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Sandvik AB
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Greetings, everyone, and welcome to the presentation of Sandvik's results for the fourth quarter of 2018. As per normal, we'll run through the presentation. It will be our CEO, Björn Rosengren; and our CFO, Tomas Eliasson, who will run through the presentation. And after which, we'll open up for a Q&A session. And I would already now like to remind you that there's an option to put questions on the online questionnaire on our website.And with no further ado, we'll open up for the presentation with Björn, please.
Thank you, Ann-Sofie. And good morning, I'd also like to say, and welcome to this Q4 and full year report meeting.The year was a record year with a robust ending. Orders and revenues exceeded SEK 100 billion. We had solid profit margin of 18.6%, strong cash flow SEK 15.3 billion, which has helped us to reach a gearing of 20%. Half of that is coming from pension liabilities and half of that is coming from financial debt.The group is coming from stability to profitability, and I'm really happy that this year has been the first step in the direction growth through acquisitions. We managed to sign and close 5 acquisitions last year and one in the beginning of this year.Also, Q4 was a very strong quarter. We saw growth in all 3 of our business areas, but also in our main 3 regions. Orders improved with 6% and revenues by 9%. We saw strong adjusted earnings with a margin of 18.1%, and that's been affected with 0.7 bps coming from the planned destocking of the inventory. And that is, of course, the basis for the fantastic improved cash flow. And we reached a record of SEK 6.3 billion in the quarter, pushing the gearing to 0.2. And also, of course, happy with the net working capital reaching 23.7%. The board has decided to propose a dividend of SEK 4.25 per share.So let's move over to what you all have been waiting for, that's the market development during the quarter. We can here see that all 3 major regions -- or more or less all our regions actually have seen growth during this quarter. We see Asia up 2%, we see Europe pretty flat around 3% and North America very strong. Maybe the most interesting here is, of course, to see what came in SMS, Machining Solutions, which really is the indicator of demand for industry in the market. And we can see that -- we see in Asia and in China a small decline of demand, especially driven by the automotive sector. Europe, pretty flat, and very strong in North America.If we look at all these segments, we can see either flat or improvement, except from the automotive, where you see a weaker demand in China as well as in Europe.Both orders and revenues continues to develop well. And this is actually the second best quarter in the group's history, reaching SEK 25.6 million in orders and SEK 25.9 million in revenues, 6% and 9% growth. Also, the EBIT continues to improve with 16%, reaching SEK 4.7 billion. And that is what I've said before, been affected by the destocking in SMS as well as in SMT with 70 bps. Excluding FX and metal price effect, the growth was 11%.So moving into our different businesses. Also, Machining Solutions had a strong quarter. It's actually also the second best in the company's history, reaching over SEK 10 billion in both orders and the invoicing. We saw a strong North America, a flat Europe, and as I said before, a slight decline in Asia. And that's, of course, driven by the automotive sector.We reached 24% EBIT level. And the destocking, which has been quite significant within SMS, actually pulled down the result with 160 bps. So I think good. Yes, we managed to do a number of acquisitions, including the last one, Dura-Mill, which was informed. We also decided to move the powder from SMT into SMS, from 1st of January 2019 will be reported there. And now it's part of the division for additive manufacturing.Then we come to SMRT, or Mining and Rock Technology. I think, as what we say in Sweden, it goes from clarity to clarity. A really strong quarter with growth of 15% both in orders as well as revenues. It's correct, we've had a large order from Russia in mechanical cutting. But also, last year, we had 2 large orders, each of them SEK 200 million. So if you take those away, it is still 15% up.Maybe the most interesting order during this period is actually the one we got from Hindustan Zinc, which is an order of OptiMine, where we actually digitalized the whole mine, including equipping our competitor's equipment, making the mine fully digitalized. This is really a pioneering order for us and putting actually the standards in the market.Also, SMRT had a good destocking during the quarter, generating a very strong cash flow. EBIT margin is now on 19.1%, which I think is a good number. This, of course, includes Varel. And if we exclude Varel, it's 20.1%. And if we want to be a little bit more specific, if we compare it to our main competitors in the market for equivalent equipment, we are as high as 21.5%. I think Mining and Rock Technology is coming up to the levels, and what's really driving the good performance is the improvement in the margins for the aftermarket, which, of course, is important for the future.Then Materials Technology. I think the development there continues to be solid. We can see that the orders increased with 0%. But if we remove the large umbilical order last year during the quarter, it is actually about 10% growth. So solid growth coming also there, and that's equivalent with what we've seen in the revenues side. We are moving in the direction of reaching 10% EBIT margin during next year. And this year, the underlying margin is 8.6%. So I think that is moving good.Very positively -- and maybe you saw this morning that we received 3 large orders of approximately SEK 1 billion during the beginning of this year. And I think this is both from umbilicals as well as OCTG piping. So a strong start, which I think is important for SMT to be able to reach the levels for next year -- or for this year, I should say.So Tomas, I give you -- and talk a little bit more about the balance sheet.
Thank you, Björn. Okay. Let's jump into the numbers and start with the financial overview. On the top line, if you look at the upper right-hand side, you see the components of the revenue as well as the orders and the revenue growth. Organically, 6% for orders, 9% for revenues. Currency added 4% for both. Structure, minus 4% and minus 5%. That's net of divestments and acquisitions over the year and then actually ending up on the same numbers, plus 6% and plus 9%. The margin ended on 18.1% for the quarter, 18.6% for the full year. And the finance net came in at SEK 136 million in the quarter and minus SEK 800 million for the full year. Quite an improvement compared to last year and actually a huge improvement compared to 3 years ago when the finance net was SEK 2 billion for the full year.The underlying tax rate for the quarter was 25.6% compared to 27.3% a year ago. As you've seen in the report, the reported tax rate was 30%, and the difference is a revaluation of the deferred tax asset, which we have done in the fourth quarter.Cash flow, as Björn mentioned, very strong in the quarter, SEK 6.3 billion and SEK 15.3 billion for the full year, actually exceeding the guidance we had 6 months ago. Return, stable at 22%. And earnings per share SEK 2.62 for the quarter and above SEK 10 for the full year.Now let's take a look at the bridge for the quarter. And the leverage, the organic leverage was 21%, with a margin accretion of 30 bps. Now if you add back the effect of reduced inventories, the leverage would have been 29%, which is, well, okay for the group, and the margin accretion would have been 1%. You can see currency added 1.3 percentage units; and structure and one-offs, which is mainly the net between acquisitions and divestments, was minus 0.5%. So all in all, 18.1%.Now let's move to the balance sheet. And you can see now in the fourth quarter, we had a very strong development after 2 quarters with, let's say, some slightly unsatisfactory inventory development. Now working capital came down, but also accounts receivable came down, very healthy. Collections were very, very good and payables were stable. And on the right-hand side, you can see that all 3 business areas contributed, and the whole group is now back below 25%.And you can see the corresponding development here in the cash flow. Cash flow was very strong in the fourth quarter. And if you look at the right-hand side, you can see that the earnings improved. CapEx was a little bit up, but not much. And the main driver for the cash flow this quarter was the working capital improvement. The financial net debt continues to go down, now below SEK 12 billion, half pensions and half financial net debt. Gearing, 0.2.Now if we then take a look at the dividend, the dividend proposal, the board, as you heard, has proposed SEK 4.25, an increase with 21%. Payout ratio, you can see on the right-hand side, 43%, basically the same as a year ago, which was 44%.Let's have a look at the outcome Q4 and the guidance. We guided for a currency effect of SEK 400 million 3 months ago, we came in at SEK 528 million or close to SEK 500 million in total currency effect. And the difference between the situation 3 months ago is, of course, the strengthened U.S. dollar. The metal prices, we guided minus SEK 100 million, came in on minus SEK 86 million. Full year, we have guided a CapEx of SEK 4 billion, we came in at SEK 3.9 billion. Net financial, we guided SEK 1 billion, we came in at SEK 0.8 billion. And the underlying tax rate, we guided 26% to 28%, we came in at 26.1%, taking out the effect of the write-down of the deferred tax asset we had.Now as it is a new year, 2019, we have a new guidance for you on these items. If we look at CapEx, we have said SEK 4 billion, we now say below SEK 4 billion going forward. The currency effects, transaction and translation for the next quarter, we guide to plus SEK 500 million. Metal prices, minus SEK 150 million for the first quarter. Net financials, we have guided SEK 1 billion before, now we say below SEK 1 billion. And tax rate, we're actually taking it down now from 26% to 28%, down to 25% to 27%. We said a year ago when we had the U.S. tax reform that we expected the tax rate to come down quite a bit, but we would still be in the range, which we are. We are now on 26.1% for the full year. But as we see things playing out now, we have lowered it with 100 bps, so 25% to 27% for 2019.And with that, I would like to hand to over to you again, Björn, for summary and conclusions.
Thank you, Tomas. That was impressive numbers on the balance sheet development, I must say.
Always happy to help.
Yes. Good. We are moving into 2019. And we are, of course, meeting more challenging numbers to beat, not least in SMS. We will work with the continuous improvement to make sure that we protect and improve our margins. We will be focusing on our core, and we will challenge our 34 businesses. And we will drive growth both organically, but a lot of focus, of course, of M&A activities. And of course, with a strong balance sheet and lower valuation of many companies, I think it will be an exciting year.I also would like to take this opportunity. It's been a record year. It has been fantastic development for the group, and I'd like to thank all our employees who actually have made Sandvik so successful during this year. But I also like to thank our financial department. As you all know, we have moved the presentation 14 days earlier compared to last year, which is quite challenging for everybody to getting all the data, all the numbers ready for this presentation. So a great thank you for all of you.And I think, by that, we move over to questions and answers.
What a great ending. [Operator Instructions] And I'll actually take the liberty to start with some questions put through online. And starting with the question from Olof Larshammar at DNB, who asks you to elaborate on this daily phased development in the Machining Solutions and what happened in the different markets, and also what you see during the first few weeks of January.
Yes, absolutely. I think this -- we do expect a lot of questions around our numbers, not least within SMS. And I think we can see that it's been a pretty steady quarter. It's pretty clear that we've seen a weaker China during this period, especially in the automotive segment. And we've also seen some weakening also in Europe in automotive and affecting Germany with actually minus 1% in growth. On the other hand, we've seen an extremely strong North America, with, of course, U.S. as being the driver force within this part. So good number. I mentioned during my presentation that the levels we are talking about here, these are the second-highest orders we have had in SMS during the company's history. So it is quite impressive numbers. If we're looking at the daily rate, we can see that it's moving on the same level as we've seen during the quarter. So pretty much no big changes in either directions, I would say.
And the second question put through by Olof Larshammar is on the inventory reductions in Machining Solutions. Do we see continuing -- continued reductions going forward and an impact also in the first quarter of 2019?
I've been longing for this question for quite some time because I think this is really, from my perspective, this is the best part of our report. I think you probably remember that we were -- we only generated SEK 4 billion during the first half year and now SEK 11 billion in the second. And of course, the quarter is a record with SEK 16.3 billion. And there is a lot of destocking, and it's actually coming from all 3 of our businesses, they all have contributed very nicely. And then you can see actually that our net working capital has now come down under the 25% level, which I think is important. And for SMS, where maybe we were most disappointed that we didn't see this reduction in Q3, they were actually down at 21.7%. I think these levels are good. We should not push the destocking more at this stage. I think now it's important to make sure that we produce in line with what we -- what demand we are getting from the customers. And I think you all know we have no inventory, that mean -- no inventory by the customer because we had 24 hours delivery, which means no one needs to keep inventory in that part. That's why we really can follow the demand very closely. And that's important going forward, and make sure that we don't overproduce.
Thank you. And with that, we'll take a question from the conference call. Operator, would you please put through the first question?
And the first question is from the line of Klas Bergelind from Citi.
Yes. Björn and Tomas, it's Klas from Citi. I have 2 questions, please. I want to come back on daily sales on demand at the start of the year. It seems like Asia is now witnessing some weakness also outside automotive quarter-on-quarter. General engineering is still okay in Europe, still strong in North America, but it seems like it's softer in Asia. If you could talk a little bit about what you've seen in Asia outside of automotive. And then as you've said just now, it seems like you're saying that production is likely -- I mean, what you see right now, likely to be in line with demand here in the quarter. So effectively, it's only the 50 bps that you overproduced last year that will reverse, if that is correct understanding.
Let me talk a little bit about Asia. I think Asia's down is actually driven by automotive. We could probably see maybe a little bit in the general engineering. But otherwise, I think it's quite strong still. So that is correct. And it's correct that the destocking has been taking place during Q4. And we do not expect to have the same destocking during the first quarter.
Okay. Very clear. My second one is on SMRT and if you could help us with what you're hearing from your customers. And I'm thinking about replacement. When we speak to your competitors or, well, shall I perhaps say your key competitor, they're indicating that it's only the first peak in '07, '08 that has been replaced so far and not yet the peak in '11 and '12. And we also understand that most of the volumes at the last peak was primarily underground where the replacement cycle is particularly short, I think 5 to 6 years. So is -- there is also an argument that we could have a second wave of replacement pretty soon. Is that something you hear from your customers which could help orders increase sequentially from current levels, and the early signs of a new step-up in replacement, please?
First, it's difficult to talk about the future and expectation there. And you can, of course, do a lot of theories about if it's replacement of equipment and so on. First, it's pretty clear that all the equipment -- and I've said that's why we are a little bit in the so-called sweet spot of mining, because all our equipment are actually wear equipment, it's not really capital investments in that way. You have to replace them all. And if you don't replace them, you have to spend a little bit more on aftermarket on the equipment. We've seen, of course, a lot of replacement of the fleet, and I think we will be expecting that also. But I'm still saying that what is actually driving -- I mean, every mine wants to have new equipment, more efficient, more automatized. But in the end, it's actually the boardrooms who turns on the valve and turns off the valve, and that depends a little bit on how much money the mines are making at a certain stage. So I think that is probably more important than just the replacement part of equipment. So we have to monitor. We've seen metal price has gone down a lot. Gold, of course, has gone up. But we've seen in copper go under $6,000, but I think it's improved a little bit more. And I think the investment decisions within that industry has been taken, and that is long-term investment. So I think we are pretty optimistic when it comes to copper. Other metals have gotten maybe a little bit more hit. We've seen that nickel, which is affecting us, of course, in the SMT revaluation of inventory and so on. But still, we feel that it's a good demand, and especially with the aftermarket. I think it's a good indicator of the activity level. And we have had a fantastic development during 2018 there with close to 15% growth, which is during the whole year. And that is important. But I think it's more, as I said, how much money the mines are making that's going to determine what kind of investments we will see going forward.
Let me ask this in a different way, Björn, and I promise to be a bit short. Is demand below replacement in drilling and underground still?
I think I have a little bit difficulty to answer. I think it's probably pretty much in line, I think, but I'm not 100% sure. We'll investigate a little bit in that, and we'll try to come back a little bit more going forward.
Thank you. We'll continue with another question from -- put through online, and it's from Markus Almerud at Kepler Cheuvreux who queries about the profitability in Varel and what will drive profitability from here on, I assume, in total of SMRT.
SMRT. Okay. A little short of Varel. As we see, we are getting closer now to put the company in the market. First, I'd like to mention that 1/3 of the company we are keeping, that is the mining-related part. And then we have the other part, which is the oil and gas part. We've seen a good development. And we are close to 10% margin on that part. But that's before the PPA. Then you have dock the PPA, and then you come actually to zero profit on that part. Of that business, we have a lot of goodwill. And when we put that out to the market, I'm feel pretty sure that we will be needing to write off some goodwill during this process. On SMRT, generating profit, of course, I'm very happy with the development that has taken place during this year, very much driven from the aftermarket that has been enormously strong. But we have, of course, much more to be done going forward. It is continuous improvement. If we're looking at the last year, we've had such a huge volume increases, which means that we have been holding back a little bit on those continuous improvement activities. Now when the levels are -- I mean, we managed to get the production level up to the same level as the order, now we can start concentrating on all these small things to make the businesses better. And that, hopefully, will drive some margins also.
Thank you. And we'll take another question from the conference call, please, operator.
And the next question is from the line of Graham Phillips from Jefferies.
My first question is, if we look at the drop-through margin in SMS and adjust for the inventory change, it looks like it's sub-30%. Is there any reason why it's coming in lower than that? And if we think about 2019, the impact maybe of more round tools, less inserts, more powder additive manufacturing, could it be, even with some small growth, 2%-ish, that you're still going to see something sub-30% on mix?
Thoughts on the bps there from the destocking, that is 160. So if you look at the underlying there, it's about 25.6% profit margin. That's a little bit where that business is running today. We know that during the last years, the round tools have been increasing more than inserts, and we still managed to protect the margins. And of course, going forward, more challenging numbers, less growth that we, of course, we need to put a lot of efforts to be able to protect the margins going forward. So we will take measures to adopting SG&A costs in line with what demand we will see going forward. So it's very much important for SMS to show that we can maintain the margins going forward.
And my second question then is on your targets. So I don't expect you to give the new targets today, but you've said you will give them before the Capital Markets Day. Actually, the indication, will it be something you might publish in the annual report? And particularly, when we think about the amount of cash you're now going to have -- maybe this is a little bit directed also to Tomas as well, you're still guiding for net financial items under SEK 1 billion. But clearly, you're going to have probably net cash at some point today -- sorry, this year, and there's going to be the opportunity probably to see a lot more M&A. And again, I think, Björn, you've touched on the point that there's going to be some good multiples at the moment better than before to build the business, and where this might actually be where you're going to focus, which division.
Yes, why don't you start?
Yes.
Okay. The first...
I didn't really get the question.
On the -- the first part, which was that, help me.
Net financials.
Net financial, okay.
Yes. But what was the question, Graham?
Okay. Well, the point is that you're going to have net cash, it seems that you're guiding to quite a high net interest expense for the year. Is that anticipating that you're going to be making some acquisitions fairly large that will use a lot of that cash?
Okay. Okay...
I can say that the acquisitions that are driven, of course, from our operating entities and they will be trying to improve their business, making sure that they are #1 and #2. Our financial situation gives us the freedom we need. And I think that is the most important. It's not actually how much money we have on the bank that drives the acquisition, that is a purely strategic incentive that does that. But of course, the freedom is fantastic, to have a strong balance sheet going into tougher times. That's pretty clear.
And to answer your question on the guidance. No, we have not built in any major acquisitions in that guidance on the net financial items for 2019. When we say below SEK 1 billion, there is, in the 2018 numbers, around SEK 100 million in positive revaluations, which we bumped back up into the EBIT, which will impact the earnings. Really, the underlying is SEK 900 million and then you have to add another SEK 100 million for the IFRS 16 accounting things, so we're coming close to SEK 1 billion for 2019.
And the timing for -- now I remember what the question you said, when are we coming out with the new financial targets. We promised to have it before the Capital Market Day in May. I will be surprised if we would have them ready for the annual report. So I think it's probably will be end April somewhere, where we'll be launching. Maybe in connection to the annual meeting, somewhere around there. But it will be ready for the Capital Market Day.
Next question is from the line of Max Yates from Credit Suisse.
Just my first question would be around sort of your customer inventories. And I wanted to see whether we you had any sense of whether your sales had been going into customer inventories and whether, from conversations with customers, you've seen any buildup of inventories on the customer side which may then affect demand in Q1. So any comments there will be helpful.
No, I think the structure and nature of that business we have, especially in the SMS part, that is, of course, from hand into mouth, meaning that we are delivering directly to the production. And our short delivery times helps us, of course, to avoid inventory buildup. So we have no indication that any of our customers have stocked up during this period. So we think they are pretty clear numbers. In the mining side, of course, the orders -- we produced what we get orders on and that we try to deliver. We have also, of course, enormous inventory reduction also in the mining period, generating SEK 2.7 billion in fresh cash in that part. So I don't think there is any inventory buildup actually among our customers.
Okay. And just the second question is around dividend. Obviously, you showed us -- you showed a slide that shows us a 19% increase since 2015. Obviously, the payout ratio coming down. But just in terms of when we think about your earnings growth maybe starting to flatten out, do you still think you can grow the dividend above your earnings growth, i.e. the payout ratio, since you're going back up as earnings starts to flatten out given where your balance sheet is? So can we still keep the dividend growing faster than earnings given the lack of leverage in the group currently?
I think that's absolutely our objective. The one who decides in the end what we pay dividend is at the annual meeting. We can only propose for it. But of course -- and that's, of course, the reason why we don't pull up the dividend even higher, which we could actually do during this period. We have the objective to improve every year, like everything else in the business. And now is the second time we lifted with 21%, which I think is pretty generous and a good level at the moment. So yes, we will definitely strive to improve every year.
Thank you. And again, coming back to a question put through online from Rizk Maidi at Berenberg, coming back to China and the development there. Can you give an indication of the China decline outside of automotive? Do you see any other segments coming down?
I mentioned there might be a little bit on the general engineering, but otherwise, it's mainly what we're seeing in the automotive sector that is pulling down. We should know, of course, that China has been producing 29 million cars every year. That is, of course, a big question if that's sustainable in the long range and so on. It's not a big surprise, I think, for us.
Thank you. And then, operator, can we have the next question put through from the conference call, please?
And the next question is from the line of Andrew Wilson from JPMorgan.
I just wanted to go back to the mining margin and thinking about 2019. We've obviously seen very good improvement as you've gone through 2018. And is it kind of Q4 level and think about a 19% or the 20% [ XRO ], I mean, is there any reason why we shouldn't see that improving? And if we do have to think about some headwinds, is it things like the mix? Is there anything in terms of investment that we wouldn't be factoring in? Just trying to get a sense, I guess, of how sustainable that Q4 run rate is and then what upside we have to it.
Andrew, we could never guide the profit part. But of course, we're coming up to good levels. We have good orders on hand. We have a good development in the aftermarket and are really come up to new levels. So of course, that's our objective to keep our self on these levels. I think time will tell if we manage or not or if something to comes come. But it is a different SMRT that has been created. And I think we are -- we're coming up to levels where I think we should be. And this will, of course, also help us to protect the margins in the downturn. The aftermarket is the key for agility within the mining business. And that's, of course -- I'm really happy to see that we reached this level. It's -- I think they've done a good job there. We have still things to do. And I mentioned it before. When you're growing so fast that we have done during this period, it's difficult that you get inefficiencies in the processes. Some suppliers are not supplying product components in time for your productions, you get hiccups and things like that that can affect your margin. And we've seen that during the year. But I must say that one of the areas where we had a lot of issues during the year has been in underground drilling side there. But during the last quarter and the end of the quarter, they managed to get a lot of equipment up and getting the production in a really good shape, which is, of course, also paying off in a -- when it comes to margins. So I think they're coming up. They are on a good level now. Of course, you can always be better.
And maybe if I can just follow up in terms of the mining portfolio. I mean, that's clearly the -- I think we've seen the statements around the rail and the potential process there. But also, if you think about the rest of the portfolio, is that now how you wanted to look going forward? Or do we need to think about either further divestments or needing to add either capability or capacity in the existing core?
In Sandvik, we'll be challenging all our 34 operations, and they need to prove that they are #1 and #2 in that part. They have to prove that we see that this business where we are operating will be successful also in the future. So I'm going to challenge them continuously, and we'll see what comes out of that. I think, of course, it's a big difference today when you look at the way they run their businesses and how our portfolio looks like. I think, more or less, all our businesses have improved and performs better. But there are a couple of the businesses that are challenging still and where we need to shape up a little bit to be able to be as successful as we want to.
Next question is from the line of Lars Brorson from Barclays.
Björn, Tomas, a couple of follow-ups from me. Björn, just on China first, if I could, within Machining Solutions. My understanding is it's down about 7% or so organically in Q4 at the order level. There would've been a bit of lumpiness around a couple of, I think, blanks and powder orders, but call it down mid-single digit in Q4. Can you help me a little bit with the segmental call around that? You specifically said, of course, that you didn't see any broad-based weakness in general engineering. I have your automotive segment within SMS in China be about 20%, 25% of that business. Should we think about that down mid-single digit or so in China in Q4 as automotive down sort of high teens, low 20s and the rest broadly stable? Or something different for that?
I mean, it's difficult to talk about what's the future. We can see that -- what's -- how this year started. It started pretty much in line. There's no big deviation from what you are saying at the moment. It is the automotive mainly that is going down. And of course, it has been affected as we have been reading in newspaper and seeing the automotive companies. Going forward, it's difficult to say. We also know, of course, China has the ambition to protect their growth. As you know, they want to reach a growth of 6.5% for the country. There are a lot of initiatives on the infrastructure side that might have effects going forward. So I think China will work hard and not try -- and not go into recession going forward, to be honest. But I think time will tell, and we will adopt to that. You probably know that we started to prepare ourselves for tougher times for over a year ago now. And we -- I think we and every other industry in the world has done all those preparations if we would see that the demand would go down. And then we need to adapt ourselves, so. But yes, correct, automotive is the driver somewhat in the general engineering. And of course, things like that hangs together. The General engineering, of course, also supports the automotive in one way. So we'll follow that carefully and make sure that we take the actions that is needed.
And on that, if I could, just secondly as a second follow-up, the underlying incrementals in SMS in Q4, I appreciate is in the high 20s or low 30s. But if I adjust for pricing, which presumably is a good SEK 100 million, SEK 150 million or so, I still have a 0 or slight negative underlying volume leverage in the business. Could you help me a little bit with what exactly are you doing on costs in SMS and what will be the timing and magnitude of the actions you're taking there?
Yes. It's correct that the underlying, if you look at both days and pricing source of underlying, is pretty flat, I would say. And SMS are taking the actions within the business area to adapt the SG&A cost in line with that demand, and that will -- has already started and then we'll continue to do that during the year. And as I said, they will -- they work hard with this continuous improvement and adopting their operations to protect the margins, that's their focus.
Just SG&A, no initiatives right now beyond what you've already announced in France around production...
Yes, but that is an ongoing thing that we have. And if you'll recall, the last 3 years, we closed more than 15 factories within SMS, and we are looking into more also going forward. So this will be an ongoing journey, both structurally as well as through SG&A cost. And of course, if we would need to take down production levels, if that comes, of course, then we need to adapt those also, but we're not there yet.
Next question is from the line of Gael de-Bray from Deutsche Bank.
The first question I have is related to SMS. I think one of the positive surprises in today's release was the sequential increase in demand seen at SMS in North America. Could you elaborate on this positive momentum in the U.S. in terms of the key drivers there and what you've seen so far in January, specifically again in the U.S? That's question #1. And then question #2 about SMRT. I think in Q3 you had indicated that the order intake in mining was a bit shy versus your own expectations. And we had, indeed, a much stronger performance in Q4. But now I'm wondering to what extent there was a bit of a catch-up effect this quarter with some orders potentially postponed from Q3 into Q4, implying that Q4 was perhaps a bit inflated, a little bit exceptional. So I'd like to get your thoughts on that, well, basically to get a better view of the -- on the underlying demand levels for SMRT.
Correct. Let's start with the SMS development in North America. Yes, it is very strong. And I think it's only automotive, which I would say is flat; but otherwise, you're seeing a good push and good growth. Aerospace is very strong. Oil and gas is good. General engineering is moving very well. So it is a strong development there. And of course, that's compensating the weaker part, as we're seeing on the more Far East part. So that is good. It's a good momentum. On SMRT on the order side, yes, I think we said that in the mining side it bumps a little bit up and down when it comes to order and the timing of them. I think 15% was a little bit higher than we expected maybe for the quarter, but I'm happy that, that is, of course, boosted by this nice order in Russia. But to be honest, last year we had SEK 200 million orders, so if you wash those out, it's pretty much what we see. On capital equipment, yes -- or capital equipment on rigs, drill rigs and loaders and trucks and those equipment, they will be replaced when they need. But for me, the most important to see what -- where it's really happening in the mining side, and that is actually on the aftermarket. And that has shown now for quite some time, the whole year actually, 15% -- around -- between 10% and 15% growth. And that gives a good indication that there is a whole lot of hard work out in the mines at the moment. How that looks going forward? It's much too early to say. We take one quarter by quarter. And we see -- I think our factories have a lot to do at the moment and they need to deliver on these large orders, and that's where the focus is. And I think the future would tell more in detail where the mining market is driving.
Next question is from Alexander Virgo from Bank of America Merrill Lynch.
A couple of ones. I wondered if you could talk a little bit about pricing in mining, particularly in consumables. Just any commentary you can give us around there. And I suppose, in particular, development sequentially through Q4.
Yes. I think the -- I mean, we are pretty far away into good times in the mining side, and I think that pricing has now, of course, added up to where it should be. It's running around 2%. It varies a little bit between the different businesses there, but around 2%. And that's also when it comes to drilling consumables part of the business. So I think, overall, it's good price levels now in the mining business. And it should be. I mean, it should be there.
Yes, absolutely. I was wondering, your commentary on efficiency measures in consumables or in Rock Tools. Just wondered whether you can give us an indication as to how structural that is, the timing of that and the impact that, that might have. Or is that just a sort of an ongoing efficiency plan?
When it comes to consumables, it's a little bit same as when it comes to parts and service. This very much reflects what the mines are doing. These are the operation levels. And if you look at -- they are normally growing not as fast as you see the equipment. And they are much more stable, they go with 1%, 2% up, depending on how much work is taking place in the mines. They have worked hard during this period to make sure that they are efficient. I don't know if you had a chance to see our production facility up in Sandvik, where we make the drill steel and all the bits and saw. It's totally automatized and very, very efficient. And that's what we'll be working. And that it's more easier to take these small, what I would say, continuous improvements because the growth and the demand improvements is more consistent than you see on the equipment side. And it continues to grow on a good level, pretty much in line with our aftermarket business.
Thank you. Operator, do we have any more questions on the conference call?
Yes, we have one more question, and that is from Andreas Koski from Nordea.
I would like to ask about the move of powder operations from SMT to Sandvik Machining Solutions. So first, could we read this as preparation for your decision on what will happen with SMT when they have reached the 10% margin, i.e., that you're preparing for an exit of SMT, if that's what you would decide?
No, it has nothing to do with that. This is actually that how can we drive powder, how can we develop our 3D printing business in the most efficient way. And we have been considering this for quite some time because we're building up within SMS a new division there. And to be honest, I mean, to be successful within 3D printing, you actually need powder. That's the basis for success. And being a leader within this, it makes sense to put these together. So it has only to do with our future operations within additive manufacturing. It has nothing to do with what's going to happen with SMT or not. I mean, SMT is what it is. I promise you that we will reach 10% this year, and then I will be telling you what's going to happen with that business area, if it's going to continue as part or if we find some other place for that. But we'll come back to that at the right time.
And would you like to give us what kind of impact this will have on SMS revenues and EBIT? And also, will this make SMS more volatile when it comes to organic growth , i.e., is powder's revenues more lumpy than SMS?
I mean, as far as I can say, the powder business is around SEK 400 million, so it's very, very small. It is actually pushing up the margins in SMT, but it's not pushing up the margins in SMS, if you put it that way.
A little bit dilutive.
So to be honest, for the group, it's very -- have no impact. But of course, it's pulling down a little bit on SMT -- on SMS and also on SMT. So if we look at it that way, there are no winners. But of course, the ambition for this -- it is a high-profit business and it should be high growth and high profit, so we think it should be adding value also to SMS in the future.
So what kind of impact does it have to SMT's margin?
To be honest, I promised that we'll make 10%. With taking out that business, we have said 9.7% is the -- so we've given them a relief of 0.3%. If -- now I'm being very specific, but that's about how it is. So we said, "Okay. When we've taken that out, if you do 9.7%, you reach your target."
Thank you. And with that, we round off this presentation. But before we finish, I'd like to remind you all to -- if you haven't already registered for our Capital Markets Day in Finland in May, please do so now on our website. With that said, thank you very much for joining us today, and we'll see you in about a quarter's time.
Thank you.
Thank you. Bye.