awarded. But on the other hand, there are also a few politically driven projects that are just boom, fast-tracked. So you really need to be on your toes. And it's difficult.
It's not that I'm trying to avoid the question, but it's not so that it's so easy to correlate exactly what will happen with the oil price, both good and bad. But it's to be we can't influence when the projects are ready. We just need to sort of grab it when it's out for award.
Yeah. Anders Idborg from ABG. Just in relation to the cap-based guidance that Tomas gave us earlier, I mean, SMT has consumed quite a big proportion of that historically. And even in the latest years, it's been close to SEK 1 billion of spending. So how do you see this in the light of the current demand environment? I mean, could this significantly be scaled down, or is it technology shifts making you still need to be on the sort of 6%, 7%, 8% in relation to sales?
I think that it's to be in the sort of to have a vertically integrated business system that we have. I think it is difficult to dramatically scale down the capacity or the investments, the capital that we need. We can, of course, always elaborate within some limits. But I think that SMT is in the nature of being such a business that we need continuously capital to reinvest in to be a healthy business. But then if it's SEK 1 billion or if it's a little bit less, I think that we could discuss. But I think it's still around about that number because otherwise, we will just build up a debt, debt for the future. And then eventually, we will suffocate the whole business.
Thank you.
Thank you.