Sandvik AB's (SDVKF) CEO Björn Rosengren on Q4 2015 Results - Earnings Call Transcript

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Sandvik AB (OTCPK:SDVKF) Q4 2015 Earnings Conference Call February 3, 2016 4:00 AM ET

Executives

Ann-Sofie Nordh - IR

Björn Rosengren - CEO

Mats Backman - CFO

Analysts

Peder Frolen - Handelsbanken Capital Markets

Guillermo Peigneux - UBS

Klas Bergelind - Citi

Markus Almerud - Kepler

Andre Kukhnin - Credit Suisse

Ben Maslen - Morgan Stanley

Lars Brorson - Barclays

Andreas Koski - Deutsche Bank

Alasdair Leslie - Societe Generale

Anders Roslund - Swedbank

Graham Phillips - Jefferies

Andreas Willi - JPMorgan

Ann-Sofie Nordh

Good morning and greetings to you all. Welcome to the presentation of the results of Sandvik's Fourth Quarter 2015. Today, our CEO Björn Rosengren, and our CFO Mats Backman will run through the presentation. After which, we as always open up for the Q&A session.

And without further ado, I’ll just hand over to Björn and Mats.

Björn Rosengren

Thank you, Ann-Sofie, and welcome everybody to this Q4 result presentation. As Ann-Sofie said, I will start with presenting a number of slides and after that we would do the Q&A sessions.

If you look at the Q4, we can see that challenging market conditions continues. And if you look for year-over-year, we can see that the demand, especially in China as well as somewhat in US is declining. We also see that the energy market continued to be challenging. And there were some spillover effects, especially in North America when it comes to the general engineering part.

The organic growth for the quarter was negative and in the back of the low volumes, our EBIT decreased with 11%. On the other hand, we had three business areas and that is Machining Solutions, Mining and Construction that had a stable or improved EBIT level. The Venture business area as well as Materials Technology are being influenced by the low oil price.

We are continuing and pushing the operational improvements and also a little bit of cleaning. And in the fourth quarter or actually in December, we booked SEK1.5 billion as non-recurring costs. If we divide these costs up, there is SEK250 million related to the last part of the supply chain optimization program, that is about SEK320 million in cost adjustments in SMS as well as at the Group, and then you have just under SEK1 billion, which is related to impairments mainly to the Chinese market as we’re not really living up to the measures that we are taking.

The very positive thing in the report, I think is the cash flow. We had a strong cash flow in the quarter and in the full year; it was actually the highest ever. And this is of course driven by a decrease in the working capital, so I think all our business areas contributed to this good cash flow. So as I mentioned, we have seen less demand in the North American and the Asian region and as I mentioned, Asia is mainly China, which is down, while we see Europe as being flat and Europe is our largest market. So the order intake is actually down 7% year-over-year.

This pie chart actually represents our invoicing, which is down 6% year-over-year. The small arrows, the yellow one, they actually represent the sequential development and we see it pretty much flat, somewhat down when it comes to the energy segment as well as the mining side, while we see a strong development of the automotive as well as the aerospace. When it comes to mining, it’s pretty clear; it’s an effect, which is coming from the low mineral prices.

On the engineering or the energy side, that is very much of course driven by the low oil prices. And just giving you an example, in the US market, the sequential development of drill rigs, actually went down with 20%. And if you look year-over-year, it’s actually 60% down. I think the number of rig counts in US today is about 650, somewhere around there. So it’s significant. And of course, these two are affecting two of our business areas.

Machining Solution business. I think the development there in volumes follow pretty much the group. I think a lot of good mitigated actions and efficiency measures and structural improvements have – the business they have managed to keep the EBIT level and then I am talking about the adjusted EBIT level at 20%. And I think that’s a good achievement from them. SMS actually has the highest cash flow ever, both in the quarter as well as the full year. So a lot of credit to that.

It has been a year of a lot of new products introductions. In SMS, up to 15,000 new products have been introduced. And one of these products is the Walter 170 DC, which is a round tool, the quality icon of round tools and it’s very much for the automotive industry.

Mining. Well, mining there are both positives and negatives. Of course, they are impacted by weak demand in the markets, but even though that they managed to have a good orders received and actually flat development compared to the year before, and that’s especially a lot of equipment orders, which has come in during the last quarter. So we’re happy that we can move into next year with a good order book. But I am not really happy with maybe is the profitability, which was lower than we expected, approximately 1 percentage. And that is very much related to three things that came up, one is the mix between the equipment sales and that’s probably 0.5% affecting. Then you have some higher obsolescence compared to a normal quarter. And then on the last part, there were some factory issues in Asia, which actually burdened the profitability for the quarter.

We have a new head of the business area. Lars Engström. Lars Engström is one of my dream team candidates from my Atlas Copco team and I am very happy to have him on board. And Lars and I have – we have very similar view points, how we would like to take mining business forward. Also in Mining, they have a new product and here we present a narrow-vein loader and by the side, it’s also an electrical one, which fits in today world and drive towards electrical drives.

As I mentioned, two of our business areas have been affected very much from the low oil price, and that is the Materials Technology as well as Venture. If we start out with Materials Technology, I would say some parts of the tubular, which is called the core and standard have had effects. We haven’t seen too much effects yet on the umbilicals business and we have front view of about six months. What is very positive with SMT is that they actually got the working capital under 24% and I think that’s the best ever in the business area’s history, which of course also is driving cash flow in a positive way.

The underlying profitability, and I call that adjusted was including the metal price part is 7% for the quarter and 8.4% for the full year. Venture, I think that is definitely the business, which has been affected mostly from the weak oil and gas industry. And of course, you understand that the Varel business will be called Drilling & Completions today, it’s of course directly affected, of course, they delivered the drill bits for the industry. And yes, with such a weak market, of course, they are being quite severe affected. We also have some effects within the Hyperion business that they delivered some of the hard materials and also diamonds, which are used on the bit, so that is being affected.

On the construction side, I think we are having improved profitability, both on the quarter as well as full year. It is a challenging market. We got some exciting orders from Australia, SEK270 million in funding equipment, which we are very happy for. Otherwise, I think China market for construction is very weak, while we see a little bit better in the US market.

So dividend proposal is SEK2.50. And we do believe it’s important to secure the balance sheet going forward to get a little bit flexibility. It is of course within our policy when it comes to dividend. If we look at the adjusted earnings per share, which is SEK4.37, I think it is SEK4.27, this is 57% on top of that. So I think it’s been in the range.

With that I will give – hand over to Mats and he will talk a little bit about the financials.

Mats Backman

Thank you, Björn. Moving into the financials and starting with order intake for the quarter. We had an order intake of SEK19.5 billion, which corresponds to a negative organic growth of 7% in the quarter. Negative book-to-bill 0.93, and we also had some order cancellations in the quarter, mainly related down to mining and construction, about SEK200 million in China within crushing and screening. On the positive side, we had the large tunneling order for constructions in Australia, about SEK270 million.

Looking on the invoicing, SEK20.9 billion in the quarter, corresponds to minus 6% looking on organic growth. And we actually have negative growth in all business areas, but mining, where we had a positive 3% in organic growth and that was very much, as Björn said, supported by the strong equipment order intake during the first half of 2015.

Looking on the EBIT side, adjusted EBIT of some SEK2.3 billion in the quarter, corresponding to 11.1% in margin. However, we had a reported EBIT of SEK770 million, but that is also including the one-off items of approx. SEK1.5 billion.

Despite a positive currency effect of about SEK70 million, savings from savings programs of about SEK270 million, we still had an earnings, adjusted earnings decline year-on-year with about 11% in the quarter.

Cash flow, SEK3.4 billion in cash flow in the quarter, in operational cash flow. And looking on the full year 2015, we actually had all-time high of operational cash flow of some SEK12.8 billion, very positive on the cash flow side for the fourth quarter as well as the full year 2015.

Investments in the quarter SEK1.3 billion. Total capital expenditures for the full year 2015 on the level of SEK4.1 billion. For those of you that attended our Capital Markets Day back in 2014, we had a target for 2015 to be below 5% in terms of capital expenditure in relation to sales. We are actually on about 4.8% for 2015. So obviously, a lot of positive development on that side as well. But the main driver looking on the cash flow development for the year is actually coming from the net working capital. Just looking on the development in the quarter, we reduced net working capital in absolute value with some SEK2 billion, where SEK500 million are related to currencies, but SEK1.5 billion related to volume, where the destocking and inventories is the major part of the volume reductions. And in the quarter, we had actually destocking for all our business areas and we had some under absorption effect looking on the quarter and I will say that SMS, Machining Solutions as well as Materials Technology had an under-absorption effect from the margin. For Materials Technology about 2% units and looking at Machining Solutions, about 50 basis points in under-absorption in the quarter.

And looking on the development of the relative net working capital, we are on the level of 25.7%, and this is the best figure since 2010, 2011, where we are actually hitting the long-term target of 25%. So very positive development on the relative net working capital as well. And I am actually extremely happy to see that they have three out of five business areas today that are below our long-term target of 25% and we can welcome Materials Technology into the 25% family as well in the quarter and that is a great improvement for Materials Technology.

To summarize our savings programs, as we’re stating here, we are half way there when we are talking about the savings, both in terms of the savings, as such, as well as time. We have targeted total savings of SEK2.1 billion with a full run rate to 2017. By the end of 2015, we had savings of about SEK1.5 billion. In the fourth quarter, we announced the third and the final step of the supply chain optimization program and we have by the year-end 2015 closed 11 out of the 23 announced units to be closed.

Looking on the guidance for 2016, and starting with the first quarter. We are guiding for – we are estimating a negative currency effect of SEK300 million in the first quarter, and that is based on the closing rates end of 2015. Metal price effect for the first quarter, minus SEK130 million, also based on the closing rates end of 2015.

Looking on the full year 2016, we are guiding a capital expenditures on the level to be below the SEK4.1 billion that we saw this year. In terms of net financial items, to be between SEK1.7 or SEK1.9 billion and finally the tax rate to be between 26% and 28%.

So with that, I am leaving for Björn to conclude.

Björn Rosengren

Thank you, Mats. So if we then look at the summary of the year, it’s pretty clear it’s been a challenging year in our end-markets. We reached SEK86 billion in sales or 12.3% EBIT. We continue our portfolio optimization program and we have booked – then that was the divestment of the Mining Solutions business. And we are going through all our businesses going forward and challenging them.

We continue to drive the efficiency program and we have booked during the last quarter SEK1.5 billion as non-recurring cost, which is affecting the results. We have a cash – high cash flow SEK12.8 billion and the dividend is SEK2.5 billion.

So look a little bit going forward, we do not actually believe that the market will do any major changes. We think it will be a challenging year also 2015. Maybe we sequentially don’t expect any further big drops, but probably moving in the same direction as we had done. We will continue to drive efficiency and operational improvements in the company.

I also am a strong believer in decentralization. We will drive out the responsibilities further out in our operations closer to our customers to create transparency, accountability and speed. We will challenge all our businesses and I have a firm belief that we should be number one or number two in the businesses that we are operating or have the possibility to get there. Otherwise, we have to question ourselves, are we the right owner.

I do believe that we should work in the direction of continuous improvements, not to expect any quantum leaps when it comes to improvements of operations, but small steps every year and we do expect that all our businesses will improve their performance going forward.

With that I think I will end this session and we will move over to the question-and-answers.

Question-and-Answer Session

A - Ann-Sofie Nordh

Yes, thank you. And I think for those brave guys in the room who spited the terrible weather in Stockholm. We start with the question from the room. Please go ahead here in the front.

Peder Frolen

Thank you. Peder Frolen, Handelsbanken Capital Markets. Bjorn, on your last comment here, challenging the businesses, I mean, we need to see some time passing, come up with an explanation whether you can be number one and two in each -- in every one of them. When do you think it's time to put the foot down which parts that do fit in Sandvik or not, timeframe-wise? Machining systems is one that you already announced, but if we look at further portfolio optimization actions.

Björn Rosengren

Yeah of course, I’m in the middle of the analyzing group and spending a lot of time out in the different businesses. And just to mention that, I’m very optimistic and positive what I meet out there. I think we have a lot of good businesses; we have a lot of good technologies and a lot of good people around. And I do believe that the most of our businesses are world leading businesses that is pretty clear. There is of course always exceptions and I’m not planning to give any news today but I will give you a little bit of flavor when we come closer to the Capital Market Day which is actually the 24th of May in the direction where we’re planning to take the company. Of course, the mining solution was a decision which I think is very good, it’s moving more into the core business of the mining part and that process is moving very well at the movement. And we hope that we will be able to close this before the end of this half year.

Peder Frolen

Mats, if I may continue with a follow-up. Mats, you mentioned, or Bjorn, you mentioned that you don't expect any sort of big sequential differences in the demand. You usually talk about machining solutions trading conditions January. So maybe you could comment on that, and then especially, of course, how the US market is operating.

Björn Rosengren

I would say, we haven’t seen any big changes to what we saw in the fourth quarter. So I would say a flat development. Then it’s always kind of difficult to draw any conclusions at the beginning of January and I mean with all the holidays and so forth. So I would say basically flat unchanged market environments overall.

Peder Frolen

Is it fair to assume that you will not sort of under-produce in the first quarter in SMS?

Björn Rosengren

I mean we producing according to the demand. So in terms of structural need to kind of destock or to adjust the inventories that’s mainly related to mining and to some extend to venture. But the effect in terms of under absorption looking on mining is very small. So you couldn’t expect that I mean we’re planning to produce according to the demand.

Ann-Sofie Nordh

Thank you Peder. Yes please, go ahead one more from the hall.

Guillermo Peigneux

Hi, good morning it’s Guillermo Peigneux from UBS. A question, actually a follow-up on Peder’s questions on growth and focus on SMS. Maybe a bit more regional caller is difficult to see when you have the USA going down 15% organically and 13% in Asia. Whether is some destocking going on and therefore one should actually adjust for that going forward as the destocking stops to some extent.

Björn Rosengren

I mean, it’s pretty clear that both Asia or China and US are the markets where we have seen the most decline of demand. China, I believe will continue in a tough part going forward. I don’t see any big changes in the near future there. Of course, there are a number of segments which are doing well and that is the automotive segment and the aviation side. So there I think we should be able to see good volumes going forward. In US, I think the big drop actually came in relation to the oil and gas industry. So, substantially I would say pretty flat at the moment.

Guillermo Peigneux

And then a follow-up actually on oil and gas and your comments on umbilicals earlier on, saying like you haven’t seen a yet and therefore sustainable. Well, I’m just wondering why the weakness you know umbilicals tend to be higher margin within materials technology and yet the margins have been very weak. So I wonder what does it means for the rest of SMT? Is that negative or just basically losing a lot of ground when it comes to margin and also what really happened because I guess umbilicals will be impacted at some time.

Björn Rosengren

Of course the umbilical business we all know it’s a high margin business for SMT and it’s very much important. We have a view point about six months and that‘s where the order book is approximately and so far orders have come in and we have good orders in the pipeline. If the market will go down, which probably will do in the future, of course it can affect the part because it’s in a very important part of the business. And of course we need to then in that case, we have a little bit of foretime there to take mitigated actions in relation to that. But so far we have not seen any decline in the umbilicals orders.

Guillermo Peigneux

I mean last one, very short, pricing I missed bit of commentary in pricing given the deflationary environment we live in. Which segments are you know you see price erosion?

Björn Rosengren

I would say, if you look at the group overall, it’s flat or somewhat positive. There are a couple of business areas which are mostly related of course to oil and gas and that is the venture business or the drilling and completion where you see a drop in margin. There is also some drop in margin when it comes to core and standard in SMT.

Ann-Sofie Nordh

Thank you. And with that, we’ll move onto the conference call please. Operator, will you please let through the first question?

Operator

[Operator Instructions] And your first question from Klas Bergelind of Citi. Please ask your question.

Klas Bergelind

Yes. Hi, Bjorn, Mats and Ann-Fi. It's Klas from Citi. A couple of questions, please. First starting with return on capital employed. It has been a problem last two years, hovering around 10% to 12% despite considerable cost cutting and a major supply chain effort. This is well below the likes of Atlas. Bjorn, can you help us understand how we can improve asset turns? Is it -- when you look at divesting mining systems, that won't help you that much as working cap is effectively zero. The simple logic is that you have to divest units operating low margin with too much capital. But is there something else you can do to get asset turns up or do we have to rely on divestments?

Mats Backman

To improve the capital employed is two things. You have to improve your margins and you have to decrease your capital employed. So these are direction we’re heading and I think all our businesses has to driven in that direction. And I think this year we have seen good developments in net working capital which has gone down and we will continue to pull that. When it comes to all other businesses, yes, we’re going to drive the performance and from each of these businesses and I do expect that each of our businesses will improve year-over-year which will give effect on the return on capital employed of course. I don’t really want to comment anything today of divesting any businesses at this part. But as I mentioned, we are challenging our business structure and we are looking into all our areas and analyzing if we are the right owner.

Klas Bergelind

Let me ask this in a different way. We've done a big supply chain program that is currently running. Given low volumes, you can't really see ROCE improving until volumes come back, I assume. So when you've done analysis, what can happen here in terms of ROCE on the existing supply chain program or do you need to do more?

Mats Backman

I think on the existing program, you will see effects that’s pretty clear. But we will also continue in each of the businesses to work the working capital down, and that’s going to in each of our operations. And that’s a little bit part of what I’m saying that we’re in the decentralization, we are moving the responsibilities further out and when you have the balance sheet and the P&L responsibility, of course you are very much responsible for your return on capital deployed. So that is the direction we will push it.

Klas Bergelind

Okay. My second question is on volumes and pricing in the aftermarket in mining. The weakness there towards the end of the quarter, is that just because of mine closures or do you also see the miners cancelling service agreements in existing mines, bringing services more in-house? And also, what are you seeing on pricing? The pressure we saw in rock tools last quarter, is that still confined to rock tools or is -- has it started to spread elsewhere?

Björn Rosengren

It’s correct, we’re talking about the aftermarket where the demand has been somewhat weaker. On the rock tools, I think that’s sequentially pretty much as it was in Q3. What we see in Q4 is that also on the spare parts endeavor, we have seen slight decline and I’m talking about low single digit. I do believe that the volumes are still pretty good in the mining market, I mean, the tonnages that are being produced. So it’s keeping up, but of course there are mine closures and there are talking of equipment.

Today, I think we have a pretty good view point of our operating units. We know all the equipment in the market and we know how much of course they’re consuming of our products. We have a pretty good picture of that. There is of course risk going forward that there will be more mine closures and the volumes will go down and that will benefit us. The levels we are now, I’m not so worried about, I think by working hard and taking bigger market share out of the existing business, I think you can mitigate that. But we’ll follow that very carefully going forward and will keep you informed.

Klas Bergelind

My final question is also on the aftermarket. Can you help us with the split of rock tools i.e. the spares and wares, versus pure service contracts? And within pure service how much is customized services versus just selling man hours i.e. more vanilla-type services?

Björn Rosengren

I’m not sure that we are giving this information at the moment. Do we know that?

Ann-Sofie Nordh

No, we don’t normally give the split in terms of their exact disciplines within the aftermarket.

Björn Rosengren

We can do what we can do is on the Capital Market Day when I think mining will have a presentation, we will ask them to spend a little bit time on the aftermarket and give you a little bit more in-depth knowledge of the activities and the different businesses we are doing there.

Klas Bergelind

That would be very good, because what we're hearing from the miners is that there is an in-sourcing risk building that they intend to bring more services in-house and then we have to understand what is the risk to the aftermarket business.

Ann-Sofie Nordh

Thank you Klas, now we're going to let someone else through on the line, I know there is a long line of question waiting. So, I kindly but strictly ask you to limit yourselves to one question and one follow-up. Please operator let the next one through.

Operator

Next question from Markus Almerud of Kepler. Please ask your question.

Markus Almerud

Hi. Markus Almerud from Kepler Cheuvreux here. My first question is on the mining equipment, a follow-on to Klas's question on the aftermarket. You talk about positive development. Can you talk a little bit more about what you saw, if you see it as a trend or if it was just some contract that you got? You're talking about mainly Africa, so I assume it's mainly copper. But a little bit more about that, please.

Björn Rosengren

Yeah, I mean what we’re saying actually the sequential development of the demand in the mining market is actually going down slightly in the fourth quarter. But we were very happy to see that we managed to get good orders and that’s mainly in relation to underground drilling and also loading and hauling. And I think that’s very positive. So that has had a good development during the whole year and it feels that we have a strong position and strong portfolio within the segment. And I think it is of course very much related to Australia, South Africa, and some parts in South America.

Markus Almerud

Okay. Then my second question, can I just ask about -- could you talk a little bit about the overall capacity utilization you're seeing at SMT at the moment, the different parts?

Björn Rosengren

Yeah, maybe you can take that.

Mats Backman

Yeah, without, I mean, going into specifics in terms of percentages, I think we had a question previously as well looking on the margin and we are saying that the umbilicals or more on CapEx related businesses we haven’t see the effects there still. But meaning that what you see on the margins right now, it’s a pressure on the core and standard side, meaning that we have kind of under-absorption affecting the melting shop due to lower demand on core and standard. So we have effects when it comes down to utilization, but I mean without going into kind of capacity utilization numbers in detail, but mainly related to core and standard

Ann-Sofie Nordh

Great. Thank you. Operator, can we please have – put through the next question please?

Operator

Next question is from Andre Kukhnin of Credit Suisse. Please go ahead.

Andre Kukhnin

Yes. Good morning. It's Andre from CS, thanks for taking my questions. Can I just follow up on the mining aftermarket pricing first, on the spare parts? Can you help us with what product categories or geographically that's taking place? And it sounds like a new trend, so curious to find out what's changed to cause it. Is this the effect of longer-term service agreements or spare parts agreements now coming to an end and being renegotiated, or is there something else?

Björn Rosengren

It’s not actually any dramatic part when it comes to any of these contracts. It’s, I would say, the underlying pressure and of course we said, mentioned that there are of course price pressures when it comes to the consumables, but we haven’t seen it yet in the spare parts and the service part. But I mean it is an underlying demand and we see that mining companies are suffering hard and they are of course doing everything they can to lower their operational cost. And I think this is all over, this is not just certain markets, this is all over. And many of the big mining companies, they are global companies and they are operating both in surface mining as well as in underground mining, so I think it’s a global issue. I don’t think we should - at this point, it’s slight and I think we are careful to give that, but it is not any dramatic changes and I would say that there are opportunities to mitigate these volumes, the demand decrease by being active and making sure that we are delivering spare parts and service to our existing fleets. I think in some we have quite a lot to do.

Andre Kukhnin

Thank you. I appreciate the color. And just on SMS in terms of new product introductions, against the up to 15,000 that you have been launching or you were launching in 2015, what is the plan for 2016? And how should we think about the margin impact from those product launches, because I assume they come with, first, some kind of a J-curve effect?

Björn Rosengren

Yeah. They will continue to launch a lot of new products maybe 2015 was a little bit of a top. But it continues and there is a lot of focus on R&D activities within the business area and also the other business areas. And they have a lot of new existing products that will be introduced also during 2016. So they will continue with a very strong focus on R&D.

Ann-Sofie Nordh

Thank you, Andre. Operator, we will continue with the question from the conference call, please.

Operator

Your next question is from Ben Maslen of Morgan Stanley. Please ask you question.

Ben Maslen

Yes, thank you. Morning, Bjorn, morning, Mats. Firstly just on SMT and the weaker order intake, you mentioned greater competition in the standardized tubular offering. Can you just put a bit more color around where that competition comes from? Is it developed economy players or is it emerging markets starting to encroach on these markets? And are you having to walk away from business because the net consequence of that is - pricing is much tougher? Thank you.

Mats Backman

I mean, I will say it’s probably the kind of the usual suspects. I mean, it’s the same kind of competition, but I mean it’s a little bit of spillover from what we see within the kind of oil and gas segment where all players are trying to utilize capacity in other areas, so that’s the main reason behind the increased competition. I mean, in terms of pricing, we are clearly stating that we have a negative price effect at materials technology in the quarter. So it is on the core and standard business much tougher situation in terms of pricing, yes.

Ben Maslen

Got it. Thank you. And then the follow-up, just on ventures in process systems, you mentioned there is the postponement of projects for large systems. Just which end market areas do you see those postponements coming through? I would have thought that would have been a more resilient end market area. Thanks.

Björn Rosengren

It was couple of delays I think there in Q4 in that part some orders which slipped over to the next quarter. There are of course some, very much related to the software part which is the – as a relation to the oil and gas industry, but we don’t believe any sequential decline in demand when it comes to process systems, so we will probably continue in pretty similar as we have seen this year.

Ann-Sofie Nordh

Thank you, Ben. And then I think we will continue with another question from the conference call. Please, operator?

Operator

Next question is from Lars Brorson of Barclays. Please go ahead.

Lars Brorson

Thanks. Good morning, Bjorn, Mats, Ann-Fi. Mats, just a quick one on machining solutions margins. Can I just confirm that the net proceeds in terms of divestment of property within that was about SEK40 million, SEK50 million, so about a 50 basis point positive impact to margins here? And secondly, Bjorn, I wonder whether you could just talk a little bit about what you see in automotive within machining solutions. I think I heard you say automotive was doing well in China. That is not what you're obviously saying in the report. It looks to me as though automotive is weighing quite heavily both on North America and Asia. Can you assess what is the underlying market demand versus channel destocking and to what extent do you think you might be losing market share here? Thanks.

Mats Backman

Maybe I should start with the margin question on machining solutions. Yes, it’s a wash between the property sales and the gains on that one and the under-absorption, so about 50 basis points for both then, so net zero if you are looking on both sides.

Björn Rosengren

Then if we looking to the automotive segment and the two strong – I mean, oil markets in automotive has been strong also in Europe, of course. In US, we’ve seen very strong second half of the year and a little bit flattening off in the part and I think we follow pretty much we do not believe that we are losing market share there. In China, on the other hand, we saw that our supply was a little bit less than the general demand, but on the other hand, in Q3, we had higher deliveries than the underlying market. So we do believe that this is some destocking that has been taking place. We do not have any signals that we are losing market share neither in US or in China. So that’s about it, but it’s true that our volumes during the quarter was somewhat lower in China than the underlying demand.

Lars Brorson

Can I just confirm, automotive is about 25%, 30% of machining solutions and the geographic exposure mirrors that of the overall machining solutions? Would that be a fair assumption?

Björn Rosengren

Yes, it does.

Lars Brorson

Great. Thanks.

Ann-Sofie Nordh

And do we have any more questions from the conference room here. Yes, please, we have one more question here?

Guillermo Peigneux

It’s Guillermo Peigneux from UBS, again. Maybe a question on competition as well and for inserts machining solutions. I am thinking that as a fast-moving good whether you’ve actually seen pressure from lower quality Chinese competitors in international markets? Western markets, more than emerging markets.

Mats Backman

No, if you are looking on the development for the cutting tool market, they are kind of the traditional players we can see. It’s the Japanese players, it’s the big players like IMC, like Kennametal and so forth. We haven’t seen kind of local kind of low end competition moving up in that value chain. It’s the same existing brands as before.

Guillermo Peigneux

Is it reasonable to expect they will come at some point?

Mats Backman

I mean, looking back seven, eight years, we thought that we would already be there today, so I don’t know, we are not there today.

Ann-Sofie Nordh

Thank you. Operator, we will go back to question from the conference call, please.

Operator

Your next question is from Andreas Koski of Deutsche Bank. Please go ahead.

Andreas Koski

Thank you very much. So firstly on Sandvik materials technology and umbilicals, I just wanted to understand how large a part of sales umbilicals is today? Would you agree that sales for umbilicals in 2015 was between SEK3.5 billion and SEK4 billion?

Björn Rosengren

I don’t think we are that transparent on the umbilical sales, what do you say?

Ann-Sofie Nordh

Unfortunately the answer is no here as well. We don’t give that specific details on the sales.

Andreas Koski

Okay. But at least historically you have said that the oil and gas exposure in SMT was between 20% and 25%. Is that correct at least?

Björn Rosengren

Umbilicals is of course part of that, but you have also the standard and core which Mats talked about before which is the part which have been affected so far. We have not seen the effects on the umbilicals at this stage. While we have seen it then in the standard and core and as Mats said, this is because many competitors due to lack of market in other parts are moving in that direct.

Andreas Koski

Yeah, I understand that. I understand that. I just want to understand how big umbilicals is for you in SMT. That's okay.

Björn Rosengren

I think umbilicals is an important part of our profitability in SMT.

Mats Backman

Because what I have said is that we have a higher margin and an average margin looking on the umbilicals. I mean, it is important, yes.

Andreas Koski

Yeah, I know that as well. Thank you very much. Then my second question on the remaining savings of SEK1 billion, the program is expected to close by the end of 2017. But could you give some sort of guidance how much of that will be materialized in 2016?

Mats Backman

I think we have the full split as a backup in the slide deck looking on the timing of the different savings done.

Ann-Sofie Nordh

You have the phase 2 of the supply chain optimization which is due to close for savings at the end of 2016. So that should give you some guidance towards the phasing of the savings.

Mats Backman

I think you see the split on businesses as well in the information that we’ve been giving previously and there is no change to that.

Andreas Koski

Perfect. Thank you very much.

Ann-Sofie Nordh

Thank you. And, operator, we will have the next question from the conference call please.

Operator

Next question is from Alasdair Leslie of Societe Generale. Please go ahead.

Alasdair Leslie

Hi. Good morning. A couple of questions on mining. You've obviously got a new mining president, replaced Scot Smith. He was charged with improving the aftermarket focus. I know Smith wasn't really at Sandvik for that long, but I was just wondering if you could highlight what progress was made over the last 18 to 24 months in terms of capturing more of the installed base, mapping and understanding that and where you are standing today in respect? And then maybe also just obviously with your comments about moving to a more decentralized model and being closer to the customers in mind, what the priority now for that division is. Has the focus changed? Thanks.

Björn Rosengren

I think we should give credit to Scot Smith and his actions in the aftermarket. He has really made, as I said, big focus to the business area. And they started the – and I think one of the important parts and of course the visibility, you have to know why you make money, you not make money in the part and we have to know where we are, what is our market share in the aftermarket and what is the potential. And I think one of the really good project that they have been running there is the mapping of all our equipments out in the market. So I think that is a very good start when it comes to driving the aftermarket. So I think he made a good job in putting that focus. That focus will of course continue, because that is the basis for a stabilized and a good profitability for the business area.

Alasdair Leslie

So you'd say you're in much better shape now compared to 18, 24 months ago?

Björn Rosengren

I don't -- difficult for me to say, because I wasn't there then, but what I hear from the mining operation is that there is a very strong focus on the aftermarket and I also know that there is a lot of potential in the aftermarket also for us going forward. So that will definitely be priority number one. And then we come in -- you talk a little bit about the de-centralization part of it and I'll just give you a little bit of a flavor.

I cannot go too much into detail, but I have a very strong belief in business units that have a full responsibility. Then I'm talking about both P&L and the balance sheet. The decision has to be taken close to the customers and they have to drive the business from there. So we're going through our different businesses and we're trying to move as much as possible further out. So that is little bit of a direction. I will be talking much more about that during the Capital Market day, the 24th of May.

Alasdair Leslie

Thanks. And if I could just have a quick follow-up on the -- I mean, when you talked about the softness in consumables and spare parts and services in the quarter, just to be clear, for you, are the drivers for each of those, are they the same or were there different drivers in the quarter, because obviously we've heard from one of your peers that consumables was weaker but spare parts was okay.

Björn Rosengren

Yeah. I think they're pretty different. Consumables is very much how are you driving, how much are you drilling, you follow that pretty much. On the service side, of course, that is very much, that can be a decision from the customer. I would like to do it myself. I'm buying your spare parts, I'm buying pirate spare parts. There are lot of different kind of viewpoints on that.

So I think the consumable business is probably the best way to actually see how much is being drilled out there, how many rigs and so on and there are not too many players as you know in the market. There are a couple and they split the market pretty well and so, you get a pretty good picture of what is the actual situation out there. And so far, we haven't seen any volumes going down yet. The volumes have been flattened out, but they're not going back. So that is how the market looks today.

Ann-Sofie Nordh

Thank you very much. And I believe we have one question here from the room, please. Anders?

Anders Roslund

Yes. Good morning. Anders Roslund, Swedbank. I have two questions. One regarding machining solutions and the automotive sector. You've introduced new products, specifically for the automotive sector. How are you performing there and are there new products in this area coming on stream or have you seen the full effects yet? And on the second question regarding mining, the aftermarket, how do you see the two aftermarket areas, consumables and spare parts looking into a one-year perspective. Are there any specific trends?

Björn Rosengren

First, when it comes to the new products being developed and we have a very big -- very strong focus on which part of -- how many -- how big part of our sales are from products that have been launched during the last years. We also have how big part of our sales is coming from products launched the last year. And we can see that both of these have changed and are moving in the right direction. I think that's -- and that's a very important state, showing that the R&D part is actually paying off. I don't have any details, maybe you have, Mats, directly if you have how are the new products actually performing in the automotive industry.

Mats Backman

I mean, it is according to plan, but then you have, I mean, it takes some time to reach all the kind of applications as well, so I mean we have a spillover effect in to 2016 and going forward before we have the full kind of the impact from the new products, but according to sales, I mean, or according to plan, it's about -- it is a tough demand situation. So, yes, that's on the negative side.

Ann-Sofie Nordh

And on the mining question.

Björn Rosengren

Yes. Of course, sure. The aftermarket of course consists of two things, it's the service and consumables as well as the service and spare parts as well as on the consumables side. I think we mentioned that there have been a little bit of a pressure on the consumable side, also Q3, Q4, so I think that's pretty much sequentially on the same side. Well, as I mentioned before, during Q4, we've seen this small decline in demand. So far low single digit numbers and yeah, I -- maybe I didn't really get the question full out.

Anders Roslund

[indiscernible] differences in the trends in spare parts and consumables.

Björn Rosengren

It's difficult to forecast, but we know that the demand will continue to be weak or and I think it very much depends on what's going to happen with mine closures or not if it will continue, but I think we probably will see the same trend, hopefully we will have a chance to mitigate some of the aftermarket service by being more active in the market there. But probably you will feel the same trend going forward.

Ann-Sofie Nordh

Thank you. And now operator, we will move on to the conference call please for the next question.

Operator

It's from Graham Phillips of Jefferies. Please ask your question.

Graham Phillips

Yes. Good morning. A question around machining. Can you just confirm that the SEK40 million to SEK 50 million profit from the sale of assets in that division actually went through in the profit bridge as organic growth, and if also that meant that the drop-through margin was actually quite negative at around 60%? Do you think, looking into 2016, that reduces? I mean, you've got a minus 7% order to take through. Would that also see perhaps some under-absorption on fixed cost?

Björn Rosengren

I mean looking on the bridge, when you’re talking year-on-year, the fourth quarter this year comparing with last year, I think you have positives and negatives that are kind of not included in the organic side of the bridge. First of all, we had a higher under absorption this year comparing to last year within machining solutions and it's about the same effect as we saw in the quarter, kind of isolated, about 50 basis points. And so it is basically a wash between the under absorption and the gains we have from the sales of the property when you're looking on the year-on-year bridge for machining solutions.

Graham Phillips

Okay. No, I understand that. So if we're trying to look at the true organic impact, then we'll obviously have to take that away, which would imply the drop-through detrimental margin, if you like, is quite high, sort of 60 odd percent. So if you've got a minus 7% organic growth potentially in this current quarter given the order development, then that's going to be again quite difficult to recover against fixed costs. So you then expect a similar --?

Björn Rosengren

No. It's not correct. Because I mean if you're looking on the incremental margin or the leverage quarter-over-quarter, I mean year-on-year, we have negative leverage of 24% and I think that is kind of decent looking on the kind of integrated business model. What you need to do then, starting with 24%, you can kind of start taking away the under absorption that has a negative impact year-on-year and then you can put a property on top of that, but what I'm saying is that, the underlying leverage, if you're looking on a year-on-year, it's the same, because it's a wash between property and the negative effect from under absorption. So I would argue that we have an incremental margin of some 24% and nothing else.

Graham Phillips

Okay. And just in terms of the new solid carbide tool, and, sorry, you might have gone through this is at the beginning but the operator was very late connecting me to the call, can you talk about what market that's targeting and where you think your overall exposure in this division as well is towards energy and mining, because obviously you've got some indirect exposure through the general engineering segment?

Björn Rosengren

You are referring to the Walter new tool, yeah, that is targeting the automotive industry. But I said a little bit on the SMS part, where the reason why we're seeing the volumes down as a part, the general engineering has been affected by the low oil prices and I think maybe we were surprised that maybe not only in this quarter, but also in Q3 that the lower oil prices would be picked so much the general industry. That means that many of these workshops have been actually targeting the oil and gas industry, which is of course suffering at the moment. So that is what we see. We do not see any sequential further decline in the market on SMS than we’ve seen from between the say the first half to the second half.

Graham Phillips

But I think energy overall is around, what, 10% or 15% of this division. But of the general engineering, which was perhaps half, a good portion of that is then also related to energy and also other heavy industries, like mining, I guess.

Björn Rosengren

But I think yeah, on the general engineering side, I think the big hit was when they lost a contract and that was actually between second and third quarter. Then, we haven't seen any further on the general engineering. That is sequentially pretty flat. So it's actually, you're comparing with high numbers of the first half of last year.

Graham Phillips

Yes. And I guess I was looking year-on-year. But, okay. No, that's fine. Thanks.

Ann-Sofie Nordh

Thank you. We’re coming towards the end of this session, but we still have some more questions from the conference call. So operator will you please let one through.

Operator

Next question from Andreas Willi of JPMorgan. Please go ahead.

Andreas Willi

Yes. Good afternoon -- good morning, everybody. My question on machining solutions, if you could talk a little bit about pricing there and the ability to price up for particularly the new products that give customers more productivity and whether that's enough to offset that some of these products also then last longer and therefore the replacement cycle gets pushed out. So maybe if you could talk a bit around the pricing ability of these new products. Yes, that's the question, please.

Björn Rosengren

I mean, the new products, that’s kind of adding ability to increase prices, but in the same time, it's very tough environment looking on the demand. So we can see a much, much tougher environment in order to increase prices for sure. So without any new products, it will be a real challenge to keep that one on positive I would say. So, I would say the product introduction is kind of prerequisite to continue our pricing strategy.

Andreas Willi

And my follow-up question on the FX guidance you've given for Q1 that's based on December year-end rates, we've seen some emerging market currencies weakening further since then. Have you run the numbers as well for end of January? And also given the impact of SEK300 million for Q1 already, what would be the full-year estimate for the currency impact at current run rates? Thank you.

Björn Rosengren

We are not giving the kind of the full year effect. I mean we're speaking to the first quarter and we have not kind of recalculated on the numbers. We’re sticking with the year-end numbers and I think that is good for you then to make your own calculations based on the year end rates.

But what I would like to add looking on the minus 300, I mean, the reason for the kind of the negative outlook looking on the currency effect is mainly related to the mining and kind of oil dependent currencies, I mean talking about the Aussie dollar, the Brazilian real and so forth. So when you're looking on the currency effect as such, it will have -- the biggest hit will be on mining looking forward.

Andreas Willi

Thank you very much.

Ann-Sofie Nordh

Thank you. And that implies the end of this session. I know we have more questions on the line waiting to come through, but please feel free to contact us at Investor Relations and we'll do our best to help you. Thank you all for joining us today and we'll see you in about a quarter's time. Thank you.

Björn Rosengren

Thank you.

Mats Backman

Thank you.

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