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Sandvik AB
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Greetings to you all, and welcome to the presentation of Sandvik's results for the first quarter 2018. As we normally do, we will run through a presentation with our CEO, Björn Rosengren; and our CFO, Tomas Eliasson, after which we will open up for questions. And without further ado, please, Björn and Tomas, go ahead.
Thank you, Ann-Sofie, and welcome, everybody, to this first quarter presentation. We are very happy to see that the demand in the market continues on a good level. We see that in all our regions and in all segments that we're operating. So also, all 3 of our business there are contributing to the good order growth, which was 7%. This should be compared with the previous year, where we, in the first quarter, actually had the best quarter for the entire year. We're also happy to see that the leverage is developing in a good way, and we see development of our profitability and our margin this quarter actually reaching 18% profit margin. That includes SEK 250 million of negative currency effect. So if you add that back, we actually reached 19%, which, I think, is an extremely good number for Sandvik. Cash flow has been impacted during the first quarter on buildup of inventory, mainly in SMRT, in our mining business, to be able to deliver the extremely large orders on hand that we are having. This is no worry. This will recover during the year, and we will experience also this year good cash flow for the full year. We've had a number of activities during the quarter. We managed to close the welding -- the sales of the welding wire business to ESAB, and we believe that it has found a good home for that business. We have also made the decision to invest SEK 200 million in new powder plant for titanium for our 3D printing business, which is growing and a very profitable part of the SMT business. So this picture looks pretty much like the one we showed during Q4. You can see strong demand in all our segments as well as in the regions. If we're starting with the regions, you see 0% in North America, but that is -- the underlying there is actually 8% positive. We had a large umbilical order that were booked during the first quarter there. So the underlying is still strong in North America. Europe is up 6%. Continuing in Asia, 19%. So -- and out of that, 27% in China. So China continue to be very, very strong. We see we had a leveling out mining arrow. That means that, that market continue to be very strong and in line with what we have seen during previous quarter. So very strong market, mainly driven by replacement, but we also see a number of new projects. We had one in Sweden, for instance, starting up the mines. So they are popping up, a number of these projects going forward and also extension of existing mines. So very strong market there. Also good contribution, as I mentioned, from all 3 of our business areas. So on the orders and revenues, we had this quarter a book-to-bill ratio of 1.07 (sic) [ 107% ]. That means that our orders are higher than the revenues, and we continue to build up orders on hand. We see 7% growth. And that is also we have -- I would say that is a strong number. And revenues is increasing, which it should do because we start delivering more out, not least in the mining business. EBIT development of 22%. That is then if we then exclude the currency effect of SEK 250 million and the SEK 100 million metal effects, and also structure changes of SEK 56 million, which we had last year coming from the Process Systems, which is a sold business. It's actually 31% improvement of the profitability, which we think is a very, very strong number. This SEK 4.2 billion is also the strongest number that we had in the company's history. So 18% profit margin. The one who knows me say that the company should deliver over 15% profit margin to be a strong company. This quarter, it's at 18%, and it's a strong 18% because underlying, 19%. So looking at our 3 business areas. How have we seen the development? Sticking out as we have seen also during previous quarter is Machining Solutions that had so high growth at 8%. And you know that is amazing. We also see leverage here that continues to be on a very high level, 55%, and reaching a profit margin of 26%. Probably one of the highest, if not the highest, we've had for that business. The good thing is also that the cash conversion is close to 100% there, which means that we are delivering a very strong cash flow also from that business. Only some building up of inventory more to be able to meet the demand that we have from our customers. You probably remember that we said what we are struggling with too low working capital during the previous quarter to be able to have full delivery capacity, but that has worked well during this quarter. Then Sandvik Mining and Rock Technology. Also there, we are happy to see orders up 4%. And that -- actually, it surprised me a little bit because we had such huge orders during 2017. So we are glad that, that demand continues to being good. I talked before about the SEK 250 million FX for the group. All of that is actually coming, SEK 250 million, on the mining side. Then comes the question, why is it coming there? Yes, we are producing more or less most of our equipment and spare parts within the euro land. So the euro against the dollar has not developed that well, as we have seen with the weak kronor for the rest of our business. So that actually affects our EBIT margin with 2 percentage points to 15%. So if we take away the currency part, it's actually 17%. And that's a leverage of 35%, which is in line with expectations. Even though you know that we have big expectations for the mining business and with big ambitions for improving the margins going forward, so we are going to be focusing even more here on efficiency improvements and to try to drive the profitability even somewhat further. Also very happy that we've seen growth, as I mentioned, 4% here. On the aftermarket, we were actually over 10%, close to 15%, on the service and spare part business. So that's a good contribution, and it's very important also for the future performance of that business area. SMT, very strong orders. It's up 13% here. But if you actually put back the underlying here because we had -- so you maybe remember, I said SEK 430 million umbilical order last year from North America. If you put that back, it's actually 31% up. So very strong orders intake here. We see a profit margin of 9.9%. But in that, we also have the metal price effects, which, if you remove that, it moves down to 7.2%. But I think that's well in line with the development that we are expecting to be able to reach the 10% margin 2019. So that's good to see. Tomas, how's the numbers?
Yes, Björn. Yes, how's the numbers? Let's jump straight into the financial overview, hence start with the top line. As you heard, orders received, 7% organically; revenues, 14% organically. Currency was minus 2% for both orders and revenues. And then structure, minus 3% for orders and minus 2% for revenues. And that is mainly the Process Systems divestment. So total reported, plus 2% and plus 9%. The EBIT margin, 18%. And we'll get back to the bridge in a second. Working capital, you heard from Björn here, the percentage is down. But sequentially, the value is up. We'll get back to that as well. And of course, this had an impact on the cash flow, but cash flow is still positive, and net debt continues to go down. Finally, you see that return and earnings per share continues to improve in a very nice way. If you look at earnings per share, it was up 30%, whilst operating profit was up 23%. But this is what you get when you have a stable tax rate and the finals net continues to go down. So you get an overabsorption and a reduction in the finals net. So if we jump to the next page and look at the bridge and see then how we go from 16.1% to 18% in EBIT margin for the quarter. On the organic side, you can see that the leverage was 39%. And the good thing this quarter was that all 3 business areas contributed 55% from SMS and leverage; 35% for SMRT; and a positive leverage of 5% from SMT, which is good. Haven't seen that for a while. That meant an accretion of 2.7 percentage units organically. So take 16.1%, add 2.7%, and then you get the close to 19% that Björn was alluding to. Currency, SEK 255 million negative. Basically all of it SMRT and it's the U.S. dollar, which sort of represents more than 90% of that. Structure one-offs, 10 bps of dilution, and that takes us to 18%. Now working capital. Of course, percentage is down year-over-year, but the value is up sequentially. It has 2 explanations. There's 2 reasons for it, the biggest one being the buildup of inventories in SMRT in order to deliver the order backlog for the year, which we will do; and the other one is to restore sales stocks in parts of SMS in order to defend the delivery service. You can see on the right-hand side that SMS is on a very good level. We expect them to be on that good level. SMRT is picking up, but it will sort itself out during the remaining 3 quarters in the year. Of course, this had an impact on the cash flow. But if you look at the right-hand side, you can see that earnings continues to contribute to the cash flow, SEK 900 million cash contribution. Working capital took as part of cash flow at the end was SEK 2 billion, SEK 2.1 billion, which, of course, is less than a year ago, but still enough to continue to reduce the net debt, which we can see on this page here. You can see the net debt now was down to SEK 14.7 billion, and the gearing is 0.27. If you look back in time, you can see mid-last year, you see a big jump from Q3 to Q4. That was when we got the proceeds from the Process Systems divestment. But the rest of the journey from SEK 40 billion down to SEK 14.7 billion is purely operational. And as you might have heard as well, we got a new outlook from the Standard & Poor's from BBB+ negative to the BBB+ positive. That's a recognition of what has happened with the balance sheet and the strength of the balance sheet. Finally, a few words on the outlook and the guidance. We guided for SEK 250 million negative in underlying currency effect, and we basically landed there for the quarter. We guided SEK 100 million on metal price effect, and we were spot on as well. For the next quarter, with the currency that we had in March 31, we expect the currency effect to be 0. That is the translation and transaction effects. Metal prices SEK 100 million for the second quarter. Full year guidance on CapEx, SEK 4 billion. We had SEK 740 million in Q1. Net finance items, SEK 1 billion. And we were spot on, SEK 250 million, in the first quarter. If you just go back 2 years, the finals net was SEK 2 billion, so it's been cut in half now. Tax rate, 26% to 28%. And we ended Q1 on 26.5%. Then I'll hand over to you again, Björn.
Thank you, Tomas. So where are we now then? Yes, I think we are in -- and many -- or the most, the majority of our operating entities, we are both stable and profitable. That means that we have a strong focus on growth. And we're talking about growth, we talk about 3 different way of growing: One is organically. That's, of course, developing new technologies and products and sell more and take market share. The second part is new technologies. And at the moment, we are experiencing probably one of the most exciting times when it comes to the mining industry. There are huge amount of automation projects. I would say any serious mine around the world today are looking into the automation area. Sandvik is in the forefront. We are there. And we have many, many products that we -- projects that we are running at the moment, which is going to be exciting for the future development of the mining market. The third way of growing, that is through acquisitions. And we have been talking about acquisitions now for the last 6 months, and we are getting closer to be able to present our first acquisition within soon. We are interested to grow, mainly within SMS, where we have this enormous strong position at the moment. And we would like, as you know, to broaden ourselves to catch the whole cutting process, everything from designing the component to verifying the result of the production. So within very short, you will hear something from us on that part. But we are also interested to see growth within other product areas that are more stable and profitable. Mining has a number of exciting project that could be. But then, even in some part of SMT, like Powder and Kanthal and these areas where we see good profitability and good position in the market. So going forward, a lot of focus on growth, but also to drive efficiency. And we have, especially in 2 of our business areas as SMT, we will continue to drive the project to reach the 10% for 2019 as a profit margin. And on SMRT, I think we have more to squeeze out in the coming quarters. By that, I think we can end the presentation, and we go over to question and answers.
Yes, we will, indeed. Let's start with the room here in Stockholm. Do we have any questions in here? Yes, we do. Can we have the microphone up here? Thank you.
Anders Idborg, Collier. I have a question there on the mining business. You talk a lot and you seem very confident in the efficiency measures. Could you elaborate a bit on what kind of efficiency measures are you focusing on for this year and next year?
Yes. I mean, you're seeing these enormous volume increases that are taking place during the last 12 months or even more. In some of our product areas, especially when we're referring to the underground business, that is the loading and haul and the drilling part of that business, volumes have actually doubled. And you can imagine the burden for any division to drive volumes up. As you probably know, we have been focusing a lot by using satellites to be able to add the volume. But we have also shortened lead times and try to get more through. But it also puts a lot of pressure on the subsuppliers, especially when you come into hydraulics and with certain components because we all know that it is. So there is a lot of inefficiency in the supply chain to get everything in. It's enough that you are missing a couple of components before. When you put these together, you have to move it aside until you get the right components. So there is a lot of focus to get good efficiency through the whole chain, but also to make sure that we are focusing on our customers in the right way, that we are winning the right project going forward. But we will be driving efficiency, making sure that we grow -- we have a target of reaching 3% productivity improvements. We are, for the group, running at 8% today. But at such a good time, we would like to see that even improve. So there is a lot of measures being taken at the moment. And each of the product area are driving these, what we call, continuous improvement.
And a question for Mr. Eliasson. On the pension deficit, if you're paying down debt, can you see yourself making extra contributions, et cetera, just to get the pension deficit even further?
You mean the pension debt in the balance sheet right now, which ended at SEK 4.3 billion? Well, the reason why the pension debt has come down from SEK 5 billion down to SEK 4.5 million and now SEK 4.3 billion is purely technical. It's because the discount rates are going up really. So I mean, discount rates are going up in all regions in the world. But no, we have no plans on making any extra contributions today.
Okay. Operator, can we have a question from the conference call, please?
We first go to the line of Klas Bergelind at Citi.
It's Klas from Citi. The first one is on SMT. The drop-through is 5%, and pricing is now improving a bit. So it should help the drop-through as we go through the year. Against this, however, it's a pretty tough comp on large orders in umbilicals, which is high-margin. These orders are also very short-cycle when we look at deliveries. Orders in the year often become deliveries in the year. There were no larger orders this quarter. Have we passed the peak on umbilicals side? If you could talk, Björn, about quotation activity, order scope versus 2017, please.
There are quite a lot of activities out in the market, both large projects as well as small project. But of course, an order is never an order before it's signed and delivered. So we are working with it. So far, we have taken the majority of these umbilical orders during the last 2 years, and we have a very strong position in that. So we continue to focus to get these orders in. We have, on orders on hand, between 2 and 4 months, approximately. And we hope to get some orders within the short near future. That's how it looks. But there are many projects, but they have to be closed, of course.
Okay. On mining, my second question. Aftermarket, if I heard it correctly, was up near 15% year-over-year. And then mining, are we down slightly on the past comps? I get this to sequential flatter OE, but higher off the market quarter-on-quarter. So I guess, the question on the equipment side, last time, at SMRT, when I looked back, surprised positively against expectations or about 1 year ago in the first quarter of '17. So the question is really, are we plateauing here on the replacement and brownfield side? Or do you think increased automation can drive upside to equipment volumes? Thinking about whether they can shorten the life cycle, I wonder to what extent. I struggle to see, but if you could comment on the scope for the equipment business to reaccelerate in mining, please.
It's difficult to say if we'll see some margin accelerate. I mean, we were happy if can keep it on this level. For -- if we're looking at SMRT, we are -- last year, we had the highest orders. It was over SEK 10 billion. That was the absolutely best quarter during previous year to beat that with 4%. And of course, I'm very happy that it's the aftermarket that is what's growing most because that's, of course, the most profitable part of our business going forward. We don't see any weakening in the mining market. And if you have heard me before, from my perspective, this is driven by metal prices. As long as we see the metal prices on these level, we will continue to see good demand. We have, as you know, close to 20,000 equipment out in the market, which will be replaced and bought new. They have a certain nice time being -- will be coming. Some mines will place bigger orders. We didn't have any huge orders during this quarter. Probably, we'll expect that in the coming quarters also to come. So I think if we can keep this level that we are having today, we are very happy with that part. That's also because we got the quarter production rates up to certain levels, we can also drive efficiency a little bit more. And you get the whole supply chain rolling in the way you need to do at this volume. But we don't see any weakening of the market.
One very quick one, finally, on SMS and the 55% drop-through. When we met last time in London, you said SMS should normalize to 40% to 50% in the medium term, 30% to 40% longer term. But how should we think about inventory build also in the second quarter, costs going back in, in both digital, more feet in the street? Can we hold 50% for the year and then we come down next? Or -- so how should we think about incremental margin for 2018?
I think, yes, 55% surprised us also a little bit. It's on a very high level. I think long term-wise, you cannot expect that we should be on these levels. So we should be more on what we have communicated before. We are investing, as you know, a lot of money in new technologies, both in the software, as well as in the 3D printing. So during this year, we are probably putting in SEK 300 million, which is actually taken out of the profit straight in. And it will take a couple years before we can see good returns on those investments. But we're taking the opportunity now, and that business also is delivering such a strong and good result. But 55% leverage, I doubt that we should see that many quarters going forward, even though I hope.
That would be nice, of course. That 35% to 40% is a more normalized level.
We now go to Guillermo Peigneux of UBS.
Guillermo Peigneux from UBS. Just a question on pricing for Machining Solutions. Some much of the organic growth was pricing, and what do you think about pricing going forward? And then on SMRT, on mining, kind of the same question regarding like-for-like equipment. How is pricing moving? But more interested in understanding how -- what's, let's say, the amount of growth you saw in aftermarket and in consumables relative to equipment. How is that basically mix not helping you to get better operating leverage numbers into the quarter? I'm wondering.
If you're looking at the pricing, so yes, we've seen an improvement during the quarter. So we are approximately 1.5% up. So that is developing well. And that is both on the SMS as well as on the SMRT, which it should be also now when the demand is on a high level. On the growth of equipment, I think you said in relation to aftermarket, yes, equipment can go a little bit up and down for a quarter. The demand is still good, and we have nothing else signaled. I've spent quite a time out also this quarter out meeting customers around the world, and it is happy customers, growing customers and prepared to invest also in our equipment going forward. So I'm not so worried about that development as long as we see the metal prices on the level that we see now. The 15% on the aftermarket is, of course, important for us because this -- the aftermarket remains also in weaker times. You know we're putting quite a lot of efforts to grow the aftermarket, and we know that the market is -- the underlying market is not growing as high as we are growing that. So we are improving in our own abilities on that market. On the consumable side, that means the drill steel and the drill bits and the part, that is not growing in this. We're only talking about a couple percent there. 1%.
Maybe a follow-up. You mentioned automation in mining. Could you characterize -- or could you give us basically an indication of how [indiscernible] is becoming more or higher content in terms of automation? So maybe just compare the amount of equipment that goes into a high level of automation versus the, let's say, traditional level of automation that you may have had over the last 5 years?
Still, the majority of the equipment that we supply is not for automated part. But we have a number of project. We have so far 30 installations today of automated mines, so on different levels. And we have a huge amount of projects that are running and is going to be in the future. Yes, automation drives equipment also because when you are moving into automation, you also need equipment, which are equipped with the latest technology when it comes to navigation and mechanization also on the equipment. So yes, it drives that part. But these project, I mean, that we're talking about is still a minority of what you are seeing. And that, we would probably see more in the coming future of these projects. We have one exciting project what we talked about, and that is a project in Mali. Normally, you think about automation, it's taking place in the northern atmosphere in the most modern countries. But in the middle of Africa, in Mali, we are actually putting in the first fully automated mine with all equipment from Sandvik today. So even in these parts of the world, we see development on that side. So we expect a lot to come there, both when it comes to automation equipment as well as new -- driving new equipment sales.
We go to the line of Peder Frölén of Handelsbanken.
A couple of questions, if I may. Firstly, on the additive investment in SMT, if you take sort of a group view on this, could you just repeat the amount on revenues you get from powdered today? And could you also, please, try to talk about what type of sales that plant investment eventually could drive if they were fully operating? That's my first question, please.
Of the 3D printing, as you know, there are different part -- powder is the part of the business which is growing fastest and where we have the strongest market share at the moment today. Our powder business, but that includes not only for 3D printing, it's also metal injection molding, which is part of that, this around SEK 300 million in size. But the 3D printing part of the business, which is probably growing the fastest of these, are growing around 20%, 25% in growth. When we're looking at the 3D printing, we are, of course, still in an early stage. It's a building up. We are running a number of projects with customers. They are setting up the business model, they are employing a lot of people. So it will take some time before we can see revenues actually coming out of that. But we will be -- the business model is being set up, and we will be able to service our customer to help them to both design, in some cases, also to make components. The startup has been together with SMS actually, because today, we are already producing a number of 3D printed components for tool holders, which are very lightweight and designed in a way to run for high productivity, which we're really benefiting already from today. But there are a number of projects. It will take a number of years before you can even see these numbers in our total numbers. But it's a big focus, and we are investing heavily into this business.
But shortly on raw material, I guess, it's wise to take a group view there. So you managed to positive on a net of price of raw materials, I guess, with the 1.5% price increase, but maybe you can confirm on that, Tomas? And lastly, just on trading conditions, were March a bit weaker than January or Feb? And how is April looking so far? I'm talking about SMS, obviously.
I think if you're looking at March, it was a little bit shorter because of the Easter, of course. But if you look at the day -- to the day trade, we actually had the strongest one in March. So it accelerated during the quarter. Did you want to answer anything on the materials prices?
Well, we don't price based on material costs, not really.
But just the net -- I guess, your -- you have a raw material content, many alluded to that, in bridges. You don't, which I find relevant, but still could you verify that the raw material increase was sort of less than the 1% then?
We don't have a number for that.
And trading conditions in April, Björn?
Yes, the trading conditions, as I've said, if you're looking their day -- [indiscernible] SMS, the day -- the day trade was actually better in March than the previous 2 months. So it accelerated in the end of the month. In -- end of the quarter.
And -- Björn, did you actually answer Peder on the April stocks?
Sorry, I missed that one. Yes, April has continued at the same level as we saw during previous quarter or in March, no change in trade there.
That serves the line of Markus Almerud, Kepler Cheuvreux.
This is Markus Almerud, Kepler Cheuvreux. I'd like to start by going back to Guillermo's question, just on the margin in SMRT. So you see strong growth in aftermarket, and that despite that you saw the lowest margin, expect for Q1, but Q2, Q3 and Q4 last year was much higher than it was. So is it just currency, or is there something else as well that is driving that? So that's my first question.
It's only currency. You can say that you have, compared to Q4, you have SEK 70 million in negative currency compared to the previous quarter there. So, as I mentioned, that is SEK 250 million compared to last year. So the underlying is 17%. Then, of course, which we have been very open before, we have 8 product areas within the part. Some of them are performing extraordinary good, and some of them have a little bit more challenging position. And that is, of course, how it is. We are everything from mechanical casting to crushing to drilling as well as loading and hauling the part. We can say that the underground drilling and blasting side and loading and haul is doing extremely good.
So does that also mean then, if we can just follow up on that, that if the underground loading, hauling and drilling is doing good but equipment overall is flattish, do the other ones like crushing is not -- is actually declining then?
Crushing is pretty flat.
Okay. My second question. I'm just curious to hear if you are seeing any improvement in underlying demand on the oil and gas side for umbilicals but also for [indiscernible] if you're seeing an impact from the higher oil production in the U.S. on that? So do you happen to see any movement in oil and gas demand from that?
We see that. It follows very much the number of rig count. And we are up in, I think, [indiscernible] over 10% growth during this quarter, which is good. And then the underlying profitability is also doing well. So if you take away the PPA amortization, we are running close to 10% today. So it's developing in a very good way. Yes.
With a steady and good cash flow.
Yes, very good cash flow.
Right.
And in terms of discussions, et cetera, with oil and gas customers in -- on the umbilicals side, any change? Or still too early?
I think it's too early. I mean, there are a number of projects that we are waiting for at the moment. But that's the story of umbilicals there. I've been in the company now for 2.5 years, and there is a constant waiting for umbilicals. And they come. So we'll see. But we don't feel so worried about that.
We now go to the line of Sébastien Gruter at Redburn.
I have two questions. The first one is on Machining Solutions. The Chinese demand, I keep on surprising, and I was wondering if you have any visibility on the level of inventories for customers and distributors in China, specifically for SMS?
I would say that we don't have any kind of reports that we have any inventory building up there. It's the underlying demand which is actually driving this good development that we are seeing.
Okay. And the second question, asking on Machining Solutions. I mean, you're still growing in automotive, while global auto production was broadly flattish in Q1. Just what is driving with this outperformance? Is it market share gains or do we see a marketing tool spending per vehicle [ projects ]? I mean, what's the driver behind this outperformance of this production?
I didn't really hear that.
No, you were asking about market share gains in China in automotive?
No, no, no. It's not in China, but overall global automotive production was flat in Q1 and Machining Solutions seems to be growing in automotive. What's driving this outperformance?
I think the underlying market, what we have, if you look at the regions there, we've seen a flat development of the sales in North America. We are growing in Europe and we are growing in China. And I think that's pretty much follows the demand we're seeing in the market.
And that's over the line of Andrew Wilson of JPMorgan.
Just a couple of questions, please. And reading into, I think, one of the early questions, just on the inventory levels in SMS, and I guess SMRT as well. Can just give us a sense of kind of where we are in that sort of build process, i.e. should we be expecting to see a similar inventory benefit into Q2? Or are you kind of closer to the levels that you feel like you need to be for the 2 businesses now?
I mean, for SMS, I think we've got it up to the level where we want to have it. So we are not expecting any growth in inventory during the second quarter. Also, on SMRT, we will not have this increase during the second quarter. That's pretty clear. So we will have a lot of deliveries during the period. You can probably see also we had huge deliveries during March. So there's a lot of receivables in the networking capital also, which will be money coming in during the second quarter. So I'm not worried at all about the cash flow for the coming quarters.
That's very clear. And just on a slightly different question. On the M&A opportunities, you've kind of talked about in SMS, I'm just thinking about from a strategic perspective, you've been quite clear about the kind of businesses you're targeting and why within SMS. Can you just talk a little about whether you're seeing your competitors, the kind of traditional competitors in that market, talking about doing the same things or perhaps seeing those bidding for the same kind of assets? Just give us a sense of whether you think the current SMS strategy is different to what you're seeing your competitors try to do?
No, it's quite amazing. We are quite alone in putting that strategy up. But if you look back a number of years, I think Coromant and SMS has been really on the front side when it comes to digitalization and introducing intelligent tools in the market, which we haven't actually seen by any of our competitors. So I think we are in the front line when we are looking at driving our business in this direction. But I think it comes from our very strong position through Coromant, but also with our other 2 brands that are operating very close to our customers and helping them to become more productive. So it comes natural -- for us, it comes natural that this is the direction we have. As you also know, we made a number of acquisitions before of software companies, which has actually played out very well and added value for our customers. But that might change. The competitors might go this way also in the future. But at the moment, we are not really seeing that.
It's over the line of Graham Phillips of Jefferies.
A couple of questions, please. Could you talk a little bit about the aftermarket growth of 16%? Where you were seeing the major benefits there? Because clearly, that has well outperformed underlying level of production. And just, and I apologize, you may have this in the release here, but I'm actually traveling. What was the organic growth of original equipment, aftermarket and consumables for mining?
We don't do that split. So sorry about that. We are not going that deep into our numbers. So the only thing actually that we are telling, we are being a little bit generous when we say 15% on the aftermarket or on the parts and service business. Why we talk about that a little bit extra is because we see that as really an enabler to both strengthen the business that we have, but also make it more agile in the downturn. So that is important. We have the last 2, 3 years been a lot of focus on the aftermarket. And it's actually, Tomas and I, we spent a full day with the whole business area or the product area team in Amsterdam last week and looked into the new technologies that they are putting in. And it's quite impressive what both the technology they are using to drive the business, but also the good knowledge they have of our performance with our equipment in the market. Coming also, and that is the connectivity, which I think is probably one of the most exciting side within the aftermarket is today. We have more than 3,500 customer today connected into our MySandvik, and that's the portal where you can actually order all your spare parts, you can bring up service journals, you can find all spare parts and you can even monitor your equipment if you buy that service also for the future. And this is growing dramatically. And, of course, this generates revenues into the future.
So the 15% that you quoted for aftermarket, that includes consumables, that included...
No, no. No, no. Sorry, this is the parts and service business. The consumable business is only growing 1% or something like that during the quarter. So that is more following the output that you are getting from your operations. And I normally been -- explaining this is that the output from the mining companies actually it's coming to 1% to 2% per year. That's how that is developing. So if you are in an aftermarket grow faster than that, you're actually taking market share. And then we talking market share is of our aftermarket business, that means against what our customers are doing themselves or pirates with our equipment. Or we're taking a bigger percentage of the service that is being done on the equipment, and that's the ambition we have.
And the original equipment orders is down 4%. Can you contrast that between surface and underground?
No. I don't have that. But, I mean, the big drive is underground, of course, in that part. And that's also where we have our strongest position in the mining side. I don't think you have to worry about a couple of percentage down. This varies a little bit between the quarters. You might be surprised during next quarter in the other direction. I mean, this is a little bit how it goes. It's if you get the big order in during this quarter or not. So I think it's better that you listen to the underlying demand has not changed, it had not gone down. Then, of course, when you will take the certain orders and when you do get them into your order books, that can vary a little bit between months and quarter. So I think you have to trust us there. The underlying demand is very strong in mining, and it's expected to be at least what in the near short future.
Okay, and my final question is on...
[indiscernible] is unusually strong.
And we are also comparing, as you probably remember, we had huge orders during the previous year as of 2017. That was over 30% growth at that time.
Fair enough. Sorry, my final question is around the potential credit-rating upgrade. So S&P moved from stable to positive. If you did go from BBB+ to A- and remind us how much you're thinking of spending on M&A, would you get a bit of benefit from lower interest cost borrowings? Or if you already got set lines of credit at rates determined already?
That portfolio is very long. It stretches out over 10 to 12 years. And basically, all of it is, well, long-term debt. And, of course, over time, it will have an impact, but immediately, not that much.
No. And just remind us how much you're looking to spend in terms of M&A?
I mean, we can say that we are not into -- I mean, at these price levels that you can see in the market, we are not going to take any huge bite that would jeopardize Sandvik's rating or our cash flow or our net debt. So we are looking for a small to medium-sized companies, especially on the tech side, which can add both technology and products just for these areas. And then we will utilize the group size and all our competence centers around the world to drive volumes.
And the credit -- and the net debt-to-EBITDA that you would be happy about, just remind us of the figure on that?
I mean, we said that we are happy with the BBB. I mean, that's what we have said. We are BBB+ today, but it can also depending on how you rate our business.
Yes. But what was the question on net debt-to-EBITDA?
Well, did you have -- I mean, you obviously would need to gear up if you made some acquisitions and what were you comfortable with in terms of a ceiling for net debt-to-EBITDA that wouldn't jeopardize a potential credit-rating upgrade?
No, we don't have a target on that as such. We are around 1 right now. That has come down quite substantially over the last 2 years. If you read the Standard & Poor's press release and their reports, you would see that, that when they give us the credit rating, we have an outlook, we have -- they have an assumption on like up to SEK 5 billion annually on M&A spend. But, I mean, we don't have a out-spoken target as such for ourselves. But the rating is important for us.
That serves the line of Ben Uglow at Morgan Stanley.
I had 2 questions. The first, and forgive me if it sounds slightly pedantic, I'm trying to figure it out. But on your market development slide at this time, your arrows, and particularly Europe stood out, have kind of flattened. So 3 of the 6 arrows have begun to go sequentially sideways. In Europe, when I look at the individual end markets, all of them, with the exception of mining, are actually heading upwards. So what I really wanted to know is, is your -- is this sort of flattening, is this kind of change on this slide simply to do with mining? Or do you see anything else in the European environment or anywhere else, which is sort of incrementally more cautious? I know you mentioned a plateau in mining in your opening remarks. I just wanted to make sure that's the only [indiscernible] that you're trying to make.
I mean, it's the mining that is actually driving this. There is nothing else to do -- worry. It's strong all over. You can see, you can actually see from last year, it's up on all of them, but sequentially, we had, as you also know, that fourth quarter was pretty much in line with the strength that we have seen now during Q1. It was very, very strong at that moment. So the only one where you say is that, yes, mining has probably plateaued out on a very high level.
Okay. That's very helpful. And just second question. Briefly, on China, and I want to make sure I got the numbers right, you had 27% order growth. I wanted to check, first of all, were there any large orders or any one-off effects in that? And for Sandvik Machining Solutions specifically, was there a kind of growth in line with that type of level? And did it change at all during the quarter? Did we see a sequential acceleration or deceleration? Did it -- was there anything significant either way during the period?
There was no, I mean, if you're looking at the 27%, there were no big orders driving that. But that's pretty much in line with what we see now during actually the last quarters also. So that was pretty much in line. On SMS, it's about 20%, that's where they are in China, so very, very strong.
And remaining strong throughout the quarter?
Yes.
The next question is from the line of Gael de-Bray at Deutsche Bank.
Two questions, please. The first one is, I mean, the business grew again tremendously this quarter, but the number of employees has actually been fairly stable year-over-year and even slightly down, I think. And you've been talking about future efficiency opportunities. But it appears to me that you've been pretty efficient so far already. And, I guess, my question is at what point will you need to invest more in people, in more sales on the ground, perhaps to sustain future growth? So that's question #1. And question #2, I was surprised by one of your earlier comments that the production of your spare parts in mining is mostly in Europe. I thought it was sort of a local business for the most part. So is there a plan to better optimize the manufacturing footprint for the spare parts and reduce the mismatch you have between the revenue base and cost base in euros?
Okay. First on SMS efficiency programs there. I think, first, when it comes to the people, yes, we have grown a little bit, but yes, we have been able to grow a lot of business without adding a lot of people. And a lot of this is, of course, coming from the SMS. We closed 23 factories all around. So it's actually on the back side that we are becoming more efficient. We are running more product through bigger factories, and that is driving efficiency. And without a doubt, the best job is done there by SMS. In Mining, yes, they have added people on to the business. But the people they have added on is mainly related to the aftermarket and to service contracts. We've taken numerous of large service contracts around the world where you need to add people. But these people are added on to contracts. That means if we lose the contract, the people are connected to that. So they are not like stuck into our books. But we monitored this very, very carefully because we all know that in the future, it's going to change. So we say that you have to drive efficiency all the time, and that's why we are driving the target of 3% per year. We are running at 8% today, and we'll probably going to be even higher than that. But that's how it is when you are on a top side. There is a lot of efficiency in all our operations to be done, and we will continue to drive that also in the future. When it comes to the mining equipment, the setup we have is that each product area is responsible for its own production. If you're looking where we have our production facilities, we have 4 product areas which are located in Finland. We have in Turku, in Tampere and in...
Austria.
No, no. But in Finland that we have 4 big factories there. We have production in Austria, we have production in China and we have some small production also in Sweden. The crushing equipment, let's say, the station equipment is done in [indiscernible] but we are making drill steel in Sandvik. So you can see it's pretty much brought up. But spare parts are bought from suppliers all around the world. So it's some of them is coming from our production facilities around the world, but we also -- from some sub-supplies. It can be in Germany, it can be in China, it can be all over. But if you look at the majority of the costs that we are generating, it's done in euro cost if you compare that part. And then we sell the most of equipment into countries in the dollar base. Many of the Third World countries are driving most of this in dollars. So it's the euro to the dollar part. I mean, we have no ambition to try to change that or hedge that in a way. We do believe that we can drive good profitability even when the currencies change. And that's how we do it. If the cost goes up a lot and we have a big demand, we will also lift the prices. This is moving all the time. And it will be also in the future decided by our product areas.
Can I just clarify a little bit here? When we talk about production in euros, we don't talk about spare parts, we talk about equipment really. So the comment here on producing in euro land and selling to a dollar land, it's equipment. As Björn said, the spare parts, they are partially produced by ourselves but sourced externally from all over the world.
Thank you. And I know there's probably a few questions still to be asked from the conference call, but unfortunately, we are out of time. So please feel free to call myself or my colleague in the Investor Relations, and we're happy to help you. And with that, we will say thank you very much for joining us today, and we will see you in about a quarter's time.
Thank you so much.
Thank you.