Sandvik AB

STO:SAND

Earnings Call Analysis

Company Maintains Stable Q4 Amid Challenges

In the fourth quarter, the company maintained stability with robust mining demand despite a challenging infrastructure segment and automotive positive development. Order intake fell by 2-4%, while modest revenue growth of 1-2% was witnessed. A resilient margin of 19.5% was achieved, slightly down from 20.6% the previous year, aligning with the annual target corridor of 20%. The Mining and Rock Solutions sector remained steady with a strong 20.6% margin, slightly down due to currency headwinds. The company launched key innovations and made strategic acquisitions to strengthen future positioning.

Performance Amid Challenges and Opportunities

In an atmosphere rattled by volumetric pressures and integration costs, evidenced by a minor margin contraction to 15.7%, the company's ability to sustain robust performance stands out. The investments in an Indian foundry, aimed at bolstering the Asia-centric supply chain, alongside the introduction of the 'DeckMapp' digital solution, are strategic steps highlighting the company's commitment to innovation and regional self-reliance.

Financial Highlights and Strategic Acquisitions

The quarter's results showcased a resilience with organic order intake remaining flat and a minor 1% organic revenue drop, amid a turbulent macroeconomic landscape. The margin, impacted by volume fluctuations and strategic inventory decisions, stood at 20.2%. The quarter was also marked by judicious acquisitions aimed at enhancing the company's product suite and market presence, one of which was Buffalo Tungsten to secure the North American tungsten powder supply chain.

Navigating Forward: Investments and Projections

With reported earnings of SEK 6.2 billion, the company maintains a strong EBITA within its target range. Over the next fiscal period, capital expenditures are projected to decrease to around SEK 5 billion, down from the prior figure of SEK 5.4 billion. Meanwhile, currency headwinds are anticipated to exert a negative impact of SEK 360 million in the ensuing quarter.

Efficiencies and Margin Corridors: Tightrope of Savings Programs

The company's new restructuring program, promising run rate savings of SEK 1.2 billion by the end of 2025, is a decisive move to bolster efficiency. It's worth mentioning that this program isn't intended to expand the current margin corridor but rather to propel the company within its existing thresholds, thereby enhancing its competitive stance without altering its long-term financial strategy.

Earnings Call Transcript 2023-Q4

[Louise Tjeder, executive]

Good morning, everyone, and a warm welcome to Sandvik's presentation of the fourth quarter results 2023. My name is Louise Tjeder, Head of Investor Relations here at Sandvik. And beside me, I have our CEO, Stefan Widing; and our CFO, Cecilia Felton. We will start with the presentation. Stefan and Cecilia will take you through the quarterly highlights, and after that, we will do the Q&A session.And with this, it's time for the presentation. Over to you, Stefan Widing.

[Stefan Widing, executive]

Thanks, Louise. And also from my side, welcome to our fourth quarter report for 2023. We believe, we ended the year with a stable fourth quarter. We continue to see strong demand in aerospace. We have a positive development in automotive and a stable development in general engineering. We also see mining demand to continue to be robust at high levels, while the infrastructure segment continues to be challenging, as it has been for most of the year. If we look at the order intake, it declined by 2% at fixed exchange rates and declined by 4% organically. The revenue grew by 2% at fixed exchange rates and 1% organically.If you look at the profit level, we show a resilient margin. The adjusted EBITA declined by 3%. This corresponds to a margin of 19.5% versus 20.6% last year. At the full year or rolling 12 months, we delivered a margin of 20%, which is in line with our target range. And of course, in the given macroeconomic situation, we are pleased that we, for a second consecutive year, can deliver a margin within our margin corridor target.This was partly aided by the 2022 savings and restructuring program. And we said we would be at the 50% run rate by the end of this year. We ended up at 48%. So I think well executed in line with our plans. If you look at the adjusted profit level for the period, it was SEK 4 billion, same as last year.We also continue to execute in a solid way on our strategy. We have made some important investments in this quarter to ensure we strengthen our position in the future, and I will come to that in the various BA presentations later today. We also announced 3 acquisitions, all of them within SMS, come back to those as well. And also happy to see a number of really good and groundbreaking innovations launched in the quarter.Those of you that attended our Capital Markets Day will have seen live the new battery-electric surface drill rig that we launched at the CMD, has received very positive attention from customers.But the innovation I wanted to highlight today here is our launch of AutoMine for underground drills. We have, of course, had underground drill automation for a long time. But here, we've become the first OEM or solution provider in the industry to provide a common automation platform, not only for a fleet of underground drills, but also integrated with loaders and trucks. So a customer can choose to automate a single drill, a fleet of drills or a fleet of machines, leading to increased efficiency and more automation penetration among our customers.If you then go into the market update and segments and regions, and I start with the regional perspective. Europe was flat year-over-year, 0%, while if you look specifically at cutting tools, it was up in the low single-digits. North America was down 9%. Cutting tools though were up 2% in the quarter. Asia was up 6%. And here on the cutting tools side, we saw a strong performance in China with double-digit growth, although, of course, that is partly driven by low comparable numbers. Africa, Middle East, down 20%, Australia, minus 1%, and South America, plus 10%. And of course, these are markets that are primarily driven by the mining business.If we look at this from a segment point of view, mining, we continue to see robust stable demand at a high level. Infrastructure though, continue to see a decline in negative market outlook and so on, that we have seen more or less for the full year, and this goes across all the regions. If you take general engineering, we see a stable demand this quarter. Europe is stable. North America is slightly down, while Asia, especially China, is up high double-digits.Here, we see a change from the third quarter where general engineering was down quite a bit. And we believe there are 2 underlying reasons. One is that, of course, in China, we have a little bit of a different compare. But we also see across the markets that -- in Q3, we saw destocking in the supply chain. We haven't really seen that as much in Q4. So we believe that now we are back to more underlying demand levels, while Q3 was depressed by the destocking.In automotive, we see a positive development. It's positive in Europe, it's stable in North America. And also here, China was up in the high double-digits. Energy, down, primarily driven by a double-digit decline in North America, while Europe and Asia, China were positive.Aerospace, strong growth, double-digit growth, double-digits in Europe, high single-digits in North America and Asia. And then if we take the Other segment, it's a more mixed picture, which is stable overall. Europe is slightly down. North America is strong with high double-digit growth, while Asia is down. However, here, if we look at China specifically, it is actually up. So I would say, a fairly mixed picture, but slightly improving overall versus quarter 3.Then looking at order intake and revenues. Orders came in just above SEK 30 billion, revenues, SEK 31.8 billion, leading to a book-to-bill of 94%. Book-to-bill below 100% is, I would say, normal in Q4 as it's high deliveries and the seasonality of the order intake is more towards the beginning of the year.But we have, of course, in the quarter, taken a little bit out of the order backlog, especially in the mining business. But if you look at historic performance, we have built quite a lot of backlog. So [ I'm ] actually think this is in a way positive, because we need to get the backlog down to enhance our delivery times and not make our customers unhappy with our lead times.If we look at this from a slightly different perspective and also see the split between organic and structure, we can here see the minus 4% organic order intake in the quarter. We can also see the positive revenue growth in the quarter. And both rolling 12 have flattened out at the level of around SEK 125 billion.Converting these revenues then into EBITA, we see a margin of 19.5%. Overall, absolute numbers down 3% versus prior year, SEK 6.2 billion versus SEK 6.4 billion last year. I believe this is a good and resilient level, considering we have lower volumes in some of the businesses, and we have a currency dilution of 110 basis points, which is fairly significant. And as I already mentioned, from a rolling 12 months point of view, we stay in line with our margin corridor.Going then into the specific business area, starting with Mining and Rock Solutions. Here, again, continued stable demand. We see a positive momentum continuing for our automation solutions. We're also pleased to note our largest order to date in surface mining of almost SEK 250 million. However, order intake was slightly negative, 3% down organically. Here, aftermarket was stable, while equipment orders were down 10%. The equipment orders are still at a good level in absolute terms, but we are for a couple of quarters here facing very high compares.On the aftermarket side, Parts & Services specifically has a positive growth, but this is offset by a more weakening market in ground support. Ground support has been impacted partly by a weaker infrastructure segment, but also now some destocking among some key customers. We also saw 4 major orders in the quarter of almost SEK 1.2 billion, which was good to see. You remember, we did not land a major order in the third quarter. So it was good to see that, that was an anomaly.Looking then at the margin, a good margin of 20.6%, very solid operating leverage. So even though the margin was down versus prior year, this was driven by a currency headwind of 190 basis points. But again, the organic performance and leverage was very solid in the business.We also continue to launch innovations. I've already talked to several of them. We also launched a new top hammer tool systems that will help our Rock Tools business with differentiation towards competition and customers.We also continue to invest in surface drilling and have invested into a new surface test mine, we haven't had one before. So those of you that have visited our underground test mine, that has been very successful for us over the years, and now we also make a similar investment for a surface test mine outside of Tampere.Going to Rock Processing, very divided picture, you could say. We continue to see stable demand in mining, while infrastructure continues to be very weak. This means that the order intake at fixed exchange rates was minus 11%. And from an organic point of view, it is minus 18%. But then you can basically split that into stable mining and a significant decline in infrastructure.It was good to see, we booked a couple of major orders on the mining side of Rock Processing, [ total ] SEK 171 million. And remember that the threshold for a major order is a bit lower in Rock Processing versus Mining and Rock Solutions.Margin, I think they did a good job in this quarter, 15.7%, only slightly down versus prior year. And considering the negative impact from volumes that they also had a sort of last quarter with integration costs in Schenck. I think that was a good performance. They also had 80 basis points dilution from currency. They had savings and good operational performance that made the margin come in at still, I think, is a good level.Also here, we did an important investment in the quarter. We have invested into a new foundry in India where we do wear parts for crushers. This means that we can have an additional supply chain. We have a foundry here in Sweden as well. But this is important for the growth in Asia, and we've become less dependent on sourcing from, for example, China with long lead times, making it more difficult for us to adjust volumes as the market evolves. So this is a good development to strengthen that business.We also launched a new innovation called DeckMapp within the screening solutions business. This is a digital solution where you can screen or scan then the screening media panels for wear, so you don't have to send people out to see if you need to exchange some of the panels.Finally, then Manufacturing and Machining Solutions. Already mentioned, we saw strong demand in aerospace, a positive development in automation, while the engineering was stable. If we focus on cutting tools, we saw 4% growth of cutting tools in the quarter. We continue to see good development of the software business with high single-digit growth, but we had a significant headwind coming from the powder business, which continues to be impacted by supply chain bullwhip effect as lower demand is combined with destocking, as they are very early in their supply chain. So a significant headwind from that.Looking then at the total order intake, it was flat at fixed exchange rate and minus 1% organically.If we look at how the quarter has started, it has been a stable start of January. I want to highlight though our comment that you -- if you want to model the quarter, please be aware of calendar effects. We have Easter moving into end of March versus April, which is the normal. And this has quite a significant impact on March. It's 3 less working days, which is 15% of the month that goes away. And March is typically a high activity month. So there will be a calendar effect in Q1, which, of course, we will get back in Q2, but it could be good to be aware of that in your modeling.Margin at 20.2%, negatively impacted by volumes. We also had one of our cutting tool divisions that hit the brakes a little bit too hard to reduce inventories, which led to an under absorption on the margin. This is, of course, something we always have a little bit up or down. But this time it became a little bit more material, so it is worth mentioning. We have good contribution from the savings program here, SEK 62 million and only a slightly dilution from currency.SMS did 3 acquisitions in the quarter. Buffalo Tungsten, which will regionalize the supply chain for tungsten powder in North America for us, which is good. It will strengthen our market position there. Esco is a small software company doing software for a niche machining area called power skiving, which is important for gear manufacturing, and it's a niche, but high-growth area. And then pro-micron, which is a leading company for sensorised round tools where we have a leading offering in search today. This is a really good [ complement ] to the sensor machining business. So we welcome all of these 3 companies to the group.So with that, I'll hand over to Cecilia to take you through the details in more -- the numbers in more detail.

[Cecilia Felton, executive]

Yes. Thank you, Stefan. All right. So let's dive into the numbers then. And as usual, let's start with the growth bridge. And here, you can see that organically orders were down 4%, while revenues grew by 1%. Structure had a positive impact of 1% on both orders and revenue. And in total, that brings total order intake growth at minus 2%, whilst it was plus 2% revenues. Earnings came in at SEK 6.2 billion, corresponding to a margin of 19.5%. And as Stefan said, we're really proud to have delivered on our EBITA corridor again for the full year.Net financial items increased year-over-year, and I will show you a detailed bridge over the development in a few minutes. Tax rate for the quarter was low. Excluding items affecting comparability, it was 20.8%. Normalized tax rate for the full year ago was within guidance.Net working capital came down sequentially in both absolute and relative terms, but compared to Q4 of last year, it increased. We had a strong cash flow quarter, SEK 5.5 billion, corresponding to a cash conversion rate of 92%. Returns increased to 17.4%, and the EPS ended up at the same level as last year.So if we continue then with the EBITA bridge and start with the organic column, herez you can see that revenues grew by SEK 286 million, generating an EBITDA of SEK 59 million. And that corresponds to a leverage of 21% for the group, which was margin neutral. Structure was also neutral to the margin development, whilst currency had a negative impact of 1.1 percentage points. And that brings us from a margin of 20.6% last year to 19.5% this year.As Stefan mentioned, we continue to execute on the savings program that we announced in 2022. And as you remember, this program is expected to generate run rate savings of SEK 785 million. In the fourth quarter, we had savings of SEK 94 million, and that then corresponds to an annualized run rate saving of 48%. So here we are progressing according to plan.We are also continuously seeking to drive efficiency, resilience and making sure that we have an optimized footprint. And therefore, we've decided and announced today [ our ] new restructuring program, and this program will generate run rate savings of SEK 1.2 billion, and we will reach full run rate by the end of 2025.Most of the initiatives and the savings are structural, around 85%, and only a smaller part, around 15% then is volume related. The cost for the program is estimated at SEK 2.4 billion, and we will book those costs now in the first quarter of 2024 as an item affecting comparability.If we continue down the P&L then and look at the net financials, and starting with the interest net, you can see that, that increased year-over-year, and that's driven by the higher interest rates. You can see the total yield cost at the bottom of the table here.Then, if you look at the last row, you can also see that -- where we have FX and other asset classes, you can see that we had a really positive impact there last year. And as you know, on this row is where we book temporary revaluations of currency hedges and orders that we haven't invoiced yet and also temporary revaluations of our electricity hedges. So last year, we had a big positive revaluation effect, whereas it was very small this year. As you know, these effects eventually net out to 0.And as I mentioned, the tax rate for the quarter was low. Reported tax rate was 19.6%. If we exclude items affecting comparability, mainly relating to our divestment and our capital gain from that, it was 20.8%. Then we also had a correction related to a prior period. And excluding that, the normalized tax rate was 21.7%, still lower than our guidance for the year. And the reason for that is that we've received a tax credit for R&D spend. For the full year though, the tax rate on a normalized basis was 23.4%, so in line with guidance.As I mentioned, and as you can see in the graph here to the left, net working capital levels came down sequentially, both in absolute and relative terms. We also had a significant reduction in inventory levels, SEK 1.8 billion in the quarter. And we've had reductions across all of our business areas. And now since June this -- well, last year 2023, we have had a gradual decline in inventory levels. And this is a very high focus area for the group, and we are continuously working with bringing inventory levels to more normalized levels again. And that's a work that will continue throughout 2024.If we look at the cash flow then, and starting with the table, you can see that earnings net of non-cash items was lower than last year, with a positive impact from the net working capital change, while CapEx was slightly higher than last year. And that brings us from free operating cash flow of SEK 6.2 billion last year to SEK 5.5 billion this year. You can also see in the graph that the cash conversion for the full year came in at 18%.Financial net debt came down sequentially, driven by the positive cash flow and landed at SEK 35.2 billion. Capitalized leases came down slightly. It was largely unchanged, whereas the pension liability increased somewhat, driven by changes in the discount rates. So net debt then amounted to SEK 43.5 billion. Financial net debt over EBITDA continued to trend downwards. We ended the third quarter at 1.3, and now we are at 1.2.If we then look at outcome versus guidance, you can see the currency impact here came out at minus SEK 323 million. CapEx in the end was SEK 5.4 billion, so higher than what we guided. And here, we anticipated to be at the higher end of the guidance. But then we had several projects across the business areas that we anticipated in Q1, that came into Q4 already. Interest net and the normalized tax rate came in line with guidance.And looking ahead then, we expect CapEx for this year to be around SEK 5 billion, so slightly lower than what we had in 2023. Currency effects for the first quarter based on December rates, we estimate [ at ] around negative SEK 360 million. And the interest net guidance, here we expect it to be a little bit lower compared to 2023. So here, we guide SEK 1.3 billion for this year. And the tax rate guidance were left unchanged.And with that, I will hand back to you, Stefan, for summary and conclusions.

[Stefan Widing, executive]

Thank you, Cecilia. And I think if we conclude the full year, we believe it's been a successful 2023 for Sandvik. Full year revenues at fixed exchange rates grew by 9%. Organically, we grew by 6% this year. And we have a record result of SEK 25.2 billion and an adjusted EBITA margin of 20%, in line with our targets. And we also saw a strong cash conversion of 80%. And as Cecilia just mentioned, the financial net debt of EBITDA, which landed at 1.2, well below our target to stay below 1.5.We also see good progress in our strategic focus areas. We have done 7 acquisitions in the year, contributing to strengthening our presence in our customers' value chain and also in faster-growing segments for the group. We have made good progress overall in surface mining. I've already mentioned several of examples there.And we see overall a strong momentum for our technology and automation solutions. This goes both on the mining side with automation and software within, for example, Deswik. It also goes for our industrial software solutions within Sandvik Manufacturing Solutions.So overall, we continue to work on value creation for all our stakeholders. We have a strong company culture, world leading positions in the markets where we are active. We are today part of helping our customers in their shift towards more digital and sustainable solutions. We have also now another year proven our resilience, financial stability and our ability to generate strong cash flows. This is, of course, also one of the reasons for why we have also proposed to the AGM to increase the dividend by 10% to SEK 5.50 this year.So with that, thank you for listening, and let's go into the Q&A.

[Louise Tjeder, executive]

Indeed, time for Q&A, and I remind you, as I usually do, to stick to a couple of questions each so everyone has the chance to ask their questions. And with this, we can take the first question, operator.

[Operator]

The first question comes from Klas Bergelind, Citi.

[Klas Bergelind, analyst]

So my first question was on the margin in Machining Solutions. It seems like price cost is also a little bit worse year-over-year and then you have some under absorption from the destocking. You had a very good price cost quarter, I think in Machining Solutions last year. So I'm wondering, Stefan, what kind of price growth did you have now? Is it 3%, 4%? And how should we think about price cost going forward? Is this effectively total cost still going up, including sticky wages, while pricing is now slowing? We've seen this from others this reporting season. I'm interested to hear you thought.

[Stefan Widing, executive]

I'll let Cecilia answer first.

[Cecilia Felton, executive]

Yes. So, you are right. When we look at the margin development for the SMM business, it's negatively impacted by the volume decline that we had, that's offset by both the savings initiative and other contingency measures that we had. Then, when you do the year-over-year bridge, there's a negative impact from a destocking under absorption in one of our cutting tools divisions. And then as you mentioned, there's a negative price versus inflation effects or dilutive effect when you compare to Q4 of last year.However, if you remember, we did price increases in the beginning of Q4 of last year. And so, as we also mentioned on the call 1 year ago, in Q4 last year, we were -- price versus inflation was accretive to the margin.Then, when it comes to price increases, et cetera, going forward, we don't give any specifics. But so far, we've shown that we've had good pricing power. We've managed to offset price versus inflation. We took -- when you take a 2-year perspective, it's neutral to the SMM margin.I don't know if you want to add anything there, Stefan.

[Stefan Widing, executive]

No. We can just add to that, that SMS is -- [ well ] have been doing price increases now in the beginning of this year as well or beginning of Q1. So I would say the Q4 impact here is a little bit of timing because of the situation we were in 1 year ago where there were repeated price increases throughout the year. Normally, they time -- so it's the same time every year, but now we've got a bit of a, let's call it a gap during a quarter here. So...

[Klas Bergelind, analyst]

And my second one is on mining. You talked, Stefan, about destocking and ground support underground and your orders are very weak in SRP despite the easy comp you referred to in the third quarter in Asia and Europe. I think your equipment business is holding up relatively well in mining and SMR, but it looks that with some signs of softness in the mining verticals, ground support and maybe also in SRP, I'm interested to hear if that's the case?

[Stefan Widing, executive]

Now, as I said on ground support, yes, it was a weaker quarter, and it's partly related to infrastructure, but they have also -- I mean, ground support products is a consumable and is production critical. And -- so during the logistics and challenges 1 year ago and for longer than that, some of the larger mining customers with remote -- especially with remote mine sites, they created very large buffers on the site for ground support equipment. And -- so now they are reducing those local inventory, so to say, and that is impacting the business also. So those 2 combined is why we have a bit of a weaker quarter for ground support.Difficult to say when that is finished, if it will impact a few more quarters. But at the end of the day, ground support is fully correlated with mining production. So there is no reason to expect that, that business will not over time be fully correlated. We saw very good, or high growth rates for a while. So maybe that would have been a warning sign in hindsight.Looking at SRP, yes, as you said -- I mean, we see stable mining demand on the SRP side, while infrastructure is very weak, even on the lower comparison. Here, what we see is also -- this is, for us, very much a dealer business, and we see dealers having overstocked. And this is, I would say, industry-wide phenomena. We can see yards full of equipment, [ ours ] and competitor equipment in this space. We also have dealers with rental fleets with -- that have gone into more challenges due to financing costs and so on. So then they are also more careful to renew their fleet. So it is a tough period in infrastructure.And Q1 will be interesting to see because Q1 is typically an order quarter where customers place orders for the construction summer season. So it will be really interesting to see how Q1 evolves. And I don't have the answer. I'm just as curious.

[Operator]

The next question is from Sebastian Kuenne, RBC.

[Sebastian Kuenne, analyst]

I have 2 questions, one on restructuring, one on SMR. On restructuring, I was wondering if you could give us some color on the type of adjustments that you do? Is it related to end market shifts, like out of auto into aerospace? Or is it a regional adjustment where you want to reduce your exposure to one region in favor of another region? And then I was wondering what has changed in the last 19 months that you saw another requirement for a major restructuring in SMS, that's fully restructuring?

[Stefan Widing, executive]

I can start with that. Type of restructuring, I would say, it's less about the shifts you talk about there. Of the ones you mentioned, there is a little bit of regionalization, we could say. But it's primarily about -- we have asked the divisions again to look at what can you do more efficiently, where can you reduce complexity, where can you sort of consolidate, do more with less. So it's more simplified organization, consolidate sites, in a few occasions reduced management layers and so on. So more -- it's more about, in general, trying to be more efficient and do things smarter, but then also a little bit of making sure we have the right regional footprints as well.In terms of the -- what has happened in the last 19 months, well, I would say, that's not a driver for this. We are executing on the [ '22 ] program. We started to see that we can do more here. There are more things we can do to increase efficiency further. And it's also a matter of that you cannot do everything at once. So once you are executing and getting ready with what you're doing, it's sort of easier to focus on identifying new opportunities. The timing is not driven by economical cycles or anything like that. It's -- we just feel we can do more, and then this is the right thing to do to make the company more efficient. If you want to add?

[Cecilia Felton, executive]

No, I agree. And that's also, as I mentioned, 85% of the savings are structural in nature. So that's the majority of the program.

[Stefan Widing, executive]

Yes.

[Sebastian Kuenne, analyst]

And then on SMR, what tender activity do you currently see on the mining side? And do you still see financing costs -- rising financing costs hampering tenders from the junior mines? Or do you see any change there now that the interest rates seem to come down a little bit?

[Stefan Widing, executive]

I think we continue to see good activity. In this quarter, we had a slightly different mix. We had -- [ so ] replace -- sorry, brownfield went up from 50% to 60%. Greenfield went down from 20% to 15%, replacement went down to 25% from around 30%. But I don't really draw any conclusions from this. It can fluctuate a bit. It's been quite stable for a while, but historically, it has fluctuated. So in terms of -- yes, we still see that junior miners is having a little bit more difficulty with the financing, which doesn't mean that the project will not happen, but it can take longer for them to get the approvals. They might have to work a little more also with the life of mine and how they can ensure returns.I think it's positive that interest rates most likely have peaked, but it's probably going to take -- they probably have to start to come down before it starts to impact the situation there. But I would say there is nothing alarming. It's just that it makes -- some projects take a little bit longer.

[Operator]

The next question is from Daniela Costa, Goldman Sachs.

[Daniela Costa, analyst]

I have 2 questions as well. The first one is more on SMM and trying to tie up the relationship between cutting tools and powder because the trends seem to be quite different in cutting tools. You've mentioned the end of destocking. In powder, there are still some destocking. I guess, powder is selling to other cutting tool companies. So do they [ call ] if at all one normally tends to be the lead to the other? And is it sort of any reflection on cutting tools doing better than powder that we can extract in terms of your market share there?My second question, just back to SRP, it seems like we're at a low point in the cycle. Sort of do you see this margin now has trough? Or what do you see as the ultimate end goal of what you would like to do in SRP in terms of margins?

[Stefan Widing, executive]

If we start with cutting tool versus powder, powder is -- I mean, we talk about cutting tools being sort of early short cycle. Powder is even earlier. So that's in a way a leading indicator also for cutting tools. But it's also a product, let's say, that is really a bullwhip effect in the supply chain. So when markets go up, we tend to get a lot of orders, everyone wants to secure supply. And then they tend to over order and have too much. And then when the market goes down, it's one of the things you stop ordering. So it can -- for some customers, they simply stop completely for a while to order. And that's where we have been now for, I think, it's 3 quarters, and that means the business can be down 50%. So very volatile in that sense.And quite frankly, we contribute to this as well. This is something we should address. But we have a lot of internal ordering. And when our cutting tool divisions want to reduce inventories, they do the same. So this is an early signal. I would be waiting for -- to see where there is, in general, more confidence in the market, that then we will see the powder flipping around in the other direction instead. We haven't seen that yet.But it's a leading indicator, and it's even more -- or it's much more volatile than cutting tools in general. And just a comment as well. We're not only selling to cutting tool companies. Their external sales goes to other type of component manufacturing that is being done using tungsten.Then on SRP margin, as I said, I think we were quite pleased with our margin performance in Q4. They have historically been above 16%, and that's where we want them to be. Q1 for them is a bit more challenging. They have a seasonal pattern where they have a big business throughout Australia, and Australia is on holiday in January. But otherwise, we want them back above 16%, and that's where we're aiming.

[Daniela Costa, analyst]

Just clarifying on the first one. So if -- powder is weak now, but -- and it's a leading indicator, but it's at trough. Is that sort of your comment?

[Stefan Widing, executive]

Yes, absolutely. I -- It's been in the trough for a while, and we're -- I mean, honestly, just waiting for the signals where it starts to pick up again. And also here, I think, this is a business where many customers place full year orders in the beginning of the year. So it will be interesting to see Q1 now if we can -- if the business comes back a little bit.

[Daniela Costa, analyst]

So we shouldn't see the weakness now has a sign for cutting tools will revert and will be weak?

[Stefan Widing, executive]

No, I don't think that's the conclusion you should draw. No.

[Operator]

The next question is from Max Yates, Morgan Stanley.

[Max Yates, analyst]

Could I just ask about the FX headwind in mining? It was obviously kind of pretty significant and more than I would have expected. So I just wanted to check, is that all to do with underlying currencies? Or is there a kind of balance sheet revaluation in there that particularly impacted the quarter? And any sort of color on kind of how big that is and was that a balance sheet revaluation from last year that didn't repeat? Or was that a new one this quarter? Just to try and understand exactly what's happening there.

[Cecilia Felton, executive]

I'll take that one. So when it comes to the currency effect for SMR, it's underlying currency impact. So revaluation of balance sheet items, we moved out from currency, so that now sits in the organic column. And what's impacting SMR or transactional currency effects, so the development of the euro versus the mining currencies, so the Australian dollar, South African rand and the U.S. dollar, for instance.

[Max Yates, analyst]

So just -- so it's fair to assume that maybe the majority of the FX headwind that you're guiding for in Q1 will again be in mining? Is that a fair assumption?

[Cecilia Felton, executive]

Depending on how the currency evolves, but that is -- those flows are the main ones impacting the transactional currency effect in SMR. So looking at how that develops in Q1, would give a good indication I think.

[Max Yates, analyst]

And maybe, Stefan, just a kind of bigger picture question. Just on -- when I look at SMM volumes and I compare them kind of ex-price to 2019, it looks like they're quite meaningfully below kind of where we were in 2018 and '19. I would say that's kind of relatively unique when I look across the coverage. So when you look at the business and you look at the different end markets, what's happened with destocking, is there anything you'd point to kind of particularly in your business that has been a kind of real challenge versus where we were in 2019? And then just thinking about kind of whatever that impact may be, do we expect that to kind of roll off quite quickly in the next couple of years? I guess what I'm trying to understand is kind of how do we get to where we are now? And how do we think about the kind of recovery back to 2019 levels? Because on my numbers, we're about 14% in volume terms below where we were in 2019.

[Stefan Widing, executive]

Yes. I agree, volumes are below [ '19 ]. I don't think we have maybe exactly the same numbers, but the point is the same. And the main driver is the fact that several of our key end markets are still not back to where they were in '19. Aerospace is still below, although it's getting there gradually now with a good recovery we see. Automotive however -- automotive was sort of in the peak end of '18 and production levels are not back to where they were than now. In that regard, it's still fairly muted production levels globally.So that's, I would say is the main explanation. We don't feel -- when we look at it overall, market shares is the same. And the gap can be explained by the end market developments. Yes, I guess that's a simple answer.

[Operator]

The next question from [indiscernible] Robinson, Bank of America.

[Unknown Analyst]

Congratulations on a pretty solid quarter. Just a quick one for me. So looking at Processing Solutions, obviously, you've had this steep buildup in net working capital even relative to the other division since 2022. And it was the only division not to kind of significantly decrease its net working capital this year -- sorry, this quarter despite the weak demand. I was just wondering what the sort of the story is here? And how does this kind of impact the cash conversion of this division relative to the other ones? And how should we look at that in 2024?

[Cecilia Felton, executive]

Yes. So for SRP, when you look back a few years in time, they were at significantly lower levels. And in some parts of the business, they were at too low inventory levels. So they are still now at too high levels. So they are also working at bringing inventory levels down, but maybe not quite back to the historical levels that we've seen in the past. In the quarter, all business areas, including SRP, had a reduction in inventory volumes. For SRP, though why you can't see that comes through in their net working capital development is that they had less prepayments driven by the infrastructure segments and the developments there and then also some sort of impact from accounts payables. That will, of course, flush out over time. I think the important thing is that they are also reducing their inventory levels. And net working capital should continue to come down in 2024.

[Operator]

The next question is from Vlad Sergievskii, Barclays.

[Vladimir Sergievskiy, analyst]

2 questions. First one on SMR aftermarket growth. You mentioned ground support tools as one of the reasons of weaker aftermarket order growth here. How big is this ground support for you within the SMR segment? And why the dynamic here is so different to the other parts of the mining aftermarket? And maybe is it possible that elevated stocks were accumulated in other parts of the mining aftermarket and not just here in ground support? That's the first one, please.

[Stefan Widing, executive]

Yes. The size of ground support we have said before, has been roughly SEK 10 billion. That's the order of magnitude. So it's a fairly significant part of the SMR business. We don't see the same dynamic in other parts, meaning that customers have overstocked, and it's because of the nature of the product. Each -- ground support, it's either basic or more advanced bars or rebars. As I said, it's production critical. You cannot continue to develop the mine if you don't have ground support. So it's important that it's always there.You have a similar need, for example, for Rock Tools, but those are more expensive products and more -- I would say, often more unique. And there often, we at Sandvik have vendor-managed inventory as well since we also do certain services or regrinding on the mine side. So we have more control over that in many cases ourselves.And if you take Parts & Services to get the equipment fleet running, it's not -- you cannot have the same type of behavior where you overstock locally on the mine side because it's thousands and thousands of different parts. While ground support, you might have one type of product, period, or a few type of products.So this dynamic has meant that the -- when we had all the logistics issues, some customers decided to simply build their own buffer stocks. We have not seen the same behavior in other parts of our aftermarket business. So we are not concerned in that regard.

[Cecilia Felton, executive]

I think the stock buildup for the other parts of the market is it's more in our books. It's part of where our -- is the reason for why our inventory levels are at elevated levels within SMR.

[Stefan Widing, executive]

Yes. Correct.

[Vladimir Sergievskiy, analyst]

And much quicker question on the currency. You mentioned there was some revaluation in part put into organic column, as you highlighted. Can I ask if this effect on organic column was positive or negative in this fourth quarter? And maybe how material has it been?

[Cecilia Felton, executive]

For SMR, it was slightly positive, not in a material way. We had a negative impact from the devaluation in Argentina, but that was offset by other positive impacts. So it was slightly positive, but not a material impact overall.

[Operator]

The next question is from James Moore, Redburn.

[James Moore, analyst]

Maybe one on margin and one on SMM pricing. Just to start on margin. When you set out the 22% margin target across the cycle at the recent Capital Markets Day, you haven't announced this savings plan. Can you talk about what this savings plan does to margins in 2025, 2026 when you deliver it? Basically, is it needed to get to the bottom end of the range? Or can it be incremental and push us to the higher end or even above the higher end of the range? That's the first question. Maybe we can start there.

[Cecilia Felton, executive]

Yes, I can start. So when we look at our margin corridor, it's not an absolute peak to trough. Sometimes, we can fall below, then we will take action to get back into the margin corridor theoretically. We could even be above for a specific quarter. And I would say, that's where we are pleased with our performance and our results. I would not say that the savings program that we have announced now would indicate that we would increase our margin corridor, but it would result in a movement within the corridor.

[Stefan Widing, executive]

And if I can just add. I mean, when we launch a target like this, we know we don't know much about the future. And then it's about us managing the business to stay within the target. And that's, of course, partly why we have the target to give us a guidance for where we need to be to be performing well. Then we can have higher growth or lower growth and then we need to take actions to that. But what we have always assumed is that the company, as such, always continuously work on becoming more efficient and -- as a company because that's what competitors do. We have inflation. We want to invest into new areas, which sometimes have risks and sometimes cost money and so on.So I would say, this is just part of us managing the businesses in a way where we make sure we future-proof the company, we can do the investments, and we can deliver a good solid margin within that range.Then of course, there is a room -- we are happy. We continue to be in the range, but we are at the lower end of the range. So, I mean, there is also room for us to move towards the middle end of the range and be even more happy. But I don't think you should assume that this was something that was done to sort of impact the range as such.

[James Moore, analyst]

I thought that would be the case. Just the other one, if I could, on pricing. And thanks for the answer to Klas earlier, but could I just follow up on it. I understand the timing point on raising prices in a multi way in the supply chain crisis. But could you help us a bit more and just unpack what is going on with gross price realization versus gross cost inflation and the 2 sides behind it? I'm really just trying to understand how the price impact on sales has developed. Obviously, we've come down from the level last quarter. But are we still in positive territory? Are we in mid-single positive territory? Any kind of quantification there would be helpful.

[Cecilia Felton, executive]

I can start. So we don't give specifics on price. I think what we can say is that, looking back, if you take a 2-year perspective, we worked very hard with pricing in an agile way, having multiple price increases last year. And our ambition here has been to offset and mitigate inflation, not only in absolute terms, but also making sure it's margin neutral. So we've been successful so far with that. As I mentioned before, we are margin neutral if we take a 2-year perspective. And now we have additional price increases in the first quarter.

[Stefan Widing, executive]

And I think since we have this approach, we want to be margin neutral. If you look at general inflation numbers, I mean, which is basically what we need to offset, right, of course, you need to [ weight ] it depending on what cost types we have and so on. But that gives you sort of an order of magnitude of what type of price actions we need to take as well. Then, of course, it's impossible to time it perfectly because inflation is continuous, but the price increases are instant. So it becomes like a saw tooth pattern where sometimes you're slightly accretive and then you maybe dip a little bit below and then you do the price action again and so. So that's sort of the dynamics here. And then in normal times, this is not a material dynamic, but this is -- we are at the tail end of the dynamics on the high inflationary period. So it had some impact, as mentioned here.

[Operator]

The next question is from Andreas Koski, BNP.

[Andreas Koski, analyst]

I would also like to ask about the savings program that was launched today. So firstly, how much savings did you have for the full year in 2023? I don't think I've been able to find that number. And is it fair to expect savings of around SEK 1 billion in 2024? And with these savings, do you think you will be able to deliver on your targeted margin corridor also in 2024?

[Cecilia Felton, executive]

The full year savings, I don't have that now on top of my mind. We need to come back with that question. Can you repeat your second question again, please?

[Andreas Koski, analyst]

Yes, is it fair to expect savings of around SEK 1 billion from both programs that you have now in 2024? And with these savings, do you think you will be able to deliver on your targeted margin corridor in 2024?

[Cecilia Felton, executive]

I would say like this, the program that we've announced in 2022 is progressing according to plan. And here we said that we would reach around 90% run rate savings at the end of 2024. So that could give an indication of the gradual improvement from the 50% level where we are at now. And for the new program, we expect 70% of the savings to be realized by the end of the year. Now we are launching the program during the first quarter. So it's going to be limited savings for the first half of the year and then a gradual increase during the second half of the year.

[Andreas Koski, analyst]

Yes, I will follow up with [indiscernible] on the cost savings for 2023. And then my second question is just on the AutoMine for underground drills. I think that sounds great. But can you please explain how this will work for customers with a mixed fleet of machines? Do you see a risk that you might lose market share because you are not able to offer these kind of solutions for mixed fleet?

[Stefan Widing, executive]

Yes. Before I go to that, I want to answer the last part of your previous question, which was, we believe we can meet the margin corridor in 2024. And of course, we don't give guidance on margin, but what I can say is that every single year, we will start the year with the ambition to reach the margin corridor. That I think we can be clear with. That's why we have the margin corridor, and we have said that if we fall below, we should take action to get back into the margin corridor. That's an ambition level, not a guidance or a forecast.When it comes to AutoMine, no, this is one thing that we have expanded our own solution to now be able to handle all type of equipments, loaders, trucks and drills. This does not mean that we cannot work together with a mixed fleet environment. But that happens then as a traffic management level. So you will have different systems that controls the specific machines and then they collaborate on deciding which type of machine that can go where.And that's the way we believe mixed fleet automation will happen for the foreseeable future, simply because it's -- especially if we go into drilling, it's virtually impossible to do a good fully automated drilling cycle with someone else's hardware if you look at safety, liability and everything and the complication of these machines. So no, I don't see a drawback. I know it's a narrative from someone else, but we don't agree with that.

[Louise Tjeder, executive]

All right. Thank you, Stefan, Cecilia. It's time to wrap up. And should you have any more questions, please do not hesitate to contact Investor Relations. And with this, we say thank you for calling in, and wish you a good rest of the day.

[Stefan Widing, executive]

Thank you.

[Cecilia Felton, executive]

Thank you.