Sandvik AB

STO:SAND

Earnings Call Analysis

Mixed Q1 Performance with Positive Future Indicators

Sandvik reported its Q1 2024 results, highlighting a mixed performance. The company experienced a 7% decline in total order intake, with revenues down by 6%, impacting an adjusted EBITA margin of 18.2%. Despite weak infrastructure demand and calendar effects, mining and aerospace sectors showed strong performance. Key strategic advancements included acquisitions and growth in Rotary Drilling. The company remains confident about future growth, supported by positive leading indicators like PMI and key commodity prices. For the full year, Sandvik expects gradual benefits from restructuring savings and maintained guidance on key financial targets.

Introduction

In the latest earnings call, the company experienced a challenging yet eventful quarter. Despite seasonal low volumes impacting revenues and order intakes, the company demonstrates a cautiously optimistic outlook moving forward. Key highlights include ongoing restructuring efforts, strategic acquisitions, and innovations in their product portfolio.

Revenue and Order Intake

The company reported a 7% decline in total order intake, with a 5% organic decline. Revenues were down by 6%, predominantly due to a 5% organic decline. Seasonal effects, notably the shift of Easter, and temporary lower volumes adversely impacted revenue. Interestingly, even with these declines, the cash flow remained robust at SEK 3.8 billion, signifying a solid cash conversion rate of 77%.

Operating Margins and EBITA

Adjusted EBITA decreased by 14% to SEK 5.3 billion, resulting in a margin of 18.2%. This is a reduction from the previous year's margin of 19.8%. Temporary lower volumes and a currency dilution of 40 basis points pressured the SG&A cost coverage, significantly influencing the margins. The company anticipates margins to recover as volumes stabilize and savings from restructuring programs materialize.

Strategic Acquisitions and Innovations

The quarter saw three strategic acquisitions, notably Cimquest in North America and pro-micron in Germany, enhancing the company's automation capabilities. Additionally, the company launched an upgraded 800 series cone crusher, integrating a new Automation & Connectivity System that fortifies their product offerings in mining applications.

Market Performance

The company observed mixed market performance across different regions and sectors. Europe and North America reported declines, influenced by a weak Central European market and timing differences in aerospace orders. Conversely, Asia, particularly China, displayed growth, driven by strong demand in general engineering. The mining sector continued to exhibit stable demand, with significant contributions from smaller orders and aftermarket services.

Financial Stability and Guidance

Despite the revenue and margin declines, the company's financial health remains solid. Net debt reduced to SEK 33.9 billion, supported by positive cash flows. The company maintains its guidance for CapEx, interest net, and tax rates, projecting a currency effect of SEK 120 million in Q2. This cautious yet stable guidance indicates a measured and prepared approach for the rest of the fiscal year.

Future Outlook

Looking ahead, the company is optimistic about the remaining quarters. They expect the market conditions to improve, supported by positive indicators in PMI and commodity prices. The company's strategic focus on cost management and innovation is expected to bolster their margin recovery. With a strong foundation and proactive strategy, the company is well-positioned to navigate the challenges and capitalize on future growth opportunities.

Earnings Call Transcript 2024-Q1

[Louise Tjeder, executive]

Hello, everyone, and welcome to Sandvik's presentation of the first quarter results 2024. My name is Louise Tjeder, Head of Investor Relations, and beside me, CEO, Stefan Widing; and our CFO, Cecilia Felton. We will, as we usually do, listen to Stefan and Cecilia take us through the highlights of this quarter. And after that, we will open up for questions.

So now let's listen to the presentation. And please, Stefan.

[Stefan Widing, executive]

Thank you, Louise. And also, from my side, welcome to the first quarter report for 2024. And if we summarize this quarter, we can see the typical seasonality with a positive book-to-bill. And overall, I would say the order intake levels are at a solid level in this quarter. We see a strong demand in aerospace, a bit more mixed picture in general engineering. Mining demand is on high levels while infrastructure has remained weak in the quarter.

Total order intake declined by 7%, of which organic decline was 5%. Revenues declined in total 6%, and of that, organic was 5%. And the organic decline on the revenue side, of course, also had an impact on our margins this quarter. Adjusted EBITA decreased by 14%, corresponding to a margin of 18.2%. This leaves our rolling 12 months EBITA margin at 19.6%. So just like last year, we are starting a little bit on the low side this year. We do see some of the savings starting to come through in the various restructuring programs. And in this quarter, it was SEK 128 million. Adjusted profit for the period came in at SEK 3.3 billion.

We also, in this quarter, continued to see good progress on our strategic priority areas, was very happy to see very strong growth in our Rotary Drilling division, which is a business we are looking to grow. We also had a repeat major order for our AutoMine solutions, mine automation, for what is the largest underground mining automation installation in the world. We also completed two acquisitions, and we announced a third one after the close of the quarter.

The innovation I want to highlight this quarter is our upgraded 800 series cone crusher. This is our flagship crusher for mining applications within Rock Processing. It's an updated crusher with a new Automation & Connectivity System, which means it comes pre-prepared to be connected to our digital solutions. It also has an upgraded and robust and optimized mechanical design that helps reliability and simplicity, which is key for our customers in this segment.

Jumping into the market development. Starting with a geographical view, we have Europe being down 9%. If we take a cutting tool look at this, we are down 6% in Europe. And this is primarily driven by general engineering and a weak Central Europe.

North America, minus 14%, but more positive from a cutting tool perspective. Reported in that segment, minus 4%, but underlying, we believe it's stable and robust. The negative number is driven by timing of order intake for larger customers in the aerospace industry, which can come in March or April. And this year, it will come in April instead. So underlying positive or stable, I should say, in North America.

Asia, flat, 0%. But here, we note a positive development for cutting tools in China with low double-digit growth in China in the period, driven in particular by a positive general engineering. For the rest of the geographies, it's driven by mining. And I will not comment more specifically on them.

If we take mining as a segment, we continue to see demand picture being stable at a high level. Orders are slightly down. But we compare now to Q1 of last year, which was the highest order intake quarter ever. And also, for equipment, if we take away the major orders, it's only slightly down, which shows that the activity for the smaller orders and especially replacement orders is on a high level.

General engineering is down, overall down in the mid-single digits. Europe, down in the low double digits, and here, as noted, primarily driven by a weak Germany, Central Europe, including Italy. North America, stable in general engineering, while Asia, as I noted, positive, China up double digits.

Infrastructure continues to be weak. But we have here the North America, stable. What we can say is that we are not through the destocking yet. But we have seen some positive signs, some unexpected orders from some dealers, indicating that they are slowly but surely working through their inventory levels.

Automotive is slightly down, down in the low single digits. Europe is down mid-single. It's offset by North America being up mid-single. But here, we could say that Europe is slightly more adverse mid-single than North America is positive mid-single digits. So the outcome is slightly down because Asia and China was flat in the quarter.

Aerospace, good growth, low double-digit growth in the quarter, driven by Europe, also China up mid-single. North America, as I said, is actually, in the figures, it's down mid-single digits in this quarter. But it's purely driven by timing of larger framework contracts that is now coming into April instead. So we still denote it as positive development because that's the underlying market development here.

The other segments are down overall mid-single digits. Europe, down mid-single, North America is flattish. Asia is positive, but China is actually a bit negative mid-single digits. But other markets in Asia, such as India, has been very positive in the quarter.

This leads us to an order intake overall of close to SEK 32 billion. We have though revenues in the quarter of SEK 29 billion, so a positive book-to-bill of 110%. The lower revenues in the quarter has been driven partly by calendar effects in SMS, driven by the shift of Easter from April into March, but maybe more importantly, relatively low invoicing in SMR, which is a timing effect. We see the year being back-loaded, meaning more sales and invoicing will happen in the remaining 3 quarters of the year and a slightly more adverse impact than the normal seasonality now in Q1.

If we look at order intake and revenues here from a slightly different perspective, I think the main highlight or lowlight maybe is that we had 12 quarters of consecutive organic revenue growth, but that then came to an end now in Q1 because of the effects I just mentioned.

These lower revenues also had an impact on our EBITA. EBITA was down 14%, margin of 18.2%. Cecilia will come more into this dynamic. But I think the short summary of it is very simple. We have temporary lower volumes in this quarter. And it's putting pressure on our SG&A cost coverage. As this is what we believe a temporary lower volume, it's also something that's very difficult to mitigate short term. We also have a currency dilution of 40 basis points. And we are now sitting with a rolling 12 months EBITA margin of 19.6%.

Going into the business areas, starting with Mining and Rock Solutions, resilient demand but, of course, facing record high comps in Q1 of last year. But you can see on the graph that otherwise, order intake is at a very stable level. As I said, we saw strong growth in Rotary Drilling. And we've got the major AutoMine order of about SEK 300 million. Total order intake declined by 9% and the organic decline was 7%. Aftermarket was stable while equipment was down 18%, primarily driven then by the major orders, which is mainly done or it is sitting on the equipment side.

If we digest a little bit the aftermarket number of flat development, we can say that parts and services continues to have a positive development, but it is being offset by another quarter of both destocking in ground support, but also the impact they have from a weaker tunneling business. We expect to be through that now, if nothing unexpected happens. So we should no longer see that more negative offset from ground support in the aftermarket business going forward.

If we look at the margin, 18.2%, down from 20%, impacted then by the lower invoicing in the quarter and the same dynamic I just mentioned for the group as a whole. We have some savings coming through of SEK 15 million and some dilution from currency of 10 basis points.

No acquisitions in SMR in the quarter, but happy to see that we continue to strengthen our partnership with key customers. We extended our framework agreement with one of our top three customers, where they will now roll out our Remote Monitoring Service, meaning connected equipment, to their entire fleet. And we have also agreed to collaborate on their BEV strategy to help them reach their net-zero emission targets that they have as a company.

Coming down into Rock Processing. Also here, stable demand in mining, but infrastructure continues to be weak. Some positive signs, as I said, maybe in North America, but we expect the destocking to continue for probably another quarter there. Total order intake declined 9%, organic decline was 7%. Here, however, we saw a positive dynamic on the major orders with major orders totaling SEK 169 million in the quarter.

Adjusted EBITA at 13.3% versus 14.5%. They always have a low seasonality in Q1. But this is, of course, on the lower side. But we still believe they show good margin resilience, considering invoicing was down 15% organically. And this is because of good contribution from their savings and cost initiatives as well as good execution of price realization. Currency also had a dilutive impact on the margin of 50 basis points. And I already mentioned the launch of the new flagship cone crusher.

Manufacturing and Machining Solutions, already mentioned the market comments here with solid demand in aerospace, more mixed in general engineering and automotive, slightly down overall, primarily driven then by weakness in Europe while we have a resilient North America and some positive signs coming out of China.

Software grew mid-single digits. Cutting tools then was down mid-single digits. And we also saw some positive signs on the powder side, up high single digits in the quarter, which is positive, given this is the quarter we get many of the frame orders for the full year. Total order intake declined by 3%. And that was also the organic number, minus 3%.

If we look ahead or look how the April has started, we see a stable development in the first 2 weeks. And if we look ahead, we can, of course, see leading indicators improving. But it usually takes a while before we actually see that in our numbers. But the fact that PMIs on average are starting to cross 50% in most regions, except maybe Central Europe, that's a positive for us.

Adjusted EBITA margin, 20.3%, down from 22.4%, impacted then by the negative volumes in the quarter. Good progress on implementing the savings program, SEK 87 million realized in the quarter, and also here, negative impact from currency of 60 basis points.

We had three acquisitions coming in this quarter, two completed, Cimquest, a CAM reseller in North America, and pro-micron, a German company developing and manufacturing tools with embedded sensors, which is important for automation going forward. And then I also announced recently Almü, which is a German manufacturer of tools for lightweight machining or aluminum machining, in particular, for electric vehicles.

So with that, I'll come back for the conclusions and Q&A. But first, hand over to you, Cecilia.

[Cecilia Felton, executive]

Yes. Thank you, Stefan. All right. So let's take a closer look then at the numbers together. And as usual, let's start with the growth bridge. And here, you can see that organically, both orders and revenues were down by 5%. Structure did not have a material impact in the quarter and currency had a negative impact of 2%. And then with some rounding differences, total order intake were down by 7% and revenues were down by 6%.

Adjusted EBITA, as Stefan mentioned, came in at SEK 5.3 billion with a margin of 18.2%. And I will show you the EBITA bridge in just a few minutes. Net financial items came down slightly year-over-year, SEK 506 million, and the tax rate, excluding items affecting comparability and also on a normalized basis, was 24%, so in line with guidance.

Net working capital, 30.9% of revenues. Sequentially, in volume, net working capital was flat. We had a good cash flow in the quarter, SEK 3.8 billion, corresponding to a cash conversion of 77%. Returns, 6.8%, impacted also by the restructuring charges in the quarter and adjusted EPS at SEK 2.61.

All right. So if we continue with the bridge then, starting with the organic column. Here, you can see that revenues were down SEK 1.6 billion, minus 5%, and adjusted EBITA declined by SEK 637 million. And that gives a leverage of minus 40% and a dilution of 1.1 percentage points.

And as Stefan said earlier, this is really driven by the temporary lower volumes that we had in the quarter, which puts pressure on the SG&A coverage. Currency was dilutive, 0.4 percentage points, while structure was neutral on the margin. And that brings us from a margin of 19.8% last year to 18.2% this year.

The restructuring programs are progressing according to plan. The program that we announced in 2022 has now generated SEK 113 million of savings in total. The year-over-year bridge effect is not the same as the numbers here as we had some savings last year. And that corresponds to an annualized run rate of 58%.

We've also now commenced the program that we announced in January and booked a SEK 2.4 billion of restructuring charges in the quarter. And as you can see here, we also have some savings from the 2024 program now in this quarter, corresponding to 8% of annualized run rate savings.

If we continue down the P&L, looking at the finance net and starting with the interest net here at the top. You can see that it was largely on par with last year. And here, we have, on the one hand, higher yield costs, but on the other hand, lower borrowed volumes.

Then at the bottom, FX and other assets classes, here, you know that in the past, we have booked temporary revaluation of currency hedges on orders not yet invoiced. From 1st of January now this year, we are applying hedge accounting in this area, which means that these revaluations will instead go via equity in the balance sheet. And then in total, net financials came in at SEK 506 million.

The reported tax rate was 26.1%. If we then exclude items affecting comparability, mainly the restructuring program, we came in at 24%, so right in the middle of the guided range for the year.

Then if we move on to the balance sheet and starting with net working capital. Here, if you look at the bars on the left, you can see a slight sequential increase in absolute terms in net working capital. This is driven by currency. In volume, as I mentioned, net working capital was flat sequentially. In relative terms, net working capital increased to 30.9%. And as you can see on the graph on the right, this is mainly driven by SMR and SRP.

We had a good cash flow in the quarter, SEK 3.8 billion, corresponding to a cash conversion of 77%. And on a 12-month rolling basis, we are at 83% cash conversion. Then if you look at the year-over-year development, EBITDA adjusted for noncash items was lower compared to last year. But then last year, we had a net working capital buildup of SEK 2.1 billion. And CapEx was slightly higher this year versus last year.

Financial net debt continued to gradually come down in the first quarter and to a level of SEK 33.9 billion, driven by the positive cash flow. Capitalized leases increased slightly sequentially whereas the pension liability came down a little bit, driven by changes in the discount rates. Our balance sheet target, financial net debt over EBITDA, increased a little bit sequentially from 1.2 to 1.3. And this is driven by the restructuring charges in the quarter impacting 12 months rolling EBITDA.

Then if we look at outcome versus guidance, currency came in at SEK 212 million; CapEx, SEK 1.2 billion; interest net, SEK 0.4 billion; and the tax rate, as I mentioned, right in the middle of the guided range.

And looking ahead then for the second quarter and the full year, we've left guidance unchanged for CapEx, interest net and the tax rate. And for the currency effect, we estimate this to be plus SEK 120 million in the second quarter based on the currency rates at the end of March.

And with that, I will hand back over to you, Stefan.

[Stefan Widing, executive]

Thank you, Cecilia. So let's conclude. I think a good way to describe it is it's a mixed picture quarter. The short-cycle business is stable, but it is adversely impacted by calendar effects on top of the fact that we are, of course, in a down-cycle in general but stable with some positive signs.

The long-cycle business remains at high levels. But the year is characterized by more back-loaded deliveries for the remaining 3 quarters of the year. We see a stable to positive sentiment among our customers and a continued investment willingness. The temporary lower volumes in the quarter, of course, put pressure on the SG&A cost coverage, also impacting the margin in the quarter.

I'm happy to see that we continue to be an enabler in our customers' shift. We are a trusted partner when it comes to, for example, implementation of large automation projects and helping our customers with the BEV transition. We continue to launch good innovations that helps our customers become more productive and efficient, which is, at the end of the day, what drives our business forward. And we have strengthened our platform for growth with continued expanded offerings and capabilities through M&A in the quarter.

If we look ahead, we can see that the savings from the restructuring program is gradually coming through as planned. We have good price realization and good cost focus in the organization, which will be important to support our full year margin target. And we have the leading indicators such as PMI and key commodities on a positive trajectory, in some cases, all-time-high levels, which will support our business also going forward. So overall, I would say we look forward to the rest of the year with confidence.

Thank you for listening, and we move into Q&A.

[Louise Tjeder, executive]

Yes, thank you, Stefan, and Cecilia. Indeed, it's time for the Q&A session. So let's jump right into it. Operator, please, the first question.

[Operator]

[Operator Instructions] The first question comes from the line of Daniela Costa with Goldman Sachs.

[Daniela Costa, analyst]

My question sort of mainly relates to the mining and to the back-end loading that you talked about. Can you comment, one, exactly on what is -- is there some clients that asked to delay some projects? Is this related to your own execution? Is it something you already expected? And two, is that something that we should look to see a recovery or the offsetting movement in 2Q or maybe in 3Q, if you give us some color behind the reasons and when do the compensatory impacts come?

[Stefan Widing, executive]

Yes, thank you. Good questions. Expected questions also, maybe I should say. Now if I start with was is expected? Yes, it was. I would say the quarter overall and including in each of the business areas came through pretty much as expected, maybe slightly better order intake in SRP in the quarter. But the invoicing on the mining side came in, in line with expectations. And we have seen this basically since we really started to look at Q1 sort of during the full time that it would be a lower invoicing quarter.

What is the driver? It's not a single driver that we -- because, of course, then we would have pinpointed it or been clear about it. It is when we work with our customers, we have orders. We look when do you want delivery, sort of then we plan the year and everything related to that. This is how it comes out. So it is driven by customer need, if you will. Of course, there are also things like, in some cases, they might want it and we cannot deliver it, but we can deliver something else and so on. And so it's a mix, but it's not a specific single driver.

And to be very clear, it's not demand-driven. You can see it on the order intake. We have an order backlog that is almost a full year. So it is more, I would call it, practical dynamics of when the customers want the equipment. So when will it sort of be compensated for? Well, I would say, if we look at the full year, I would say there are no surprises when I look at it. Of course, you all have different views on the full year. So I will not -- cannot comment on what to expect overall. But if I were you, I would not change sort of your view on the year too much. But don't expect everything to come back in Q2. But throughout the year, I think we will see a decent recovery of the invoicing.

[Daniela Costa, analyst]

And just to clarify also, is it concentrated to like the new products like the BEVs and the automation? Or is it broad-based across the portfolio?

[Stefan Widing, executive]

No, it's nothing specific because then that would have been sort of a reason to highlight. But of course, you have aftermarket being flat. Typically, we would go into the year with growth in aftermarket. But because we have this sort of offset now in ground support also this quarter, it leaves sort of for the equipment part to drive all of the growth, or in this case, negative growth. So it's mainly equipment-related. But on top of that, we have a sort of flat aftermarket this quarter.

[Operator]

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

[Klas Bergelind, analyst]

Klas at Citi. So first, on the positives, looking at SMMS, the powder business is up high single digits, which is typically, as you say, Stefan, the leading indicator. Also, things like China in general engineering is seeing double-digit growth in orders and not only linked to easier comps this time.

When you say flat in April sequentially versus the first quarter and now without any drag here from powder, it looks to me that SMMS can start growing in orders, low single digit, here for the second quarter. Just to hear if you back that reasoning, and also if you think powder will continue to support growth or if all of the restocking there was happening in the first quarter.

[Stefan Widing, executive]

Yes. When we say flat, we are -- the comment is focused on cutting tools and daily order intake. So you would add or remove any impact from powder through that comment. So if your assumption is that powder is sort of positive in Q2, then that should -- that will sort of add positively to the comment of a flat start or stable start of the quarter.

Otherwise, when it comes to powder, we are mainly -- I mean, we're talking order intake here. And the order intake in Q1 is very important, then of course, deliveries happens throughout the year. I'm not sure if that was the question you asked on powder there. In the end, I didn't quite get it.

[Klas Bergelind, analyst]

Yes. No, that's correct, Stefan. It seems like most of the restocking seems to occur in the first quarter rather than continuously. But obviously, the drag that you had of, I think, 3 percentage points from the second quarter last year is obviously going away, right? That's clear.

[Stefan Widing, executive]

Yes, sure. I mean, it was very tough outcome on the powder business in the prior quarters. And even if it would stay at a lower level, of course, the comps then are much easier. So from a growth perspective, the drag, yes, is almost guaranteed to go away, I would say, yes.

[Klas Bergelind, analyst]

Yes. Okay, good. My second one is on SMR. And can I just confirm that this is effectively linked to the fixed cost coverage, it's not the gross margin that is seeing incremental weakness? And obviously, I'm adjusting for the one-offs, of course. And also linked to this, I think you saw the maintenance at minus across nickel and zinc, which is obviously battery-linked. That weakness could stay, but maybe copper will improve at some point, given what we see in terms of the copper price. A question as well around the mining pipeline, to the extent that is changing, weaker battery, perhaps improving copper at some point?

[Cecilia Felton, executive]

I can start with margin question. And you're right, GP held up well for SMR. So it's mainly SG&A coverage that's under pressure in the quarter. So that is a correct assumption.

[Stefan Widing, executive]

Yes. And we can also say on pricing there, also I mentioned it on SRP, I should have mentioned it on SMR as well, that also SMR held up well and compensated cost inflation with pricing. On the market dynamics, yes, there has been a little bit of demand impact, especially from nickel mines in Australia, for example. A little bit zinc as well, but zinc prices have recovered. So I think the worst is behind us there.

Nickel is a fairly small or it's a small commodity in relation to the others, as you know. And -- but then, of course, gold, at very high levels, and then copper now coming up towards very good levels as well. This is, of course, part of what I'm talking about that there are indicators, leading indicators, that should be supportive of the business going forward.

[Operator]

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

[Andrew Wilson, analyst]

If I can start with just a question on the aftermarket on the mining side, there's a couple of quarters now where we've been flat. And I know there's been -- obviously, you identified some headwinds quite specific. And I think we previously talked about some of the escalation contracts, obviously, as steel prices come down, kind of been a headwind as well.

I mean, if we sort of look at the comps easing, particularly in the second half of the year but even in the Q2 as well, do we expect that business to return to growth? And kind of if you could try and put some kind of, I guess, range within that, I'm just trying to understand kind of what's underlying and what's been kind of one-off specific headwinds. Because it feels like the last couple of quarters have been -- we've had quite identifiable specific headwinds rather than a comment on miners not spending.

[Stefan Widing, executive]

Yes, yes, I think you describe it in the right way. Underlying, meaning parts and services, spare parts and service on the machines, it has continued to be positive growth. Then we have had this headwind in ground support for 3 to 4 quarters now, yes. And we expect that to improve now going forward, partly because of less destocking and also because we see some improving sentiment in the tunneling business there.

So I cannot give you a guidance on specific growth numbers. But parts and services, in general, in normal times has typically been growing sort of high single digits. So I think something between mid- and high single digits in that range is probably the underlying performance if we take away these other sort of dynamics.

[Andrew Wilson, analyst]

That's really helpful. And sorry, just to clarify on Klas' question just around powder and the impact, if I take the daily order intake as a comment on cutting tools and a similar level in early April versus the Q1, my understanding was that powder is seasonally good in the Q1 and then weakens as we go through the year.

Obviously, notwithstanding that the base effect in Q2 last year, might be easier. But would that mean that actually we should expect overall SMM numbers to be -- or orders rather to be lower in Q2 versus Q1, if we take the first 2 weeks of April as the run rate? Or am I misunderstanding that? I just wanted to try and clarify that.

[Stefan Widing, executive]

I'm not sure I understand the question, but let me try to answer anyway. The powder business is seasonal in the sense that the absolute level of order intake is higher in Q1 because we get a lot of orders that is done for deliveries for the full year. So that's how the orders are being sort of split across the quarters in the year.

So in that sense, from a seasonality point of view, you will see a step-down in absolute number from Q1 and then into the other quarters of the year. Then the deliveries are smoothened out, so to say. The comment on stable start of April is completely clean from any dynamics of powder. It's a pure cutting tool comment. Did that make sense?

[Andrew Wilson, analyst]

That was a much better answer than my question. That makes perfect sense.

[Operator]

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

[Max Yates, analyst]

Just my first question is around the large order pipeline in mining. I guess, large orders are a bit weaker kind of than what we saw last year. And I just wanted to understand, I mean, do you see this as a reflection of we've had less project sanctioning that's triggered maybe less large orders for you? Is this just a timing effect?

And obviously, taking into account commodity prices are quite a bit better than maybe they were this time last year, I'm just trying to sort of reconcile, is this just the timing effect, and actually, SEK 1 billion of large orders every quarter is a kind of realistic expectation? Or has something actually kind of fundamentally changed when you look at conversations with your customers?

[Stefan Widing, executive]

Yes. I think if we take this quarter, I think if we start with the positive on the order intake side in mining is that we saw it's actually quite a strong order intake for smaller orders and also replacement orders, sort of more of a flow. So that was up to 40% this quarter. It's been more down to 30%, 35% previous, for quite some time in previous quarters. But we, on the other hand, then we see a slightly smaller share of greenfield and brownfield, greenfield around 15% and brownfield around 45% instead of around 50%.

This can, of course, be an in-quarter effect only. That's too early to say. But that was the dynamic we saw in the quarter, which is why we are quite happy with the order level sort of in the absence of as many major orders as we had last year. I would say, in general, the pipeline looks good. I think there is -- I mean, we talked about the commodity prices. There is plenty of activity in the mining sort of sector, even though there are a few commodities that are weaker.

Then when we land major orders and not -- and it's inherently -- I won't call it random, but I don't know, which word to use. It can be lumpy then maybe is a better word. In some cases, you land more in 1 quarter, it feels great. And some quarters, you land a few less. I don't think there is any structural change in this regard.

But it's clear that for a -- I would say this, we had 3 quarters, Q1, Q4 and Q3 of '22, that were exceptionally good in that sense. So we have been facing 3 quarters in a row now with very tough comps. And in that regard, I would say it's more of a maybe normalized level but still at a very good level. Then hopefully, in the future, we'll continue to see a nice flow of large orders as well. But I cannot say exactly how it will look at from a quarter-to-quarter perspective, so to say.

[Max Yates, analyst]

That makes sense. Maybe a quick just follow-up on your M&A strategy. And obviously, we've seen you kind of focusing on software and metrology. I think there's been some discussion in the market about Renishaw. And we've had kind of a couple of A-large industrial company rule themselves out of kind of bidding for that.

I mean, I guess, the question I would have for you is, are you kind of very happy with the acquisition strategy that you've been pursuing so far, which has been kind of building up towards that kind of SEK 6 billion level in Sandvik Manufacturing via kind of more bolt-on M&A? Or do you think there may be the opportunity going forward to do some larger M&A to really accelerate your positioning in that market and make you more of a sort of a large metrology player?

[Stefan Widing, executive]

Yes, thanks. No, I would say we are happy with the strategy we are pursuing, which, a, importantly, we are typically not as part of the strategy going after more transformational in terms of -- from a financial point of view, transformational acquisitions. We prefer bolt-on. And when we talk large acquisitions or medium-sized, it's more like a Schenck or a DSI or things like that in terms of size.

We also have a focus, and we talked a bit about this at our CMD, that Sandvik Manufacturing Solutions has really has a focus more on software business and digital business. And because we think that's where there would be more structural growth. I think there is more value that will come out of that long term, so -- and the company you mentioned here is more of a, let's say, traditional hardware player. So yes, I'm happy with the strategy we are pursuing, to step-by-step gradually build our position but then more on the digital and software side of this business.

[Operator]

The next question comes from the line of Vlad Sergievskii with Barclays.

[Vladimir Sergievskiy, analyst]

I'll start with the follow-up on back-end loading in SMR, especially production that is back-end loaded or deliveries that are back-end loaded. When I look at the inventories, they were materially up in Q1, which would indicate that production levels were actually decent. And how do you see those production rates developing through the rest of the year?

[Stefan Widing, executive]

Yes. I mean, the production levels, we are sort of -- we are balancing the production for the long-term demand picture, so to say, as much as we can since it's difficult to ramp up or down too much within the year. So when we talk about this, the profile on the invoicing this year, it's not production-driven.

There are, of course, certain machines, certain types that might be more in high demand, so to say, where there is more of a bottleneck, but -- and then there are others that we have capacity for. But as a general comment, no, this was not driven by production. It's more, as I said in the beginning, when our customers have said they want delivery of equipment.

[Vladimir Sergievskiy, analyst]

That's very clear. And my last one would be could you discuss what impact do you expect from a recent increase in main commodity prices, mainly copper and gold, on both equipment and aftermarket orders in, let's say, the next 2, 3, 4 quarters compared to what you saw in Q1?

[Stefan Widing, executive]

Yes. I guess, we can say, in general, we expect it to be a positive dynamic because it means that our customers are making money. And some of them has been a little bit more on the cost -- under pressure from cost inflation and so on. And when they make money and the more they make per ounce or per tonne, the more they want to maximize their production.

There might be many reasons for why that is being sort of held back or limited. But one is, of course, the availability or the use of our equipment. So the better the commodity prices, the better for us in terms of both aftermarket, which is going up if they operate the machines at sort of peak levels, but also additional equipment sales. So I don't have a figure to give you in that regard, just that there is a positive correlation.

[Vladimir Sergievskiy, analyst]

Is there any specific lag for -- or this lag is different when you see the reaction on high commodity prices in both new equipment and aftermarket? Is aftermarket earlier to react and new equipment is a bit later and what those historical lags could be?

[Stefan Widing, executive]

I don't have an answer to that, actually. It's a good question. We can look into it. I would just spontaneously say, of course, aftermarket, I mean, you have the machines you have. If you want -- if you have a few machines parked or if you increase the utilization rate of what you have, that you can do immediately, that would help with aftermarket.

But also equipment, it can be noticed quicker if we have -- we have also sales stock, meaning equipment relatively already out in the market areas. And that can also be a first indicator if the market turns more upward. But how this historically have correlated in the situation like this, I cannot really say. We will have to look into that.

[Operator]

We now have a question from the line of Gael de-Bray from Deutsche Bank.

[Gael de-Bray, analyst]

I have two questions, please. I guess, the first one is for you, Stefan. Why is the software business growing only mid-single digits? I mean, what's missing for software to grow high single digits or low-teens like most other software companies these days?

And then the second question is on the margin side. Obviously, we are seeing good progress on the cost-cutting programs. But if I exclude the savings this quarter, the negative drop-through was around 80% for SMM and around 60% for SMR. So it looks pretty high. How do you explain these fairly high negative decrementals this quarter? And in relation to that, what's your level of confidence that the group margin will be back in the range for the full year?

[Stefan Widing, executive]

Yes. I'll start with the first one. So mid-single-digit growth on the software business this quarter, I think that's fairly aligned with -- now we haven't seen the report of some of the peers this quarter yet, but it's been in line with the growth we have seen of some key peers' prior years or prior quarters. So they have been in line.

When you say high single-digit, double-digit growth, that's not what we have seen from industrial software peers in the space we are in. If I can comment specifically on the business, we see in general, good traction. But we have -- we saw some softening from license sales into the automotive sector in the quarter. But other than that, I would say it was overall good traction.

[Cecilia Felton, executive]

Yes, I can comment on the margin and the drop-through of the lower volumes. I think if we start with Machining Solutions, which was very much impacted by the timing of Easter, so Easter falling into Q1 as opposed to Q2, such a temporary volume drop is difficult to mitigate through cost activities. I think for the underlying volume declines that we've seen in some segments, we've handled well, both in the third quarter and fourth quarter of last year and also into Q1 this year. So in that sense, part of the volume reduction in Q1 becomes unmitigated.

And it's a similar picture for SMR, where, as we mentioned, it's a more back-end loaded year. So it's a bit of phasing of deliveries between the quarters. So also in that sense, in Q1, the volume drop becomes unmitigated for that part. Then in terms of when we look ahead for the full year, we see good or stable sentiment amongst our customers. We have so far managed to offset inflation with price. And we're continuously actively working with price and also have a very strong cost focus across the organization, which together should support our margin delivery for the year.

[Stefan Widing, executive]

And I can just emphasize this dynamic, where we -- I mean, as I also said in the beginning, this -- the invoicing levels this quarter was not a surprise to us, which also means we have had time to look into what kind of mitigating factors can we take. And we have, of course, mitigated as much as we can. But at the end of the day, we also see we don't want to do things that will negatively impact our ability to capture the growth in the rest of the year.

And then in the very short term, all costs are fixed, so to say, unless we do again things that could hurt the business mid-term. So that's why we decided to go for this, even though we understood that we will get these kind of questions. But you have seen in previous quarters that when it's a more generic volume decline that is sort of more economical cycle-driven, we can take down cost and adjust to that in a good way. But this is a different dynamic this quarter, I would say.

[Operator]

We have the next question from the line of Cunliffe, Daniel with Bernstein SG.

[Daniel Cunliffe, analyst]

It's Daniel Cunliffe from Bernstein SG. Just clarifying on this quarter some back-loaded deliveries and timing comments, is it that you're saying that the delivery delays that you've seen and sort of leading to lost revenues will be reversed over 1/4 of the year? And what gives you that confidence that customers will no longer be delaying here? Because what it sounds like that they're actually going to speed up deliveries in order to sort of compensate for the delays that we've seen in Q1, just sort of really clarifying that issue.

[Stefan Widing, executive]

Yes, I wouldn't use the word delay myself. Delay, I would have used if we expected much more and then it was delayed or pushed out, then we would have been standing here surprised. As I said, when we have planned the deliveries, this is the plan we had. And it's not that the customers have changed their minds. Whether they had another view 18 months ago and is delayed in relation to that, I cannot really say.

But it's not any kind of late-minute pushout or that they're like, "No, we don't want it." It's the plan we have had for some time. So based on that, I also have no reason to, let's say, question when we look at the rest of the delivery schedule. And then we can see that it is a different yearly pattern than it was maybe last year and the years before in terms of the progression between the different quarters.

[Operator]

We have the next question from the line of Andreas Koski with BNP Paribas.

[Andreas Koski, analyst]

I would also like to ask about the profitability in the quarter but in a slightly different way. So I can see that your underlying gross margin is relatively stable at 41.5% and that the adjusted EBITA margin weakness came from elevated G&A cost or cost coverage, as you call it. So when I exclude your restructuring charges, it looks like your SG&A cost is up by 12% year-over-year. So what drives that increase? And is that kind of increase what we should also expect for the coming quarters?

[Cecilia Felton, executive]

The 12%, I don't recognize. So we will need to look into that, I think, exactly what...

[Andreas Koski, analyst]

Okay. Yes, you can ignore the exact numbers. But if I just look at the selling, administration, R&D and other lines, all lines are up quite significantly on a year-over-year basis. And when I exclude the SEK 565 million that you have been restructuring costs of those lines, it looks like we are up by [ 19% ]. So even though it's 12%, 8%, 9%, why is the SG&A up so much? And yes, should we expect a strong increase in your SG&A costs also in the coming quarters?

[Stefan Widing, executive]

Should I start?

[Cecilia Felton, executive]

Yes.

[Stefan Widing, executive]

I need to answer this one. No, because I don't recognize at all. And the fundamental question then becomes a little bit not so relevant. Because if you add SG&A and other EBIT, it should be an absolute decline year-over-year. We have a slight absolute increase in SG&A. If I would also recall, I think it's less than 2%, which if you take inflation into account means that the activity levels are actually down year-over-year.

And then in other EBIT, we have a positive bridge effect. Because you might recall, we had some FX hedge issues in the same quarter last year. So the combined two rows are down in percentage or in absolute terms year-over-year. And it just reinforces the message that even though that is the fact, we get the margin impact because the volume drop is quite significant. Do you want to add anything?

[Cecilia Felton, executive]

No.

[Stefan Widing, executive]

But maybe we can come back, Andreas, and maybe we'll -- we're clearly looking at some different numbers, but let's circle back with Louise and we'll try to sort it out.

[Andreas Koski, analyst]

Yes, that's great. And then the second question is on your position in surface drilling. Do you think you had the global market share of around 15% in 2023 in surface drilling overall, not only rotary, and that you target a 30% market share? And can you give us an indication of how much of SMR is surface drilling?

[Stefan Widing, executive]

Yes. The split between surface and underground is about 20-80, so 20% surface, 80% underground, I think is what we -- yes. That might change a few percent here and there, but that's roughly the split. I think I don't have a specific comment on the market share percentages. But what we are -- what we can say is that we believe we have significantly higher share than that now on the boom drills. But maybe on the rotary side, it's approximately or in the ballpark of the figures you mentioned. But the overall share on surface should be higher than that or is higher than that.

[Louise Tjeder, executive]

So it's now time to wrap up. And with this, we thank you all for calling in and for your questions, and we wish you a good rest of the day.

[Stefan Widing, executive]

Thank you.