Sandvik AB (publ)

Ann-Sofie Nordh - VP, IR Olof Faxander - CEO Mats Backman - CFO

Andre Kukhnin - Credit Suisse Alexander Whight - JPMorgan Guillermo Peigneux - UBS Anders Roslund - Swedbank Lars Brorson - Barclays Peder Froelen - Handelsbanken Ben Maslen - BofA Merrill Lynch Andreas Koski - Deutsche Bank James Moore - Redburn Erik Karlsson - AKO Capital Daniel Cunliffe - Liberum Capital Daniel Schmidt - SEB

Greetings to you and very welcome to this Presentation on Sandvik's Fourth Quarter and Full Year 2014 results. Our President and CEO Olof Faxander will run through the presentation together with our CFO Mats Backman and as per norm there will be opportunities to ask questions after the presentation, both here in the room in Stockholm as well as via the telephone conference.

And that said I hand over to Olof Faxander for the presentation, please carry on.

Some people will be distracted and thinking about what's happened to my hand, so I will start by actually commenting on that. I managed to fracture a small bone in my thumb on my vacation, mountain climbing.

And now I even have a stainless steel pin in the thumb holding the small bone together. So what don't you do for you company not breaking the products and to your body here.

But on a more senior note on safety that's one thing that we actually had a very good improvement in the Sandvik Group during the 2014. And we have been focusing a lot on safety and we have reduced our lost time injury frequency rate by 22% in 2014 compared to 2013.

So we do have a strong focus on safety and I will not go on any dangerous vacations for a period of time and stay safe at Sandvik instead here. Looking then at the fourth quarter coming on to our numbers, maybe first some comments about the full year 2014.

We have continued with our active portfolio management. We have made an acquisition of Varel International Energy Services and despite seeing some weakness in oil price in the near-term we do still strongly believe in energy sector as an important and interesting growth sector for Sandvik in the future.

We've also made some divestures of non-core businesses, so we're gradually trying to refine our portfolio to the areas where we see high growth and higher opportunities to gain good returns in the company. We're trying to make Sandvik more cost efficient and streamline our business operations continuously.

We have our ongoing supply chain optimization program and we have currently initiated the closures of 11 different production facilities around the company and to-date have closed 5 facilities around the group and expect a further two to be closed now in the first quarter of 2015. So that's running well according to plan and we're tracking according to the communication we have given regarding that program.

We see stable market conditions. There are some pluses and minuses but on the big picture we do see very stable market conditions for the Sandvik Group.

And we end the year with a total turnover of SEK89 billion and an EBIT margin of 11% for the Sandvik Group. In the quarter, as you have seen we have had a strong cash flow and with that background and the quality of our balance sheet the Board's recommendation to the Annual General Meeting will be to maintain dividend at SEK3.50 per share.

Looking more specifically down at the fourth quarter for the Sandvik Group. Well, we do see some mixed demand pattern.

North America continues to be very, very strong and we see stable demand in both Asia and Europe. And especially I would say the industrial parts of our business now start to see a good momentum in most parts of the world.

We continue to see low order intake in our Mining Systems business and this is of course in time is the most CapEx oriented part of our mining business the Mining Systems projects. But we don't really seem too concerned about seeing that low order intake I think it's quite natural with the low CapEx levels we're seeing in the mining companies right now.

And at the same time we have very low fixed cost associated with the Mining Systems business being a project business where we really deliver mainly engineering services and project execution to our customers. But that is a main driver behind our lower order intake in the group in the fourth quarter.

We do see some so far smaller effects due to the lower oil price in order intake effecting somewhat low order intake on Sandvik Materials Technology. The cash flow for the fourth quarter was very strong and that was really based and driven by very good strong inventory reductions across the group but especially within Sandvik Materials Technology and Sandvik Construction.

So we actually delivered in the fourth quarter the second best cash flow ever in the company's history. This strong cash flow helped us to drive down our net debt-to-equity ratio and we're now well below our net gearing target of 0.8 for the group and we ended the quarter at 0.75.

Earnings grew for the Sandvik Group in the fourth quarter compared to the same quarter last year. And we came in at an EBIT margin of 11.2% for the company.

We are starting to see stronger and stronger currency tailwinds for Sandvik, we're plus $270 million in this quarter and based on the currency rates we see, also under the fourth quarter we would expect something in the magnitude of SEK600 million and positive currency effects in the first quarter. So currency is really starting to give strong positive impact on the Sandvik group preceding years we’ve had especially in 2013 very strong negative effects from the currency and that trend has now turned.

Metal prices had a somewhat negative effect in the quarter minus 71 million and we had a positive effect of 71 million that happened to metal price effect with SMT from divestiture we have done and closed during the quarter. Looking then geographically at Sandvik’s business, in Europe which now represent 38% of our sales, we saw a neutral pattern.

Some growth in some parts of the Europe I mean in industrial parts of the business which was somewhat negatively affected by what’s going on in Russia with the trade sanctions and very weak Russian ruble. Asia, so a negative development and that was mainly driven by the development we see in mining and construction.

On the industrial parts of Sandvik group, we see a positive development. North America displayed good strong growth plus 5% driven again a lot by especially machining solutions which has very, very good momentum now in the North American market.

The Southern Hemisphere is mainly driven by the mining sector in both South America and Africa we are fairly stable in margin levels but we have the further drop in Australia and this is all mining-driving. And if you look at the pie-chart on the right hand side of this slide you can see mining is area where we get still a negative invoicing development.

In energy and aerospace we do see a positive development year-on-year and in rest of the company more or less the stable demand pattern compared to where we were a year ago. The aero and energy we’ve turned slightly downwards driven by the weaker oil price which is likely to have in the near term some negative effects on demand.

Aerospace continues to be now than the only arrow where we really see a strong positive development and continued strong demand. Order intake was down 6% year-on-year and the main driver between the somewhat lower order intake that was still on this quarter was again mining systems as I mentioned earlier.

And we also saw some weakness in order intake from materials technology. Invoicing was down 1% year-on-year but up 2% comparing to the preceding quarter and we actually in the quarter had record high invoicing from machining solutions business area.

So you can see now the weakness that we’ve seen in the mining is really being compensate to -- driven positively in a positive direction by the strong development we start to see in machining solutions on the good result development we see in our business area. EBIT came in down at SEK2.6 billion and we did have a fairly strong positive effect from currency and as you can see the cash flow was very, very strong in the fourth quarter, mainly driven by inventory reductions and the strongest inventory reductions we saw in Sandvik materials technology and in Sandvik construction.

Investment levels continue to be at the fairly low levels. We’ve shown I think good discipline during 2014 on our CapEx levels and with the CapEx level of 4.7 billion for the Sandvik group and expect EBIT to stay below 5 billion also in 2015.

So this of course when it comes to our cash flow, influences in a positive direction as well. Comparing now this quarter’s development to our financial targets in the group well actually in terms of growth supported by currency and structural steps we’ve taken, we’re pretty close this quarter to the total top-line growth.

We’re up 7% compared to our target of 8%. Return on capital employed came in at 13.4% and to move towards our targets we need to continue to work especially on mining and constructions financial development and bring the returns up in this business.

Of course in connection we’re continuing develop machining solutions in a positive direction. Net debt to equity shrunk quite significantly in the quarter with 0.87 the preceding quarter and we dropped to 0.75.

So very strong improvements which takes us clearly below our long-term target of 0.8 and that of course influences the board and feeling comfortable about recommending and maintain dividend even though about still is quite the high share of our earnings per share of 73% in the dividend recommendation we give. But Sandvik is the company that generates strong cash flows.

We have uninterrupted dividends since 1870 and I think very few companies can show that and we have the strong confidence in the future potential and development in the business. So with that I’ll hand it over Mats, will talk a bit more about the financial aspects and I’ll wrap up and open up for questions.

Thank you, Olof. I hope my voice will keep up.

It’s a little bit bad. It’s a bad cold, it’s not [risky].

Some highlights on some of our key areas in the fourth quarter, starting with the supply chain optimization program, where we closed another three units in the fourth quarter, one for Sandvik Mining in Germany and two from Machining Solutions one in Italy and one in UK. And as we have said we've now closed five out of the 11 in each year it closes.

Looking on the phasing of the coming closures, we will close another two in the first quarter one for constructions and one for mining and the remaining four in the balance of 2015, ending up a total of 11. Looking on savings, we actually reached 260 million in run rate savings 2014 and that's actually it's like better than previously communicated.

So we're well on track with our ambition to reach 800 million in full run rate in 2015. And all in all this program is running according to plan and we're actually detailing the kind of the final plans now for the supply chain optimization program.

Moving over to net working capital. We reduced our net working capital in net numbers with 1.5 billion in the quarter.

So the positive trends from the third quarter continued into the fourth quarter, and that is including 2 billion in structure -- 2 billion in volume, 500 million in structure related to the divestments within Materials Technology. And finally, 1 billion in currencies going in other directions, standing up within 1.5 billion.

So all in all we have already lost two quarters, actually reduced our net working capital and volume with 3 billion and most of it coming from these document in from inventories. Looking on the relative development over the quarter and the trends, I am little bit disappointed with the 28% in relative net working capital.

But what I would like to highlight looking on the relative numbers is the inventories in relation to sales; because where we're today we have not been since 2011. So the gap in performance we can see right now is based very much due to lack of prepayment with the shrinking product business.

So we're proud over what we have done on the inventory side. Looking on the different business areas, Machining Solutions continue to perform very well on 24% in terms of relative net working capital.

And most important is that we have less volatility when it comes to the net working capital for Machining Solutions and that is important in terms reducing earnings volatility as well for the business area. Constructions are now close to the long-term target, I mean they on close to 25%, so they have done a great job.

We have good development for Materials Technology and for mining as well but we're still far from the long-term target looking on mining and Materials Technology. So looking on the development in the fourth quarter we had destocking in all business areas, you cannot expect that kind of development in the first quarter.

Constructions, Machining Solutions will pretty much produce according to demand, while mining and Materials Technology will continue the destocking but not to the same extent as we saw in the fourth quarter. Moving on to debt, like we have said we have been able to reduce our net debt further.

We reduced 2.5 billion in the quarter, we reached a net debt to equity 0.75 being below our target, that's definitely driven by strong cash flow where the inventory reductions play very, very big role in that reduction. You probably remember that net debt to equity ratio when we ended the second quarter and we ended that one, we have actually then being able to restore the net debt to equity over two quarters back to targeted levels which we're very proud of in terms of the produced cash flow.

With that I will leave it for you Olof to summarize.

Thank you Mats. So to summarize first on the fourth quarter, we saw earnings growth in Sandvik, so I think it's very positive, together with a very strong cash flow in the fourth quarter, which brought down our net debt to equity levels to 0.75.

And that means from the one down to 0.75, we've actually come back below our targets despite the fairly sizable acquisition and very generous dividend payment in 2014. So very, very good cash flow during the and good balance sheet development in that perspective.

We're making good progress on our supply chain optimization program, as Mats said we're actually slightly ahead of where we're planning to be now by year-end and we feel totally conformable with the progress of this program according to the plans that we have communicated and drawn out within the group. And when it comes to the demand picture around mix demand.

But I think in general actually quite a lot of positive things happening in the market right now. North America has very strong demand, Sandvik has quite a large European business.

And lot of stimulus is going right now into the European economy, with the steps that Draghi has taken with the fairly weak euro and also a lower oil price which somehow have to expect will stimulate European economy to increased growth rates and that is a big positive for the Sandvik Group. We normally put these slides in our presentations.

This summarizes really the actions and the steps that we're taking in all our different business areas. The main things we're trying to choose as a company is to of course yield higher returns for you as sshareholders in our business.

Two reduce the risk you can see in the company by reducing on its volatility to have more stability in the earnings profile throughout the cyclical sectors that we serve as a group. And develop towards fast growing markets just both in terms of geographies and in terms of sectors and customer groups.

And then looking forward into 2015, well we have been talking a lot about our efforts within research and development and they are starting to bear fruits. We're going to launch a lot of new products in -- throughout the Sandvik Group during 2015.

Sandvik Machining Solutions are planning to have a very, very high level of product launches during 2015, the total number they are talking about is some 15,000 new products into their product portfolio and this absolutely in terms of long-term value creation in the Sandvik Group. But we really keep this leading position in the market but we have the products out there and the best offerings, the most productive solutions for our customers.

Mining may well stay slow in terms of capital expenditures for a long period of time. We still believe in this market that we have great opportunities to improve our mining business from where we stand today.

And especially in the aftermarket we have a lot of opportunities to develop our position further, capture more sale on our installed base, help our customers with getting up availability on their equipment by supporting them in both service, parts, and of course good rock tools. And on technology development also in mining we have launched a number of products during 2014 and we will continue also mining here to develop good products for our customers that help them to be more productive.

And today even though customers are not investing for capacity to stay in the mining sector, mining customers are very interested in solutions that can help them drive out cost and be more productive and I think Sandvik has a lot of good solutions in that area. And we will continue to look at our portfolio of businesses to train the portfolio to move into more fast growing strong sectors where Sandvik really can add value as gradually step out to of certain areas which we believe are less core to the business.

Okay. With that I think we’ll open up for question and answers.

We do indeed and we felt we would see if there any questions from the audience here in Stockholm. Appears not so then we will go to the operator and see who the first question is from now.

Hi. Good morning.

Yes. It's Andre from Credit Suisse.

Thanks for taking my questions. Just one at a time.

Firstly, on mining profitability at these levels, is there anything there happening, like inventory obsolescence or any other abnormal effects taking place in that level that we've been at in Q4 and Q3?

We have not had any material effects from stock obsolescence or credit losses or so affecting us in the fourth quarter.

I don't think it's destocking, it's' very much related to [posh]. We don't have that much of a margin effect on the destocking either in mining.

Got it. Thank you.

And that actually just brings me onto the second question on destock effect. Could you quantify what was the impact on EBIT from destocking in the work in progress there?

You mean for all business areas or only mining?

I understand it was around 300 basis points in SMT, but I just wanted to get the picture for the whole Group, across all divisions.

Yes. Also I mean like we said the materials technology 3%, constructions around 1%, mining I would say I mean maybe around 1% so it's a very small effect and for machine solutions a very small effect as well.

So the most important one to observe is materials technology with 3%.

And then looking into Q1 we expect some un-absorption effect to continue when it comes to materials technology here as well, so we will talk about maybe half the un-absorption effect that was on Q4 coming in Q1 as they continue to drive down inventories in materials technology.

That's very clear. Thank you.

And just a last one on the FX guidance for Q1 of SEK600m. Would I be right to think that roughly half of that is translational and half transactional?

And could you just help us with the -- maybe with any more color on that and how that can evolve during the year? I appreciate you don't give quarterly guidance or full-guidance for the year, but just in terms of how we think about the shape of that tailwind for the rest of the year.

It's a fair assumption 50% translation and 50% transactional. And then if you look on kind of the step up between the fall from on the first quarter we have some as all have said some Rubble effects in the fourth quarter that will not be [as pronounced] in the first quarter.

As such I mean we have the much higher run rate so to speak in Q4 which we're taking with us now in to the first quarter.

But just on the ruble effect, I was trying to get my around it. But it shouldn't be giving a year-on-year tailwind in Q1 2015, right, because you've reset your selling prices to hard currencies out there, right?

So versus Q4 it gives a benefit, but versus Q1 --.

Actually Q4 the ruble has negative impact for us. So without the ruble we would have then even stronger and that’s what -- this negative effect we have had customers buying our products in rubles but now with high volatility and the weak ruble so we have to stay at over those sales to selling now the currency are, ruble exposure is actually decreasing quite a lot current, but we’ve had in the fourth quarter sale for example receivables in rubles so where we saw negative effects due to those changes in the rubles.

Thank you, Andre. And then we’ll move on to the next question from the telephone line please operator.

Good morning, everybody. It’s Alex with JPMorgan.

I’ve got a couple of questions. I’ll take them one at a time, if I could.

Firstly, could you just talk a little bit about the levels that you can pull to maintain SMT margins as we move through 2015 given the weakness that’s coming through on the energy side?

SMT in both areas, which are effected negative and positively from the oil price development. SMT I would say from an EBIT perspective is the part of Sandvik that has biggest potentially negative impact from lost oil and gas sales for this we have high profitability on the lot of those products.

First with umbilicals, which is the most important EBIT driver for SMT, we have the fair order stock. Umbilical’s installation is normally one of the final stages of an investment that will makes at the new well or it’s repairing to extend the life of an existing well.

So therefore we still believe that our order book will be delivered and will take us at least half way through 2015 and potentially actually getting some further orders in umbilicals potentially it will take us all the way through the year. But when order paid-off and if we start to lose volume of course we will have to address the cost base and take measures to try to mitigate that lost contribution of those if we start to see those drops in sales and coming through in the business era.

And can you -- could you help us out with how much of the sales would be going into umbilicals?

Well, for materials technology about 20% of their sales or to the oil and gas sector. And those 20% are clearly over represented in terms of profitability.

So it is a higher percentage of the business area of profitability 20%.

And just still on SMT, how much longer do you expect the destocking to persist in SMT? Do you think that you can get to where you want to be in terms of inventories by the end of Q1 or --?

No, we probably take a couple of quarters to get one where we want to be at all. But we will do it a balanced way now, going forward.

So, a couple of quarters. So if we’re thinking about the back half of next year, we start to get a bit more aligned with demand, barring perhaps some seasonal destocking in Q3?

Yes, I mean SMT clearly above our long term targets of being for the group 25% network and capital to sale. So to achieve that target we need to see inventory reductions in several areas.

And as Mats has shown on the graph here, the need for destocking is most pronounced in really SMT and mining within the Sandvik Group right now in 2015.

That’s helpful. The other question I had was just a follow-up or a clarification.

The destock drag on margins in mining in your previous answer to Andre, was that 1 percentage point, so 100 basis points in Q4?

Approximately.

Okay, great. Thanks very much for your answers.

Thank you. Now we have more questions queuing up from the telephone conference but just to make sure are there any questions here from the room Stockholm we should cut in with before we proceed?

No. It appears not.

Then we go back to the telephone conference, please. Operator, the next question, please.

Hi. Good morning, everyone.

It’s Guillermo Peigneux at UBS. Just a question on pricing on mining.

You mentioned pricing weakness. Can you quantify that weakness and which areas have been weaker?

I guess aftermarket hasn’t been. But could you give us some clarity on that?

I have more questions, but I’ll ask them one by one. Thank you.

The pricing for the group we saw about 1% positive pricing development which mainly was driven by the machining solutions part to our business. Mining I would say we saw a fairly neutral price development.

But is it fair to assume that when you talk about pricing, I guess it’s also mix included? So I’m thinking about how much was equipment or, let’s say, product related versus mix related.

That’s our underlying pricing development that we’re talking about that really, when we talk about the 1%.

Okay. Thank you.

Now aftermarket in mining, I understand the potential for this division, but I think you mentioned no growth. And one follows the production reports for most of the majors, and we are talking about 10% growth.

Maybe the industry's not growing as much, but the industry is still growing. So I'm wondering whether aftermarket is actually disappointing to your growth expectation so far.

Not really. Aftermarket has been very stable for a number of quarters for us right now at Sandvik.

I mean our customers are trying to extend life of their equipment, of their parts and there is a lot of cost focus with the customer base. But we don't feel that we're losing any market share that we're developing in line with the marker demand for our products in the aftermarket, and that we going forward actually should have a good opportunity to say increased market share growth with the market leading faster.

And then last question probably. On the SMT operations, I think you mentioned around 20% of the revenues going to oil and gas.

Could you also give us some clarity as to whether that is all upstream or actually there's more actually downstream exposure to oil and gas in other SMT operations? And also I would love to hear about if you have basically everything that is oil or oil derivatives within the SMT operation, i.e.

oil and gas is something, but also we would like to -- or I would like to know about petrochemical exposure, fertilizer exposure, chemical exposure, because CapEx is going down as well on the chemical segments. So I'm just wondering whether you could aggregate everything.

We don't share sort of that level of granularity on the SMT business, with exactly what we're selling into certain customer groups. But SMT as you're pointing out, I would say the bulk of its oil and gas business in upstream part when it comes to extracting oil, that's where umbilicals go, also to being control lines rises on these kind of products that we're selling from SMT.

But we also have a certain exposure to more downstream petrochemical as I say. And so fertilizers definitely an interesting, important area for us in general chemical plants, but they use a lot stainless steel since they have gross at the moment in the manufacturing processes.

But it's more heavy towards the upstream part. We've put in a slide in the back up pack in this presentation that tries to guide a bit on our both geographical exposure and our up and downstream exposures for various parts of Sandvik.

So just have a look at that and I am IR or ultimately I or Mats can help you if you need further details about it.

Anders Roslund, Swedbank. I am interested in Machining Solutions.

What will it cost to launch 15,000 new products, you have some additional sales and marketing costs or do you stick to your present level?

We have been investing during 2014 in our sales and marketing costs within Machining Solutions. And we have been talking about all through 2014, somewhat we can leverage due to that fact.

We feel that we're at the right level when it comes to those investments. So we will maintain the current cost level but we don't see that increasing further going into 2015 now.

So we have already part down that investment to meet a higher level of ambition in the market that we have.

So given that you get some volume growth this year, why shouldn't incremental margins be more positive way this year than in 2014?

They should absolutely. We had very low incremental margin in Q3, this quarter we have 27% in Machining Solutions which is a reasonable margin and given what you have been looking at throughout '14 I think this is good opportunity to see those kind of higher leverages coming through 2015, given that the markets continues to grow.

Next question please operator?

Just a couple of questions from my side. First of all, Olof, on the mining mix in Q4, sales mix.

Obviously it's a quarter normally weighted towards systems, but given the high level of invoicing in Q3, are you seeing a higher level of aftermarket here than seasonally is the case? And also just as you look into 2015, can you give us a sense of what you see from a mix standpoint in mining, given the current backlog, which I assume is weighted towards systems, but also of course offset against your ambition to grow the aftermarket?

Well in the fourth quarter we had about 54% of our sales in the aftermarket, 20% profit in equipment and mining systems. And I should say we normally have a very high level of invoicing and mining systems in Q4.

So in Q1 that should be potentially somewhat positive mix effect as mining systems will be lower share of the total sales which should enhance margins from the ones that saw in Q3.

So just to be clear, given Q4 is normally again seasonally weighted towards systems, that was a normal quarter and not offset against a high level of invoicing in Q3. You saw a normal seasonally weighted quarter in mining towards systems, is that right?

I would say so and we had a very high level of invoicing in mining systems in Q4, that's correct, yes.

And how do you see that develop in 2015?

Well I mean we will see it declining from the mining systems, we're still working off our order backlog that we have within the business, we have had a weaker order intake in that part of the business. And gradually as these projects would construct over several years or completed of course the sales level of mining systems will decrease.

But that's from a mix perspective should have a positive impact on margins within inline.

And secondly Matt on the manufacturing footprint program you said you are beating the final phases or the final plans round off for phase 2 and does this now have scope to include SMT and inventory and what's the scope here from a manufacturing footprint standpoint.

I mean we will not reveal any details now when it comes to that program. And we have communicated previously come with all details now during the first half of 2015, so not going through the details in the step yet.

But the brunt of that project is focused on machining solutions and mining where we have a very large number of manufacturing sites and we have the biggest opportunities for consolidation. Well besides from other parts of the company as well we have been looking at but still the biggest opportunity for this consolidation efforts are within mining and machining solutions.

Thank you. And we move to continue with the telephone conference and the line there, please operator the next question.

A couple of questions if I may. If we stop at savings months you mentioned the run rate of 260 or 65 in the quarter from the supply chain, could you help us understand in prior savings at the C&D we talked about other savings we also have possibilities on CapEx related capacity adjusted saving.

So if we try to sum it all up that's my first question?

Looking at the impact in the fourth quarter I think you need to remember two major parts. The supply chain optimization program with the 65 million effect in the fourth quarter but we also had the rightsizing in mining last year, when we ended the full run rate of the rightsizing savings within mining of 500 million on annualized basis in the second quarter and we are also benefiting from that spot now in the fourth quarter, so you need to have that one top of the supply chain optimization savings.

Yeah exactly the ones that should save around 500 million capacity adjustment and do you have some other savings as well. I guess from outsourcing and IT infrastructure some economic functions and so forth, is that any meaningful number to add to that?

No I would have said the major two parts are related to supply chain and to the rightsizing programs within mining that's the major part of those savings you see in the fourth quarter.

Yes on 2014 for your basis, is it fair you assume that you have maybe reached 400 of the 500 rightsizing or is it less or more?

I mean like we said I mean we reached the full run rate for rightsizing mining in the second quarter. So I mean you can't start from there I mean it's a [indiscernible] function.

Yes. Okay.

That's great. Sorry about that.

Okay, coming back to SMT and umbilicals, just to get my head around this, you get an order first quarter last year of around SEK1.1b. You argue that you feel that you will deliver on that specific order.

We know that umbilical system is majority of the 20% oil and gas business in SMT. How is it then that you take you halfway through 2015?

Please help me to understand that. For me it seems like if you deliver on the order, with a big if, the revenues for the energy-related would be up year on year 2015.

What have I misunderstood? Thank you.

Well some of these projects such considered to be longer than of course the first half year. So thus we will not be able to maintain full production that doesn't mean that we go down to zero tat that point but that's when we're going to start to see the tailing off from -- but we will still of course be delivering of certain elements of the order book.

They were not surprised to give us a full utilization of our production facilities after that point so that's when you are going to see the tailing off. So it's not that we have an order book to deliver everything by the summer and then it comes down to zero but I mean some of the sequencing of delivering on these projects is of course longer into the future.

That's when we're going to start to potentially see a meaningful decrease in saves in these products if new orders don't come in.

So given what we know today if you deliver on the order, will the oil and gas revenues be up or down '15 with sort of call it flat underlying demand from now just take it out of the equation?

Well of course if there is flat no further orders coming in we're likely to see sales that are down compared to 2014 when it comes to oil and gas product.

Okay. I'll get back.

My final one, the nitty-gritty, you talk about the ruble effect hitting less. Just a curiosity here.

How much did that -- the negative ruble actually hit the margin in the SMS in fourth quarter? Are we talking about 10s of bps or is it less?

No, I mean that’s a bit more detail than we would normally share I would say. So I cannot give you a specific number, but Russia is quite an important market for the SMS business.

And looking of the exposure to Russia that we had in 2014 we have approx. 2.5 billion in sales to Russia whereas approx.

60% is related to machining solutions

Approximately how much percent?

Out of the total exposure 2.5 about 50 is related to machine solutions.

Thank you. And causes of the time here and I know there are quite a few peoples still queue in up to ask questions so I kindly ask you to limit yourself to two questions as we from here alone.

Operator, through the next question please.

Yes, thank you. Good morning Mats.

First one, please, just on ventures. Maybe give a bit of color on how badly Varel has been affected by the oil drop so far and how you’d expect that to develop as we go through the year, because I think companies like Cat say we’re not really going to see the negative impact of weaker drilling in the U.S.

until the second half of the year. That’s the first question.

Yes, Varel has about 40% of its business in North America which is of course heavily geared to the drilling activity in North America. So that part of the business will of course be affected if we see drops in rig counts and so going in forward.

At the same time we do feel that we have a lot of good growth opportunities internationally with Varel potential to take market share and so because we have a good product and lot of not fully extraordinary market opportunities as well as the downhaul products that we’re supplying from there where we believe we can continue to see a strong growth. So the immediate effect to drop rig count in North America is affecting about 40% Varel’s business and we’re trying to of course to get that by increasing sales in other parts.

And the part that we cannot mitigate, we of course need to if that drop becomes material adapt our cost base to the volumes we see in the market.

Got it. Thanks.

And then on Sandvik Mining, the book to bill for the year ‘14 was at 87%, and I’m guessing it’s pretty close to 100% on the aftermarket. Is all the shortfall on your book to bill last year coming on the systems business, or is equipment still running below one and we’ll see a volume drop in ‘15?

Thanks.

The majority is coming from the mining systems business but we have had slightly negative book-to-bill on equipment as well during 2014, but the big deviation in book-to-bill is coming from mining systems.

Thank you. And we’ll move on to the next question on the telephone line please operator.

Yes. Good morning.

This is Andreas. Firstly, on Sandvik Mining, can you share with us what size of backlog you have in Sandvik Mining and if it all relates to mining systems?

We have ongoing projects that’s we’ll gradually trade-off but of course sales offer gradually when it comes to mining systems giving the length of the projects. In other parts of the business we have a very limited order stock today.

So you want the mining machine we can supply one very quickly to, unfortunately.

Okay. And then can you also share with us what kind of margin difference you currently have in this low demand environment between mining equipment and mining systems, just to understand what kind of mix effect we will have there when mining systems decline?

Will we have a very positive mix effect or is the margin in mining equipment also depressed?

Of course the big under-absorption issues in equipment given that sales have dropped off some 75% from the peak levels we saw on equipment. Mining system is clearly below the average profitability rates for the mining business area today.

That might be because of the aftermarket business, if you only compare equipment to systems --

That is mainly driven by the aftermarket that’s correct. So Sandvik’s near term profitability development is very much driven about the utilization rates in the mines and very little driven I would say about the CapEx rates.

Of course when CapEx picks up that’s a big positive but we don’t have much more down side really from CapEx related cost, production related costs -- to weaker aftermarket demand drop those demand in this area but we don’t see that today.

Okay. And then lastly on Sandvik Machining Solutions, now we will see operating leverages normalize.

Would you say about 40% is the normalized for operating leverage in Sandvik Machining Solutions?

Well there is upside from the 27% that we saw in this quarter anyway, given the growth rates pick up going forward into 2015. And I think the good opportunities if the European picks up with a very strong development that we see in North America that Machining Solutions could see good growth rates going into '15.

And take the next question from the telephone line please operator.

You're cutting a number of plants as demand can't support these at the moment, which makes a lot of sense. But just thinking in the long term, to avoid restructuring costs and under-absorption in future cycles, how do you think about increasing cost flexibility in the business for the next downturn and what are you doing to achieve that?

Very good question, we feel by consolidating the number of sites, that is one way actually that we can increase our cost flexibility, because if we have large manufacturing units certain product lines are operating on a higher level and others on a lower, so you have better opportunities to use personnel between different areas. It's easier to use temps in certain parts of the production.

So by consolidating onto smaller foot prints that gives us more flexibility. We believe that net working capital is very important for us to have lower volatility in our own as going forward, both because of course risk with stock option lessons, so with high net working capital if you have a down turn.

But also that forces you when you need to bring down inventories to slow down production more than what you necessarily would have had if you would have had continuously your inventory levels balanced. And of course of inventory management is also helped by having fewer manufacturing locations.

So we're taking a number of measures to look at both structurally improve our cost base and to how we operate the company. Then on top of that we need to build our aftermarket business or service business as we share our total sales, because that's really what sustains profitability through the weaker parts of the business cycle.

And we continue with the next question from the telephone line, please operator.

I've got one on currency and one on demand. On currency, thanks for the 600 million at current rates for the first quarter.

I'm coming out at around SEK1.5b for the full year 2015 at current rates. Does that seem fair?

It's a ballpark figure that would be --I would say so.

And I'm just trying to understand demand better.

Just to qualify that, around currencies given that they stay stable throughout the year but we will have very significant, if these currencies rates remain at this level throughout 2015, we're going to have quite strong currency tailwind for the group this year.

And just on demand, I see that orders have been just under SEK21 billion for the last couple of quarters, including Varel, which is a sort of times by 4, if you like, 83 billion year. And I see consensus is more like 93 billion.

I'm just trying to understand conceptually, do you think that there was anything that was particularly weak in terms of orders and artificially weak that you can see bouncing back, other than just a macro in the US and Europe? Or are these order run rates a representation of where revenues need to go, currency-adjusted?

Well we had a balanced book to bill in the quarter for most parts of the company, the two areas where we had weakness in order intake related managed money systems and that we can expect lower sales going forward given that we've had such a low order intake and in Materials Technology, besides that I mean other parts of the company have been operating at more balanced book-to-bill and there should be opportunities of course for growth going into '15 now from those levels.

And just on that, as we look at the start of the year, could you say anything about the demand trends in January for SMS or any other parts of the business? Has there been a change in terms of the rate of year-on-year growth?

No the operating levels we saw on the end of the fourth quarter have been sustained into the beginning of the first quarter this year. So we see similar operating levels as the year started here.

And sorry to be pedantic, but I got the sense that the end of the year was the better part of the -- the end of the fourth quarter was the better part of the fourth quarter, with a lot of companies seeing quite a strong December. Is that the case?

And are you saying that January is up with a strong December or is that not the case?

We've continued to operate similar as December levels, and we did see a slight positive trend during the quarter for example Machining Solutions where December was a strong.

And we take the next question please operator.

I think most of the questions have been asked already, but just a detail on mining systems to start with. I think you had mentioned historically that you do the in-house production when it comes to the crushers.

Is that correct? And if you would see this sort of lack of orders continuing, would that mean any under-absorption going into the end of 2015?

Those certain amounts of crushers are going in to the mining systems business we also manufacture some conveyor components internally; those are the two in-house components that we were supply to the mining systems projects. So there could be some effect in this area with a low continued activity level in mining systems.

And with the lack of orders, I think you mentioned there were six, seven orders that were pending in Q3 that didn't come. None of those have surfaced yet, is that correct?

No I mean the mining market is still quite hesitant it takes longer time for investments decisions to be taken in place by the mining companies. So we haven't lost any projects -- no projects have been cancelled or decided not to go ahead that we were hoping to get.

So it's just that the timeframe is actually to get the orders signed up and so where the customer is continues to dragging out in time that's what's happening right now.

Okay. Good.

And then the final question on construction. In connection with the CMD in the US during the autumn, you talked about a substantial part of white-collar workers in construction being let go in the next phase of the program, I guess.

Is this process being started yet or when do you see that coming into the numbers?

That is a process that will happen during 2015, yes. So there is a strong focus on the overheads A&S costs of the business remain construction and that was what D.G.

was talking about at the capital markets state and there is no changes in that number.

And I think we may have time for one more question from the operator, please go ahead.

Hello. One question, please, on write-down risk, just on the carrying value of your global asset base with oil and gas exposure.

I note a number of companies, recognizing obviously the halving of the oil price, structurally changing their outlook and earnings and valuations. This morning I know Vallourec has written down EUR1.2b in its oil and gas-exposed business.

So I just wanted to -- how confident are you that you will not see any write-downs to your oil and gas exposed business in particular [indiscernible] and SMT? Thank you.

We don't see that we have any such risks currently within the Sandvik Group when it relates to oil and gas, no.

Well that was a quick one, would you squeeze in another one please, operator.

Thank you, a couple of very, very short ones. The FX guidance or calculation what date are you basing those on, second -- take that first?

Honestly what date is it?

The actual date

On the…

I don't remember the actual date, okay I can check that and come back to you.

I think it's around the 15th of January it sounds like, so it is [indiscernible] into January that's the base.

Okay. Fine.

The -- you mentioned, Olof, that SMS business or the industrial business in Asia and China was okay or even strong. Could you help us to understand the magnitude, the SMS growth in China I'm talking about then organically?

Well I mean we see a fair level of activity in automotive and in general engineering, we don't break out time and specifics but we do see good activity level when it comes to industrial business like SMS in China. What has been weighing down the Asian side is for us is money in construction really.

Okay. That's clear.

On systems, this is nitty-gritty, but at least according to my calculations the systems order has been a bit of SEK1b or so the last couple of quarters, except the Q3 and obviously Q4. Could you help us understand this?

Is it even lower in Q4 than Q3 or is it basically wiped out compared to previous quarter, yes, to understand the magnitude here?

I would say clearly below a billion but we haven't taken softened orders of course it's not zero either.

Okay. Thank you and I can just confirm to you that the date is on the 16th of January.

Thank you.

And with that thank you very much for joining us for this presentation this morning. Should you have any additional questions please don't hesitate to contact Sandvik Investor Relations.

Thank you very much.