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Sandvik AB
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Greetings, everyone, and welcome to the presentation of the Fourth Quarter Results of Sandvik. We will spend about the next hour together. And as we normally do, we will look through the presentation and followed by a Q&A. And with us today, we have, of course, our CEO, Björn Rosengren; and our CFO, Tomas Eliasson. And without further ado, I will let Björn and Thomas take over from here.
Thank you, Ann-Sofie. Hello, everybody. Good morning. So starting up with 2019, another remarkable year when it comes to earnings and cash flow. And this is despite that we have big headwind when it comes to our so-called short-cycle business. And I think it's building on a strong mitigation package, which was presented during Q3.And if we look at the earnings for the year, 18.6%, and a cash flow of SEK 18 billion, which is of course both of them very high numbers. But Tomas, there is one disappointment and that is related to our financial net debt. I think we have EUR 40 million in net debt. And you promised me debt free.
Yes. We went from EUR 4 billion to EUR 40 million. Yes, that's a big miss. I'm sorry, Björn. And I realize this will have a negative impact on our future relationship. The remaining, whatever, 3 days.
Exactly. Anyway, I think we should be very happy. So it's more or less debt-free also when we look at that. And that is, of course, a big achievement.Anyway, I think the decision to separate the SMT was made in the quarter. We had the -- also decided to dispose Varel, the oil and gas business, which is expected to be closed within short. And very positively, also moving from the stability profitability into the growth mode, we managed to do 9 -- or report 9 acquisitions during the year.So let's take a little closer look at the Q4 report. Also, the Q4 is pretty similar to earlier quarter, meaning that we see a big headwind, of course, in the early cycle business, more driven by the automotive and Europe weak, reaching an order minus 6%, while we see stronger demand -- continued strong demand both in the mining as well as in the energy and oil and gas industry.So if we look at the earnings for the quarter, SEK 5.1 billion, which is actually a record quarter for us, it's in line with what we saw during second quarter 2018 when everything was going our -- and I think that is despite a very weak market.We also see a record high cash flow, which is, of course, driven by big earnings but also a dramatic reduction of net working capital, and that's mainly inventory, SEK 1.9 billion. And that, I think, is a great achievement during the quarter. And we have a dividend proposal which will be finally decided at the AGM of SEK 4.5 per share. That is actually an increase if you look at it annually since 2016 of 18% per year. So shall we start looking at how does the demand look out there? And I mentioned, yes, Europe is the weak. And I think it's the automotive and Germany which is really sticking out on the weak side. But also North America, this is becoming weaker, while we see Asia somewhat better. We should also know that China for the quarter, for the whole group, was up 15%. But if you look at the SMS, which is the underlying, it's about minus 1%. So it is a flattening out. But if you want to be positive, you can see an improvement there. It's, of course, comparison with much lower number. It is mostly the automotive industry, and it is also general industry which has some connection that are weaker, while we still see a good development within the aerospace industry. Australia was also fantastic during -- I'd like to mention that because we had huge order from the mining industry there. I mean a lot of orders and the good deliveries during the quarter which is very, very promising. So looking at the order side, I think it's minus 6% in volume down, and that, of course, comparing to last year. That is if you look at the different businesses, I would probably say that you are around 10% on the mining and around 7% -- sorry, on the SMS and 7% on the mining. But there was a big order during last year. I'll talk a little bit about that. I think, overall, a pretty solid demand. On the revenues, yes, it's minus 2%, and that's, of course, driven by large deliveries on the SMRT business, which is sticking out to record levels. On the EBIT level, we are up 9%. And that's, of course, driven both by strong currency as well as both metal price effects. But there is also saving under, which is SEK 250 million during the quarter. So if you analyze that, that actually ends up to approximately SEK 1 billion. And you know from the program that we presented before, the full program would be approximately SEK 1.7 billion. So there are more, more savings to come during the coming quarters. Anyway, reaching a 19.1% and SEK 5 billion in profit. And I said that is a very, very high number for Sandvik. So I'll take a little bit more deeper look into the different businesses. And where we're seeing the most of the headwind, that is, of course, in the SMS business. But I think you see a lower margin which is natural as that is a very vertically integrated business. We have also lowered the inventory with SEK 630 million, which is, of course, a record when it comes to decreasing inventory. This means that we actually have been running the production 20% under last year. So if you add 2 percentage point, that's about what the effect on the EBIT margin is, then you are around 22 and -- 22.2%, and I think that's where that business should look like. So I think strong on from -- seen from that perspective. But it is a challenging business and it has been now for the last 6 months. And we do expect that this will continue also moving into Q1, where we have of course challenging comparison numbers. Sticking up as really being the star of the quarter is Mining and Rock Technology. And for me, this is, of course, very warming when I can see the EBIT margin reaching 21.6%. I think that's a fantastic number. Also, this business have done a good job when it comes to getting inventory down. So over SEK 1 billion in reduction of inventory, actually getting ourself under the 25% net working capital. So that continues to develop in a very strong and good way. SMT. Yes, Johan and his team, they promised that we should reach here the 10% underlying profit. And congratulations, SMT. You've done a good job. We reached the 10% for the full year. And I think that's great. Orders are up 6%, in that there is a large order within the energy sector that is supporting, of course, the growth numbers that you are seeing then. If you see -- if you would exclude the large order there from the energy sector, it would be minus 16%. So there is challenges also in this business on the so-called early cycle business. Also, SMT have reduced the inventory and also generated good cash during the quarter. Tomas, let's look at the balance sheet. How does it look?
Yes, the balance sheet and some P&L numbers as well.
Go.
So let's jump into the financial summary as usual, and start at the top right-hand corner, the components of the top line. Organic growth, minus 6% for orders, minus 2% for revenues, as you heard. Currency, plus 4% for both orders and revenues. Structure, plus 1% for orders and black 0 for revenue. So all in all, minus 2% for orders and plus 2% of revenues. So if we look then at the quarter, profits were up 9%, SEK 5.066 billion, which is a really, really good number, plus 9%, as we said, for the full year; plus 3% -- sorry, for the quarter, plus 3% for the full year. The margin, 19.1% compared to 18% a year ago. And for the full year, 18.6%, the same margin as we had in 2018. The finance net, SEK 274 million negative in the quarter and SEK 1.2 billion for the full year, just as we have guided. We'll come back to that in a minute. The tax rate is a little bit, I was going to say, weird or strange this quarter. But I have a special on that one as well. The reported underlying tax rate, excluding items affecting comparability, was a record low 17.5%. But I'll get back to that. Working capital below 25%. Cash flow, SEK 6.6 billion. We had SEK 6.2 billion or nearly SEK 6.3 billion a year ago. We thought it would be difficult to repeat that. But it was even better this time. So 6% up. Returns above 20% and earnings per share had a healthy increase. So if we look at the bridge first then, organically, minus 2% on revenues, that's minus SEK 770 million. A negative leverage of 11% which is not too bad, actually a positive accretion, 20 bps. Currency was big, 40 bps accretion. Metal prices was quite big as well this time, 80 bps accretion. And structure, 30 bps dilution. So that's the journey from 18% to 19.1%. Now if we take a look at the tax rate. The reported tax rate looks strange, 118.5% in the quarter, but that is because we had the big impairment of the Varel oil and gas divestment. We have impairment of the excess values. If you take that out, the reported tax rate is 17.5% for the quarter and 23.5% for the full year. Now in that number in the fourth quarter, there is a lot of not items affecting comparability, but there are a number of positives like tax provisions that we have released. We have had to release them because the outcome has been better than we had expected. And we have also started to use some tax losses, which were not valued, meaning that those profits are basically tax-free. So if you adjust that, just to understand where we're going when we're going into 2020, the normalized tax rate, as we call it, is 23.5% for the quarter and 25.1% for the full year. So it's in line with the guidance for 2019, 25% to 27%, although, as expected, in the lower end of that range. And I will come back to the guidance at the end of this presentation because we're changing it now for 2020. Tax rate. The important line here is the one at the very top. The tax rate is -- sorry the interest net is going down. We will end up somewhere between SEK 400 million and SEK 500 million, SEK 532 million now for 2019. We did a redemption mid-2019 of SEK 5.1 billion. The cost was SEK 202 million, as you can see in the table here now. This means that the interest net will be reduced by 50% as per midyear 2019. The full year finance net was SEK 1.2 billion, exactly according to guidance. Now let's move to the balance sheet. You can see here the good development of net working capital at the end of the year, below 25%. 25% is kind of the inofficial target we have. That's where we want to be. And you can also see on the right-hand side that all 3 business areas are contributing to this very nice development. And this, of course, has a very good impact on the cash flow, on the free operating cash flow, SEK 6.6 billion in the quarter compared to nearly SEK 6.3 billion a year ago. So even better this year. Profits, of course, are, as usual, the big contributor. Net working capital continues to deliver as well. And CapEx is basically on the same level as last year. So this leads us to this beautiful chart. And I'm sorry, Björn, but it's not 0. If you count billions, it's actually 0, but it's SEK 466 million. Yes. So if you go back, even back to 2014, this number was close to SEK 40 billion or EUR 4 billion. And it's now down to SEK 466 million. So we're basically debt-free financially. So financial net debt is basically 0. So the net gearing, which is now on 0.18, is consisting only of pension debt, some actuarial losses and the capitalized leases. So we're entering 2020 now with a very, very strong balance sheet, which gives us freedom to operate, freedom to maneuver and freedom to do the investments that we want to do. Now let's move to the dividend. As Björn mentioned here, the Board is proposing to the AGM to increase the dividend from SEK 4.25 to SEK 4.50. That is an increase of 40% -- sorry, the payout ratio is 40%, and the average increase over this period of time is 18% annually. Outcome of the guidance. We guided SEK 400 million in underlying currency effect, we ended with SEK 391 million. So basically, according to guidance. The total currency effect including all revaluations was plus SEK 297 million. Metal price is SEK 174 million, not as much as we guided for the SEK 300 million. And of course, the nickel is coming down, so less positive metal price effects here. CapEx, SEK 4.1 billion. Net financial debt, SEK 1.2 billion, we guided SEK 1.2 billion. And the normalized tax rate, 25.1%, at the lower end of the range of 25% to 27%.Now as it is January and we're entering a new year, we have a new set of guidance here, targets -- not targets but guidance. CapEx, we will keep at SEK 4 billion for 2020. Currency effects, we only talk about the next quarter, SEK 150 million. Metal prices, here also we only talk about the next quarter, we say minus SEK 200 million. The interest net, we have set to minus SEK 500 million, maybe a little bit conservative. But it will be somewhere between SEK 400 million and SEK 500 million. It is closer to SEK 400 million if you consider the redemption or the prepayments of loans. But the swaps are coming up a little bit. So somewhere between SEK 400 million, SEK 500 million for the full year. And just to compare, 4 years ago, this was SEK 1.6 billion. Now it will be somewhere between SEK 400 million and SEK 500 million. So a very good development. And then at the very end, the tax rate, we're taking down the guidance again for the third time now to 23% to 25% for 2020. And 20 -- as you saw, 23.5%, that's the sort of level we're running at right now. So with that, I'll hand back to you, Björn, again for conclusions and summary.
Thank you, Tomas. It is a little bit emotional to sum up a little bit when it comes to Sandvik, where we are and to reflect a little bit on where we're coming from. I think besides that we financially are very strong, and I think also this quarter and the year has shown that Sandvik is a world-class company performing better than the most. I think that's fantastic. The other part is that I think Sandvik is a market leader within the businesses that they operate. And I think that's very important, being #1 or #2. We have a decentralized structure today which makes us much quicker in our decision-making; and also more agile, which I think this quarter has proven. We have managed during this half year to reduce costs in line with -- and in line with the demand that we are seeing in the market and still deliver good numbers. So from my perspective, I think Sandvik is standing strong for the future. And I cannot more than wish, Stefan, who's coming in now after me, and the rest of Sandvik Group all the best and all the success in the future. And I'm looking forward to follow the great developments. So thank you very much, everybody. Thank you.
And with that, we'll open up for questions. And operator, we'll start with a question from the conference call, please, if you would put through.
[Operator Instructions] Our first question comes from the line of Lars Brorson from Barclays.
Björn, sorry on your last conference call to ask you about near-term demand trends in Machining Solutions. But I was struck by the comments, I think, on the media call, where you suggested demand in January so far on par with December. I'm assuming December was weaker than October, November, at least in the U.S. and probably in Europe. So tracking down, what, low double. I just want to get a sense for what exactly you have suggested and what the commentary has been in January. And also just for clarification, did I hear you say China for SMS was down 1% in Q4, which, of course, within the context of APAC being down 7%, would mean that the remaining APAC, I presume notably Japan, is still very weak? I just wanted to clarify that.
First, I'd say that December was not a negative month at all. I think it probably showed some positive developments. So I would say December was not weaker than the rest of the quarters. So I think it's a pretty -- been a pretty -- I mean pretty average, the whole month, if you look at. I mentioned during the last call, and we were a couple of weeks into that quarter, that we are running approximately on the same. And I think sequentially, that hasn't changed. So it's definitely not weaker in December even though we ran our production very low during this period. We took a longer break there which, of course, had a fantastic impact on the cash flow and the inventory level because we still delivered out there. So we are not really seeing a weaker January than we did during the last quarter. I think you probably remember that when we saw the weakening in the market, it was actually in June last year, that's where we saw the big drop. So the comparison during January and the beginning of Q2 is, of course, challenging because we still saw a very strong market there. But sequentially, we do not expect anything weaker than we have seen during that period. That was on the SMS part. Yes, I know if you want to be positive somewhere in such a weak market that we are seeing because it is big numbers, of course, out there. I think China is probably showing they're more positive when it comes to Asia, where you've seen improvement, especially in the end of the quarter. So yes, Japan is low and India is also low in that respect. So not so big change to that. So the more positive is actually China that I would say from the Asian part. But -- I mean, when we look at it, it is the automotive industry which is weak, and that is especially driven by the Germany and the European part, that is keeping the numbers so low. But I think the positive from my perspective here when it comes to SMS, they're taking down the inventory, SEK 640 million. That is actually a record when it comes to inventory reduction. That means that they've been running the production 20% under the last year's demand and still delivered over 20% EBIT margin. I think that is good. That actually cost us a couple of percentage points to do that. So if you add that back, it's running around 22.5%, 22.2% approximately in EBIT level. So I feel pretty comfortable with that part. They've done a fantastic job, and taken out costs in relation to the demand and actually exceeded my expectations.
Can you remind me, please, of your SMS revenue exposure to the Boeing 737 MAX? And have you already see an impact there in 2019 from the disruption to the supply chain?
If you look at the market demand here, we show that the aerospace industry is actually the only segment which is improving part of that. And then, of course, yes, Boeing is an important part of the business, but also Airbus in Europe. But there are, of course, many other players within the aerospace industry also. I wouldn't say that is has effect, but probably it has. But I don't have any certain numbers if that is so. But I think it's a lot of airplane that will be manufactured, either by Boeing or Airbus, so I think the orders will be delivered going forward. So that can have effect maybe in the...
Especially -- if I can just ask you on SMRT and the order trends in mining equipment. If you exclude large orders, your mining equipment business is down double digit in the quarter. It was up mid...
It's actually minus 3% if you take out the large orders. And I think the most important here -- I mean, first, I think that's a good level and very strong in the end of the quarter, which was great. And the positive is that the aftermarket is running around, yes, mid-teens around 5%. So there is a lot of activity. So we don't see any softening in the market. Some might say that, yes, we were waiting for some orders during the quarter, but they came in, in the end of the quarter also. So I think it's not bad. I think no change actually in the demand, what you see. You also see the mineral prices work itself up a little bit when it comes to gold. And of course, our biggest exposure is gold and copper. So it looks pretty good and I...
I didn't finish my question, Björn. I'm a little bit surprised. I mean you write in the report that equipment orders are down low double digits. I appreciate that, overall, orders are down 3% excluding large orders. But I'm after the equipment orders.
I'm sorry. Sorry.
And again, I appreciate that your crusher and screen business is doing relatively better, and your underground mining equipment has the largest decline is what you write in the report. And I'm wondering whether you're able to quantify that.
10%.
I presume that means underground mining equipment down in the 20s.
No, no, no. Mining equipment is around 10%. So that is the -- equipment is down 10% if you compare to -- on the equipment side.
Okay. I just wondered, just finally, can you -- sort of what do you read into that? How much of that is transitory? We've seen some social unrest in Chile and Peru. I think you mentioned that earlier. We've obviously seen maybe some more transitory issues around pausing. But do you see that come back in Q1? Or do you think we're entering a weaker trend here as far specifically as your underground mining equipment piece is concerned?
No. I mean I'm saying that again and -- the demand from the mines are at a good level. It's not changed. I also said that it can vary a little bit about quarters when you get the big orders and saw it delivered. That's natural. But I think the same level that we also saw during previous quarter, these are the levels where the mines are replacing equipment. We have not had any cancellations or anything when it comes equipment. If you say there's been maybe some delays, maybe in some markets, but I also think, by the end of the year, we received a lot of orders also that people have been waiting for during the quarter. So I don't feel so nervous. Australia is sticking out, which is the biggest mining market. That was extraordinary both when it comes to orders and revenue. But also China was good during this quarter. So yes, it varies a little bit between the different parts of world but we do not see any major decline. But it can vary between the quarters and that's how the orders are being placed. Going forward, it's difficult to say how that is but...
Björn, best of luck.
Yes, thank you.
Thank you, Lars. And as a little bit of a reminder, I show that you can now also put questions through online. I will actually ask a question that's come through online here with regards to SMS and the inventories going forward. Do you expect further reduction on inventories in the first quarter?
No, I don't think so. I think they've taken it down to a level where, I think, it's in line with the demand that we are seeing in the market. So we should see production levels in line with the demand now during the quarter and the first half year approximately. We have to, of course, make sure that we are not building inventory, which is always, I mean, an important part, which we did a little bit during last year. And I think the divisions are focusing very much not to end up in a situation where we are overstocked after the first half year. That will be important for the divisions to make sure that. But I think they've done a tremendous job to get inventory down during the Q4 and still deliver good numbers. So I think I'm pleased with that.
Thank you. And operator, could you put through the next question from the conference call, please?
The next question comes from the line of Ben Uglow from Morgan Stanley.
So first of all, my first question -- and like Lars, I apologize for focusing on SMS in the short cycle. Could you just contrast the end market and underlying trends that you're seeing between Asia and North America at the moment? If I look at the orders, Asia has improved from minus 13% to minus 7%. So getting better. And North America has gone from minus 4% to minus 11%. Now my assumption would be Asia is being driven largely by slightly better comps in autos and general engineering. Is that assumption correct? And then what is really taking down North America? Is this, again, autos or is it something else? Is it more broad-based? Can you give us some sense on the North America decline, please?
Yes. It's more related to the automotive there and somewhat the general engineering part of the business. That's -- I mean, that's been the driver of this whole industry softening in all these markets. And yes, I mentioned if we should see some small light, it is actually in China that we've seen somewhat demand in there, especially in the end of the quarter that has gone in the positive direction. Otherwise, it continue to be around soft, but Europe is the weakest.
And is it the case that, like China, North America has begun to bottom out? Or were you taken by surprise at all during the quarter by that order evolution?
No. We're actually not surprised at all when it comes to this. I think we were expecting approximately a quarter which we ended up to. And yes, maybe -- I was maybe expecting a little bit weaker end of the -- that people would go home during Christmas and not place any orders, but that didn't happen, the demand continued all the way out through the year. So rather maybe a little bit better in the end of the part. Otherwise, I think this -- it is what it is. It is softer in the market and that's what they are adapting themselves to.Luckily, we're seeing, of course, the bottom out in China. I think that's important because that's an important market for us for the tooling. So hopefully, we can see some improvements there going forward. But now the Chinese New Year starts now, and I think it's always exciting to see what happens after the Chinese New Year. Is it going to be positive or be weak? That's always the same big question.
That's helpful. And then one -- just one follow-up. On the SMS margin, I know that at the Capital Markets Day, your divisional guys were under pressure to kind of give a trough indication. And reluctantly, I think they were sort of suggesting that 20% could be the floor. Given that production and demand are now much better aligned and inventory won't be coming down, is it reasonable for us to assume that, that will be the floor in the coming quarters?
No. I think we've given the trough margin for the company, and we stand very strong into that. But I think, of course, the last quarter with the December, while we closed the factories more or less the whole month there and taking down the inventory there, so the underlying is just over 22%, right, I would say, on that part. And from my perspective is if you look 10% lower than the previous year -- and production numbers are huge numbers for SMS, if you look historically in ups and down, it's very seldom you see. I think the last time we saw this deep, you have to probably move back to 2009 in numbers. So from that perspective it is. And we also said that when it is -- when the market is weakening off, of course, companies are holding back inventory, producing a little bit more to come in line. So it's always worst in the beginning of a downturn in a certain market. And then when the production comes up to an even level, then maybe go up a little bit, so something else. So 10% is a huge number and that's what we always said within SMS. In the full -- or if you look at last year, 5% was the full year, and that's more a reasonable number.
Another way to answer that question is that personnel reductions will be rolling in -- has been rolling in, in Q4 and also in Q1 2020. So as from April, we will have full year run rate savings coming into SMS.
Also.
Yes, also. Yes.
But I think you probably saw that the company totally had a saving of SEK 250 million. So if you analyze -- annualize that, it's about SEK 1 billion. And we said SEK 1.7 billion is the target that we have said, which means that you have about 70% more savings to come in going forward. So...
Yes. In 2020, yes.
Yes. No, I think that's what it is. I think we realize that those savings came at the right time, and they are now being executed and that's giving result.
Thank you, Ben.
The next question comes from the line of Andrew Wilson from JPMorgan.
I just wanted to ask on the mining and rock side. Actually, on the construction exposure, I mean, just what you're seeing there in terms of, I guess, a little bit of color by region and kind of how that developed against this time last year, just on the -- specifically the construction side rather than on mining for a change.
Yes. I think it's probably a little bit up -- flat, a little bit up, I would probably say, on that part. I mean our exposure to the construction side is not that big, as you know. It's quite a small part of our business mainly coming from the crushing and screening business. But it's not down. It's probably flat. And I think also our crushing and screening business are doing a good job both when it comes to delivering profitability as well as catching good orders. So they have good equipment which has been introduced also during the year. So -- but it is such a small part of our business. So when you look at our numbers, mining isn't really the driving force there.
Maybe a quick follow-up just on the SMS side. Just perhaps some comments around pricing, and I guess, specifically, if you've seen any changing in competitive actions. Obviously, market's been into a little bit of pressure, just interested to hear if you're seeing any change in the market there.
No. I think the prices are being kept up in SMS. I think we said 1.7%. But for the tools, that's approximately where it is. Some of the divisions are lying over 2% and some are a little bit lower than that. Where you've seen a little bit weaker is on the Wolfram part because you see the APT prices has gone down. So that is only a technical thing. So that was negative on the pricing side. And that pulled down, I think, SMS to pricing approximately 1% for the quarter.
That's great. Björn, good luck in your new role.
Thank you. Thank you, Andrew.
Thank you, Andy.
The next question comes from the line of Gael de-Bray from Deutsche Bank.
Björn, I think we all agree that both SMRT and SMT are better businesses today than they were 5 years ago. But what about SMS? I mean purely looking at today's numbers for SMS in terms of margins and inventories, doesn't look fundamentally different from what it was back in 2015. So could you elaborate on what has actually changed at SMS that makes it a better business today?
Yes. I think that SMS has gone through a big change when it comes to fully decentralized, meaning that the divisions are today owning everything from their production to the end customer. That is important in the way they're profiled, but also how they run their profitability and how they drive their margins in the business. I think they're doing very good. They continue to introduce good, new technologies into the market, which they are living to. They are always under volume pressures in the market, has always been on that. But they've been, of course, very successful in being able charges for their solutions to the customers. And that continues. If it's better or worse, I think difficult to say. I think in my perspective, it's a good business. They closed 15 factories during the last 4 years, and they have moved production over to more efficient facilities. Looking at Gimo Upp is seen as one of the world's most efficient production facilities in the world since they got this special price for that. And they're doing a good job, I think, to keep up the margins. And when it is tough in the market, it is challenging, of course, being vertically integrated, and they are and there will always be. But there are a few businesses, from my perspective, that keeps up over 20% margin over different business cycles again and again and again. I mean, it's quite a remarkable business. And at the same time, they deliver a cash flow which is 100% of the profit. So -- and they do that. And from my perspective, it is one of the most fantastic businesses that I have been working with. So they were good before and they are maybe a little bit better now or at least as good.
Okay. Can I have a second one on -- I mean, with the strong balance sheet you have now, I guess, the future will be more about acquisitions, at least for your successor. But I mean, so far, in 2019, I mean, this year, you did 9 acquisitions, I think, but with a negative contribution to EBIT, I mean, in particular, this quarter. So perhaps, could you elaborate about this? Why the contribution has been so negative and when you expect basically these acquisitions to contribute a bit more to the bottom line?
Yes, of course. Do you want to answer that, Tomas?
Yes, sure. Yes, absolutely. I mean you have a number of round tool acquisitions within SMS: OSK, Dura-Mill, Wetmore, et cetera, and these acquisitions are just sort of coming around. I mean the business cases are very much built on integration and synergies and all that, so it takes a while to get to where we want to be, so it's in the start. The SMRT acquisitions of Artisan, that's battery electric vehicles and Newtrax, is kind of little bit of start-ups, you can say, sort of, at least Artisan; Newtrax a little bit as well. So that's also in the beginning of the business cycle. And then the total of that is a minus.
Well, I would say that the key to the success when it comes to buying these small integrated companies is that almost all of these companies are underperforming if you compare to the Sandvik businesses. And the key to success in value creation is to lift these companies up to the similar levels, profit levels as you have in the other SMS businesses. That's always been the name of the game and that's what we will continue. And that's really creating value from my perspective.
Thank you.
The next question comes from the line of Klas Bergelind from Citi.
It's Klas Bergelind from Citi, a couple of questions from me. First, coming back to SMS, we had expected North America to see incremental weakness. But I just want to focus a bit on Europe. Europe came out weaker than we thought, particularly on Germany and automotive. To what extent are other major countries now adding to the weakness we saw in Germany? Could you, Björn, walk through the trading by different countries here, France, Netherlands, Central Europe, Nordics, and so on, and talk a little bit what you see in Europe beginning of Jan? Because I'm curious, as China getting better, it's typically a lead for Europe getting better through the year. So I will start there.
Yes. It's correct that you -- I mentioned Germany because that is actually sticking out most, and it is the automotive and somewhat in the German engineering. And of course, a lot -- many German companies have also been delivering to China during the years when it comes to fabrication machinery which has been much lower. And they had, of course, weak last year. And of course, if China comes up again, it takes a little bit of time before these deliveries and so it will come. But it's true. Yes, I think Europe overall is weaker. I think it's both automotive and the general engineering that we have seen. It's being dealt with, we're delivering up there and it is around 10%. And that's approximately when you're looking at the total is what we're also seeing going into January. So it is weaker and it will take a little bit time before that businesses start booming again. On the other hand, it is tough comparison numbers that we, of course, had. And when we come over after the first half year, the comparison numbers will be, of course, significantly softer. And that will, of course, help when we look at comparisons at least. But I think the important thing is that what we have done is adopted us to these demand levels. And that is what we deliver on today, and that's also where our cost structure is based on. So...
My second one is I want to come back to the operational gearing in SMS. There's a big debate in the market on this and the big destock. One way to look at this is that you were running production maybe too hard too late last year, and this is why we see these big production cuts coming through from high level. Some market observers say that you may be over-earning at the peak. Can I ask you in a different way, and maybe to you, Tomas, 15 factories, and I think there's about SEK 700 million of savings, and these are structural, would you say that the underlying operational gearing has improved should you have been more quicker to respond on the production side of the business?
Yes. I can only say that what they are doing is they are protecting their margins by, of course, adopting their cost level and the savings base when you have these softer. I mean, it has normally been a business with a big leverage. So when volumes are going up, you get, of course, enormous leverage positive, which you saw during the pickup. And this, of course, affects you also on the downturn, which makes you have to take tougher actions. So it's always hard work. But I mean, if you look at the underlying, I agree with you that during the first half year, they were overproducing somewhat, which you normally do because the delivery is out during the summer. Then summer came weaker than expected, and they managed to get the inventory down during third quarter but not good enough and now they took it down there. Of course, in an ideal world, we would love to see much more stable inventory also during the first. And I think that's what they will be trying to work with. On the other hand, if you're looking at the margins that they are delivering around 22.2%, that part is not -- is, from my perspective, a good margin for that business. In the upturns, of course, there will be an enormous leverage when we have adopted the costs in accordance to these demands. That is how the business is and that's how we'll be going forward also.
Quick final one for you on SMT. Obviously, well done on the 10%. You've done some M&A recently in SMT. And it's quite rare to see SMT engaged in M&A, that they get capital allocated for growth. Should we read this, Björn, as if the spin is closing in, the fact that they are doing deals now in high-margin areas could be seen as if they're now already working on the strategy as a stand-alone company? So in short, is the preparation on track, maybe even running a bit ahead of plan?
Our strategy is going from stability, profitability and then to growth. And I think they're really proven that their businesses are -- have been both stable and profitable on this part. And then we also allow acquisitions. Yes, I mean, the 2 companies that we looked in, one was part of the Kanthal business. That is these electric furnaces, which is a very exciting business going forward. While there are a lot of -- no big competitors, only small local ones in the country which we would like to pick up. And I have mentioned that before. And I think also, Göran have done that. The other one was actually tubing for the aerospace industry, this special high alloy tubing part. And that's one of the area where we would like to strengthen ourselves to get more into the aerospace. The SpaceX rocket that was sent up yesterday, it's loaded with Sandvik tubing in. So we really like to be in that high-end market where the margins are good.
If I may just add to that. I mean, some people ask us, have you increased your pace in M&A activities? Not really. I mean, we've been running full speed ahead for the last 3 years. We have a shortlist of more than 100 companies that constantly look at. And it's very difficult to forecast when does these acquisition happen. It can take 6 months, nothing happens. And then it's like a ketchup bottle, then suddenly you have 6 within 2 months or something like that. So what you see now is just the effect of years of discussions and negotiations. And suddenly, we -- yes, we had a flow of acquisitions. And the Kanthal business, as Björn said here, that's been going on for years because they've been ready for acquisitions. And we've made a few acquisitions in that area, so that's nothing new.
Yes.
Thank you, Klas.
The final question comes from the line of Sébastien Gruter from Redburn.
Two questions on SMS. First, on the demand side. Full year '19, down 6%. You mentioned a lot in the automotive industry as being a driver. Could you give us some color about how much automotive was down for SMS in full year '19 versus the mid-single-digit drop in automotive production? That's the first question.
I think the automotive industry has been weak now for quite some time and that is what you are seeing. I don't think we are seeing any weakening actually in the -- in that industry. It has been, and that's, of course, affecting the production rate where we are delivering into, and that's what we've been adapting into. But I -- from my perspective, I think they are doing that in a well. 10% is a lot for this business, and I think they've been adapting to this in a good way. So the automotive is weak, we'll -- yes.
Yes. My question was more SMS versus the automotive production down 5% in full year '19, where the SMS down 10%, 15% due to destocking and maybe regional mix, which was a [ net full ].
I think -- well, when it comes to the production levels compared to last year, I think we probably were overproducing the first half and underproducing the second half. So if you're looking at the destocking has taken care -- they can happen actually, while we've been running well under 10%, that has been during third and fourth quarter; while we were probably overproducing somewhat during the first part of the year.
My question, Björn, was on the demand. On the demand, Automotive has been a big driver of the demand weakness for SMS in full year '19. Automotive production, your customers were down 5%. I imagine how much SMS was down in automotive in full year '19.
Oh, the full year.
Can you share that number?
No, we don't have that number to share. No, we don't have that.
Can you share that you are much weaker than the automotive production because your customers have destocked.
Yes. I mean it's what I said before. It is when you go from overproduction, but also in the automotive, and you are destocking and you're lowering your inventory of cars which the automotive have done, that means that their production levels are, of course, much lower. So it's always going from a good demand to a softer demand where a lot of destocking among the customers have taken place. And it really started dramatically as we saw in June. And then I think it has kept itself during this last 6 months. Nothing has been much more severe or much more dramatic after that. There have been some variations between different parts of the world. But otherwise, it is around 10% down compared to the good volumes that were before.
Okay. Again, on SMS, on the margin in Q4. So you have about SEK 100 million lower revenues versus Q3, but almost SEK 200 million EBIT decline, while cost savings have ramped up. So if we include the -- exclude the cost saving, it's almost a SEK 300 million EBIT decline in Q4 on SEK 100 million lower revenues. Is it just destocking Q4 versus Q3? Or you have also some negative mix or other costs you haven't talked about?
No, it's related to destocking, absolutely.
So all of the SEK 300 million is destocking?
Yes.
Thank you very much. And with that, we close the Q&A session for this quarter.
But we don't close the call.
No, we don't.
No. Because, Björn, this is it. The show ends here.
Yes.
Yes. So you're really sure about this?
Yes.
Anyway, Björn, on behalf of everybody at Sandvik here, we would like to thank you for 4 amazing years.
Thank you.
And we wish you all the best for your next mission, where you're going to tell all my former buddies at ABB how to drive decentralization. So good luck.
Thank you, Tomas.
So thanks, Björn.
I will miss the whole team. I think it's a great company with great people. So -- but I'm not going to let you go, guys. I'm still a shareholder, I'm going to follow the development going forward and I have big expectations for you guys.
Okay. We'll do our very best. We promise.
Good. Okay. Thank you.
We are, however, not going to let you go, really not yet because the communications team here with Jessica and the crew and the Investor Relations team here with Ann-Sofie and Anna have prepared a little surprise for you. So if everything works now, we should have something coming up on the screens now.[Presentation]
Thank you a lot. Thank you.
And with that, we actually do close the call. And yes, it's sad to see Björn go, but we need to look ahead. And just as a little bit of a reminder, we do have a CMD in Austria towards the end of the year, and we hope to see you all there. Thank you.
Thank you.
Thank you. Bye-bye.