Sandvik AB's (SDVKF) CEO Björn Rosengren on Q4 2018 Results - Earnings Call Transcript

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About: Sandvik AB (SDVKF)
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Earning Call Audio

Sandvik AB (OTCPK:SDVKF) Q4 2018 Earnings Conference Call January 21, 2019 4:00 AM ET

Company Participants

Ann-Sofie Nordh - Head, IR

Björn Rosengren - President and CEO

Tomas Eliasson - EVP and CFO

Conference Call Participants

Klas Bergelind - Citi

Graham Phillips - Jefferies

Max Yates - Credit Suisse

Andrew Wilson - JPMorgan

Lars Brorson - Barclays

Gael de-Bray - Deutsche Bank

Alexander Virgo - Bank of America Merrill Lynch

Andreas Koski - Nordea

Ann-Sofie Nordh

Greetings, everyone and welcome to the presentation of Sandvik’s results for the Fourth Quarter of 2018. As per normal, we’ll run through the presentation, it would be our CEO, Björn Rosengren and our CFO, Tomas Eliasson, who will run through the presentation and after which we’ll open up for Q&A session. And I would already now like to remind you that there is an option to put questions on online questionnaire on our website.

And with no further ado, we’ll open up for the presentation with Björn, please.

Björn Rosengren

Thank you, Ann-Sofie. And good morning I also like to say and welcome to this Q4 and full year report meeting. The year was a record year with a robust ending. Orders and revenues exceeded SEK 100 billion. We had solid profit margin of 18.6%. Strong cash flow SEK 15.3 billion, which has helped us to reach gearing of 20%, half of that is coming from pension liabilities and half of that is coming from financial debt.

The group is coming from stability to profitability and I am really happy that this year has been the first step in the direction growth through acquisitions, we have managed to sign and close five acquisitions last year and one in the beginning of this year.

Also Q4 was a very strong quarter, we saw growth in all three of our business areas, but also in our main three regions. Orders improved with 6% and revenues by 9%. We saw a strong adjusted earnings with a margin of 18.1% and that’s been affected with 0.7 bps coming from the planned destocking of the inventory. And that is, of course, the basis for the fantastic improved cash flow and we reached a record of SEK 6.3 billion in the quarter, pushing the gearing to 0.2. And also, of course, happy with the networking capital reaching 23.7%. The board has decided to propose a dividend of SEK 4.25 per share.

So let's move over to what you all been waiting for. That's the market development during the quarter. We can here see that all three major region or more or less all our regions actually have seen growth during this quarter. We see Asia up 2%, we see Europe pretty flat around 3% and North America very strong. Maybe the most interesting here is of course to see what came in SMS Machining Solutions, which is the really indicator of the demand for industry in the market. And we can see that -- we see in Asia and in China a small decline of demand, especially driven by the automotive sector. Europe pretty flat and very strong in North America.

If we look at all the segments, we can see either flat or improvement, except from the automotive where you see weaker demand in China as well as in Europe. Both orders and revenues continues to develop well. And this is actually the second best quarter in the group's history reaching 25.6% in orders and 25.9% to revenues 6% and 9% growth. Also the EBIT continues to improve with the 16%, reaching SEK 4.7 billion and that is what I said before been affected by the destocking in SMS, as well as in SMT with 70 bps. Excluding FX and metal price effects, the growth was 11%.

So moving into our different businesses, also Machining Solutions had a strong quarter. It's actually also the second best in the company's history reaching over SEK 10 billion in both orders and invoicing. We saw strong North America, flat Europe and as I said before, slight decline in Asia. And that's of course driven by the automotive sector. We reached 24% EBIT level, and the destocking which have been quite significant within SMS actually pull down the result with 160 bps. So I think good, yes, we've managed to do a number of acquisitions including the last one Dura-Mill, which was informed.

We also decided to move the powder from SMT into SMS from January 1, 2019, will be reported there. And now it's part of the division for additive manufacturing. Then we come to SMRT or mining and rock technology. I think as what we say in Sweden it goes from clarity to clarity, really strong quarter with growth of 15% both in orders as well as revenues. It's correct we had a large order from Russia in Mechanical cutting. But also last year, we had two large order, each of them SEK 200 million. So if you take those away it is still 15% up.

Maybe the most interesting order during this period it’s actually the order we got from Hindustan Zinc, which is an order of OptiMine, where we actually digitalize the whole mine, including equipping our competitor’s equipment making the mine fully digitalized. This is really pioneering order for us and putting actually the standards in the market. Also SMRT had good destocking during the quarter generating a very strong cash flow.

EBIT margin is now on 19.1%, which I think is a good number. This of course includes Varel. And if we exclude Varel it's 20.1% and if we want to be a little bit more specific, if we compared to our main competitors in the market for equivalent equipment we are as high as 21.5%. I think Mining and Rock Technology is coming up to the levels. And what's really driving the good performance is the improvement in the margins for the aftermarket, which of course is important for the future.

Then material technology, I think the development there continues to be solid. We can see that the orders increased with 0%, but if we remove the large umbilical order last year during the quarter it is actually about 10% growth. So a solid growth coming also there and that's equivalent with what we've seen in the revenue side.

We are moving in the direction of reaching 10% EBIT margin during next year and this year the underlying margin is 8.6%. So I think that is moving good, very positively and maybe you saw this morning that we received three large orders of approximately SEK 1 billion during the beginning of this year. And I think this is both from an umbilicals as well as OCTG piping. So a strong start, which I think is important for SMT to be able to reach the levels for next year or for this year, I should say.

So Tomas, I give you and talk a little bit more about the balance sheet.

Tomas Eliasson

Thank you, Björn. Okay, let's jump into the numbers and start with a financial overview and the top line. If you look at the upper right hand side, you see the components of the revenue sort of the orders and the revenue growth. Organically 6% for orders, 9% for revenues, currency added 4% for both, structure minus 4% and minus 5%. That's a net of divestments and acquisitions over the year. And then actually ending up on the same numbers that is plus 6% and plus 9%.

The margin ended on 18.1% for the quarter, 18.6% for the full year. And the finance net came in at minus SEK 136 million in the quarter and minus SEK 800 million for the full year. Quite an improvement compared to last year and actually huge improvement compared to three years ago when the finance net was SEK 2 billion for the full year. The underlying tax rate for the quarter was 25.6% compared to 27.3% a year ago. As you've seen in the report, the reported tax rate was 30% and the difference is revaluation of our deferred tax assets, which we have done in the fourth quarter.

Cash flow has Björn mentioned very strong in the quarter SEK 6.3 billion and SEK 15.3 billion for the full year, actually exceeding the guidance we had six months ago. Return stable at 22% and earnings per share SEK 2.62 for the quarter and above SEK 10 for the full year.

Now, let's take a look at the bridge for the quarter and the leverage, the organic leverage was 21% with a margin accretion of 30 bps. Now, if you add back the effect of reduced inventories the leverage would have been 29%, which is well, okay, for the group. And the margin accretion would have been 1%. The currency added 1.3 percentage units and structure and one-offs, which is mainly the net between acquisitions and divestments was minus 0.5%, so all-in-all 18.1%.

Let's move to the balance sheet and you can see now in the fourth quarter we had a very strong development after two quarters, with let's say some slightly unsatisfactory inventory development now working capital came down, but also accounts receivable came down very healthy collections were very, very good and payables were stable. And on the right hand side you can see that all three business areas contributing and the whole group is now back below 25%.

And you can see the corresponding development here in the cash flow. Cash flow very strong in the fourth quarter. And if you look at the right hand side, you can see that earnings improved, CapEx was little bit up, but not much. The main driver for the cash flow this quarter was the working capital improvement.

The financial net debt continues to go down, now below SEK 12 billion half pensions and half financial net debt gearing 0.2. Now if we then take a look at the dividend, the dividend proposal, the board as you heard has proposed 4.25, an increase with 21%. Payout ratio you can see on the right hand side 43%, basically the same as a year ago, which was 44%.

Let's have a look at the outcome Q4 and the guidance. We guided for a currency effect of SEK 400 million. Three months ago it came in at SEK 528 million or close to SEK 500 million in total currency effect. And the difference between the situation three months ago is of course the strengthened U.S. dollar. The metal prices we guided minus SEK 100 million came in on minus SEK 86 million.

Full year, we have guided a CapEx of SEK 4 billion, we came in at SEK 3.9 billion, net financial we guided SEK 1 billion we came in at SEK 0.8 billion, and the underlying tax rate we guided 26% to 28%, we came in at 26.1%, taking out the effect of the write down of the deferred tax asset we have.

Now, as it is a new year 2019, we have new guidance for you on these items. If we look at CapEx, we've said SEK 4 billion, we now say below SEK 4 billion going forward. The currency effect transaction and translation for the next quarter we guide to plus SEK 500 million. Metal prices minus SEK 150 million for the first quarter.

Net financials, we have guided SEK 1 billion before now we say below SEK 1 billion. And tax rate we're actually taking it down now from 26% to 28% down to 25% to 27%. We said a year ago when we had the U.S. Tax Reform that we expected the tax rate to come down quite a bit, but we would still be in the range, which we are, we are now on 26.1% for the full year, but as we see things playing out now, we have lowered it with 100 bps, so 25% to 27% for 2019.

And with that, I would like to handover to you again Björn for a summary and conclusions.

Björn Rosengren

Thank you, Tomas. That was impressive numbers on the balance sheet development I must say.

Tomas Eliasson

Always happy to help.

Björn Rosengren

Good. We are moving in to 2019, and we are of course meeting more challenging numbers to beat not least in SMS. We will work with a continuous improvement to make sure that we protect and improve our margins. We will be focusing on our core and we will challenge our 34 businesses. And we will drive growth both organically, but a lot of focus, of course, of M&A activities. And of course with the strong balance sheet and lower valuation of many companies, I think it will an exciting year.

I also like to take this opportunity, it's been a record year, it's been fantastic development for the group and I like to thank all our employees, who actually have made Sandvik so successful during this year. But I also like to thank our financial department, as you all know we have moved the presentation 14 days earlier compared to last year, which is quite challenging for everybody for getting all the data, all the numbers ready for this presentation. So a great thank you for all of you.

And I think by that, we move over to question-and-answers.

Question-and-Answer Session

A - Ann-Sofie Nordh

The great ending. On the Q&A, I'd like to remind you now, because I know there is quite a few already queuing up, so please limit yourself to two questions at the time. And I’ll actually take the liberty to start with some questions put through online.

And starting with a question from Olof Larshammar at DnB, who asks you to elaborate on this daily sales development in the Machining Solutions and what happened in the different markets. And also what you’re seeing during the first few weeks of January?

Björn Rosengren

Yes, absolutely. I think this we do expect a lot of questions around our numbers, not least within SMS. And I think we can see that it’s been pretty steady quarter, it's pretty clear that we’ve seen a weaker China during this period, especially in the automotive segment. And we also seen some weakening also in Europe in automotive and affecting Germany with actually minus 1% growth.

On the other hand, we’ve seen an extremely strong North America with of course U.S. is being the driver force within this part, so good number. I mentioned during my presentation that the levels we are talking about here these are the second highest orders we have had in SMS during the company's history. So it is quite impressive numbers. If we’re looking at the daily rates, we can see that it's moving on the same level as we’ve seen during the quarter. So pretty much no big changes in either directions I would say.

Ann-Sofie Nordh

And the second question put through by Olof Larshammar is, on the inventory reductions in Machining Solutions, do we see continued reductions going forward and an impact also in the first quarter in 2019?

Björn Rosengren

I’ve been longing for this question for quite some time, because I think this is really -- from my perspective this is the best part of our report. I think you'll probably remember that we were, we only generated SEK 4 billion during the first half year now SEK 11 billion in the second.

And of course, the quarters is a record with SEK16.3 billion, and there is a lot of destocking. And it's actually coming from all three of our businesses, they all have contributed very nicely. And you can see actually that our net working capital have now come down under the 25% level, which I think is important.

And for SMS where maybe we were most disappointed that we didn't see this reduction in Q3, they are actually down at 21.7%. I think these levels are good. We should not push the destocking more at this stage. I think now it's important to make sure that we produced in line with what we -- what demand we are getting from the customers. And I think you all know we have no inventory that means no inventory by the customer, because we have 24 hours delivery, which means no one needs to keep inventory in that part, that's why we really can follow the demand very closely. And that's the importance there going forward and make sure that we don't overproduce.

Ann-Sofie Nordh

Thank you. And with that we'll take a question from the conference call, operator, would you please put through the first question?

Operator

And the first question is from the line of Klas Bergelind from Citi. Please go ahead, your line is now open.

Klas Bergelind

Yes hi, Björn and Tomas, its Klas, from Citi. So I have two questions please. I want to come back on daily sales. On demand here at start of the year it seems like Asia is now witnessing some weakness also outside automotive quarter-on-quarter. General engineering is still okay in Europe, still strong in North America, but it seems like it's softer in Asia, if you could talk a little bit about what you see in Asia outside of automotive.

And then as you said just now it seems like you're saying that production is likely -- I mean what you see right now, likely to be in line with demand here in the quarter. So effectively it's only the 50 bps that you overproduced last year that will reverse, if that is the correct understanding. Thank you.

Björn Rosengren

Let me talk a little bit about the Asia. I think Asia is down, it's actually driven by automotive. We could probably see maybe a little bit in the general engineering, but otherwise I think it's quite strong still, so that is correct. And it's correct that the destocking has been taking place during Q4. And we do not expect to have the same destocking during the first quarter.

Klas Bergelind

Okay, very clear. My second one is on SMRT, and if you could help us with what you're hearing from your customers. And I'm thinking about replacement. When we speak to your competitors or well shall I perhaps say your key competitor, they're indicating that it's only the first peak in 2007-08 that has been replaced so far and not yet the peak in 2011 and 2012. And we also understand that most of the volumes at the last peak was primarily underground where the replacement cycle is particularly short, I think five to six years.

So there is also an argument that we could have a second wave of replacement pretty soon, is that something you hear from your customers and which could have orders increase sequentially from current levels any early signs of a new step up in replacement, please?

Björn Rosengren

First, it's difficult to talk about the future and expectation there and you can of course do a lot of theories about if it's replacement of equipment and so on. First, it's pretty clear that all the equipment and I'd say that's why we are a little bit in the so-called sweet spot of mining, because all our equipment are actually wear equipment, it's not really capital investments in that way. You have to replace them all and if you don't replace them you have to spend a little bit more on aftermarket on the equipment.

We've seen, of course, a lot of replacement of the fleet. And I think we will be expecting that also. But I'm still saying that what is actually driving, I mean, every mine wants to have new equipment more efficient, more automatized, but in the end it's actually the boardrooms, who turns on the valve and turns off the valve. And that depends a little bit on how much money the mines are making at a certain stage. So I think that is probably more important than just the replacement part of equipment.

So we have to monitor, we’ve seen metal prices gone down a lot, gold of course has gone up, but we're seeing copper go under 6,000. But I think it's improved a little bit more and I think the investment decisions within that industry has been taken and that is long-term investment. So I think we are pretty optimistic when it comes to copper. Other metals have got maybe a little bit more hit. We've seen the nickel, which is affecting us of course in the SMT revaluation of inventory and so on.

But still we feel that it's a good demand and especially the aftermarket, I think it's a good indicator of the activity level. And we have had fantastic development during 2018 there with close to 15% growth, which is -- during the whole year and that is important. But I think is more as I said how much money the mines are making, that's going to determine what kind of investments we will see going forward.

Klas Bergelind

Let me ask this in a different way Bjorn and I promise to be short, is demand below replacement in drilling in underground still?

Björn Rosengren

I think I have a little bit difficulty to -- and I think it’s probably pretty much in line, I think. But I'm not 100% sure. We'll investigate a little bit in that and we'll try to come back little bit more going forward.

Klas Bergelind

Thank you.

Ann-Sofie Nordh

Thank you. We'll continue with another question from put through online and it’s from Markus Almerud at Kepler Cheuvreux who queries about the profitability in Varel and what will drive profitability from here on I assume in the total of SMRT?

Björn Rosengren

Okay, little short of Varel, as we see we are getting closer now to put the company in the market. First I'd like to mention that one-third of the company we are keeping that is the mining related part. And then we have the other part, which is still oil and gas part. We've seen good development and we are close to 10% margin on that part. But that's before the PPA. Then you have deduct the PPA and then you come actually to CRO profit on that part.

Of that business, we have a lot of goodwill and when we put that out to the market, I'm pretty sure that we will be needing to write-off some goodwill during this process.

On SMRT, generating profit of course I'm very happy with the development that has taken place during this year very much driven from the aftermarket that has been enormously strong. But we have, of course, much more to be done going forward, it is continuous improvement. If we're looking at the last year, we have had such a huge volume increases, which means that we have been holding back a little bit on those continuous improvement activities.

Now when the levels are -- I mean we managed to get the production level up to the same level as the order. Now we can start concentrating on all these small things to make the businesses better. And that hopefully will drive some margins also.

Ann-Sofie Nordh

Thank you. And we'll take another question from the conference call please, operator.

Operator

Of course. And the next question is from the line of Graham Phillips from Jefferies. Please go ahead, your line is open.

Graham Phillips

Yes, good morning Björn, Tomas and Ann-Sofie, thank you. My first question is, if we look at the drop through margin in SMS and adjust for the inventory change. Looks like it's sub-30%. Is there any reason why it's coming in lower than that? And if we think about 2019, the impact maybe of more round tools less inserts, more powder additive manufacturing. Could it be even with some small growth 2%-ish that you're still going to see something sub-30% on mix?

Björn Rosengren

On the bps front the destocking that is 163. So if you look at the underlying there it's about 25.6% profit margin. That's a little bit where that business is running today. We know that during the last years the round tools have been increasing more than inserts and we still manage to protect the margins. And of course going forward, more challenging numbers, less growth that we -- of course we need to put lot of efforts to be able to protect the margins going forward.

So we will take measures to adopting SG&A cost in line with what demand we will see going forward. So it's a very much important for SMS to show that we can maintain the margins going forward.

Graham Phillips

Okay, thank you. And my second question is on your targets. So I don't expect you to give the new targets today, but you said you will give them before the Capital Markets Day. Perhaps the indications would it be something that might publish in the annual report. And particularly when we think about the amount of cash you’re now going to have.

Maybe this is a little bit directed to also to Tomas as well, that you're still guiding for net financial items under SEK 1 billion, but clearly you're going to have probably net cash at some point today -- this year. And there are going to be the opportunity that you probably see a lot more M&A and again I think beyond you've touched on the point that there is going to be some good multiples at the moment better than before to build the business and where this might actually be where you're going to focused which division?

Björn Rosengren

Why don't you start?

Tomas Eliasson

Yeah.

Björn Rosengren

Okay. First, on the first part which was that, help me.

Ann-Sofie Nordh

Net financials.

Björn Rosengren

Net financial --.

Tomas Eliasson

But what was the question, Graham?

Graham Phillips

Okay. Well the point is that you're going to have net cash. And it seems that you’re guiding to quite a high net interest expense for the year. Is that anticipating that you're going to be making some acquisitions fairly large that will use a lot of that cash?

Björn Rosengren

Like I said that the acquisitions that are driven of course from our operating entities. And they will be trying to improve their business and making sure that they are number one and number two. Our financial situations gives us the freedom we need. And I think that is the most important. It's not actually how much money we have on the bank that drives the acquisition that is the purely strategic incentive that does that. But of course the freedom is fantastic to have a strong balance sheet going into tougher times that's pretty clear.

Tomas Eliasson

And to answer your question on the guidance. No, we have not built in any major acquisitions in that guidance on the net financial items for 2019, when we say below SEK 1 billion. There is in the 2018 numbers around SEK 100 million in positive revaluations, which will bump back up into the EBIT, which will impact the earnings really the underlying is SEK 900 million. And then you have to add another SEK 100 million for the IFRS 16 accounting things. So we’re coming close to SEK 1 billion for 2019.

Björn Rosengren

And the timing for -- now I remember what the question just when are we coming out with the new financial targets? We promised to have it before the Capital Market Day in May. I would be surprised if we would have them ready for the annual report. So I think it's probably will be end April somewhere where we'll be launching maybe in connection to the annual meeting somewhere around there, but it will be ready for the Capital Market Day.

Graham Phillips

Okay, thank you.

Ann-Sofie Nordh

Operator, can we have the next question put through, please?

Operator

Next question is from the line of Max Yates from Credit Suisse. Please go ahead, your line is open.

Max Yates

Thank you. Just my first question would be around sort of your customer inventories. And I wanted to see whether you had any sense of whether your sales had been going into customer inventories and whether from conversations with customers you've seen any buildup of inventories on the customer side, which may then affect demand in Q1. So any comments there would be helpful.

Björn Rosengren

No, I think the structure and nature of that business we have especially in the SMS part, that is of course from hand into mouth. Meaning that we are delivering directly to the production. And our short delivery times helps us of course to avoid inventory build ups. So we have no indications that any of our customers have stocked up during this period. So we think they are pretty clear numbers.

In the mining side, of course, the orders we produced what we get orders on and that we try to deliver. We have also, of course, enormous inventory reduction also in the mining field generating SEK 2.7 billion in fresh cash in that part. So I don't think there is any inventory buildup actually among our customers.

Max Yates

Okay. And just the second question is around dividend, obviously you showed us slide that shows us a 19% increase since 2015. Obviously the payout ratio coming down. But just in terms of when we think about your earnings growth maybe starting to flatten out, do you still think you can grow the dividend above your earnings growth i.e. the payout ratio potentially going back up as earnings starts to flatten out given where your balance sheet is. So can we still keep the dividend growing faster than earnings given the lack of leverage in the group currently?

Björn Rosengren

I think that's absolutely our objective. The one who decides in the end what we pay dividend is at the annual meeting. We can only propose for it, but of course -- and that's of course the why we don't pull up the dividend even higher, which we could actually do during this period. We have the objective to improve every year like everything else in the business. And now second time we lifted with 21%, which I think is pretty generous and a good level at the moment. So yes, we will definitely strive to improve every year.

Max Yates

Okay, thank you very much.

Ann-Sofie Nordh

Thank you. And again coming back to the question put through online from Rizk Maidi at Berenberg, coming back to China and the development there, can you give an indication of the China decline outside of automotive? Do you see any other segments coming down?

Björn Rosengren

I mentioned there might be a little bit on the general engineering, but otherwise it's mainly what we seeing in the automotive sector that is pulling down. We should know of course that China has been producing 29 million cars every year. That is of course a big question if that's sustainable in the long range. So it's not the big surprise I think for us.

Ann-Sofie Nordh

Thank you. And then operator, can we have the next question put through from the conference call, please?

Operator

And the next question is from the line of Andrew Wilson from JPMorgan. Please go ahead. Your line is open.

Andrew Wilson

Hi, good morning everyone. I just wanted to go back to the mining margin and thinking about 2019. We’ve obviously seen very good improvement as we’ve gone through 2018. And is it kind of Q4 level and thinking about that 19 percentile, the 20% extra. Is there any reason why we shouldn’t that improving. And if we do have to think about some headwinds is it things like mix, is there anything in terms of the investment that we won’t be factoring in. And just trying to get a sense of I guess how sustainable that Q4 run rate is and then what upside we have to it.

Björn Rosengren

Hi, Andrew. We never guide the profit part, but of course we coming up to good levels, we have good orders on hand. We have a good development in the aftermarket and are really come up to new levels. So of course that's our objective to keep ourselves on these levels. I think time will tell if we manage or not or if something to come. But it is a different SMRT that has been created and I think we are coming up to levels where I think we should be. And this will of course also help us to protect the margins in the downturn. The aftermarket is the key for agility within the mining business and that's of course -- I'm really happy to see that we reached this level. And I think they done a good job there.

We have still things to do and I mentioned it before, when you're growing so fast that we have done during this period, it's difficult that you get inefficiencies in the processes. Sub-suppliers are not supplying product components in time for your production you get hiccups and things like that that can affect your margin. And we’ve seen that during the year, but I must say that one of the areas where we had a lot of issues during the year has been in underground drilling side there.

But during the last quarter and the end of the quarter they manage to get a lot of equipment up and getting the either production in a really good shape, which is of course also paying off when it comes to margins. So I think that coming up -- they are on a good level now. Of course, it can always be better.

Andrew Wilson

And maybe if I can just follow-up in terms of the mining portfolio. I mean that's clearly there -- I think the [indiscernible] around the well and the potential process head. But also if we think about the rest of the portfolio, is that now how you wanted to look going forward? Or do we need to think about either for divestments or needing to add either capability or capacity in the existing coal?

Björn Rosengren

In Sandvik we'll be challenging all our 34 operations. And they need to prove that they are number one and number two in the part, they have to prove that we see that this business where we are operating will be successful also in the future. So I'm going to challenge them continuously. And we'll see what comes out of that. I think of course it's a big difference today when you look the way they run their businesses and how our portfolio looks like. I think more or less all our businesses have improved and performs better, but there are a couple of the businesses that are challenging still and where we need to shape up a little bit to be able to be as successful as we want to.

Andrew Wilson

That’s great. Thank you, Björn.

Ann-Sofie Nordh

Thanks, Andy. Operator, can we have the next question, please?

Operator

Next question is from the line of Lars Brorson from Barclays. Please go ahead, your line is open.

Lars Brorson

Hi, good morning, Björn and Tomas. A couple of follow ups for me, Björn, just on China first if I could, within Machining Solutions, my understanding is it's down about 7% or so organically in Q4 at the order level that would have been a bit of lumpiness around a couple of I think blanks in powder orders, but call it down mid-single digit in Q4. Can you help me a little bit with the segmental call around that?

You just specifically said of course that you didn't see more broad-based weakness in general engineering have your automotive segment within SMS in China be about 20%, 25% of that business. So should we think of that down mid-single digit or so in China in Q4 as automotive down sort of high-teens low-20s and the rest broadly stable or something different from that?

Björn Rosengren

I mean, it's difficult to talk about what the future. We can see that what's -- how this year started it started pretty much in line. There is no big deviation from what you are saying at the moment. It is the automotive mainly that this is going down. And of course it has been affected as we have been reading in newspaper and seen the automotive companies. Going forward it's difficult to say.

We also know of course China has the ambition to protect their growth as you know. They want to reach growth of 6.5% for the country. There are a lot of initiatives on the infrastructure side that might have effects going forward. So I think China will work hard and not go into recession going forward to be honest.

But I think time will tell and we will adopt to that, you probably know that we started to prepare ourselves for tougher times for over a year ago now. And I think we and every other industry in the world has done all those preparations if we would see that the demand would go down, and then we need to adapt ourselves. But yes, correct, automotive is still is the drive somewhat in the general engineering. And of course things like that hangs together, the general engineering of course also supports the automotive in one way. So we’ll follow that carefully and make sure that we take the actions that is needed.

Lars Brorson

And on that if I could just secondly, just second follow-up. The underlying incrementals in SMS in Q4, I appreciate is in the high-20s to low-30s but if I adjust for pricing, which presumably is a good SEK 100 million, SEK 150 million or so, I still have a zero or slight negative underlying volume leverage in the business. Could you help me a little bit with what exactly you're doing on cost in SMS. And what will be the timing and magnitude of the actions you're taking there?

Björn Rosengren

Yes, it's correct that the underlying if you look at both days and pricing so the underlying is pretty flat, I would say. And SMS are taking the actions within the business area to adopt SG&A costs in line with that demand and that has already started and they will continue to do that during the year.

And as I said they will work hard with this continuous improvement in adopting their operations to protect the margins. That's a focus.

Lars Brorson

With just SG&A, no initiatives right now beyond what you've already announced in France around production.

Björn Rosengren

Yes. But that is an ongoing thing that we have and if you recall the last three years we closed more than 15 factories within SMS and we are looking in to more also going forward. So this will be an ongoing journey, both structurally as well as through SG&A costs end. Of course if we would need to take down production levels if that comes of course then we need to adopt those also, but we are not there yet.

Lars Brorson

Understood. Thanks, Björn.

Ann-Sofie Nordh

Thank you, Lars. Can we have the next question put through please, operator?

Operator

Next question is from the line of Gael de-Bray from Deutsche Bank. Please go ahead, your line is open.

Gael de-Bray

Yes, good morning everybody and thanks very much. The first question I have is related to SMS. I think one of the positive surprises in today's release was the sequential increase in demand seen at SMS in North America. Could you elaborate on this positive momentum in the U.S. in terms of the key drivers there and what you've seen so far in January specifically again in the U.S? So that’s question number one.

And then question number two about SMRT, I think in Q3 you had indicated that the order intake in mining was a bit shy versus your own expectations and we had indeed a much stronger performance in Q4. But now, I'm wondering to what extent there was a bit of a catch up effect this quarter with some orders potentially postponed from Q3 into Q4 implying that Q4 was perhaps a bit inflated a little bit exceptional. So I'd like to get your thoughts on that, well basically to get a better view of the -- on the underlying demand levels for SMRT? Thanks very much.

Björn Rosengren

Correct. Let's start with the SMS development in North America. Yes, it is very strong and I think it's only automotive, which I would say is flat, but otherwise you're seeing good push and good growth there. Aerospace is very strong, oil and gas is good, general engineering is moving very well. So it is a strong development there and of course that's compensating though weaker part as we're seeing on the more Far East part. So that is good, it's a good momentum.

On SMRT, on the order side. Yes, I think we said that in the mining side it bumps a little bit up and down when it comes to order and the timing of them. I think 15% was a little bit higher than we expected maybe for the quarter. But I'm happy that that is of course boosted by this nice order in Russia. But to be honest last year we had SEK 200 million order. So if you wash those out it's pretty much where we see.

On capital equipment, yes, or capital equipment on rigs drill rigs and loaders and trucks and those equipment, they will be replaced when they need. But for me the most important to see what -- where it’s really happening in the mining side and that is actually on the aftermarket and that has shown now for quite some time. The whole year actually 15% -- around 10% and 15% growth. And that gives a good indication that there is a lot of hard work out in the mines at the moment.

How that looks going forward? It's much too early to say. We take one quarter-by-quarter and we see I think our factories have a lot to do at the moment and they need to deliver on these large orders and that's where the focus is and I think the future will tell more in detail where the mining market is driving.

Gael de-Bray

Okay, thanks very much.

Ann-Sofie Nordh

Thank you. I believe we have one more question on the conference call. Please operator, can you put that through?

Operator

Next question is from Alexander Virgo from Bank of America Merrill Lynch. Please go ahead, your line is open.

Alexander Virgo

Thanks very much and good morning Björn and Tomas. Good to hear from you this year. Couple of ones, thanks for squeezing me at the end, I wondered if you could talk a little bit about pricing in mining particularly in consumables. Just any comments you can give us around there. And I suppose in particular development sequentially through Q4?

Björn Rosengren

Yes, I think that -- I mean we are pretty far way into good times in the mining side. And I think the pricing has now of course added up to where it should be. It's running around 2%. This varies a little bit between different businesses there, but around 2% and that's also when it comes to drilling consumables part of the business.

So I think overall, it's good price levels now in the mining business. And it should be, I mean it should be there.

Alexander Virgo

Yes, absolutely. I was wondering your commentary on efficiency measures in consumables or in Rock Tools. Just wonder whether you can give us an indication as to how structural that is, the timing of that and the impact that that might have or is that just a sort of an ongoing efficiency plan?

Björn Rosengren

When it comes to consumables it's a little bit same as when it comes to parts and service. This very much reflect what the mines are doing, these are the operational levels. And if you look at that they are normally growing not as fast as you see the equipment and they are much more stable they go with 1%, 2% up depending on how much work is taking place in the mines.

They have worked hard during this period to make sure that they are efficient. I don't know if you had a chance to see our production facility up in Sandvik and where we make the drill steel and all the bits and so it’s totally automatized and very, very efficient. And that's what we've been working and that is more easy to take these small what we say continuous improvements. Because the growth and the demand improvement is more consistent than you see on the equipment side. And it continues to grow on a good level pretty much in line with our aftermarket business.

Alexander Virgo

Great, thank you very much.

Björn Rosengren

Thank you.

Ann-Sofie Nordh

Thank you. Operator, do we have any more questions on the conference call?

Operator

Yes, we have one more question and that is from Andreas Koski from Nordea. Please go ahead, Andreas, your line is open.

Andreas Koski

Thank you very much and good morning to all of you. I would like to ask about the move powder operations from SMT to Sandvik Machining Solutions. So first could we read this as a preparation for your decision of what will happened with SMT when they have reached the 10% margin i.e. as you're preparing for an exit of SMT if that's what you would decide?

Björn Rosengren

No, it has nothing to do with that. This is actually that how can we drive powder, how can we develop our 3D printing business in the most efficient way. And we have been considering this for quite some time. Because we are building up within SMS new division there. And to be honest, I mean to be successful within 3D printing you actually need the powder that's the basis for success.

And being a leader within this it make sense to put this together. So it has only to do with our future operations within additive manufacturing. It has nothing to do with what's going to happened with SMT or not. I mean, SMT is what it is. I have promised you that we'll reach 10% this year and then I will be telling you what's going to happen with that business area if it's going to continuous part or if we find some other place for that. But we'll come back to that at the right time.

Andreas Koski

And would you like to give us what kind of impact this will have on SMS revenues and EBIT or so will this make SMS more volatile when it comes to organic growth i.e. is powders’ revenues more lumpy than SMS?

Björn Rosengren

I mean for that I can say the powder business is around SEK 400 million, so it's very, very small. It is actually pushing up the margins in SMT, but it's not pushing up the margins in SMS, if you put it that way. So to be honest for the group it's very have no impact, but of course it's pulling down a little bit on SMT -- on SMS and also on SMT. So if you look at that way there are no winners, but of course the ambition for this it is the high profit business and it should be high growth and high profit. So we think it should be adding value also to SMS in the future.

Andreas Koski

So what kind of impact does it have to the SMT's margin?

Björn Rosengren

To be honest I promise that it will make 10%, we’re taking out that business we have said 9.7% is, so we’ve given them a relief of 0.3%. Now I'm being very specific, but that's about how it is. So we said, okay, when we’ve taken that out if you do 9.7% you reach your target.

Andreas Koski

Okay, great. Thank you very much.

Ann-Sofie Nordh

Thank you. And with that we round off this presentation, but before we finish I'd like to remind you all to if you haven't already registered for our Capital Markets Day in Finland in May please do so now on our website. With that said, thank you very much for joining us today and we'll you in about a quarter’s time.

Björn Rosengren

Thank you.

Tomas Eliasson

Thank you. Bye.