Sandvik AB

STO:SAND

Earnings Call Transcript 2023-Q1

[Louise Tjeder, executive]

Good afternoon, everyone, and welcome to Sandvik's presentation of the First Quarter Results 2023. I am Louise Tjeder, Head of Investor Relations here at Sandvik. And beside me, I have our CEO, Stefan Widing; and CFO, Cecilia Felton. We will do, as usual, we start with the presentation where Stefan and Cecilia will take you through the highlights of the quarter. And after that, we open up for the Q&A.With this, I hand over to the word to you, Stefan.

[Stefan Widing, executive]

Thank you, Louise. And also from my side, welcome to the first quarter report in 2023. If we summarize the quarter, it was a quarter where we saw continued robust performance from the group. We have good momentum. We saw solid execution and strong revenue growth and order levels at a record level. On the order side, we had order growth of 6% at fixed exchange rates, of that, 2% was organic. Revenue is up 18% at fixed exchange rates and 13% organic. If we exclude the impact from Russia, organic orders and revenues grew 5% and 16%, respectively. And happy to say it's the last quarter we should have to make that comment since we will have Russia out of our comparison going forward.We also see a healthy underlying margin and happy to say that we can now say that all our business areas are fully offsetting cost inflation by their own pricing, including then at group level. The adjusted EBITA increased by 21%. This corresponds to a margin of 19.8% versus 20.2% last year. This, of course, we are not fully happy with. We want to be within our target range. It has a very specific explanation, and we'll come back to that later on the call. The adjusted profit improved by 13% to SEK3.9 billion.If we focus on our shift to growth priorities, we had a number of highlights in the quarter. First of all, of course, the very strong both organic and acquisitive growth in the quarter, very pleased to see. We also see very positive momentum in some of our focus areas, such as our automation solutions and battery electric vehicle solutions on the mining side. We also completed 2 acquisitions. I will come back to those as well later in this presentation.But I always start with a slide on our latest innovations. This time, I've selected an innovation from Sandvik Coromant called Y-axis turning. Turning is typically a relatively static process, so to say. But with this method, we can use multi-axis machines and take advantage of their capabilities to also do turning. This gives the possibility to do several machining steps with one tool. It reduces tool change times. And there are also various aspects to the cutting process and the stability of the process that gives additional productivity improvements and also reduced wear time.Explaining exactly what it is, is very technical. So there I refer you to our website. Another interesting aspect with this innovation is that this is a fairly novel machining method, which means that operators typically don't have the experience to program it. It can be complex. So you need software support. So here, Coromant has worked with our GibbsCAM Sandvik CAM Solution, to ensure support for this machining method in the latest version of GibbsCAM. So this gives -- it facilitates faster market uptake from Sandvik Coromant that gives GibbsCAM a unique feature and a differentiator in the market or at least an early mover advantage. So it's a good synergy between our cutting tool divisions and our software offerings.Going into then the market development. And if I start with the geographical perspective, Europe, up 21%. We can say more or less across the board that Europe has surprised on the upside in the quarter. The only segment where we see more negative development is in infrastructure that we have said for a couple of quarters already. North America, more stable development. Basically, aerospace being the segment would highlight as up. If you look at our reported order figures for North America in SMM, you might see it as slightly negative. We want to emphasize that we don't see that as an indication of the underlying market.We have in general engineering and aerospace, some timing issues or timing impacts of orders being placed either in Q4 or that will come in Q2 instead related to large distributors and also some key accounts on the aerospace side. So the underlying market development in North America for SMM, we would consider to be stable. Asia, a bit weaker, minus 6%. Here, we definitely see an impact from a weaker China in January and February. While on the machining side, we did see a good uptick in China in March. March was positive in China, and that has also continued into the second quarter into April. Other parts of Asia, such as India has been positive in the quarter.Then we have the mining markets following and generally positive Australia, you see down -- not too much to read into that. It's related to timing and some big orders that they took in the same period of last year. If I go through this from a segment point of view as well, a little bit, mining, we see continued very robust and good demand at a high level. The fact that some markets are up and some down. I wouldn't read too much into it. It's more related to when we get specific orders in specific regions. So underlying very positive sentiment, I would say.General engineering, from an underlying volume point of view more flattish. But with a strong Europe, Europe is up in the double digits and also up in volume. More stable North America and then more of a decline in Asia, driven then by the slow start in China that I mentioned. We see very similar development in automotive as we saw in general engineering, but maybe slightly more negative in China, but otherwise similar in the other regions. Energy is positive across the board, maybe slightly more flattish in North America. Infrastructure, we could say, has maybe weakened a little bit more. We used to more comment on a weak Europe. Now we also see that in Asia, while North America is still on a more stable level. But overall, we indicate that as softening market in infrastructure.Aerospace, strong double-digit growth, strong across the board and still not back to pre-Covid levels, we should say. I think they are about 20% below where they were in 2019. So there is more to get in aerospace as well in the future. If you look at order intake and revenues overall, we have an order intake of SEK34.4 billion, revenues of SEK31 billion. So a positive book to bill, which is really good to see. And in particular, good to see this order intake in the light of the high compare we had in the same period of last year, so that we can continue to grow the order intake compared in relation to that compare, we think, is very positive, and it sets us up in a good way also for the rest of the year.Looking at this from a slightly different take, looking at the growth organically and through structure. We can see, if we look at the revenue graph, that is actually our 8th consecutive quarter of double-digit revenue growth at fixed exchange rate, which we think is a good achievement and a testament to the execution of our shift to growth strategy. Coming then to the EBITA development. We see an absolute EBITA of SEK6.1 billion, up from SEK5 billion last year. It's an uptick of 21%. And the margin at 19.8% versus 20.2% as I said, it's not where we want to be. Let's be clear on that. It's -- we expect ourselves to deliver a better margin than that.But we did see an impact from revaluation of unhedged balance sheet items that had a 100 basis points negative impact in the quarter. This is related to currencies and Cecilia will explain that a little bit more going forward. On the leverage side, as I said, price is now fully mitigating cost inflation in all BAs. So that's also very positive as we go forward. Going then deeper into each business area, starting with Mining and Rock Solutions, what can we say on the top line, fantastic achievements, all-time high order intake level, particularly strong growth in load and haul, in parts and services and in our digital mining business, which is really good to see.Total order growth at fixed exchange rate was 2%, organic 1% to exclude Russia, it's up 6%, which we think is a solid number given the compare we were working against. A margin of 20%, it's decent. It could have been better if we didn't have the 150 basis point dilution then from these balance sheet items. We should say that it's in quarter, it's 120 basis point impact, so slightly less than the bridge effect. And for the first quarter, we can also say that SMR is fully offsetting cost inflation with pricing also, so they have now caught up in that.I'll now shift to growth priorities. You have seen in the press releases, 2 new major orders on our BEV equipment, one to Rana Gruber in Norway and one to Torex in Mexico, which we are, of course, really happy to see. We closed the Polymathian acquisition, and we also announced the acquisition of Deswik Brazil. This was a joint venture that came with Deswik where we had a minority stake. We have now acquired the full entity, which means that we now have a platform for expanding our mining software business into the Latin American market. So not a big acquisition, but a highly strategic one for the future.If you look at the EBITA development in the graph as well, you can see the very seasonal nature of the EBITA development in SMR, where we tend to start low in Q1 and the growth throughout the year. It's been like that for the past 4 quarters. Going into SRP, here, we see strong contribution from acquisitions, 25% on the growth side on the order side. We also see positive aftermarket development. If we look at the order intake at fixed exchange rates, it's up 15%, but it's an organic decline of 9%, excluding Russia, is an organic decline of 6%, and this is driven by a decline in the equipment -- on the equipment side by negative 16%, while aftermarket is up 5%.We see strong revenue growth, up 43%, both in the, let's call it, the organic or the organic growth, but also the addition of the Schenck business. And if you look at these numbers, I hope you appreciate the enormous task it is for SRP to do this integration of Schenck basically grow their business by 25%. On the margin side, 14.5% versus 15.9%, clearly below normal expectations for them, but having impacted quite significantly by integration and carve-out costs for Schenck of 120 basis points. This was not a surprise. This is something that is in line with our plans. In hindsight, we should probably have been better at explaining this when we close the acquisition.We expect for the full year a cost of SEK110 million for the integration of Schenck, about SEK30 million then in Q1, SEK30 million in Q2 and then around SEK25 million per quarter in the second half of the year. Quite high cost, but it relates to the fact that Schenck Mining is a carve-out, so we'll basically need to rebuild a number of systems as we currently get a service from the selling entity. Also, SRP had some impact from these hedge revaluations but not as big as the market. Another highlight for SRP was that they, for the first time in a long time, they launched a new range of hammers in the attachment tools business at CONEXPO in the U.S. this quarter, a successful launch with good innovative products that are also more efficient to produce for us in the smaller hammer range.Then going into Manufacturing and Machining Solutions. I have to say, a really good quarter from them in Q1. We see positive development in all customer segments really and especially driven then by very solid demand in Europe. Overall, we see double-digit growth in both aerospace and energy. Fixed exchange rate, the growth was 9%, organically, it was 5%. And then if we exclude Russia from the organic order intake, that we grew by 7%. In the first 2 weeks of April, we see daily order intake being slightly up compared to the average of the first quarter. This is, in particular, driven by China. As I said, we saw a slow start in Q1 from China.We saw an uptick in March, but uptick has continued into April. So we expect China to be a positive contributor then into Q2 and going forward. Margin, 22.4%, up from 22%. We see solid leverage for our cutting tool divisions due to both pricing and good cost control and on an acquisitive front, those were neutral to the margin. We also did an acquisition here at Seco Tools that acquired Premier Machine Tools from Ireland. A small acquisition but strategically very relevant. They give us a capability to deliver more full solutions on the machining side for medical applications, which is a strategic growth area for us, something we expect to be able to scale globally.With that, I will hand over to Cecilia and I will come back with the Q&A.

[Cecilia Felton, executive]

Thank you, Stefan. So let's take a closer look at the numbers then. And as you can see here in the main table, also Stefan mentioned, order intake was higher than revenues in absolute terms, meaning a positive book-to-bill ratio. If we then look at the box on the top right hand corner, you should see that order intake grew organically by 2% and revenues by 13%. Our acquisitions contributed with 4% growth and currency by 7% and 6%. So in total, orders grew by 13% and revenues by 24%. Earnings were up 21%, reaching SEK6.1 billion, margin 19.8%, and we will look at the bridge in a couple of minutes.Net financial items increased year-over-year driven by the higher interest net. Tax rate, 24.5%, in line with guidance. Net working capital, 27.8%, also an increase compared to last year, driven by the higher inventory volumes. And free operating cash flow at SEK3.7 billion corresponding to a cash conversion of 53% in the quarter. Returns 16.6% and adjusted EPS increased to SEK3.07.If we look at the bridge then and start with the organic column. Here, you can see that revenues grew by SEK3.2 billion, 13%. And that gave an EBITA of SEK234 million, corresponding then to a leverage of 7% and a dilution of 1.5 percentage points. And here, as Stefan mentioned, we had a negative currency effect coming from revaluations of hedges and accounts receivables and accounts payables. This was unexpected. And we had too many open position for a mismatch in terms of timing of our hedges due to the complexity that we are seeing on the logistics side. And that's in combination with movements in the currency rates then gave this negative effect.And in terms of dilution, it was minus 100 bps and the in-quarter effect was minus 90 bps. Currency still accretive, 1.1 percentage points. And our acquisitions contributed with SEK1 billion of revenue, and they were almost margin neutral this quarter slightly dilutive. And all in all, that brings us from a margin last year of 20.2% to 19.8% this year. If we continue down the P&L then looking at the finance net and starting with the first row, the interest net, you can see the increase year-over-year here, and that's due to both higher borrowed volumes, but also higher interest rates.Then at the bottom, you have FX and other asset classes minus SEK74 million, and that's due to temporary revaluations of our electricity hedges as sequentially energy prices have come down. The reported tax rate came in at 24.6%. If we exclude items affecting comparability related to M&A costs, were 24.5%. And then we had a transfer price adjustments related to a prior year. And if we exclude that, the normalized tax rate was 23.6%, so in line with guidance for the year.Looking then at net working capital and starting with the graph on the left-hand side, you can see that both absolute and relative net working capital increased year-over-year and also sequentially. It's mainly driven by the higher inventory levels. On the right-hand side, you can see the development by business area. And compared to a year ago, all business areas are at higher levels. Sequentially, SMR and SRP increased, whereas SMM came down slightly.If we continue then with cash flow and starting with the table on the right-hand side, you can see that earnings were up compared to last year. The net working capital buildup of around SEK2 billion was slightly lower than what we had last year, and investment levels were higher, and that gives us an a free operating cash flow of SEK3.7 billion. And as I mentioned, that corresponds to a cash conversion ratio of 63%. In the graph on the left-hand side, if you look at the orange trend line, you can see that our 12-month rolling cash conversion is at [ 67% ].Financial net debt decreased slightly sequentially to SEK36.2 billion and our balance sheet target, financial net debt over 12 months rolling EBITDA came in at 1.3. So below our target of 1.5. Capitalized leases were largely unchanged in the quarter. The pension liability decreased a little bit driven by higher discount rates. And that gives us a net debt of SEK43.4 billion.Then looking at outcome versus guidance. The currency effect came out at SEK660 million. Here, we guided SEK600 million. And CapEx levels were at SEK1.2 billion, interest net SEK0.4 billion and the normalized tax rate also in line with guidance.And if we look ahead, then the coming quarter and for the full year, we have left the CapEx guidance unchanged at SEK4.5 billion. We still expect positive currency effect of SEK200 million for the second quarter. And we've also left the guidance for the interest net and tax rate unchanged at SEK1.7 billion and 23% to 25%.And with that, I will hand over back to Stefan for a summary and conclusions.

[Stefan Widing, executive]

Thanks, Cecilia. So if we conclude, as I mentioned, we saw the eighth consecutive quarter with double-digit revenue growth, which we are really happy with, and it's a great achievement. We see continued good momentum favorable demand and also solid price execution. We continue to see strong contribution from our acquisitions. And with a positive book-to-bill, again, we have strong backlogs in the long-cycle business and the robust development in the short cycle business, which is a good way of continuing into 2023. We are also continuing to execute on our shift to growth strategy, we see high growth in strategic priority areas.We see really good traction in mining automation and mining battery electric vehicles as examples. And as you might have noticed, we have also announced that we are increasing production capacity for BEVs, not only in our main factory in Turku, but we are also building a completely new plant in Malaysia, and that will initially focus solely on EV and battery pack production to meet the market demand. Also, a couple of smaller but strategic acquisitions in the quarter related to mining software in Latin America and the Medical Machining segment, that should add to the business.And going forward, we'll continue to leverage on our strong and leading global positions. We see that we are leading the way in many of the strategic focus areas that we have with our good offerings. We're going to continue to strengthen our value chain positions through acquisitions in the selected area. And with the price leadership we have shown in this quarter as well, we are enabling all our business areas to compensate the cost inflation in a very good way.Thank you for listening, and let's go into some Q&A.

[Louise Tjeder, executive]

Yes. Now to the part that you're eagerly waiting for to ask your questions to Stefan and Cecilia. Just a gentle reminder, please keep your questions to [ caplet ] so everyone has the possibility to ask that question. Operator, we can take the first question please.

[Operator]

First question from the telephone comes from the line of Daniela Costa with Goldman Sachs.

[Daniela Costa, analyst]

I have two. I'll ask them one at a time. The first one, they are somewhat related, but the first one sort of regarding operating leverage across many divisions, it's sort of we're a bit below from where Sandvik used to be. Is it just sort of the M&A, the dilution of like heavy M&A over the last few years? Do you expect a recovery of that? How soon can we get back to the older operational leverage? And maybe actually, my question was very similar on cash conversion. My second question, if you can address sort of like sort of 60% is still relatively low compared to what you did over the past. Do we have an uptick near term?

[Cecilia Felton, executive]

Yes. All right. If I start first with sort of longer-term leverage question. Here, I think it's important to remember that what considered good leverage is different for price-driven growth versus volume-driven growth. When we have price-driven growth, the ambition is to offset cost inflation. So being no accretion or dilution in terms of margin, whereas where we have volume growth, we, of course, expect that to be accretive to the margin. So I think that long term, when we will come back to the old leverage levels that partly impacted by the timing of how long we will be in this higher inflationary environment with a very high component of price-driven growth.Then if I continue with the second question. So the cash conversion rate in this quarter, as I said, we were at 63%. We are seeing supply chain and also the logistics challenges slowly easing up. We think that will continue for the rest of this year and potentially also into next year until we are back to our more informal net working capital target of 25%. But for this year, we are expecting a better cash conversion compared to what we had last year.

[Stefan Widing, executive]

Just one -- add one thing to that on the leverage side. And if you talk SMS in particular, which historically has had very high leverage level, sometimes 60%, 70%. We should note that we have been working hard or they have been working hard for the past 2, 3 years to actually reduce that leverage. It might sound negative, why wouldn't you want the high leverage, but leverage covers both ways. And we prefer them to be at a stable margin level or a more stable margin level in up and downs than a more margin volatility. So they have been working on cost flexibility, which in a way, will dampen a little bit the leverage also on volume growth. But on the other hand, we'll make them more resilient in the downturn. So that's something you should expect to see going forward as well.

[Daniela Costa, analyst]

And maybe Cecilia mentioned pricing sort of has been dominant this period, and that's why also we didn't have much leverage. But can you clarify that inside your growth, how much is pricing this quarter versus volume?

[Cecilia Felton, executive]

Yes, we don't comment on that, both at the group level and all business areas, price offset the inflation. And also for the core cutting tools within SMM leverage was 27%.

[Stefan Widing, executive]

And that you can say, if you look at the organic growth in SMM, excluding Russia, around 7%, there is an element of volume in that, but most of it is price. In relation to that, I think the leverage is where it should be for the cutting tool division.

[Operator]

The next question comes from the line of Klas Bergelind with Citi.

[Klas Bergelind, analyst]

Klas at Citi. So the first one I had is on SMM and the growth. Obviously, very solid in Europe across all verticals. But Stefan, can you please help us, as you normally do with roughly how much each vertical grew in Europe but also in total Machining Solutions? And also the comment of April being a bit higher than the average of the first quarter, whether something became stronger versus maybe something getting weaker, it would be really helpful just to get some ranges to start there.

[Stefan Widing, executive]

Sure. I mean if we start with Europe, I mean, it's stronger than I had expected when the quarter started, to be frank, so really good to see. For SMM, I mean, we see double-digit growth across the board in Europe. Aerospace and Energy in the high teens. Automotive in the mid-teens and automotive in the low teens. So really solid growth, and that also means good volume growth in Europe. If you look at the more total picture, Aerospace and Energy continues to be positive with double-digit growth, as we mentioned, also on a global level, while general engineering is more in the high single digits, automotive more in the mid-single-digit growth on global level.If we look at China specifically, we -- as I said, we saw a slow start of the year. First 2 months was weak, I would say, uptick in March to positive numbers. But overall, the quarter still was negative. Good uptick or good development in energy, which probably shouldn't read too much into it, China energy is not a huge business, so there can be more fluctuations. But maybe calling out a weaker automotive in China, especially at the beginning of the quarter was definitely seen. In the commentary in April, you should read that in the light of the comment on China. So I would say, excluding China, it's a stable development versus Q1 on average. But with the uptick we saw in China in March continuing into April, that is driving a positive momentum versus a slight uptick then versus Q1.

[Klas Bergelind, analyst]

Okay. Perfect. My second one is on revenues. You are delivering out more from the backlog this time. It looks like bottlenecks are easing now gradually. Can we talk about the lead times in SMR? You previously said that the lead times are over 18 months. Is that still the case versus perhaps lead times getting shorter now outside of BEV? I'm trying to understand how far we can model out the revenues here.

[Stefan Widing, executive]

BEV lead times, I think it's still very much at a order-by-order or customer-by-customer basis, managing individual units who can get what and so on. Some of the orders we have taken now, they have deliveries in this year, but it's very much a juggling we're trying to meet demand. We're really leading up a new factory in Malaysia to come online to fully resolve the BEV capacity bottlenecks we have. Overall, I wouldn't say lead times have come down for SMR. We continue to have a positive book to bill in Q1, but you can also see revenues are ramping up. So I think we are catching up. And I think we should, during this year, be able to normalize the time, at least that's the ambition.

[Operator]

The next question comes from the line of Andrew Wilson with JPMorgan.

[Andrew Wilson, analyst]

I've got 2 and they're different, so I'll take them one by one. On the comments on China very helpfully in terms of kind of Q2 versus Q1, and apologies for sort of diving into this again. But I'm interested in terms of whether you think this is a catch-up on a slow start to the year? Or you think it's genuine underlying strength. I appreciate the lead times are only so far and there's lots of different markets and customers. But could you get a sense of kind of the confidence around that continuing in China, at least not from the customer indications you've got at the moment?

[Stefan Widing, executive]

The indications I've got is not that we talk about the catch-up. It's more of a reopening, meaning -- I mean last year it was up and down, but average was not good. And we came in Q4 was not good with lockdown first and then sick leaves and so on. And then that slowness continued into -- over the Chinese New Year in January and February. So continued at a low level simply. And now we see more in March and going forward, more of a reopening. So it's not that we see a boom in any way, which could sort of could indicate a catch up. Like, for example, we saw in China during 2020 after the lockdown in February, and there was sort of a boom in March, April. It's more of a reopening. So in that sense, it should be more sustainable as well.

[Andrew Wilson, analyst]

That's very helpful. And then secondly, just on the aftermarket on the mining side. I mean it feels like every quarter, it's just a very, very good number. And again, it was in the Q1 here, particularly in SMR, I guess. I guess the same question that you've probably had a lot of recent quarters. To what degree do you think we can be sustaining those kinds of growth rates? Is there a little bit of seasonality in terms of the ordering? Is there a little bit of concern around customers having built big inventories potentially through last year? I mean, I know previously the commentary is still been pretty positive around aftermarket, but just some help around how to think about that? And if there's any signs at all that the levels that we've seen, could you either slow or I guess, to be fair, accelerate even further?

[Stefan Widing, executive]

Happy you asked the question. I didn't think I had any credibility left in answering that question because I can tell you, we continue to be sometimes surprised as well when we see the figures coming in every month. So -- but to give you an answer, I think there are -- first of all, let's be clear, there is a price component in this, of course. But there is also volume growth. We do see, first of all, just strong what we can call over-the-counter sales, so smaller parts across the board, which indicates that what our customers really want to keep the machines running, which makes sense to have a maximum output considering the current mineral prices.We also see stronger demand on refurbs, midlife upgrades extensions and so on, which, of course, could be related then to leadx on new equipment, which means you can underline or the equipment you have. So then you get that into the aftermarket sales instead. Those are the 2 main points that we see. So it's driven by the maximum output from our customers and extending the life of some of the equipment they have.

[Operator]

The next question comes from the line of Mattias Holmberg with DNB.

[Mattias Holmberg, analyst]

I'm going to follow-up a bit on Daniela's question here, and sorry to dwell on this topic. But when I look at the bridge for SMM and then consider the comment you made here that it was [ 27% ] of the leverage for the cutting tools. It [ basically ties ] with the Manufacturing Solutions business must have been quite dilutive in order for the numbers, which you add up for the division. So can you just comment or clarify on what's [Technical Difficulty].

[Cecilia Felton, executive]

SMS was slightly dilutive, SMM also had some impact on the revaluation of unhedged balance sheet items. A dilution of 40 bps and an in-quarter effect of around 60 bps.

[Stefan Widing, executive]

Sorry, just to add to that as well. We also have a powder -- the 27% is the core cutting tools leverage. We also have a powder business with a lower leverage. So if you take that out, I think it's more like 20%. So if you look at the reported figures, you will see a different number.

[Mattias Holmberg, analyst]

And just to follow up, are you happy with where the sort of CAD and CAM business possibilities at this point?

[Stefan Widing, executive]

Yes. Those are performing at a good level. Bear in mind that they are still small in relation to the overall SMM business. So they have a relatively limited impact on the reported profit so to say.

[Operator]

The next question comes from the of Max Yates with Morgan Stanley. We will move on to the next question coming from the line of Gael de-Bray with Deutsche Bank.

[Gael de-Bray, analyst]

Can I start with the bridge again and the impact from the revaluation of unhedged items on the balance sheet. Just checking the bridge you show on Page 24 that this negative impact is indeed taken in the organic column. And shall we see this as sort of a one-off this quarter? Or do you still have a lot of open positions with mismatches, which could play out negatively in Q2 or in the next quarters?

[Cecilia Felton, executive]

Yes. So starting with your first question. So this impact is in the organic column, we changed that a couple of years ago. And in terms of whether this effect could really occur, I would say that we always have some effects every quarter. Sometimes it's slightly positive, sometimes it's slightly negative. This quarter, the effect was unusually large. We had a similar effect back in the first quarter in 2020, for instance, where we also had too many open positions, and we are, of course, always working very hard not to be in a position like we were in this quarter.

[Gael de-Bray, analyst]

Okay. Understood. And I have a second question about the SP Mining acquisition. I mean, obviously, we saw very high integration costs this quarter and this will apparently remain pretty high in the next few quarters as well. But it also appears that the Q1 revenue was somewhat disappointing, at least versus my own expectations and at least relative to the trend that we saw in Q4. So can you comment a little bit about what's going on there?

[Stefan Widing, executive]

Yes, absolutely. No, you're right. And they have a quite significant seasonal effect. They have a large portion of their business in Australia. Australia is basically on holiday in January, so very low revenues in January or the start of the year. So sequentially versus Q4, yes, you will see a decline, but it's like some -- a number of our SMR business, they start weaker and grow throughout the year. So from an SP Mining point of view, Q1 was according to plan. And I guess we also are learning a little bit that impact. So we would just have to get used to that normalizing during the first year. But that's the reason.

[Gael de-Bray, analyst]

Okay. That's great. Maybe a very final one just to make sure I understand or I interpret correctly what you're saying regarding the daily order intake in April for SMM. I mean do you actually adjust for Russia into this? I mean does that mean that the organic order growth in the first couple of weeks in April was basically a bit above 7%.

[Stefan Widing, executive]

So we all -- yes, in the -- well, yes, to the question, have we adjusted for Russia. Yes, we don't compare with any sales in Russia in Q1 of last year. Comments are completely clean on Russia business.

[Operator]

The next question comes from the line of Sebastian Kuenne with RBC.

[Sebastian Kuenne, analyst]

First question is on SRP, where you had very strong revenue growth and where you say that like in the other divisions, you caught up with the cost development, so pricing caught up with cost. But if I run the numbers and I look at the 14.5% margin and I adjust for the 120 bps from SP and the 40 bps revaluation, I still only get to 16.1% margin. Last year, you had 15.9%. So that looks fine, but then this is supported by 230 bps currency. So to me, it seems that you caught up with cost but only with the help of currency. Is that correct? Or am I missing something here? That would be question number one.

[Cecilia Felton, executive]

Yes. We also have some larger ongoing projects within the SRP business, mainly on the IT side, so changing both ERP systems and CRM systems. So that also impacts the leverage.

[Stefan Widing, executive]

So it's higher cost basically. And just to answer specifically your question, no, we are not counting on the FX impact -- the positive FX impact when we say that price has compensated for inflation, those are 2 completely separate thing.

[Sebastian Kuenne, analyst]

So we then can expect an improvement in the coming quarters? Or this is a one-off now or...

[Cecilia Felton, executive]

I mean, as we said, the integration costs will continue to run during the year. And also these bigger IT projects are also longer term projects that will impact the leverage over the coming quarters.

[Sebastian Kuenne, analyst]

Okay. Second question is on the BEV on the electric machinery. You now had a couple of follow-up orders and deliveries. Can you give us an idea whether the equipment is running at a similar margin to your ICE equipment? And then if the Battery as a Service business will give us a similar margin than conventional service business. So I just want to get an understanding of the margin impact longer term from BEV.

[Stefan Widing, executive]

Currently, the BEV business is dilutive to SMR. We don't have the same margin on the BEV equipment as the combustion engine business. We expect that to be corrected eventually. But today, primarily because of volume, the production line is not sort of an industrialized level in the way that ICE equipment is. And on top of that, it's new equipment, and it tends to take a little while before we can do cost downs and efficiency as well in the actual product design. The priority has been at this stage to expand the offering and capture the market with good innovations. But over time, we don't see any reason why it shouldn't be at least as good because it's a machine that provides more value and in a way, it's a little bit simpler to build. Battery as a Service margins, I will pass on for now. I think that requires a bit more elaboration and probably it's more of a Capital Markets Day answer or question.

[Operator]

The next question comes from the line of Andreas Koski with BNP Paribas Exane.

[Andreas Koski, analyst]

So I have 2 questions. The first one is on organic growth in North America for Sandvik Manufacturing and Machining Solutions. So we saw a significant slowdown in year-over-year growth rates during the quarter. I know you touched on it briefly, but could you elaborate a bit more if you have seen a change in the demand at North America during the first quarter for a sequential decline month by month during this quarter or something.

[Stefan Widing, executive]

Yes. I think the answer is no. It's stable, if we look at what we feel is the underlying market. So the main driver is, as I mentioned, that on the aerospace side, we have some very big customers that where order timing can impact depending on when they place orders for the year. And also, actually, we had some of the major distributors that have changed the order pattern in a way as they also a little bit adopt their ordering behavior at the moment. But we have talked to them specifically. And also, there is no underlying change in their customer demand. It's more how they decide to place their orders from their side.

[Andreas Koski, analyst]

Okay. Very clear. And then the second question is on your comments that the price increases are now compensating for cost inflation. Does that comment relate to the absolute EBITA? Or is it relating to the margins you perform? And if it is the latter, which I thought it had been when we have talked about this previously, I have a bit -- yes, it's difficult for me to reconcile that because we saw an organic dilution to margins in Q1 last year, and we continue to see some organic dilution to margins in this quarter. So what explains that margin dilution on the organic side?

[Cecilia Felton, executive]

Yes. So when we are talking about price offsetting inflation, we are working margin, and we're doing offsetting both the group level and also all of our business areas. In terms of the leverage, I think we touched upon the unhedged balance sheet items. We talked a bit around the SMM leverage and the SRP leverage. On SMR, what's impacting their leverage is for also some inefficiencies in production driven by supply chain and logistics challenges. There's also a negative mix impact with the higher share of equipment revenue. And then we're also investing in R&D for future growth. So those are the key components.

[Stefan Widing, executive]

And also then a reminder of why -- I agree, we had a challenge last year in Q1 as well. That was more related to that compared to Q1 of '21. In Q1 of '21, we were all sitting at home. We had no travel, no marketing costs, et cetera. So we had a very high, I would say, an inflated margin in Q1 of '21. That was a challenge last year. So that was a completely different dynamic.

[Operator]

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

[James Moore, analyst]

I've got 2 questions. Firstly, can we talk a bit about price cost conceptually. You've come back to neutral, well done, but in your market share in the cutting tool industry and the mining equipment industry, one could argue for positive net pricing power across the cycle. With the current inflation levels that you see and the pricing actions you have done and plan to do in the near term, do you see the potential for price cost to turn positive at all during this year or next year given your current plans? That's the first question. Maybe you go one at a time?

[Stefan Widing, executive]

Yes. Should I take that. Yes. No, I mean, I think we have to differentiate here between what we can maybe do with the pricing power and what is wise to do if you run a long-term business. I think we could dial up prices more and we could get it through. I don't think it's the right thing to do if we think about the long-term health of the business and also growing the business because customers will remember and they will react to that, and they will seek alternative suppliers, if they feel we are taking advantage of the situation of what we're doing it.So my view is we -- our task here is to offset the cost inflation, but not take advantage of the situation. We have such healthy margins to begin with. And I can tell you in front of customers raising prices when they have different margins than we have, it's hard enough.

[James Moore, analyst]

That's very helpful. And on the mining side, great order dynamics, couple of points I'd like to try and understand, greenfield versus brownfield and large versus small customers. I guess, we're in a world of a higher cost of capital, which is probably squeezing out [ juniors ] and explorers, yet the world has mattered need over the next 5 to 10 years. And yes, the projects are taking a very long time. To what degree do you think that there is a shift in the mix of your book of business as we move away from a classic CapEx cycle to one where growth may have to come from sweating the existing fleet harder.

[Stefan Widing, executive]

Yes. If we start with the first one. We have seen for a number of quarters, a split roughly 50% brownfield, 20% greenfield and 30% replacement. In this quarter, we saw greenfield increasing slightly with a couple of percentage points. I think it's too early to say whether that was just a coincidence of timing or not. It's too early to say if it's a trend, but at least that's the split we saw.When it comes to large versus small customers, I actually don't have that data or I don't think we cut the data in that way. Over time, though, if you take a couple of years, our top 10 customers has increased as a share of revenue, both because we have one market share or a bigger part of their business. And potentially, but that I don't know for a fact that you say that the bigger it might sort of are getting bigger at least. What we can see on the M&A front, as I'm sure you follow as well, there is quite a lot of activity with, in particular, the bigger ones buying up, especially, for example, copper assets.Because they have been quite clear, some of them that they believe that the current copper prices are not reflective of the future demand shortage, which means if you believe that, obviously, then it's a good time to buy a copper asset today.

[Operator]

The next question comes from the line of Edward Hussey with Credit Suisse.

[Edward Hussey, analyst]

Just a couple of quick questions for me on SMR. So first of all, you framed China -- China reopening for SMM, but just on SMR, I mean, clearly, the largest commodity importer in the world, I mean, can we expect strong aftermarket acceleration in Q2?

[Stefan Widing, executive]

You mean our SMR sales in China or just as a general demand question?

[Edward Hussey, analyst]

No, just a general demand question.

[Stefan Widing, executive]

It's a good question. I think in general, I would say it's, of course, positive. We are opening in China, especially if you look at, for example, iron ore demand, not that that's our biggest exposure, but it provides some stability to the overall market. So I think it's positive. I cannot answer to if it will have any direct impact on our customers. I would say, at the moment, they feel pretty much that they're going from maximum capacity already before China reopened. So if anything, you could, of course, provide some stability to the current mineral prices which would indicate that trend can continue. But I don't think it will have a short-term impact on a positive side either.

[Edward Hussey, analyst]

Okay. That's very helpful. And then just quickly, just on sort of comments around commodity specifically. I mean whether any commodities that particularly stood up, which were driving the -- with particularly strong production driving aftermarket.

[Stefan Widing, executive]

No, not in that sense. I wouldn't say if anything -- but what we have seen over a little bit of time is that our share of exposure to copper has increased slightly versus, for example, gold and others. But it's not that one commodity is driving more aftermarket than the other. That's not what I have seen at least.

[Louise Tjeder, executive]

We'll take one question more please.

[Operator]

The next question comes from the line of Max Yates with Morgan Stanley.

[Max Yates, analyst]

Stefan, can you hear me now?

[Stefan Widing, executive]

Yes.

[Max Yates, analyst]

Yes. Excellent. Just the question I wanted to ask was around the aftermarket growth as well. So 15%. And I think when we look at a lot of the mining companies themselves, they are missing production target. So what I'm trying to understand is how do we bridge the gap between low single-digit kind of mine production volumes versus the kind of orders that you have been generating. Is a lot of it price? Is there aftermarket projects that are coming back, maybe more rebuilding? Are you taking some share? Is there anything outside of just the underlying sort of mine production that you would highlight that you're doing better now versus the past that is resulting in these sort of outsized growth rates that we're seeing versus underlying production.

[Stefan Widing, executive]

As I mentioned, we are seeing an uptick in things like rebuilds on midlife upgrades, which -- the main interpretation of that is long lead times for new equipment. So you extend the lifetime of what you have. We are also having a -- it has gone on for a number of years now, and it continues. We are gradually increasing the share of aftermarket on our own equipment. And it increases by a few percentage points per year, and we are steadily progressing on that. So we're getting better and better at full -- sort of full service agreements. You might have seen we have announced orders on remote monitoring service.For example, we now publicly announced that Barrick, I think it's the second largest gold producer now in the world is going all out with Sandvik remote monitoring service on their underground equipment fleet. The order value for that order itself is very small. But what typically means when we go into that engagement, we also get pretty much a full service contract because we help the customer with productivity improvements. But as part of that, they also go with Sandvik parts and Sandvik services and so on. So we are inching upwards also in terms of the market with this kind of agreements and work.

[Max Yates, analyst]

And maybe just a very quick follow-up on the new President of Sandvik Manufacturing have announced this morning. I mean, obviously, kind of the strategy -- you've made the strategy quite clear of kind of what you're trying to do with this business. But in terms of kind of what his priorities would be for that business is, have you sort of -- are you pushing kind of -- do you want to see more acquisitions? Do you want to see the margins go up? Would you like to see the growth accelerate? Kind of what have you sort of communicated and worked together that you would really like to see happen with that business? Or is it -- would you say it's more of the same to what we've seen in the last 2 to 3 years?

[Stefan Widing, executive]

I mean I would raise it like this. The strategy isn't changing, meaning his task is to continue to execute on the strategy as defined. But it's -- I wouldn't call it more of the same because what we have done in the past years is we have acquired quite a few entities. The focus is on integration. We are investing in some of the businesses as well. So the ambition is to achieve the targets we have set out, which is some additional revenue growth. Majority of that being organic, some of is additional acquisitions and then to get them up to the margin target, where, as we have said, they are currently dilutive to SMM [ slowly ] that they should be around 20% as a first step, and that's going to be his task.

[Max Yates, analyst]

Will we have already -- well, we have seen a good step in those margins this year, Stefan. Are we kind of making -- I think they were at 10.4%, are we kind of moving in the right direction already?

[Stefan Widing, executive]

You will not see 20% this year. In terms of how we see that progressing, we expect to give you a much better view at the CMD in November.

[Louise Tjeder, executive]

Right. Max, you were cheating, 3 questions, long questions and typical Stefan long good answers. But now it's time to end this webcast. Thank you, everyone, for calling in.

[Stefan Widing, executive]

Thank you.

[Cecilia Felton, executive]

Thank you.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.