Sandvik AB

STO:SAND

Earnings Call Transcript 2020-Q4

[Louise Tjeder, Head of Investor Relations & VP]

Hello, everyone, and a warm welcome to Sandvik's Presentation of the Fourth Quarter Results 2020. My name is Louise Tjeder, new Head of Investor Relations; and beside me, we have our CEO, Stefan Widing; and our CFO, Tomas Eliasson. We will, as usual, start with the presentation, where Stefan and Tomas will take you through the quarterly highlights. And after that, we will open up for questions, and those you can ask either via online or via the conference call. So with this said, I hand over the word to you, Stefan. Please.

[Stefan Widing]

Thank you, Louise. And also, I would like to welcome you to this Fourth Quarter Result in 2020 for Sandvik. I think it's clear when we summarize the quarter that we are now gradually shifting back to growth. This was actually the first quarter that we saw a positive order intake of plus 3%, excluding major orders, since quarter 1 of 2019. We had a record order intake in SMRT. We saw a good sequential improvement in SMM, especially driven by automotive. We also had good development in several of SMT segments, such as medical, industrial heating and the consumer-related segments. And of course, we also saw the announcement that we intend to acquire DSI Underground by the end of the quarter, something that we expect to close in around mid-year. We also saw margins at record levels. The adjusted operating profit came in at 20.1% versus 19.1% last year. And this is the first time at least in modern times that we are able to deliver a margin of over 20% in the quarter. Also the rolling 12-month result or the annual result, so to say, came in at 17.1%, excluding metal prices, which is how we have defined in our financial target. This is well above our trough margin target of 16%. And I think you agree with me that 2020 was definitely a trough year. This is, of course, driven partly by the recovery in the business, but also by very strong savings that we continued to deliver in the quarter. This quarter, we had SEK 920 million of savings that we delivered. This also means that we continue to strengthen our balance sheet. We had a cash flow in the period of SEK 5.9 billion, which drove our gearing down to a low 0.04. This includes then 3 acquisitions also that we closed in the quarter and paid for, not to forget then the strategic one of CGTech, which also had the biggest financial impact from that perspective. Based on this and looking at where we are with the balance sheet and our business, the Board has decided to recommend to the AGM in April to give a dividend of SEK 4.5 as well as an additional dividend of SEK 2 for this year. Last quarter, I showed you our SMRT AutoMine concept loader, fully automated, fully electric. This quarter, I would like to show a smaller product. But that will have maybe a much greater financial impact in the next couple of years. This is Coromant that have launched a completely new generation of their steel turning grades, the GC4425 and the GC4415. As you know, Coromant is the market leader, the market-leading brand in the tooling industry. And also, by far, the biggest brand we have in our portfolio. They are clear market leaders in turning, and it's about 50% of the revenue. So a substantial financial impact for the group as a whole. Launching a completely new generation that we have been working on for quite a few years is, therefore, a big deal. Here, we have new coating technology and new substrates and a new post-treatment procedure that overall enhances the product in a way that the overall tool life is increasing by an average of 25%. This is exactly what we have done for decades and that we will continue doing to ensure we can continue to be market leaders and price leaders in this industry. And turning is really big in automotive. So the fact that we launched this in October, just when automotive were recovering and also looking for productivity improvements was a very good timing for us. If we look at the market development overall. We have now, if you look at the arrows to the bottom end of the right, we have now gone back to showing the sequential development as this quarter versus prior quarter and not the in-quarter development. This is a good sign. It means that the volatility is not as big anymore, so we can compare the quarters instead. And as you can see on the regional development, all regions are up sequentially. If we look at the segment view, mining, engineering and automotive are up sequentially, while energy, construction and aerospace, we continue to really see no improving development at all. If we look at the year-over-year performance instead, and take it from a regional perspective. We see Europe being at minus 2%. Here, it's notable that general engineering and automotive are flat, meaning they are back to the levels they were in the prior year. Of course, aerospace continues to be down, which is hitting, for example, France and the U.K., in particular, in Europe. North America, down 23%. This is where we had the major order in SMT last year. So if you take that out, it's down to minus 6%, so less dramatic than it might look here. Here, also automotive is flat, so back to the same levels as last year, while general engineering is still down. So the recovery in general engineering is lagging a bit in North America compared to Europe. Also here, we should remember that oil and gas and aerospace is a higher portion of our revenues compared to Europe. So the fact that they are down, of course, also contributes negatively for North America as a whole. If you look at Asia, we are up 4%. China is actually down 3%, but SMS in China is up 6%, driven, in particular, then by, for example, automotive and general engineering. So the negative number in China is driven by projects in SMT and SMRT, so not a factor in the underlying development there. Then you can see high growth in Africa, Middle East and South America, and that is, of course, driven by good midsized order intake in SMRT. In particular, happy with an automation order in South America of over SEK 100 million that we have been working on for some time, but it was good to see coming into our order books. So if we summarize this, the order intake is minus 2%, plus 3% then, excluding the big order in SMT in December last year. Revenues trailing a bit at minus 6%. Despite revenues being at minus 6%, we delivered an EBIT of SEK 4.5 billion or a margin of 20.1% versus 19.1% last year. This would have been 19.5% versus 18.4% then excluding the metal price effect. So you can see that the improvement is basically the same, regardless if we look at metal prices or not. It's also worth noting that the decline of 11% in the absolute EBIT figure is essentially entirely driven by currency. It's a little bit of structure as well but entirely driven by currency. So if we normalize for currency, the EBIT would have been the same. In fact, the organic EBIT development was positive in the quarter. That's why the group leverage is not applicable since we have a drop in top line and improvement in EBIT. Going into the business areas. Sandvik Mining and Rock Technology, again, plus 15% order intake, an all-time high, driven by equipment orders up 23%, aftermarket up 8%, so strong performance in both areas there. Revenues, minus 1%. This is against a very, very high comparison Q4 of last year. So we are happy to see that number, actually a little bit better than we had expected ourselves. They also delivered a record margin, 21.7% in the quarter, 10 basis points higher than last year. We note here that we have also taken the cost now for the DSI acquisition, but there were other positive year-end effects that offset that. So it doesn't impact the margin, but it could just be good to know that we have put that behind us as well. Of course, the acquisition of DSI was a big event for SMRT in Q4. DSI being the world's leader in safety solutions for underground mining and the tunneling industries, a very good complement for the SMR business going forward. And it's actually one of the largest acquisitions in Sandvik's history, the second or third largest, depending on how we rank Seco in that context. We expect this deal to close around midyear, a little bit dependent on how the regulatory processes evolve here going forward. Then we have Sandvik Manufacturing and Machining Solutions, down minus 7% then on the organic side. I think I've talked about most of regional development already. We note as well that in December, the order intake were down in the negative mid-single digits. And now in January, it has started in the negative low single digits. I want to urge you again, though, to be very careful in how you interpret them the first couple of weeks, especially now in January with a lot of holiday days and so on. So it's -- we continue to see the recovery, but we are in the middle of the second wave of the pandemic. So we will have to see how things continue to evolve now in quarter 1. Positive to note as well is the strong order development in our tungsten powder business, Wolfram. This is typically a leading indicator, which means that companies are stocking up on powder because they expect a higher demand of products going forward. And this is also one of the reasons why we have the differential here between order intake and revenues because they book orders, and they will deliver them now going into this year. Despite being down 11% on the top line, SMM is delivering a better margin than last year, 21.4% versus 20.3% in prior year. This is, of course, driven both by the savings as well as the recovery in the business, but over SEK 0.5 billion of savings in the quarter alone. We also closed 2 acquisitions in the quarter then, Miranda Tools, a round tools company in India as well as a software company, CGTech. We also took a minority stake, as you have seen, in a manufacturing technology company called Oqton, based out of the U.S. And then if we take SMT, a big drop in the orders of 31% in the period. Excluding for the major order, this would have been minus 7%. And actually, the underlying volume is minus 4%, if we also take away the alloy surcharges we have in that number. Now of course, we cannot, for a full year, continue to exclude the material orders because it's supposed to be excluded because it's supposed to be a timing effect. But if we don't have them for a full year, then, of course, it will impact the business. But the minus 7% or minus 4% is really how the underlying short-cycle business is doing. And I think that's important to note. We do see continued weakness in oil and gas and aerospace of course. And we do, however, note, in a positive sense, some very strong development in some of the short-cycle business. Medical, industrial heating and consumer are all up in the double digits. And those are early-cycle businesses in SMT. So that's positive. Also, SMT delivered strong margins in the context of their top line of minus 10% and underlying margin of 11.6% versus 12.1% last year. So they basically keep their margin level despite double-digit decline on the top line. So very strong delivery from SMT in this quarter. And of course, earlier in the quarter, we also announced the intention to continue with the separation process of SMT. With that, I'll hand over to you, Tomas, to take us deeper into the numbers.

[Tomas Eliasson, Executive VP & CFO]

Thank you, Stefan, and let's move into the numbers now and start with the financial summary, as we always do. And let's start with the top line in the upper right-hand corner. The organic growth, as you heard, was minus 2% for revenues and minus 6% for orders -- sorry, it had to be around, minus 2% for orders and minus 6% revenues. Currency is a headwind, of course, for us now, both on the top line and in the earnings, minus 9% for both orders and revenues, and structure was minus 2%. Structure is mainly the divestment of Varel Oil & Gas, which happened at the end of the first quarter in 2020. So we'll have that effect for another quarter before it turns around. Total was minus 12% and minus 16%. If we then walk down the income statement, the earnings came in at SEK 4.5 billion compared to SEK 5.1 billion a year ago, minus 11%. But currency had a major impact on this one, and I'll get back to the bridge in just a little bit here now. Margin, 20.1% versus 19.1%, so 100 bps in margin accretion. Net financials will come to a specification on that as well in just a little bit. Underlying tax rate came in at 24.1%; full year, 22.8%. Cash flow was really good. And the full year cash flow, free operating cash flow was SEK 15.4 billion compared to SEK 17 billion a year ago, a really good cash flow year. So if we move to the bridge then, and look at the margin development here, 19.1% to 20.1%, and start with the organic part. The minus 9% -- sorry, the minus 6% on revenues is corresponding to SEK 1.5 billion on the top line. But as you can see here, in the bridge, basically no impact at all in earnings, actually, a little plus, plus SEK 35 billion. And of course, if you lose SEK 1.5 billion on the top line and the profit stays the same, it has a massive accretive effect on the margin. So 130 bps up. This is, of course, very much a result of all the savings initiatives and efficiency initiatives that we have launched and executed on during 2020. Currency, minus SEK 2 billion on the top line, SEK 0.5 billion on the EBIT line, 20 bps dilution, metal prices. 0.1% dilution, structure plus 0.1%. So all in all, 100 bps up during the fourth quarter. 20.1% in the fourth quarter is really, really strong. We've never been on that level before and not -- especially not in the fourth quarter. Let's then move to the savings programs. And you're familiar with this slide here. We have on the first line, the program that we kicked off mid-2019, the full impact is SEK 1.7 billion annualized. And we finished deliveries on this program mid-2020. But as this is a bridge analysis, we still have sort of tail of this program in Q3, Q4, and we will also have a little bit in Q1 next year as well. So SEK 180 million in the fourth quarter. The next line is the work time reduction program. This is part of the temporary savings, SEK 200 million or SEK 205 million in the fourth quarter. And this is coming down now. It's now less than half of what it was when it started. This will continue a little bit into 2021 as well. But eventually, it will go away. The third line here is the discretionary spend or other temporary savings, flying, exhibitions, meetings and what have you. The majority of us are still working from home or working at the sites where we are. So of course, that gives a profound impact on the income statement on the cost levels, SEK 500 million in the fourth quarter in savings. This will continue at what level, we can't say today, but it will be -- it will have a decent impact in the first quarter as well until we can start traveling normally again. At the fourth line here, we will start to see now effect from the 2020 program, and we see effects from the 2020 program starting to sort of trickle in here a little bit. This will mainly have an effect on 2021 and then into 2022 and onwards. But there are some of these initiatives that are now -- already now in the income statement, SEK 35 million, all in all. So the full impact of all these 4 programs for the fourth quarter was SEK 920 million. If you recall, Q2 and Q3, we had SEK 1.5 million in Q2, we had SEK 1.4 million in Q3. We have SEK 900 million now in this quarter. So this is SEK 3.8 billion for the full year, which, of course, has helped. I mean if you take off SEK 3.8 billion from the SEK 15 billion in earnings we had, I mean, we would have had a completely different operating margin in the group. At the very bottom, we have also just repeated the information that you saw in the press release from December, the savings program that will give SEK 1.3 billion annualized, the new one. How is the spread between the business areas? And you can see here that half of it is in SMM, SEK 125 million in SMRT and the remainder mainly in SMT -- sorry, SMRT, SEK 125 million; SMT, SEK 0.5 billion. So if we then move forward into the -- what's below the operating earnings, net financials, the interest net came in just below SEK 100 million, SEK 96 million. That's SEK 400 million full year 2020, and we'll come to the guidance later here now, but we believe that this will be around the same level in 2021, SEK 400 million. Tax rate. The reported tax rate, 22.7%, but it was impacted by one-offs and items affecting comparability. So the real underlying tax rate was 24.1%. The full year underlying tax rate was 22.8%, so just below the range of 23% to 25%. We'll come back to the guidance for 2021 in just a little bit here. Into the balance sheet now. Working capital, a very strong finish of the year, below 25%. And you can see on the right-hand side, all 3 business areas are delivering very well. The cash flow is strong in the fourth quarter. If you look at the right-hand side, you can see that we -- of course, we have a bit of a reduction in earnings, but we still have good releases from working capital. We are careful with CapEx. So SEK 5.9 billion compared to SEK 6.5 billion a year ago. Very happy with these results. And that, of course, has a good impact on the balance sheet. You can see that the gearing now is down to 0.04. The financial net cash position is SEK 8.8 billion. The total net debt is a little bit of SEK 2 billion. Of course, as Stefan mentioned here now in these numbers, we have 3 acquisitions that we paid for, but we still managed to improve the situation, net debt situation for the group. So a very healthy and strong balance sheet. Let's look at some of the guidance that we had. We said SEK 350 million on negative currency effects. Underlying the translation and transaction effects, we came in at SEK 536 million. Swedish krona continues to strengthen. The total currency effect was SEK 494 million. Metal prices, SEK 129 million plus -- instead of plus SEK 50 million. CapEx, SEK 1.1 billion, interest net we've talked about SEK 96 million and a tax rate of 24.1%. So to finish -- sorry, not to finish off, let's look at the dividend proposal here as well. We, as you have read in the report, have a proposal from the Board to give a total dividend of SEK 6.50. It's one decision, one dividend, SEK 6.50, but it should be seen as an ordinary dividend of SEK 4.50 and then an extra or additional of SEK 2. That would mean an adjusted payout ratio of 75% going forward. The target remains that over time of our business cycle, we intend to have a payout ratio of 50% on adjusted earnings per share or adjusted net income. So to finish off with the guidance for 2021. New year, new guidance, CapEx. CapEx came down in 2020. We normally are around SEK 4 billion, it came down to SEK 3.2 billion for the full year 2020. But as we are in a gradual recovery, we will see CapEx coming back now. Maybe not to SEK 4 billion, but something below or just below SEK 4 billion, so that's our new guidance for 2021. Currency has a negative impact on the earnings. 700 -- sorry, SEK 500 million in the fourth quarter, and we expect SEK 750 million, quite a big number for the first quarter 2021. Metal prices, we believe, will be plus SEK 60 million in quarter -- for the first quarter. And the interest net, as I mentioned, we believe, will be SEK 400 million for the full year 2021. Now tax rate. We have taken down the guidance for the tax rate gradually over the last 5, 6 years, starting on 27% or in the neighborhood. We have had up until now a guidance of 23% to 25%. We ended the year on 22.8%. So just below that range. We will now take down the guidance to 22% to 24%. And this is driven by the fact that in the countries where we are big, the tax rates tend to sort of consolidate around 20% right now, like in India, Czech, Finland, Sweden, the United States. And of course, if we have that kind of tax rate in the countries where we are big and have big earnings, of course, it takes the tax rate down. And then there are always a bunch of adjustments, of course, nondeductible expenses, et cetera, et cetera, which picks it up. But 22% to 24%, we believe is sustainable level on the tax rate. Not just for 2021, we believe that will stay for the next like 2 or 3 years going forward. And with that, I'll hand back to you again, Stefan, for conclusions and summary.

[Stefan Widing]

Thank you, Tomas. So as we said in the beginning, we are now moving into a phase where we are gradually shifting back to growth. We see a continued recovery, and we are able to deliver record margins in this quarter. The recovery is driven by solid demand in mining and a sequential recovery in the short-cycle business such as automotive. If we look ahead, we believe in a continued recovery, but we are cautious and with the fact that we are in the middle of the second wave of the pandemic. We have seen in the past that there are delays from underlying demand to our business. So whether we will be impacted by the second wave or not, that remains to be seen. A little bit mid to long term. We also are pessimistic, but -- or optimistic, but of course, it will also be dependent on how the pandemic is handled and various economic policy decisions. We will focus on the things we can impact. So right now, we have a strong focus on this shift from temporary to permanent savings that have already started and have been planned for quite some time and that we will now gradually see in this year. It's also important to say that as we have sort of defined our strategy for handling this pandemic in 2020, we always have top of mind that we also need to quickly be able to ramp up when the economy recovers. And that we have done. So now it will also be a focus on ramping back up and capturing the organic growth opportunities that will come with this recovery. We closed 3 acquisitions in the quarter. We announced a significant acquisition of DSI. And thanks to our good, strong balance sheet, we will continue to have an active M&A agenda also going forward. Thank you for listening. So now let's move into the Q&A, Louise.

[Louise Tjeder, Head of Investor Relations & VP]

Yes. Thank you, Stefan and Tomas. It's now time to open up the Q&A session.

[Louise Tjeder, Head of Investor Relations & VP]

Before we open up for questions on telephone, we will have 2 questions from online, and that's from Rizk Maidi at Jefferies and relates to SMRT. And what have we seen in terms of -- have we seen a catch-up on SMRT as repairs has been pushed out from Q3?

[Tomas Eliasson, Executive VP & CFO]

Sorry, what did you say as?

[Louise Tjeder, Head of Investor Relations & VP]

As repairs.

[Stefan Widing]

Repairs?

[Louise Tjeder, Head of Investor Relations & VP]

Yes.

[Stefan Widing]

I don't think we are -- we would say we are seeing any catch-ups in that sense. Maybe there are here and there, but we don't think that's an underlying driver for the development in the quarter.

[Louise Tjeder, Head of Investor Relations & VP]

Okay. And for SMM, can you comment anything about the distributors' inventory levels?

[Stefan Widing]

We often get that question. It's very difficult to answer. We -- there might be some catch-up, some restocking but it's not something we have seen as material either driving anything in the quarter.

[Louise Tjeder, Head of Investor Relations & VP]

Okay. So we open up for questions on the telephone. Please, operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Magnus Kruber from UBS.

[Magnus Kruber, Associate Director and Research Analyst]

Stefan, Tomas, a couple of questions from me. Starting with the SMS, what organic growth rate did you see on the automotive business in the quarter? I think in Q3, you mentioned low teens decline, slightly below core production numbers. How did you fair that in Q4?

[Stefan Widing]

Overall, it was slightly up. So let's say, growth in the low single digits.

[Magnus Kruber, Associate Director and Research Analyst]

Perfect. And on continuing with SMS. Have you seen any impact so far in the automotive from bottlenecks in the automotive supply chain in the first quarter?

[Stefan Widing]

No, I should say, but at the same time, this goes back to my comment that we have seen in 2020, there is a lag in the supply chain up to a month, maybe 6 weeks, sometimes. So that's why I think we should be cautious with the outlook for Q1. It might still come, but we really don't know at this point. We haven't really seen anything as of now.

[Magnus Kruber, Associate Director and Research Analyst]

Perfect. And just the final one. I think you saw the incremental margins adjusted for savings, take a slight step down in Q4 in SMS compared to the prior 3 quarters. Can you help us a bit with the reason for that and what we should expect into '21? That would be very helpful.

[Stefan Widing]

From my perspective, I don't really look at how the business is performing without savings because we are doing the savings for the reason to maintain the margins. So yes. I don't really have a good answer to that other than that.

[Tomas Eliasson, Executive VP & CFO]

Yes. I mean, when we lose sales, we lose gross contribution, you lose absorption, et cetera, et cetera. So and we do things to compensate for that, efficiency, various parts of savings programs. So for us, that's not an important KPI to adjust the incremental margin for savings.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Got it. But into next year, what do you see there? Similar level to this year? Or…

[Stefan Widing]

Sorry, what was the fundamental question, what about next year?

[Magnus Kruber, Associate Director and Research Analyst]

Yes, on incremental margins for '21, should we expect it to remain on a similar level as 2020? Or…

[Stefan Widing]

I mean we don't give guidance going forward. But of course, it would be disappointing meeting a corona trough year if we couldn't improve margins in SMS this year.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Now I was just thinking about the incremental margin, the drop-through, not absolute margins, but the incremental margins from the gross.

[Stefan Widing]

No, I think on drop-through and leverage, we have seen a very good leverage going down now because we have done the savings. Of course, some of these savings are temporary. So we should also -- we have to count on that some of these temporary savings will be reversed, which will initially also means a lower leverage going up until we're sort of back on a normal level. Then if we have growth beyond that, then we can see sort of the normal strong leverage that we usually see in SMS.

[Operator]

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

[Max Yates, Research Analyst]

Tomas, I just wanted to ask if you could help us a little bit with the temporary cost savings. And you've talked about kind of a number of impacts, sort of travel, discretionary savings. But is it possible to put the SEK 3 billion tailwind into sort of the major buckets of temporary savings? And essentially, how much they were of the SEK 3 billion? So they can kind of help us assess going into next year, what might be more sustainable and what may come back into the business as things open up. Is there any way to do that?

[Tomas Eliasson, Executive VP & CFO]

SEK 3 billion, you mean the total of SEK 3.8 billion or?

[Max Yates, Research Analyst]

The total temporary cost savings that you had this year.

[Tomas Eliasson, Executive VP & CFO]

Yes. Okay. Now work time reduction will continue for a while, but on a much smaller scale into 2021, depends on how the business recovers. Discretionary spend has been around 5 -- around SEK 0.5 billion every quarter. We believe this to a great extent will continue into the first quarter. But as soon as we sort of get back to normal that will also start to fade off. This is like 3 buckets here. We have temporary savings that will continue for a while. We have permanent savings that are coming in into 2021, the SEK 1.3 billion program. And then the difference between all of this is the expected recovery of the economy. But of course, if that doesn't happen, we need to do other things. Stefan, maybe, do you want to comment on?

[Stefan Widing]

I think the way we have seen it and the way I think you should think about this, that we have done the permanent activities that we are now starting to implement to a level where we -- to offset the temporary savings, we would have needed otherwise. And the delta there should be business growth. So overall protecting the margins. That, I think, is the generic answer. And then Tomas said, these temporary savings, they will be there as long as we are in this situation in the world, helping us. But of course, it's the negative, it will come on the top line instead. So -- it's all connected moving pieces. So I think that's how you need to see it.

[Max Yates, Research Analyst]

I guess -- or maybe, Tomas, of that SEK 500 million discretionary, how much of that came from travel, for example? Because I guess there are things that going forward, everyone will do a bit differently. So was travel kind of half, more than half of that SEK 500 million? Just trying to understand how big a component of that was discretionary?

[Tomas Eliasson, Executive VP & CFO]

We don't have that breakup as such. But of course, the biggest part of discretionary spend saving comes from the sales cost, of course, sales cost has been one of the biggest cost components and where the majority of the discretionary spend is really, but we don't have a breakup of that, not really.

[Max Yates, Research Analyst]

Okay. Maybe just a quick follow-up. Would you be able to comment on the different performance between what will become the rock processing division within mining? And then the sort of remaining drill rigs business, how those 2 businesses performed relative to each other and whether one was disproportionately stronger within the quarter?

[Stefan Widing]

I mean, you will get before the next report a full-restated results view of that. But in general, we can say that the rock processing part, which has a higher exposure to construction, has had a tougher year than what will be Rock Mining and Rock Technology. So that's how you can see it. So it's the underground and surface drilling part has been stronger, relatively speaking, than the rock processing part.

[Max Yates, Research Analyst]

And also the case in Q4? I see.

[Stefan Widing]

Yes, it's been -- yes, throughout the -- since the pandemic hit.

[Operator]

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

[Daniela C. R. de Carvalho e Costa]

I have 3 quick questions, please. First, I wanted to ask regarding your mining margins, which are already at a very high level and you've progressed a lot. But now the orders are also going up significantly. As we look forward, what -- how should we think about those margins? Is there further potential upside there? Or we've kind of reached a peak there? And the second question relates to your comment on ramp up that you've mentioned now, sort of we're on a ramp-up phase and into recovery. How should we think about working capital for 2021 and sort of your needs of -- to match the recovery there? And then the third point, if you can comment on pricing outlook. I guess there's been a bit of inflation going across many raw materials and components, but there's also growth recovery, as you've mentioned. So how should we think about pricing?

[Stefan Widing]

On SMRT -- or SMR going forward, I mean, we are never happy. We will always work trying to improve margins, especially if we grow the business. However, of course, they have also had short-term savings in 2020. So they need some growth to offset that as that comes back. SMRT has basically had very, very little temporary savings in Q4, though, that they went back already back at the end of Q3. We should also note that as they grow in the way they do with orders, on the equipment side, there is a negative mix impact from higher equipment sales versus aftermarket. The gap is smaller than it maybe has been in the past, but there's still an element of a negative mix impact there. Working capital, yes, we expect to need to add some money back into working capital this year as we now would expect to grow. So we don't have a specific guidance on that. But we have let's say, an informal target, as you know, to keep net working capital below 25%. And that we aim to continue. But then if we grow, of course, it will still be more money in absolute terms. Pricing has been positive in Q4. We don't really have an outlook or any guidance going forward on that. But there is no change in the strategy with how we will continue to work actively with pricing.

[Operator]

Next question comes from the line of Lars Brorson from Barclays.

[Lars Wauvert Brorson, Director]

If I can stay with the topic of ramping up, Stefan, I'm just curious as to your more general comments around potential constraints or challenges in scaling up the organization and beat the broader supply chain after what has been a very challenging year last year. Do you see any obvious bottlenecks? Obviously, the question earlier on SMM, on the auto side related to, I think, semiconductor shortages with regards to auto production. But more broadly across the business, do you see areas in SMM upstream, for example, in Wolfram, or in SMRT around ramping up your foundries on the rock tools side? Any obvious things that you're concerned about as you look into this year on ramping up?

[Stefan Widing]

No, not really. I mean it doesn't mean that the organization is not sort of will have to do a lot of hard work. But as I said in the presentation, this time compared to maybe during the financial crisis 10 years ago, we have been very deliberate already back in March when we plan the activities to handle this crisis that we will already plan for how to ramp back up and done it in a way so that we should be able to do that quickly so we don't lose business opportunity and market share on the upswing again. So I think it's going to be a tough for the organization, but I don't really see any major issues. And you mentioned Wolfram, for example, they are ready for higher volumes as well, as an example. So of course, here, the high vertical integration of SMS is coming back in our favor, tends to be good coming back up and tough for us coming down.

[Lars Wauvert Brorson, Director]

Perhaps the possible converse on SMRT, but that's a helpful answer. Can I secondly just ask to SMS in China. I appreciate you flagging plus 6% organic growth in the fourth quarter, still looks a little bit underwhelming to me, given the broader momentum, not only in automotive and of course, your Chinese business for SMS doesn't have the drag particularly on aerospace that the North American business does. Can you help us understand a little bit better, what sort of, I think in my uptake, driving that slightly underwhelming growth? Is that primarily a function of the exposure to larger more global accounts via your Coromant brand and less mid-market in Dormer Pramet? Or is there anything you can point to from an end market standpoint or regional in China that seems to be dragging down growth there?

[Stefan Widing]

No, the domestic market in China is what is driving the growth. And then there are -- we have global accounts that is more export-oriented and especially, in some segments, they are still lagging behind.

[Lars Wauvert Brorson, Director]

So there's no -- there are no end markets that stand out for you that are particularly challenged? It's more a matter of having a bigger exposure to the global accounts?

[Stefan Widing]

Yes. And of course, the global accounts are typically related in this case then to some end markets like aerospace, which is still down.

[Operator]

Our next question comes from the line of Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

I'd like to better understand the dynamics for SMT going into 2021 now. Firstly, is it fair to say that the oil and gas business accounted for the vast majority of profit in 2020? And then as the backlog for umbilicals, in particular, is now likely existed, do you still expect to make a profit in oil and gas this year? And overall, I mean would it make sense to see margins coming back to perhaps nearing 0 in 2021 before they recover in 2022?

[Stefan Widing]

Well, we expect SMT to definitely be profitable in 2021, even if we also expect it to be a very tough year for oil and gas. I mean the -- we have backlog that basically we were delivering from until the end of last year and a little bit now into Q1. Now we need also new orders to have things to deliver in 2021. We expect orders, typically maybe of smaller nature than the big ones. But that is now also required to have a business in oil and gas or umbilicals in 2021. We are not talking about profit and margins per segment in that way. But it's not like all profits in SMT are coming from oil and gas. We have now, I would say, a well-performing business also, for example, in Kanthal with industrial heating and medical as an example. So it's important, it's a very important, the most important profit driver in SMT, but it's not all.

[Tomas Eliasson, Executive VP & CFO]

I mean we must look at SMT now as being a very different company compared to the previous trough, which was like mid-2017. We are now on the same levels as we were then. And then we lost money. We don't do that now. So SMT is in much, much better shape with a better cost base.

[Operator]

Our next question comes from the line of Maddy Singh from Bank of America.

[Madhvendra Singh, Research Analyst]

Two questions. Firstly, on SMS side, if you could give details around -- given how much pressure has been seen on the aerospace side, if you were to look at the SMS orders, excluding aerospace, then how was it looking and how is it trending? If you could give some color on that, that will be very helpful. And secondly, on the SMT outlook, given a big chunk of it does come from the metal pricing side. So if you were to -- and given that this is going to be set for divestment as well. Also, the orders within the SMT are looking quite weak still. And so I'm just wondering, what do you think SMT order outlook is looking like? Is there a good chance of, let's say, maintaining the absolute level of orders or revenue base for the coming year because the concern is that if we don't get orders coming back soon, then maybe the base we have for 2021 is actually quite high?

[Stefan Widing]

If I start with the last one, SMT. I mean the -- currently, what we see in the reported order figures, there are no major orders from oil and gas. So from that perspective -- and again, the short-cycle businesses have started to improve. So overall, I would say, I don't really see that the current baseline is not sustainable. It's rather to start to wait for an uptick going forward. That would be my general comment.

[Madhvendra Singh, Research Analyst]

I meant the revenue base compared to the order run rate.

[Stefan Widing]

Yes. On the revenue side, of course, in 2020, we have delivered from backlog. So we're going to be continued -- we're going to be challenged in 2021 on the revenue compare year-over-year, simply because in 2020, we held revenues higher than orders because of the backlog deliveries. Then on SMS, we don't really have the figures reported in a way where we exclude a certain segment like aerospace, like that. So I don't dare answer that question.

[Madhvendra Singh, Research Analyst]

But from a -- just from like a -- roughly, if you were to think about that, would you think that growth would look a lot better if aerospace, what we excluded from the mix because that one segment seems to be lagging and continue to lag for some time?

[Stefan Widing]

Absolutely, orders will definitely be better without aerospace. It's the biggest anchor we have in that order figure.

[Madhvendra Singh, Research Analyst]

And so the number which is reported for fourth quarter, aerospace contribution of around 5% at the group level, right?

[Stefan Widing]

Yes. You have to increase -- for SMS, aerospace is more around 15%.

[Madhvendra Singh, Research Analyst]

15%. So is it still around 15%? Or now it is…

[Stefan Widing]

Okay. Fair point. 2019, it's around 15%. Yes, we would have to get back to that. That's a fair point.

[Operator]

Our next question comes from the line of Alasdair Leslie from Societe Generale.

[Alasdair Leslie, Equity Analyst]

As a follow-up on autos within SMS, and you called out more positive sentiment in North American autos. I was just kind of wondering how much that already benefited, if any, in Q4 sort of headline order decline of minus 17% for North American and SMS still stands out, is really quite weak even accounting for [indiscernible] and energy weakness. So I was just wondering if the autos and maybe even general engineering as well in North America is one area that's supporting that further sequential improvement that you've seen between December and the start of January into Q1? That's my first question.

[Stefan Widing]

On the auto side, there is not a big difference between North America and Europe. The main difference is general engineering, where in Europe, we are back on par with prior year. While in North America, it's still -- it's lagging, the recovery is lagging in general engineering. So that's one big factor. And then the other one is simply higher mix of aerospace and oil and gas in America.

[Alasdair Leslie, Equity Analyst]

Okay. And if I can have a follow-up question, please, just on SMT. It looks like the separation costs there being really on the declining trend since the first quarter of 2020. Should we expect those costs really to be negligible in 2021? And then maybe at the same time, if you could also update us on the next steps, just -- and maybe the time line ahead of spin in 2022. And a sort of final question, if I can. I suppose as part of the separation of the SMT, I was just wondering whether you also maybe use that as a kind of an opportunity to untangle elements of SMS and SMRT as well from each other, perhaps giving you a bit more strategic flexibility going forward?

[Stefan Widing]

Do you want to comment on the costs?

[Tomas Eliasson, Executive VP & CFO]

I can comment on the costs, yes, of course. I mean the costs -- I mean up until we were done with the internal separation in mid-2020, of course, we had some costs. But then after that, we've sort of hibernated the project a little bit now. But after the decision to continue with the separation here now as the Board took some time ago, we are sort of ramping up the project again. And what you will see during 2021 is an increase in costs for SMT. Firstly, a little bit careful, but more and more as we go through the year because to be listed -- to get a listing contract with NASDAQ, you need to have a standup period first before you get a listing contract. So we are aiming to move SMT into a standup situation here towards the end of the year. That's the plan. So the costs will go up, especially towards the end of the year. But we don't have a number for you for that, but they will increase again now.

[Stefan Widing]

And on the time line, we don't have a more firm time line than we have said 2022 or later if for some reason, that would not be possible. But the project is planned so that we should be able to take the decision at AGM in April. Then if for some reason, we decide to delay it, we can also do that. But that is sort of how the project is executing. But that's the time line they are working against. But we will have to come back, obviously, with a final time line when we're a little bit closer and no more. Your third question, I guess the answer is no, not really. I mean we have done now the split of SMRT into 2 natural parts. We have done a segment split between Machining and Manufacturing Solutions. I don't really foresee any more sort of untangling in that sense. But things evolve. So we will see.

[Operator]

Our next question comes from the line of Andreas Koski from Nordea.

[Andreas Juhani Koski, Analyst]

Most of my questions have already been answered, but I have one question on the strong aftermarket growth in SMRT of 8%. Do you think that is mainly driven by an underlying market growth? Or do you feel that you are gaining market shares and that we can expect continued strong growth rate for the coming years for SMRT's aftermarket business?

[Stefan Widing]

I have learnt, not to comment on market share questions until all the cards are on the table. So no, I think it's -- but to be frank, I don't think that's the reason in that sense. I think we have a well-performing aftermarket team. And we are sort of taking our fair share of what we should have there. And if we continue to drive equipment sales and increased equipment volumes, that should also help the aftermarket, of course.

[Andreas Juhani Koski, Analyst]

Yes. And can I also try on the temporary savings and especially on the discretionary savings? Because it sounds like you expect all of the temporary workforce reduction savings to come back in H1 or so. But if we -- or let's say, when we are back to a normal situation, do you think that you can still keep around 50% of the discretionary savings because you will do more digital meetings, et cetera? Or do you think all of the discretionary savings will come back when we are back to normal?

[Tomas Eliasson, Executive VP & CFO]

Well, if I start. Of course, we have learned a lot of things during this, let's say, different period, to use a diplomatic word. We have learned how to do things in a more efficient way. We have learned to use digital meetings and work remote and et cetera. We don't believe we will, in some areas, let's say, within administration, within finance, within HR, those functions, we will not travel as much and spend as much money as we did before. But one mustn't forget the biggest cost area or the biggest cost bucket here is actually sales. And we need to meet our customers. We need to travel and see our customers. We need to be present on exhibitions. We need to go to trade fairs, et cetera, et cetera. We need to do that to keep the business running. It's just a fact to send around technicians and what have you. I wouldn't think that 100% of that saving would come back, let's say, to cost. But I mean we don't have a number for it. But the bulk of it will, for sure, come back, I think, without giving too much guidance. Stefan?

[Stefan Widing]

No, I agree. And I think we -- this is going to be a learning as well. I think when things open up again, there might even be a surge initially as everyone is sort of -- there's a pent-up demand to meet. But -- and then I think it will go back to a long-term improvement trend as we take the learnings and so on. So we are not really counting on that much improvement beyond this, let's call it, pandemic phase. But there will be improvements.

[Andreas Juhani Koski, Analyst]

That's very helpful. And sorry if I missed it, but do you have the organic growth number for SMS in North America in the beginning of January? Is that also single-digit now or is still at double-digit declines in North America in the beginning of January?

[Stefan Widing]

I don't have that figure, sorry. We only have…

[Louise Tjeder, Head of Investor Relations & VP]

We take a final question from online. Johan Sjoberg from Danske Bank. Can you comment, Tomas, on how much inventory changes has impacted the margins for 2020? And if not for the full year, then maybe on the Q4, please?

[Tomas Eliasson, Executive VP & CFO]

Yes, I can do that. Inventory changes is -- I mean, what we -- I mean, what really impacted the margin is over and under absorption in the production rates. So if your production rate is according to what you have set up your production units for. In the fourth quarter, production rates were not, let's say, off track. They were as we had planned. Then, of course, the demand was a little bit stronger than expected. So that's why the inventory came down a bit. But the production rates were as we had planned, so we had no under absorption to speak of in the fourth quarter. But we did have that in Q4 2019, where we had an urgent need to take down inventories where we closed some of our major manufacturing units during the fourth quarter for 1 or 2 weeks. So that gave an under absorption, which we don't have today. So from a technical point of view, in a bridge from Q4 '19 to Q4 2020, yes, there is 100 basis points for SMM and 40 to 50 for the full group. But in quarter, if you use that word, it's 0. If that answer is sufficient?

[Louise Tjeder, Head of Investor Relations & VP]

Yes. Thank you. We thereby close the Q&A session. Should you have any more questions later on, please do not hesitate to contact IR, Emelie Alm or myself at any time. And with this, we thank you for calling in, and wish you a very nice day.