Sandvik AB

STO:SAND

Earnings Call Transcript 2022-Q1

[Louise Tjeder, executive]

Good afternoon, everyone, and a warm welcome to Sandvik's Presentation of the First Quarter Results 2022. I am Louise Tjeder, Head of Investor Relations; and beside me, I have our CEO, Stefan Widing; and our CFO, Cecilia Felton.

We will start with the presentation, where Stefan and Cecilia will take you through the highlights of the quarter and some deep dive into the financials. And then we will move on to the Q&A session. Here, you have the possibility to ask your questions in written while we are prioritizing the questions on the conference call.

Enough from me, and over to you, Stefan.

[Stefan Widing, executive]

Thanks, Louise. And also I would like to welcome you again to the first quarter report for 2022.

To summarize the quarter, it was a very strong performance, fifth consecutive quarter with double-digit growth in orders for us. At fixed exchange rates, the order growth was 30%. And we really see a solid broad-based demand across the business with strong contribution also from our acquisitions. The organic order intake was 13%. Revenues grew organically by 6%, and total at fixed exchange rate was plus 27%.

We also show a resilience in earnings despite that we have some cost inflation headwinds. EBITA margin of 20.2%, up 27% in terms of money versus prior year. The adjusted profit improved by 21% in the period. We are now sitting at a gearing of 0.31 after a free cash flow generation in the quarter of SEK 2.3 billion. More about that later.

We also continue to execute on our strategy of making the shift. We see good pace in launching new innovations and also pleasing to see good customer traction with our new digital and sustainable solutions. You have, of course, seen that the Board of Directors has now proposed to the AGM next week to approve a split and a distribution of SMT by the end of August of this year. And then we are continuing also to work on continuing to mitigating the cost inflation impacts that we have seen throughout the period.

Talking about innovation. The first one I want to mention is a new Osprey additive manufacturing powder. This one in particular is a world first, where we can 3D print super-duplex stainless steel, which is a key application for some very demanding type of industries.

We have also showcased our new battery electric truck. This is also first. It's the industry's largest battery electric truck, a 65-tonne payload capacity. This is a sibling to our best-selling 63-tonne diesel truck that we have in the market. As always, with our electric equipment, it has a drivetrain that's fully designed for being battery electric from the start. This one in particular has 4 electric motors, 1 at each wheel, which is unique. And it also gives us a 20% to 30% faster movement of the material compared to the class-leading diesel machine, translating to higher productivity of our customers. And of course, it has our patented self-swapping battery feature as well. So looking forward to seeing this in operation during this year.

Going into the market development. Starting with the geographical performance, we can see it's up in all markets. Particular highlight is North America, which is very strong. Some of the difference between Europe and North America is related to that Europe were ahead of the recovery from COVID last year, but it's also because North America has been very strong throughout this quarter. If we look at an SMM perspective, we can see that Europe is strong, at 6% up; North America is very strong at 17% up; Asia, however, is a bit weaker at minus 6% primarily driven by weakness in China.

Looking at the various segments. Mining is, of course, strong across the board, as you have seen in the numbers. General engineering is also very solid, continued improvements there. Automotive is down year-over-year, but we should say that it continues to improve sequentially from Q4, so I would say quite okay considering the component shortages and the challenges there. Energy is strong, up in the double digits again. Here, we also saw a noticeable step-up in North America in March given by investments, I guess, considering geopolitical situation. Infrastructure is also strong, up across the board. And aerospace is very strong, up in the above 20% range as the industry continues to recover from COVID.

If we look at the total picture here with order intake and revenues, you can clearly see that order intake is and continues to be very strong. It's really at levels way above pre-COVID times even. Of course, there is some structure here now that helps us, but that's part of the growth strategy as well. Revenues are trailing, and meaning we have a very good book-to-bill ratio currently and continues to build order backlog. But revenues is also trending upward in a very good way, reaching almost SEK 25 billion in the quarter, excluding SMT.

If we look at this from a growth perspective, you can see on the bar graphs here that we came out -- we had the COVID period with negative organic growth. We had a recovery in prior year that continues with solid organic growth but now also complemented with strong structural growth from acquisitions. And that is something we will continue to enjoy for some time going forward.

Margin development also, I would say, solid considering the cost inflation pressures, 20.2%, up 27% versus same period last year. And if you look at the bars here, you can see that Q1 held up really well even sequentially versus Q4, which is not always the case. And we are at levels that we haven't seen even pre-COVID. We have a weak leverage, though, that has to be said at 5%. In most businesses, this is primarily due to cost inflation pressures in SMM. However, it's more related to costs coming back from still a very low cost base in prior year. We have dilution from acquisitions, but that is offset by currency. So in a way, the development in this sense is mainly related to the organic development then.

Going into the business areas and starting with Mining and Rock Solutions, exceptional order intake of around SEK 16 billion. I have to say I will sound like crying wolf here, but this is not a level we can expect every quarter going forward. You cannot multiply that number by 4 to get our expected order intake for the year. We have a little bit of seasonal effect sometimes in Q1. We are seeing maybe some signs of some customers' ordering a bit earlier than normal, but that shouldn't take away from the fact that underlying the market is exceptionally strong. Both aftermarket and the consumables business are an all-time high, and our major equipment divisions also record record-order levels. Particularly here, I would say our surface division, I want to highlight, they are now at order levels that we have not been even near before. So we see that also as an indication that we are taking market share in that part of the business. We also noted 4 major orders in the period of in total SEK 1.3 billion.

On the margin side, we are at 20.1%. Higher volumes, of course, contribute positively. As you know, we have some dilution from DSI, although that was a business that performed extremely well in this quarter. We are lagging a bit with price increases, contract cost inflation and freight here. We have an order backlog and when we have things that are coming now with higher steel costs and so on, it takes a while for us to catch up, but we are continuing to mitigate this as we go forward.

Also noticeable here is that we did close the Deswik acquisition earlier in April, so not in Q1, but it's a noticeable event beginning of this quarter.

Rock Processing Solutions, also very strong order intake. I was actually surprised that they managed to match prior year order level in Q1. As you might remember, that was then a bit boosted by a catch-up effect after COVID. Still, they came in at plus 1% organically, which I think is really strong. And also on the revenue side, despite the supply chain issues, they managed to deliver a bit more also in the quarter.

Margin-wise, we have said before that they have been struggling a bit more than the other BAs with cost inflation. That continues to be the case, but they also continue to raise prices and are hanging in there, I would say, even though they still have some catching up to do on this side.

Also positive here, we closed the Kwatani acquisition end of last year, and that's a business down in South Africa that has performed very strongly since they joined the group.

Sandvik Manufacturing and Machining Solutions, very strong demand here as well. Order intake, up 19% at fixed exchange rates; up 6% organically, already mentioned, driven by general engineering, aerospace, and we should also mention, I think, energy here. So solid demand. All segments improved sequentially versus Q4. I think that's a strong signal. We have also seen a positive trajectory continuing into April. And we say that, we mean compared to the average of Q1, but it's a positive momentum also into April.

Margin was 22%. Here, it's well done by this organization to fully mitigate cost inflation by price. However, they were still in a low-cost mode in Q1 of last year with work time reductions and so on. So they have had more costs coming back than the other BAs, and that has negatively impacted their leverage in the month. They also enjoy some benefits from the savings program that we launched in 2020 of about SEK 100 million as a bridge effect in this quarter.

I also want to highlight here, we see very good traction in the new CAM businesses. So very good growth, strong margins, and we can see, especially the Mastercam brand performing exceptionally well, clearly taking market share in terms of new license sales.

And then finally, Materials Technology, SMT, which is now reported as discontinued operations, exceptionally strong quarter from an order perspective. I mean close to SEK 6 billion in order intake, strong underlying demand across the board complemented by several large orders in the energy segment of in total SEK 1.3 billion. Also here, the umbilicals business, that you know is important for us here, showed very good order intake, well over SEK 400 million, which is a run rate that would take us close to full capacity at that level, so very positive.

The revenues for umbilicals though is still not at that level. So I think it's therefore very strong by SMT to deliver a margin then of 9.4%, good volume, good mix and also help from currency. Here, we should say that the metal price impact, in this case because they are so extreme, have a diluting effect on our margin by 80 basis points when we exclude them from the calculation, so over 10% margin without that impact. I think they have done a good job mitigating a lot of the raw material and energy cost increases, but they are not fully there yet, but they are also working on that.

And then again, the Board has now proposed to the AGM that we will decide to list SMT by the end of August of this year.

I also want to comment on some of the media reporting that has been here in Sweden regarding Sandvik potentially having sold products to the military industry in Russia. When we got this information through media, we initiated our own investigation supported by external legal advisers. The findings are that we have not identified any violations of sanctions. These companies that are mentioned have both civil and military businesses. What we have to ensure in this case is that the products we sell are for civil use only. Here, we have identified that prior to 2018 -- in 2018, we did a significant improvement of some of our compliance programs. So prior to 2018, we have identified that we are not in all cases having the sufficient documentation needed to prove that it is for civil end use only. So that is a weakness. Again, most of it was corrected then in 2018, but it is something we will continue to work on and improving further as we go forward.

With that, I hand over to you, Cecilia, for some more financials.

[Cecilia Felton, executive]

Thank you. So let's go straight into the numbers then. And if we start with the box on the top right-hand corner, you can see that excluding currency, orders were up by 30% and revenues by 27%. Earnings increased from SEK 4 billion to SEK 5 billion, an increase of 27%. The EBITA margin came in at 20.2%. And net financial items increased slightly sequentially to SEK 299 million. Tax rate came in at 23.2%, in line with guidance. And net working capital at 24%, below our informal threshold target of 25%. Free operating cash flow, SEK 2.3 billion, returns at 17.9%. And adjusted EPS increased year-on-year driven by the higher earnings.

So if we continue with the bridge then and start with the organic column here, you can see that revenues increased by SEK 1.6 billion, 9%, and that gave an adjusted EBITA of SEK 75 million, which corresponds to a leverage of 5% for the reasons that Stefan mentioned. And that's a dilution of 1.4 percentage points. Currency impacted revenues by SEK 1.5 billion and adjusted EBITA with SEK 541 million. And that's an accretion of 1.3 percentage points. Structure contributed significantly to revenues, SEK 3.3 billion and adjusted EBITA of SEK 466 million, and that's a dilution of 1.1 percentage points. And that moves us from the adjusted EBITA margin last year of 21.4% to 20.2% this year.

Net financial items then, and here, the most interesting line to look at is the interest net at the top. It increased slightly sequentially, and that's due to higher interest on our currency hedges. At the bottom here, you also see a big item, FX and other asset classes, minus SEK 113 million, and those are the temporary revaluation effects on our hedges. Eventually, these will net out to 0.

The reported tax rate came in at 23.4%. If we exclude items affecting comparability, it was slightly lower, 23.2%. And as you can see in the table here, the tax rate was relatively low last year, and that was due to a correction in the parent company for an earlier period. If we exclude that correction, the normalized tax rate was 23.6%, largely in line with that 23.2% this year. And that's also in -- right in the middle of our guidance for the year.

If we continue with the balance sheet then and net working capital, you can see in the bars on the left-hand side that net working capital in absolute terms continued to increase in the first quarter sequentially, and that's largely driven by higher inventory volumes both to ramp up for future deliveries but also in response to the supply chain and the logistics challenges that we've had. In relative terms, though, you can see in the orange line that we came in at 24%.

On the right-hand side, you have the relative net working capital development by business area. And here, you can see that both SMR and SRP increased sequentially, whereas SMM was relatively flat, and that's in line with normal seasonality.

If we continue with the cash flow then and starting with the graph, you can see that the blue line, the EBITA continued to overtake free operating cash flow as we invest in inventories as we are growing the business. You can also see this translated into the table on the right-hand side, where there was a significant increase in earnings. However, here you can see the negative impact of the net working capital buildup. CapEx was a bit lower than last year, and that brings us to a free operating cash flow of SEK 2.3 billion compared to SEK 2.8 billion last year.

Financial net debt came in at SEK 16.5 billion. And here, interest-bearing liabilities increased somewhat sequentially. We had a Eurobond that matured in the quarter, but then we also issued commercial papers and 2 3-year bonds. And the cash position also increased somewhat sequentially. Leases increased slightly, whereas the pension liability decreased significantly due to higher discount rates. And that brings us to a net debt position of SEK 26.4 billion and a gearing of 0.31. And this is for the group total, so including SMT.

This is the outcome for the items that we've provided guidance for. And here, you can see that both currency and metal price effects for SMT came out higher than what we anticipated. And then CapEx came in at SEK 0.8 billion; interest net, SEK 0.1 billion; and the tax rate, as I mentioned, within guidance.

Looking ahead then, we've kept CapEx, interest net and the tax rate guidance unchanged. We expect the positive currency effects to continue, plus SEK 600 million for the second quarter, of which SEK 50 million is estimated to be attributable to SMT. We also expect the metal price effects for SMT to be positive, plus SEK 700 million.

And with that, I will hand over to you, Stefan, for summary and conclusions.

[Stefan Widing, executive]

Thank you. All right. So again, it's a very solid demand and a strong business momentum in the quarter. It's another strong growth quarter for us with order intake levels remaining on record-high levels. We see a solid demand for our new sustainable and digital solutions, and I'm pleased with the good pace we have in innovation. We also see strong performance from acquisitions and good traction in our new software CAM business, which is also very pleasing to see.

Despite cost inflation pressures, we also show a stable profitability. And we do have market-leading products and solutions that will enable us to do price mitigation actions. But as they hit us from time to time, we have delays in timing to do that fully. I think you have seen in the past 2 years and also now in this quarter that we believe SMT, under the name of Alleima, is well equipped for listing and standing on its own 2 feet.

We will, of course, continue to be agile in our execution. There are increased macroeconomic risks in the world because of the geopolitical situation, but we have our decentralized setup that have shown throughout COVID that we will be able to adjust to any changes in the market conditions. And overall, we continue to have a very solid foundation for continuing to execute on our growth strategy.

Thank you for that, and let's do the Q&A.

[Louise Tjeder, executive]

Yes. Thank you, Stefan, and thank you, Cecilia. [Operator Instructions] And with this, operator, we can take the first question, please.

[Operator]

[Operator Instructions] And our first question comes from the line of Lars Brorson of Barclays.

[Lars Brorson, analyst]

Great. First, on Russia, if I can start there perhaps, you are flagging a negative impact on orders and revenue in the quarter. Are you able to quantify that? And related to that, you're flagging the risks, but you're not taking any impairment of assets or backlog. So maybe you can help us just understand the quality of assets and backlog there and how to think about the Russian exposure within the context of your balance sheet backlog.

[Stefan Widing, executive]

I think from a, let's say, sales and order perspective, I mean it was basically -- or it was 0 in March. So -- and I think it was quite representative otherwise. So you can see it, as we had, say, 1/12 of a full year impact in this quarter, and of course, going forward, we can expect 3 full months per quarter going forward until further. We have in the report, you might have seen it, shown the assets we have in Russia in terms of inventory and receivables and so on. It's about SEK 1.5 billion, all assets excluding cash. So I guess that's what you could say it as a risk -- is at risk. As of now, we have not been in a position to quantify the risks in the sense that it triggers any impairments and so on. It's something we will continue to evaluate going forward. I don't know if you want to say something.

[Cecilia Felton, executive]

No, I think that's correct. And we can also say that about half of the SEK 1.5 billion in assets is inventory.

[Stefan Widing, executive]

Yes.

[Lars Brorson, analyst]

Secondly, can I speak to -- talk to SMM perhaps? And maybe, Stefan, you can give a bit of regional color around the demand trends you saw in March, April. I think I heard you say that daily orders were positive in April relative to that 6% average organic level in Q1. That's the sort of strong exit rate, I would say, out of the first quarter. How much of that is pricing? How much of that perhaps is relatively easy comps particularly in China? And specifically, can you help us with whether there has been much of a material adverse impact in Europe post the Russia-Ukraine crisis?

[Stefan Widing, executive]

I'll first start with the latter one. The regional development has not changed sort of in any material way post the war start. So it's not that Europe declined after that but was stronger before that. So I wouldn't say there was any particular readout from that. Otherwise, we can say that China was down year-over-year, as we said. But on the other hand, it was quite stable in the quarter and actually, if anything, maybe improved slightly towards the end and going into April. I don't know how much to read into that, but at least some -- maybe some positive signs.

North America, as I mentioned, was very strong. And if anything, in particular, I highlight energy coming strong, even stronger in March. I guess there are going to be investments in that sector in the U.S. now going forward. Otherwise, in a way, relatively uneventfully is my main takeaway. It's steady improvement.

On the price versus volume, I don't want to give any specific price number right now. It's -- I would say it's an ongoing and quite delicate situation in general with customer conversations and so on. And the numbers we give is seen as a roof for those kind of conversations here, so I can just say, as I said, that SMM did a good job of offsetting the cost inflation.

[Operator]

And our next question comes from the line of Klas Bergelind of Citi.

[Klas Bergelind, analyst]

So a couple of questions, please. So coming back to SMM. I want to focus a bit on the bridge. The negative SEK 60 million from M&A, Stefan, how much was transaction cost out of that number? I'm interested in the clean margin impact. And when do you expect the margin to pick up from here from the deals that you've done? And also on the organic drop, are you're saying that you're fully compensating on price, but I guess does that really include some of the year-over-year reversal on the OpEx side? I'm trying to understand that better because it looks like a quite weak drop-through. And then finally, on pricing, is that now higher than the 2%, perhaps running at 3%? Sorry, lots of questions in one, but I'll start there.

[Stefan Widing, executive]

Yes. So as I said, I don't want to comment too much on the pricing specifically, but I can confirm that it's definitely higher than the 2% now, maybe even higher than 3%. But -- so I think it's a good development and, in a way, a different level than they have been able to achieve in the past.

When we say we compensate, we mean pure inflation. So you're right, we're not talking about the year-over-year OpEx coming back. That's in -- that just becomes a lower volume leverage, so to say. So that's -- and as I said, SMM, they had an exceptional leverage actually in Q1 last year. I think it was over 100% because business were starting to come back. They're still at a very low cost base, including work time reduction in Germany. So if you average the 2, I haven't done the exact math, but I guess you would come to a leverage over a 2-year period of on average over 50%. So from that perspective, it's -- I think it's still a good performance.

On M&A, I think you're right. Maybe I should have actually commented that in -- when I spoke initially. You will see in the bridge maybe a bigger-than-expected dilution from structure in SMM. To be frank, it was bigger than we had expected ourselves to some extent. The main reason comes from that we got GWS into the books this quarter. It's a relatively sizable acquisition. It's the biggest one we have done after DSI. They had a number of one-offs, not reported as one-offs but of onetime character that took their margin to 0 in this quarter. It will come back now into normal operating margins. So that did have an impact that was a bit unexpected for us in the quarter. I think you will see continued dilution from structure, but it should not be -- I think it's 160 basis points in this quarter, and it should come down below 100 as quickly as possible.

[Klas Bergelind, analyst]

Okay. No, that's helpful. My second and final one is on the demand trends. So just coming back to Asia, just to understand the month-on-month development in China because the overall quarter, the total growth was below than I thought, and you said that you had stronger growth at the end of the quarter. So were you sort of surprised by weakness in Jan-Feb, and then it picked up, just to understand it better?

[Stefan Widing, executive]

Yes. We were -- at least we were not excited about the start of the quarter. But on the other hand, we knew -- China is difficult to read in January and February because of Chinese New Year. And this time, we also had the Olympics, which we shouldn't forget meant that they actually stopped a lot of industries operating during that period. And then towards the end here, we had COVID lockdowns. Shanghai actually hit us in the last week of the quarter. And we have our distribution center in Shanghai. We couldn't ship in the last week. So that had an impact as well. I wouldn't exaggerate when I say it was improving towards the end of the quarter and into April, but at least it has improved a bit. But if there is one country we would say has been on the weaker side in this quarter, it is China. I mean it is down in the high single digit sort of territory for SMM.

[Klas Bergelind, analyst]

Yes. No, considering the lockdowns, I was a bit surprised that you improved towards the end of the quarter, but I guess, yes, I mean it's also company specific to you, I guess, yes.

[Stefan Widing, executive]

All right.

[Operator]

Our next question comes from the line of Daniela Costa of Goldman Sachs.

[Daniela Costa, analyst]

I have 2 as well. The first one I wanted to check and to ask you, Stefan, regarding like the next strategic priorities for the group because now we're getting closer to divestment of SMT. You've done a lot of M&A in SMM towards moving the business, gravitating the business to the areas that you think are faster growth going forward. So what's sort of taking your time in terms of strategy next? Is it just more internally consolidating this? Or is there anything left on the portfolio? Just any color on that.

And then I have -- second question is more related to free cash flow. I think when we look year-on-year, the last 6 months, we have had big outflows in terms of working capital, and free cash is down year-on-year, but you're still below your net working capital target anyways. So what -- how should we think about it for the rest of the year? Are we still in kind of inventory buildup mode? Or how -- sort of cash conversion for the rest of the year, how should we think about that seasonality?

[Stefan Widing, executive]

Yes. On the first question, I would just say hold that thought and see you in May. I mean we have the Capital Markets Day in a few weeks, and this will be the theme of that Capital Markets Day, strategic priorities going forward. So I don't want to comment too much and steal thunder or make it smaller than it is, so to say, because we will spend several hours on the topic in May. So I ask you to be patient and join the call or even in person maybe.

On cash flow, yes, I mean, I agree with what you say basically. We have been investing in working capital. That's to be expected when the business grows. We are below our informal target, as you say. So I mean the -- I wouldn't say there are alarm bells going off in that sense. But on the other hand, we feel that maybe we are in some areas approaching sort of the upper end of where we're comfortable. A lot of these have gone into SMR, where, of course, the business growth has been by far the biggest. And the longer lead times in terms of the supply chain also means that you tend to tie up more capital when you ramp up. You have assembly operation, and then some of the things are underwater for 3 months, and then they come into the sales area and need to be commissioned and so on. So we do tie up quite a lot of capital there.

The supply chain issues as well have meant that we have tied up more than we normally would to try -- simply prioritize being able to deliver product, making sure that customers have spare parts on the sites and so on. But I would say that we would expect this cash flow to definitely improve throughout the year. And for the full year, I would expect a quite okay cash flow generation. That's our expectation if we manage this in a good way.

Do you want to add anything?

[Cecilia Felton, executive]

We can just say then, in the second quarter, we normally have a seasonal buildup ahead of the summer shutdowns as well.

[Operator]

Our next question comes from the line of Andrew Wilson at JPMorgan.

[Andrew Wilson, analyst]

I've got 2 questions as well, please. Just on the leverage, I think the sort of the explanation around the operating leverage in the Q1, I think, is pretty clear. But I just wanted to get a sense of kind of your confidence as we go through the year in terms of that improving. I'm sort of assuming that if supply chain gets a bit easier and the pricing comes through, then the leverage in the mining businesses should look better. And then you talked as well about the dilution, I guess, dropping off a little bit in terms of the M&A. So just to try and get a sense of the confidence and sort of line of sight on that leverage improving as we go through the quarters.

[Stefan Widing, executive]

Yes, sure. M&A, to be clear, I mean, that's not part of the leverage sort of calculation. So that improving, it should, will not help the leverage. I would say this, we were, I would say, very confident a quarter ago that mid this year, we would start to turn that around in a very solid way. I think I'm a little bit more concerned now with -- after the war started with we have steel prices that have come up significantly, that we have to handle. And we sort of had a renewed wave of disturbances in the supply chain and logistics. Those things, in a way, I'm not saying they will get worse, but I think the improvement have been pushed out into the future. At the same time, of course, our price increases continue to come through. So it's about those things sort of meeting up. I think by the second half of the year, I'm confident, I think we will continue to face some headwinds in the upcoming quarter. But we will do our best to minimize it as we did now in Q1.

[Andrew Wilson, analyst]

Yes. Sorry, just to clarify the comment on the dilution from the M&A. I'm assuming that, that -- appreciating that is separate to the leverage comment, but I'm assuming that, that in the mining businesses also start to improve as we go through the year, i.e., less dilution.

[Stefan Widing, executive]

Yes, absolutely. And I think you saw it improve actually already now in Q1. As I mentioned, I think most of that comes in mining from DSI, and DSI is performing extremely well. And as you come to Q3, then we are meeting the same compares, so it could even improve, so to say, turn positive in that sense.

[Andrew Wilson, analyst]

Yes. No, understood. And sorry, and second question was just to clarify a comment, and apologies if I didn't pick this up for the first time. But I think you talked about the positive trajectory in April being against the Q1 average as a whole. How did it specifically compared to the March exit rate in SMM, sorry?

[Stefan Widing, executive]

And that's why I phrased it the way I did because that's not a very good comparison. The end of the quarters are always a bit of a hockey stick, end of March in particular. So we shouldn't look at the daily rates in that sense. It's not a relevant compare. So it's better to look at the normalized average for the quarter and then look at the rates in the beginning of the quarter.

[Operator]

Our next question comes from the line of Mattias Holmberg of DNB.

[Mattias Holmberg, analyst]

Stefan, I think last quarter, you gave us some helpful comments on when we could expect the organic drop-through in SMM to sort of improve towards the normal above 50%. And if I'm not mistaken, I think you were talking sort of sometime H2 this year. Does this still hold? Or would you say that the timing has been pushed due to recent cost inflation and logistics issue and so on?

[Stefan Widing, executive]

No. I think for -- I mean, SMM, as I said, they have done a good job with mitigating. And of course, they are not resting now. So for SMM, I'm optimistic it will hold, bearing the new unexpected events, maybe I should say, but for the moment.

[Mattias Holmberg, analyst]

Another question on SMM. You mentioned a bit on the margin impact from some of the acquisitions. I just want to clarify, in the presentation, you write that you had some underlying temporary weakness in the acquisitions. Is this the same that you commented on verbally here?

[Stefan Widing, executive]

Yes, yes. Materially, yes. I should say we have also some, I would say, unusual investments into one of the other acquisitions. It's in SMM as well. That is more of an investment case. But the one I mentioned with GWS, that's really a quarter 1-only type impact.

[Operator]

Our next question comes from the line of Max Yates at Credit Suisse.

[Max Yates, analyst]

Just my first question was around the Sandvik manufacturing business. And I think you've talked about kind of the revenues from that business being a little bit more than SEK 3 billion, including all the sort of CAD and CAM acquisitions. So I just wanted to understand sort of whether you could give us the growth rates of that business within SMS just so we understand kind of a little bit about how that business is performing. That's my first question.

[Stefan Widing, executive]

Yes. And I will hold that answer as well a little bit because, I mean, we are not reporting them separately, so we don't comment on divisions or segment in that way. But we will talk a little bit more about this on the Capital Markets Day, again, to give you some more flavor and some more color around this. So let's come back a little bit.

[Max Yates, analyst]

Okay. And maybe just the second question was on the mining business, and I kind of appreciate the comment where you mentioned maybe don't expect sort of SEK 16 billion as a sustainable order run rate. Could you talk a little bit across equipment and aftermarket? You mentioned sort of some customers kind of pre- or maybe ordering equipment a bit earlier, but I was wondering whether that comment sort of expands to the aftermarket business as well. Do we think there was a kind of restocking effect in the aftermarket business? Or when you talk about the sort of early ordering, is that more limited to the equipment? So I'm just trying to understand kind of how much -- how representative we think that sort of 14% aftermarket growth rate and level of aftermarket ordering is. Or would you say your comment applies to both the equipment and aftermarket?

[Stefan Widing, executive]

I would say it's primarily the equipment because that's where you have the longest lead times in general. There might be some parts of aftermarket. There are certain components in the aftermarket, the bigger components, let's say, you want to replace an engine, that will also have a longer lead time. So it might be also some of that with some customers. But that's -- it's a smaller part of the aftermarket. So I would say the aftermarket growth is primarily driven by the fact that our customers are really operating at maximum capacity, and they want to maximize the uptime and the use of the equipment.

[Max Yates, analyst]

Okay. Could I squeeze in just a very quick final one? Just on sort of pricing and specifically logistics in Mining and Rock, how are you sort of dealing with that? Are you putting in sort of surcharges for your customers for shipping costs or an air freight costs? Or are you just putting up prices of your sort of entire offering for equipment, so we might have to wait sort of a few quarters to start seeing things like freight costs offset?

[Stefan Widing, executive]

So far, there are 2 things with freight cost, 2 buckets: one is general freight inflation, meaning higher cost of a container; the other thing is when we decide to shift from boat to air maybe to get the spare parts out quicker and so on. The shift to air that we do, we have taken in our books. It's our decision. We decide to serve the customer in a good way, so we take the cost. And that's a significant cost. It's SEK 125 million in the quarter. The rest we intend to compensate primarily through just general price increases. But I'm a bit careful when I answered it because we have different things in the toolbox, and a lot of things are on the plate, but we will work that through with our customers.

[Operator]

Our next question comes from the line of Joel Spungin at Berenberg.

[Joel Spungin, analyst]

Yes. Just a couple. Maybe if I can start maybe with a follow-on actually in terms of the last question in terms of how long -- given what's going on in SMR pricing and the lag there, how long do you think it will take for current pricing actions to offset the sort of cost pressures? Assuming they don't intensify so they stay at this level, do you think that by the second half of the year you'll hopefully offset the impact?

[Stefan Widing, executive]

So this is like -- the problem with this is it's a moving target. If we take an order, we have a delivery time. In a way, we have to anticipate then what should we now sell this for depending on where the cost is, maybe 6 to 9 months in advance. In some contracts and so on, of course, we have some rise and fall clauses and so on, so we can adjust. But in a way, it is trying to anticipate. And what is now coming through is what we anticipated maybe during the summer and the price changes we did then. So I would say -- that's why I said I was pretty confident that by mid this year that this would have been resolved, with what we knew back then or even in the beginning of this year.

Now with the new wave coming after the war in Ukraine with increased steel prices and further disturbances in the supply chains, we need to adjust our aim again. So I don't dare giving a solid time line. But sometime during the second half of this year, we should be back on par. That's our clear goal.

[Joel Spungin, analyst]

Okay. That's helpful. And then maybe just another question and coming back to Russia and just to understand how you're dealing with that. I mean, presumably, within your backlog, there are orders that were destined for Russian customers. Have all those orders now been canceled? Or can some of that equipment be reallocated to other customers? I mean how does that work?

[Stefan Widing, executive]

Yes. So we have not gone through the order books and in our reported figures now canceled any orders, start with that. In practice, we expect to be able to reallocate quite a lot of -- if we cannot deliver to Russia, we believe someone else or we know others are -- want to have that equipment. So it's a matter of, in some cases, reworking or retargeting where that equipment will go. We don't have a figure to share on exactly how much. I don't think -- we don't know exactly how much. We have a good idea. And I would say it's a majority, but exactly how much will remain to be seen.

[Operator]

And our next question comes from the line of Sebastian Kuenne of RBC.

[Sebastian Kuenne, analyst]

Two questions here. On SMR, you mentioned earlier in the presentation that you take market share in -- on the surface mining side. Could you give us an indication of what the situation is on the underground side, hard rock mining, whether you can take market share under the tender wins or the tender processes and whether you take market share?

The second question is on Rock Processing. You -- again, you mentioned that you were a bit surprised by the strong orders in Rock Processing. But wouldn't you expect a similar momentum in Rock Processing than in SMR with some time delay? Maybe you can explain a little bit what you -- what your thoughts are on this.

[Stefan Widing, executive]

Yes. On the market share, I would say, I think it's more of an even game underground in terms of the development of the market share. I think we have said in the past, we are confident we have taken market share in load and haul quite significantly. But I think where we are right now, I don't think it's that easy to gain further. So as of the -- currently, I think it's more about maintaining the current shares.

On Rock Processing, well, you have -- first of all, you have to see that rock processing have a much bigger part of their business in construction, which has a different dynamic than mining. So that's one part of why you will typically not see the same -- at the moment, you will not see exactly the same momentum always. They also are later in the cycle. If you take a mining investment, they are more downstream, so they are, in that sense, later in the cycle and more, yes, driven by a slightly different logic in the investments. When you invest in a mine, the mobile equipment, you can add 1 machine or 2 machines to increase capacity by 5%. Your -- the crushing step, you tend to design and plan upfront for some overcapacity. So the fact that you go up then in capacity doesn't automatically mean that you also need to add crushers. It's a bigger step changes needed for that investment to come. So it's not a one-on-one correlation in that sense because of some of those dynamics.

[Sebastian Kuenne, analyst]

Understood. Okay. I have a further question, but I go back in line.

[Operator]

The next question comes from the line of James Moore at Redburn.

[James Moore, analyst]

Yes. My first one is on SMM and the 6% growth. I think you mentioned double-digit growth in engineering and aerospace. But I wondered if you could just quantify that a bit more and also on the automotive side, just to see how those 3 pieces are moving globally.

[Stefan Widing, executive]

Yes. I gave some figures on energy, solid double; and aerospace, over 20%. I did not give specific numbers on the others. I don't know, maybe we can come back on that if you want to expand on it.

[James Moore, analyst]

Maybe I could follow up on the China side, which seemed a little bit light, but I was looking for high single-digit decline. It's really the other Asia that's obviously also difficult. Are there any other particular geographies in Asia dragging the non-China Asia growth down?

[Stefan Widing, executive]

Yes, India was also down. But on the other hand, for example, Japan was relatively strong. So I would say it's a quite mixed picture in Asia. Australia was also strong.

[James Moore, analyst]

So my second question is really -- I don't know how to ask this question. It's complex. We're sitting in an environment with massive input price increases and massive energy electricity gas price increases. Clearly, you have a mixture of hedged, contracted, long-duration, short-duration contracts. But as these hedges roll off and contracts move towards current market spot prices, let's assume they were to continue at these elevated levels, are you able to help us understand how much of a further headwind to cost this could be as the year progressed and when that would particularly kick in?

[Stefan Widing, executive]

Are we talking about energy prices now?

[James Moore, analyst]

Talking about steel costs, other raw material costs and energy prices and the fact that I presume you have a range of instruments, hedges and different contract structures, which means that you don't see the pain of massive spot price movements straight away in your P&L. It comes through over time. And I'm just trying to assess what gives you the confidence really of trying to achieve a net neutral price in the second half. And I'm trying to think about the cost side of the equation. Do you think there's a material increase in cost to come through as hedges roll off and contracts get renegotiated?

[Stefan Widing, executive]

Yes. I mean you're absolutely right, it's a very complex situation and for all the reasons you mentioned. I would say if the situation is sort of stabilized, so let's assume oil prices are now frozen, and then you will now -- okay, all of these dynamic effects you mentioned will now roll forward, then I don't think we have a problem to anticipate the impact on what we need to do to mitigate because, I mean, we have, I would say, very good understanding and so on of this. So what makes it complicated is, of course, when things are moving, especially when it's moving unexpectedly in a rapid and big way, such as now the steel price increases after the war. So that's what we have to then try to quickly adjust to, compensate for, and then there might be a bit of a time lag.

But to give some -- just a number of examples, I mean, you know now it's in discontinued, but SMT, they have a business model based on that the metal prices are mitigated in the pricing automatically, so to say. Hedging, yes, energy as an example, we have hedged 75%. We are looking at -- in general, it's not only SMT in general, whether we should move to 90% hedging to insulate us from spikes during the winter times that we have seen this year. And maybe it's worth paying a little bit more for that security and insurance, and then you can include it in your pricing.

Surcharges. In some cases, we are working with various type of surcharges to get -- if you have a rapid change in some input, you need maybe to go back and say this is sort of unexpected. We need to apply a surcharge here. We have the vertical integration that helps us. The SMM business, one of the reasons it's, I think, managing this very well is because they have a vertically integrated business model. They take a few of these things actually out of the equation completely. So that helps a lot.

We have, of course -- when, yes, you might sit on a 9-month backlog, but it also means that what you buy today will be sold in 9 months. So if you actually adjust in time, you will be able to compensate also for new prices coming now even if you have already taken -- about to take the order. So a complex situation. We are -- there's a lot of balls in the air we're juggling. I think the outcome is decent. I don't think we were perfect in Q1. But if you look at the impact, we've mitigated most of the cost inflation. And I think we will continue to do that with the goal of sometime during the second half we should have caught up. That's what we see right now.

[Louise Tjeder, executive]

Thank you. This very long yet good and detailed questions. We'll have to end the Q&A session. Before we say goodbye though, I, of course would like to highlight our Capital Markets Day. Stefan already mentioned it twice, but this will take place on the 17th of May here in Stockholm. And if you haven't registered yet, please do because we will be delighted to see you in person.

Thank you very much for calling in, and goodbye.