Sandvik AB (publ)

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

Peder Froelen - Handelsbanken Anders Roslund - Swedbank Klas Bergelind - Citi Alexander Whight - JPMorgan Lars Brorson - Barclays Guillermo Peigneux - UBS Andre Kukhnin - Credit Suisse Andreas Koski - Deutsche Bank James Moore - Redburn Sebastien Gruter - Exane Colin Gibson - HSBC Alexander Virgo - Nomura Guenther Seemann - Goldman Sachs

Greetings to you all and welcome to the presentation of Sandvik’s Result for the First Quarter 2015. As per usual we’re going to have a presentation by CEO Olof Faxander and our CFO Mats Backman.

And I think without further ado Olof, would you please start off the presentation.

Thank you very much Ann-Sofie, and very welcome to this press conference for Sandvik’s first quarter results. To start with earnings, we did see about earnings growth and margin expansion in the first quarter.

So I think a, very positive developments from that perspective. This was in part driven by strong currency effects, we had a positive effect of SEK770 million in the quarter but also due to underlying efficiency measures that are ongoing with the full pace in the company.

Adjusted EBIT margin came in at 12.6% and we were just shy of SEK3 billion in EBIT. In combination with that result we actually delivered the best first quarter cash flow that we have ever delivered in the company so very strong cash flow.

The first quarter is seasonably normally weaker when it comes to cash flow, but SEK2.4 billion is I would say a very strong performance regarding cash flow. When it comes to the market, the demand continues to be fairly stable.

We don’t really see any big dramatic changes in the markets or segments but maybe the exception being the oil and gas market, and especially the onshore drilling activity in North America which has been quite recent in the beginning of this year. And our programs are progressing according to plan.

We, the one started in this quarter, the second phase in our supply chain restructuring program and the first phase is running fully according to plan. I read someone saying that don’t believe that the world is round, while the people have been saying that the world is flat or right, we do see an extremely flat development in the world economy around us.

Oil markets have more or less than stable from geographic perspective around the globe. The growth that we saw during 2014 in North America has been hampered and we now see a more sideways movement in the North American markets but still at a very high activity level.

Also Asia continues to be quite strong but sideways development with somewhat weaker development in China with a gradually slowing growth rate there. On other hand, India has actually from our perspective performed very strongly in the first quarter.

So, but overall geographic here I would say flat development for our business. Looking at our segments we continue to see invoicing decline in the mining sector and this will likely to be continued in the future driven by our mining systems business.

On the other hand, when it comes to the equipments and aftermarket parts of our business there the market is quite stable and we have a neutral book to bill. So the weaker or the negative book in bill in mining is fully driven by the weaker order intake in the mining systems business which is quite normal given the low capital expenditure levels we’re seeing in the mining companies right now.

Aerospace had a positive development when it came to sales compared to the same period last year. And if you look at the sequential trend we do still see a slightly positive trend in Aerospace and energy driven mainly by the weaker oil price has seen a negative sequential development.

Order intake and invoicing were more or less balanced. We had one order cancellation within Sandvik Materials Technology, within the oil and gas sector in Asia.

This was more or fully compensated by other larger orders that were received two in the oil and gas sector and actually we got the first nuclear orders to China that we have seen since the Fukushima accident. In Mining Systems I mentioned order there over mining, while we saw weakness but otherwise a fairly stable book to bill and quite neutral market environments.

In the quarter, Sandvik Machining Solutions saw record high invoicing so we continue to see high sales levels for that business. And Mining Systems is hampering the developments of mining given that these are long multi-year projects that we deliver within the Mining Systems business with low order intake it’s likely that we’ll see that gradually paid off going forward the activity levels in that part of the business.

EBIT reported just over SEK1 billion but of course we had quite large one-off items in the quarter here driven by the second stage in our supply chain restructuring program. What was positive whilst that we saw a net reduction of employees within the Sandvik Group of 461 people so this is weakness about the efficiency measures that we’re gradually driving and executing in the company which is gradually lowering our cost base to respond to the weaker market environments that we see were the very neutral market environment that we see right now.

And as mentioned record Q1 cash flow which is something I think we’re very proud of in the company. It’s a result of good management of our net working capital in the business as well as a cautious approach to the capital expenditures around the company.

Comparing against our financial targets, our growth was clearly higher when it came to sales compared to our 8% target we came in at 12% but this was mainly driven by the positive currency effects, principally coming from the weak Swedish Krona. Return on capital employed was of course influenced by non-recurring charges and so came in at 11.5%.

Here we’re continuously focusing on holding back our capital base through restricted approach to investments and also net working capital reductions and at the same time driving for result improvements in the business through cost saving measures and so on. Net debt to equity continued to drop back in the quarter driven by strong cash flow and of course the earnings in the company and we are well below 0.8-target in the company.

And the proposed dividends is 73% of our EPS, we continue to have a very generous dividend policy in the Sandvik Group. We use this slide when we make our presentation is really for you to have as a reference about the different activities you can see ongoing in the various business areas around the company.

To highlight a couple of areas, firstly within Sandvik Machining Solutions, we continue to launch new products at a high pace. 1 April, Seco Tools launched the next generation of their duratomic grades which is a very sizeable product launch for them and also Coromant and our other brands continue with high activity with product launches.

And this is a result of our strong focused efforts within research and developments in recent years which are now bearing fruit in resulting products coming out in the markets. Mining continue to consolidate their footprints with the mine starts closure in Australia of production units in the quarter.

And we see very good development in the aftermarket and actually start to see some slight growth in parts of the aftermarket business. Sandvik Materials Technology had a good net working capital development so they are working with improving the capital efficiency in our business.

And within Sandvik Construction we finalized a closure of our site in Swadlincote with the mobile crushing and screening in the U.K. And this will help construction to establish a considerable best cost base within these products for the future.

So, with that I’ll hand over to Mats to give some comments and then I’ll wrap up and we’ll up for some questions. So, Mats?

Thank you, Olof. I will give some first quarter highlights in some of our prioritized areas and starting with the supply chain optimization program, where we totally have announced the closure of 21 units now.

And looking on the first phase that is including 11 units, we have completed 7 of them, two of them in the first quarter one for construction as Olof said in Swadlincote U.K. and one for Sandvik Mining in Australia’s Hunter Valley.

The remaining four units will be closed in the balance of 2015. When it comes to savings we have annualized run rate savings of SEK360 million now by the end of the first quarter, so we are well on track to reach the economy required in run rate end of 2015.

We also announced the second phase of this savings program now in the first quarter and that is including 10, the closure of 10 units and we actually started the closure of three of the 10 units in the quarter and that is two for Sandvik Mining, one in Finland, one in Sweden and one for Materials Technology in Sheffield U.K. We’re aiming for savings of SEK600 million by the end full run rate end of 2016.

So, all-in-all, the supply chain optimization program is running according to plan. More into net working capital, Olof talked about the record high first quarter cash flow and the development in net working capital is key in that cash flow performance.

We managed to keep the volume flat fourth quarter into first quarter when it comes to net working capital and that is extremely strong looking on the normal seasonality where we are building volume mainly in accounts receivables. But this quarter we managed to fully compensate to the increase in accounts receivable with de-stocking.

We had de-stocking were approximately SEK500 million in the quarter. When you see increase in absolute numbers that’s fully due to currency effects.

Looking on relative net working capital, we actually decreased relative net working capital slightly in the quarter and that is despite normal seasonality where we normally see an increase around 1.5% to 2% units in the first quarter comparing to the fourth quarter. So, really good performance when it comes to net working capital in the quarter.

Looking on the performance for the different business areas, we now have two business areas on target level. And looking at Sandvik Construction that’s actually the lowest relative net working capital ever for the business area, and Machining Solutions continue to manage their net working capital on target level.

The best improvement however we saw actually within Materials Technology that includes the relative net working capital with 3% unit in the quarter. That’s partly due to continued de-stocking but also due to prepayments in the energy product business so that’s something that’s pushing for us well in order to improve the net working capital.

Mining increased relative net working capital slightly in the quarter but that’s mainly due to lower invoicing of our top clients, when it comes to the inventories in volume, we actually continue the de-stocking in the quarter so, fairly good performance for mining as well. Looking forward and looking on the guidance, when we released the fourth quarter report, we talked about the positive effect from currencies of SEK600 million in the quarter.

We actually ended up with SEK770 million for the quarter and that was mainly driven by third slinging of the U.S. Dollar, Chinese Rand and Euro which gave a much higher impact on currencies that we anticipated when we were used to report for the fourth quarter.

Looking for the second quarter, we are estimating the currency effect to be on the level of SEK900 million and that is based on the closing rates end of March. Looking on metal price effects, we are estimating minus SEK150 million for the quarter and that is also based on the closing rates end of March for currencies but also for metal prices.

Looking on the full year guidance as for 2015, we are keeping the guidance in terms of tax rate 26% to 28%. We’re keeping the guidance for CapEx to be below SEK5 billion for the full year.

And however, we can recognize that we have a lower run rate right now but we will also have headwind when it comes to currencies on CapEx by keeping that guidance as well. When it comes to net financial items, we are actually lowering the guidance for the full year.

Previously we had SEK2 billion for the full year, now we’re looking on SEK1.8 billion to SEK2 billion supported by the good cash flow we have seen in the first quarter. So, with that I think I’ll leave for Olof to summarize them.

Thank you, Mats. So, looking down a bit into the future whilst, I’ll be focusing on for the remainder part of the year.

Well, most importantly I would say our continued high activity level when it comes to product launches within the Sandvik Group. We have a plan to launch over 15,000 projects in the company during this year.

I would say during April is the month when the first larger wave of this really has started within Sandvik Machining Solutions. So, lot of activities going on with new products which will strengthen our long-term competitive position in the market and help us to continue to support our customers in even better way to make them more productive and of course help Sandvik to strengthen its positions in the market.

We’re also working a lot with aftermarket business and to really capture larger part of the aftermarket business on our installed base. This picture shows a kit for rebuild of drifter, Sandvik drifter and this is one example of how we’re trying to make it simpler for the customer to really buy their parts from Sandvik.

So, we got a fully branded kit with a complete set of equipments you need for that rebuild, you don’t have to order a lot of items individually. So, simple solution for the customers, they get all the parts and they can make sure that they do that drift to rebuild on time, are not missing any parts and get their machine back into production as quickly as possible.

So, we’re quite optimistic about our opportunities of developing the aftermarkets in the next couple of years in the business. And then we continue to focus on building a leaner company.

We’re closing our manufacturing units according to plan and there is quite a high activity level ongoing with that. You can see the drops from the many numbers within the Sandvik Group, so a lot is happening in the areas of what we can control as a company.

Of course the macroeconomic development right now is quite tough and we see there are, limited market growth but we have a strong focus of despite that improving Sandvik’s performance through the internal measures that we’re taking within the company. So, to summarize the first quarter 2015, we are seeing good and healthy earnings growth in the company and margin expansion for the Sandvik Group.

We see a record high Q1 cash flow so work not only with improving results and margins in the company is running well, but we also see good developments in terms of cash flow and performance. So, we’re managing to actually deliver on both of these areas at the same time right now in the company, as we also did in the preceding quarter.

We’re making good progress on our supply chain optimization program, the factories have been closed according to plan and the new closures are being announced according to plan. And the provisions for the second phase have been taken now in the first quarter of this year.

And when it comes to the market development, we see overall stable demand in most sectors and most geographies with maybe the exception of oil and gas sector which has performed weaker than what we saw in the preceding quarter. So, with that, I suggest that we open up for questions.

Yes, we’ll open up for questions and we’ll alternate questions here from the audience in Stockholm as well as through the conference call and through the web. And we start off to see if we have any questions from here in Stockholm, yes, please.

Yes, good morning. This is Peder from Handelsbanken.

Could you please share some light over the demand drop in oil and gas business for distill but also in Varel try to help us to quantify that. And tied to that question, more importantly maybe describe more in detail what you actually are doing to sort of map up that weaker demand ahead?

When it comes to the demand development in oil and gas, we actually see a neutral book to bill within Sandvik Materials Technology so we have received a couple of new large orders. Then we have the cancellation which I would say is more approval and political driven and the direct consequence of the lower oil price right now.

But what does happen in the order book within Sandvik Materials Technology is sequencing in time of the order stock has moved out. So, of course this cancellation was planned for more near-term manufacturing and these new orders are for later in the future.

But we still see, I mean, an amount of book to bill and a fairly actually normal type of activity that is not a big drop when it comes to materials technology. When it comes to the Venture business and especially Varel, they have about 40% of their sales in North America.

I would say, and the rest of the world it’s been I mean, of course some pressure downwards due to the oil and gas prices, the drops but there has been a very dramatic drop in North America. And when it comes to the drilling within the Shale Gas areas and the onshore equipment, they very rapidly slowed down drilling activity with a low oil price and also very rapidly around oil prices accounts back while the offshore projects in SMT they have a much longer time perspective and you don’t stop multiyear very large investment projects just because of the temporary drop in the oil and gas price, which is what does have effect in North America.

So that’s how we see, I mean, a significant effect especially in the North American business, offshore of course pressure in the market but not as dramatic as what we’re seeing onshore. And the rig count, since we stood here last time and released Q4 results to drop by something like 40% further.

So it’s no small changes that you see in that business right now. Measures we’re taking, I mean, when it comes to our Venture business, there the drop has been much more adequate and faster than what we could anticipate.

We’ve not of course fully been able to keep up taking out cost at the same rate that that market has dropped. But we are have a strong focus on reducing our cost base mainly by that demanding numbers and so to new activity levels we see in the business.

SMT have also taken softer measures during the quarter, we have time banks so we can flex time within the business over time, so we’re using over time historic over time to reduce amount of time in the mails right now. But we’ve also had some personnel reductions mainly of temporary employed people and agency workers in the business.

The 461 of sequential lower full time employees excluded I guess attempts or while if they’re employed in Sandvik, well, there are certain rules for around even agency workers get into our statistics after a certain point in time. But it’s according to common definitions so.

And is there, most of that is of course according to the supply chain optimization programs, could you quantify the Varel part of that?

Now, we haven’t specified to that level of detail. But we are seeing a good healthy nanny reduction as a consequence of our ongoing programs here.

Thank you.

We have one more question here from the audience in Stockholm just before we open up from the conference call.

Okay, Anders Roslund from Swedbank. I have one question regarding SMS.

You are lifting production slightly but you see flat or no growth. Is it only seasonal effect of lift in production or is it thanks to that you have new products?

Well, I would say we have a fairly neutral production, we’re maintaining our net working capital, we’re not building significant inventory in the business. So we are fairly balanced and that’s what you should expect going forward in terms of production and sales.

We don’t actually flat to account to inventory and volumes so it’s no stock build behind machining solutions.

Okay. So, what about all the new product launches you mentioned, you keep that in line with the ordinary production?

I mean, we have today a totally different focus when it comes to net working capital than we had a few years back in the company. And as you should also remember when you look at Q2, where we seasonally before built quite a lot of inventory in anticipation of the Sandvik shutdown.

We are now aiming to have a much more flat net working capital development over the year, which we think will be beneficial and reduces the risk of obsolescent costs and so in the company. Thus we get a more effective and consistent utilization of our production base.

When it comes to new products, we’re also aiming to manage that without having to build significant volumes in that working capital. This is of course a significant challenge for SMS to do that when they have both products that are exiting the portfolio and new products coming in.

But we have a very high ambition when it comes to taking turn at working capital targets in the company.

Looking on the overall new development of inventories in the quarter, we only have stock build-up in volume in one Sandvik constructions. So we have flat de-stocking in all the other ones.

Okay, thank you.

Right. Operator, would you please let through the first question from the conference call please?

Yes, hi guys, its Klas from Citi. I have a few questions please.

Firstly, Olof, on the EBIT margin in SMS, quite a big FX impact here on transaction. So, pretty, you could say weak margin underlying.

Obviously you have no growth, but could you help us with the underlying investments in SG&A and R&D, I assume that they didn’t start to fall sequentially? You’re trying to…

With the leverage on SMS you can see that we had more or less flat top line excluding currency, but actually had a slight drop if you exclude those currency effects. And that’s due to the during last year build up of SG&A cost or NS cost as we call them in the company that we had to focus and support new product launches and a more ambitious plans in the market.

So, that’s the reason why you have seen this - that you don’t see a better leverage excluding currency effects within some of those.

Yes, exactly. I’m just trying to understand when will these investments start to annualize, I mean, when can we start to see sort of tailwind from lower cost to go through this year?

We build this cost up to and including the third quarter last year. So, now we’re comparing Q1 to Q1, you will see some increase Q2 on Q2 and then by Q3 you should start to see a more neutral situation here then.

Okay. My second question is on construction, nice to see a 3% margin here.

Now, reflecting back to what you said during the Capital Markets Day in November, I think Heather Construction you talked about the actions that could drive the EBIT margin up to 6% to 7% and this is at the current demand level and that most of this could land in 2015. Obviously, today’s result seems like the first time that this actually might work.

So I guess, a 6% to 7% margin for the full year, is that how we should look at it?

You’re nearly answering your own question. But I mean, Q1 for construction, they’re on track for the plan that they presented on the Capital Markets Day.

They had, I would say maybe the most ambitious improvement plan of all the business areas. And I think they should be proud and happy of what they achieved in the first quarter.

So, they’re definitely taking a clear step in that direction. They of course still have a significant challenge to go to meet the full level that they were aiming for there up to Q1 was definitely going to start and it’s totally in line with that plan that was presented.

Okay. My final question is on the aftermarket in mining, the outlook for iron ore in particular is getting weaker.

We’re hearing about the largest producer Vale starting to cap production. This is no longer contained to the high cost producers, we heard about the Cat talking about renewed aftermarket weakness.

What are you seeing here and how do you look at aftermarket ahead giving potentially slower production rates?

When it comes to specific parts side, I would say that we start to see a slight positive development at Sandvik. Our business against coal and iron-ore is mainly driven by our mining systems business and we have very little aftermarket in those areas.

So iron ore per say is not going to have a significant impact on Sandvik’s aftermarket but it does manifest itself in the very low order intake we see when it comes to new projects within the mining systems business. So the equipment in aftermarket business is much more driven by base metals gold, platinum and these other minerals.

Thank you.

All right, operator, could we have the next question please?

Hi, good morning everybody, it’s Alex at JPMorgan. I’ve got a few questions as well.

The first one is just a question around the inventory. Can you just sort of quantify the size of the SEK500 million de-stocking in each division and just give us some idea of how much was finished goods and they’re by weighing on the margins?

In terms of the SEK500 million, I mean, the biggest one is actually Sandvik Mining in that number. And it’s quite lot a lot again related to thought meaning that it’s no kind of immediate effect when it comes to under absorption so very, very small margin effect from mining coming from de-stocking.

As Materials Technology continued to de-stocking in the quarter, and I would estimate the margin effect in the quarter to maybe around 1% year-on-year but more importantly looking on Materials Technology and especially comparing with previous year, the delta in terms of de-stocking with first quarter 2014, because we had FX significant stock built up last year in Materials Technology. So the difference in stock build-up and de-stocking this year for Materials Technology is about SEK400 million year-on-year, so year-on-year, we have approximately I would say 3% unit impact on the margin for Materials Technology.

But in this quarter, it’s maybe around 1%. For that the business areas I would say kind of insignificance when it comes to down the absorption effects.

Okay, great. Got it.

The overall group leverage now, we’ve bid for the company as a whole I think fairly okay or good leverage in the company. Holding back a bit is SMS and we talked about this focus on building up ourselves cost to support our market position and new product launches and these effects that you see in Sandvik Materials Technology regarding stock build in Q1 last year and some stock reduction in Q1 this year.

So, if you disregard those two effects, actually I would say the leverage in the company is quite stronger this quarter.

And looking into the second quarter in terms of oil production rates, I mean, I can see that we’ll make some further kind of adjustments in terms of de-stocking in mining and Materials Technology. But I mean, it will be made on the level of what we did in the first quarter so not that kind of significant.

For the other business areas we will pretty much produce according to demand.

Okay, great. The second question I had is on SMT.

You’ve touched on this a little bit already. But just interested in how last quarter you talked about having backlog support through to the middle of this year.

With the cancellations, does that now mean that we should be expecting invoicing to decline more materially already from Q2? And then perhaps can you just talk a little bit about what the cost opportunities you see outside of the temp productions that you’re already making given you’ve already been through quite a large restructuring program over the last few years?

I think when it comes to Q2 you shouldn’t expect any significant changes in the volumes for SMT. There we still have an order book to support the business as wanted right now.

When it comes to cost cutting of course we continuously look at how we should adapt our costs to the activity and market levels that we have. And it’s always possible to reduce shift forms or find other ways to take out cost if it is that is necessary from a market perspective.

And do you expect to be able to maintain a double-digit margin in that division?

Well, I mean, we don’t give that precise guidance. Now we expect to actually have negative metal price effects in the second quarter.

Backing out maybe we should be able to continue around the margins that we have right now with list coming in to the second quarter for the business.

Okay. And then the third question I had was just around currency and how you think about opportunities to perhaps use it to price a bit more competitively in some of your segments given you’ve got fairly important dollar-based competitors as well.

Well, our primary focus is not to allow price erosion due to the weaker Swedish Krona. It’s best policy to aim to maintain the pricing picture in the market and win orders based on having best of products and best of solutions for our customers instead of doing that by lowering pricing and being aggressive in that way in the company.

Okay. Thanks very much for your answers.

Operator, we’ll continue with the questions from the conference call please.

Thank you very much. Yes, good morning Olof, Mats and Ann-Sofie.

A couple of questions from my side. Mats, if I could start with the EBIT bridge for mining, the negative SEK130 million for price-volume productivity, I wonder whether you could help us break that down a little bit into the individual components?

Also give us a sense for how much sales mix supported margins in the quarter. And then just on the footprint and presumably the cost savings that are still coming through from the 2013 cost savings program, give us a sense for how much that added on a year over year basis on the mining EBIT bridge?

Thanks.

Starting with the mix question, I mean we have a positive mix now in the first quarter and we’ll have it going forward as well as we can see an increase in share of the aftermarket with higher margins. So it is a certain mix effect and maybe that’s big but this will kind of increase over time in terms of the mix.

When it comes to savings, I mean, supply chain optimization program to mining is somewhat kind of backload as we haven’t seen, I mean, not kind of significant savings from that program coming to in the first quarter. What we need to remember is that we had supply chain, not the supply chain, the right-sizing program last year where we reached the savings of SEK500 million on an annualized basis already in the first quarter so, if not that much from that one either in the bridge down.

So to some extent savings coming through to some extent a positive mix effect in the bridge. And then as they get inflated through the kind of the de-stocking under absorption, even though with all de-stocking happening within mining, we don’t have any significant kind of margin effect from that one in the bridge.

That’s helpful. Thanks Mats.

If I could just ask Olof briefly on the end markets, one in machining solutions, the 2% organic order drop there, obviously North America going to minus 8% from up 11% in Q4, I wonder whether you can give us a bit of granularity around that? And also I noted from the press conference, Olof, you talk about April running on a par with Q1, again if you could give us some granularity around this.

That was one on machining solutions. Secondly, if you could…

SMS and the specific drops that we see and why it’s very significant to North America is related to that, we took quite a large aerospace order and it’s quite unusual actually that SMS has larger orders. But we did have one that came through in Q1 2014.

So, that was somewhat inflated order intake that we saw in Q1 last year and that’s why the comparables become a bit tough. And that order was in North America so that’s why you get the drop coming through there.

So, I don’t think that per say is any reason for concern in terms of the market development there. If you look at sales, these first weeks in April they have been on-line with average sales that we’ve seen in Q1.

It’s of course a difficult couple of first weeks, we’ve had Easter in there, and so, but there is no reason to talk about any significant upturn compared to Q1 and of course not any weakening either.

That’s helpful. Just on SMT if I could, how much is Petrobras of your order book today and would it be fair to say that we could be moving into a period where political uncertainly perhaps more meaningfully impacts your overall business in SMT?

And also if you could, Olof, talk a little bit about the actual underlying drivers for your commentary on underlying improvement in the aftermarket? I appreciate that coal and iron ore is mainly systems, but what are you actually seeing within the aftermarket business?

That would be helpful. Thanks.

Yes. But it’s difficult to comment on specific customers in detail.

But in general I would say we have a quite limited Petrobras exposure. When it comes to technically the kind of umbilical, they use they have been using plastic there.

And that’s been a hope of them shifting into metallic umbilical as they go deeper. Now, with the whole situation with Petrobras and I’m talking to how they’re going to develop their business, I would say Petrobras has been a significant hope for the future for us but it’s not anything that we’re banking on right now.

So no near term effect but of course I’m talking to you about the opportunities secured in them as a large customer going forward have maybe decreased a bit with uncertainty in the company and in Brazil as a whole. When it comes to mining, well, our equipment sales and our aftermarket, we have a neutral book to bill roughly.

And so, the market has stabilized at this level, I would say we’re very much at the replacement activity level in terms of equipment sales and aftermarket activity. We’ve seen maybe some slight up-tick in the markets and it’s said equipments and aftermarket business is a lot driven by base metals, gold, platinum and this kind of minerals and not as much of on coal and iron-ore.

That’s helpful. Thank you.

Do we have any questions here from the audience in Stockholm? Not at the moment.

Then we continue with questions from the conference call. But I’m cautious of the time here, can I please ask you to limit yourself to one question at a time, just to give everybody enough time to come through.

Operator, please.

Good morning everyone. It’s Guillermo Peigneux here from UBS.

I just wanted to check a bit my numbers if you don’t mind, so kind of boring question. If I back out your underlying margins excluding currency, it looks like currency actually helped you by 200 basis points or 2%, which basically means that your underlying margins are around 10%.

And then trying to understand the help of your savings, I think I get around 40 basis points which will be equating to your SEK90 million savings in the quarter, all the quarter rather than the annualized figure. Is that sounding roughly correct?

Yes, and I mean, we have more details when it comes to the net results of the bridge in the Materials, and I mean, it’s there but it’s a fair assumption, yes.

Okay. Thank you.

So currency will be actually the majority of the improvement I guess when it comes to?

That would be right and that’s correct. I mean a very strong positive effect from currency than underlying or not, I mean we’ve had very negative currency effects previous years, and now we’re getting back sort of part of that from well within historic levels.

Then if I could have a follow-up regarding SMS, I think we read comments of January and February being weaker than March, which was stronger. But then I think in your comments on an interview you said that April in terms of SMS looks the same as Q1.

And I was wondering whether it looks the same as March or January/February or a mix for the whole quarter?

Say, the same as average in Q1 there. So, we’ve seen some difference between the various months in Q1 but that said, we don’t have any room to say anything else on this sort of neutral development compared to Q1 in the beginning of Q1.

But if I read the stronger March, weaker first two months, is it like weaker April than March? Sorry for the complexity.

No, I think that’s I mean, smaller differences between months, you should take too big time since on that. But I would say, we should assume that the beginning of April has started in line with the activity levels that we saw in the Q1.

Thank you. And how big will - how big the oil and gas orders for SMT?

Do you have any size that you can share with us? Thank you.

We don’t specify the specific orders in that size, so but we had two orders against oil and gas. And the third order we received was actually against nuclear sector.

So we booked the first order against the Chinese nuclear sector since the Fukushima accident. So that was also an encouraging positive development I will say though.

I can see. Thank you very much for your answers.

Thank you.

That was significantly more than one question. So, operator, please, the next one please.

Hi, yes. Andre from Credit Suisse.

Just a couple of follow-ups. One is I think you mentioned that you’re looking for oil and gas acquisitions in the press call.

Your current exposure is quite varied. Could you comment where you’re looking and whether it would be reasonable to expect a deal this year?

And the second one is just on mining systems. Would a thinking of systems being about 10% of sales and near zero of orders, would that be roughly right, or should we be thinking about different numbers?

Well, firstly I mean, acquisition is difficult to speculate. We talk about several areas like SMS as an interesting area to expand, there could be potential within mining but also the oil and gas sector.

Of course, if oil price may create opportunities for us. And at the mining sales, mining systems was roughly 20% of those sales in the quarter.

And we actually had as much as 57% aftermarket sales in this quarter. So that gives a perspective of size of Mining Systems.

And, sorry, systems of orders?

Andre. We’re going tough here.

We have to ask you get back in line, and we put the next question through please.

Yes, good morning. Can you hear me?

Yes.

Perfect. So on mining, if we exclude major orders, your mining business grew by 7% year-over-year.

Is that entirely related to the aftermarket business or are you also starting to see a pick-up for equipment demand?

Well, I wouldn’t go as far as saying that we see growth in equipment but the market has definitely stabilized and we do start to see some positive signs in the aftermarket business. So that part of the business is robust, we have a neutral book to bill.

And the weakness in the book to bill for the business area is wholly driven by low order intake when it comes to mining systems.

So just to clarify, if orders grew by 7% excluding major orders, and you don’t have any major orders in the aftermarket business, and the equipment business didn’t grow it should imply that the aftermarket business grew by 10% to 15% year-over-year?

Well, this sounds like a question to sort out with Investor Relations, but Mining Systems do get orders that are not considered as major as well. I mean, all of their orders, so the order intake was not zero for Mining Systems which it sounds like you’re assuming.

No, no. I’m not.

I’m just assuming it’s not up year-over-year.

Okay, well.

I can take that to the Investor Relations.

I would say, save the markets, we don’t feel we can go any further than saying that we see positive market sales on equipment yet. Some positive signs in the aftermarket.

Can I take a follow-up question also on mining?

You have to negotiate with Ann-Sofie.

I would like to do equal terms in here, so I’m afraid not, you’ll have to get back in line. Next question please.

Okay, thanks.

Yes, good morning everyone. It’s James at Redburn.

I’ll just have the one then. SMS, your growth, I was surprised to see minus 1% organic decline for both orders and sales in Europe.

European industrial production’s grown 1%, 2% in the quarter. European car production’s grown 3%, 4%.

I don’t know if there was market share loss or a specific comparative for you or a customer issue, but could you talk a little bit about the European development there?

We see some markets which have been stronger in Europe like for example Italy, I would say Germany has had a fairly neutral development. But in the European numbers and having a negative impact is the Russian sales which continue to be clearly negatively affected than your year-on-year comparisons.

Okay. Could you say how much they fell?

We have not been specific on Russia as a country. But we have seen a significant drop in market activity in Russia which is negatively impacting the whole Europe number for Sandvik Materials Solutions.

Thanks a lot.

Thank you. Operator, the next question please?

Hi. Good morning.

A question again on SMS, but more on the margin. You said that you want to better manage working capital and have less magnitude of margins, so less seasonality.

I just want to check, I mean compared to the 21.4% you achieved in Q1, would you say this margin is sustainable through the next quarters or would you see the traditional slight up-tick in Q2 and a lower margin performance in Q3, the usual seasonality, or do you expect something more or less stable from Q1?

Well, I mean, seasonably there is some opportunity for margin improvement coming into Q2. But as I said earlier, the strong seasonality that we had before driven by over production in Q2 and therefore over absorption of costs as we built inventories and I’m really giving that back in Q3, that would be much more limited between the quarters as we’re running the company now.

Okay.

In terms of the guidance when it comes to currencies in the second quarter when we’re talking about the SEK900 million, I mean, that will have a slight positive effect on Machining Solutions in the second quarter.

Can you quantify that compared to the SEK400 million we had year-on-year in Q1? What will be the share of the SEK900 million for SMS in Q2 based on your guidance?

I mean, no, we don’t get into specifics, the particular use of the guidelines is to share from the first quarter, yes.

Okay. Thank you.

Thank you. The next question please, operator.

Cheers. Colin.

Morning, everybody. Several questions but I guess I can only ask the one so I’ll pick this one.

Varel acquisition last year and you’re now saying that the level of business in North America has fallen off far faster than you’d thought. At this stage what would you assess as the risk of goodwill impairment at Varel?

Thank you.

I would say right now none. I mean, we have made a long-term investments in Varel and goodwill aren’t impaired based on short-term market movements.

Okay. Thank you.

Thank you. Operator, the next question please?

Thanks. Morning.

I wondered if you could just talk a little bit around the decision to not to pursue your JV with Zhuzhou? And then can I clarify one thing, which is did you say that Varel was down 40% year-on-year or not?

Thank you.

With Varel, quickly then no, we said that 40% of their sales are in North America where we’ve seen the most significant drop. And that we’re talking about since release last quarter about 40% drop in the rig count in North America.

So, that puts things swings maybe into perspective there. When it comes to Zhuzhou, we put out after intent and did have quite extensive negotiations with them even where our own mid-market offer is developing.

And the nature of those discussions and we felt those could lead jointly from both companies really took the decision not to continue with those discussions. So, I don’t really have anything that’s had on that and we will continue our hard drive with Promet with the Carboloy brand and so to organically drive our mid-market offering from the company side.

Thank you.

Thank you. And we have one question from the audience here in Stockholm please.

Hi, this is Daniel Schmidt from SEB. I just wanted to ask you on net working capital.

De-stocking was SEK500 million in the quarter, and your cord sort of decently approaching your targets of 25% and especially with the inventory and you mentioned there will be some further de-stocking in Q2. What should we expect for the second half of this year, would that fade quite a lot compared to start o this year?

I mean, it already did base to some extent. I mean, looking on the third quarter and fourth quarter last year, it was significantly higher than we saw in the first quarter.

And it will continue to fade. But we will continue to kind of structurally address the inventory situation within mining and within Materials Technology, as you can expect some further de-stocking in those two business areas now going forward.

Also going forward into the third quarter and maybe into the fourth quarter as well, but not with that very kind of significant, kind of under-absorption effect coming from that as well. And when it comes to, I mean, we have our target to reach 25% for the whole group, I mean the first quarter and I feel we’re on track on that one.

And especially looking on the inventory and the development of the inventory in relation to sale, we haven’t been this low in a couple of years that’s all right now they’re looking on inventories. So that will continue in two business areas than to address this structurally going forward.

Thanks you, Mats.

Thank you. Operator, the next question from the conference call please.

Hi. Good morning Olof.

Good morning, Mats. My one question is, and I’ll split it slightly, 1A, how much of the lower order intake in SMT was due to volume and how much was due to pricing?

If you could split that out, that would be really useful. And 1B, I guess, is can you quantify the FX impact on net working capital?

I can take the net working capital question first. I mean, if you’re looking on the development in absolute numbers of net working capital in the first quarter, we have an increase of SEK1 billion and that is all the currency.

So the currency effect is basically SEK1 billion in books.

And for SMT, we have more or less no effect from metal prices so that’s in drive for the absolute price of the product either up, nor down. And so, and we had very limited I would say price in those materials.

So it’s not price driving the top line, and it’s an underlying volume development that you see.

Very clear. Thank you.

Thank you. And operator, the next question please?

Yes, good morning again. Can you hear me now?

Yes.

Yes.

So back to mining. Because you’re now changing your aftermarket offering and I understand the extension of the spare kit you presented earlier.

But can you elaborate a bit more about what you’re doing? Are you doing something with your internal structure you have right now, like changing your existing pricing model or something like that?

No, and as said, I mean, we are a company that offers productivity to our customers and excellent solutions. So, we’re not low cost priced competitor in the market and that’s not our ambition to slash prices and try to get a market share of that.

What we’re looking very much now is, our full installed base, the level of sales we have in these regions and that installed base driving really strong performance management on how much of that aftermarket business were captured. So that sort of pure operational drive without we have in the aftermarket.

Then we’re improving our offering when it comes to for example products like the one I showed you, to sort of have better solutions to offer our customers because they want their machines, I mean, with the high availability, high up time, I mean, it has helped them to solve those - that problem in an efficient way. We’re also continuously looking as far as types of sort of IT or information technology solutions in terms of remote monitoring, following our installed base, having sort of automatic processes to follow up and service needs and so come up on the machines.

The both elements of pure drive in the organization which has got driving very hard and has this tight follow up and our sales people and making sure that we have this sort of the right focus in our organization but also then continuously developing our aftermarket offering to our customers.

Yes. I was actually not thinking about price decreases here but a change to the business model or the pricing model which would make it possible to actually increase your prices, because I think you have been running below Atlas’ aftermarket business margins for a very long time.

And I think it, to some extent, can be because of the pricing model. So that was more what I related to.

Well, I mean, of course, I mean, this kind of kits and so and they give us better opportunities to lock in and potentially maybe expand margins in the future. And it’s very, very tough and competitive market that we see in the mining sector right now, I think significant price increases are very challenging with the current market environment.

And there is a lot of pressure from the miners on their costs, cost base and so, so to really gain more business with our customers, we need to prove to them that we offer them a better solution that helps them to be more effective. And if we can help the mine manager to look good in his business by us solving his problems in a more efficient way and at the same time doing more business and we have this win-win situation that we really need to build on more forcefully just to force changes in our customers.

Instead we should say getting an adverse negative reaction from the customers. So we want to build this in a positive environment where we really give something better to the customer at the same time as we help Sandvik develop this business.

Perfect. Thank you very much.

Thank you. I believe we have one more question from the conference call.

Please, operator.

Hi. Thanks very much.

A quick follow-up from me. I think it would be wrong if we let this conference call go entirely past without asking anything about Anders Nyren, and I’m happy to be the guy who does that.

So I understand from reading Industrivarden’s commentaries this morning, he won’t be proposing himself for reelection as Sandvik’s Chairman. When do you expect to be able to make a new announcement in that regard, please?

Thank you.

Very good question, just shortly about the facts, I mean, there has been a lot of changes going on and around the industry about that which is the largest shareholder in Sandvik, they’re on the 11%. But of course we have lot of other shareholders and many of you probably on this call as well.

But as the consequence of these changes, your Anders has decided to leave Industrivarden and as a consequence of that is not going to be nominated or has turned down the opportunity to be nominated again as Sandvik’s Chairman. This news was released earlier this morning right now there is no new name for a new Chairman for the Sandvik Group.

But as you know, the board and the Chairman is decided by our owners, and we have a nomination committee with a representation from the largest owners in the company and they will have to of course now meet and discuss how to deal with the situation. For me it’s important that we don’t let these kinds of changes in any way distort our focus on driving Sandvik, continuing in our journey with making improvements and we are driving in the company.

And that will be my focus and the management’s focus. And if you have more specific questions about what that will mean in terms of and who will succeed.

Anders Nyren if you really need to turn to the nomination committee of Sandvik, who will make a proposal for our AGM where a new Chairman would be elected.

Thank you.

I’m sorry I cannot give you any more on that right now. But good question, I’m glad you asked it.

Okay, so I think.

Yes. Thank you very much for joining us today.

And should you have any additional questions, please don’t hesitate to contact us at Sandvik Investor Relations. And before I let you got, I would just like to mention that we’ll run our Capital Markets Day on 16 November, we’ll run it at our EMO site here in Sweden.

And you will find a link for registration etcetera at the Sandvik website. Thank you.

Thank you.