Sandvik AB (publ)

Björn Rosengren - CEO Tomas Eliasson - CFO Ann-Sofie Nordh - Head, IR

Peder Frölén - Handelsbanken Capital Markets Andrew Wilson - JP Morgan Chase & Co Graham Phillips - Jefferies Benedict Uglow - Morgan Stanley Gael de-Bray - Deutsche Bank AG

Thank you, Nancy and welcome everybody to this first quarter presentation. We are very happy to see that this demand in the market continues on a good level.

We see that in all our regions and in all segments that we are operating so also all three of our business are contributing to the good overall growth which was 7%. This should be compared with previous year where the first quarter actually had the best quarter for the entire year.

We are also happy to see that the leverage is developing in a good way, and we see development of our profitability and our margin this quarter actually reaching 18% profit margin. That includes SEK250 million of negative currency effect.

So if you add that back, that actually reached 19%, which, I think, is an extremely good number for Sandvik. Cash flow.

It's been impacted during the first quarter on buildup of inventory, mainly in SMRT, in our Mining business, to be able to deliver the extremely large orders on hand that we are having. This is no worry.

This will recover during the year, and we will experience also this year a good cash flow for the full year. We've had a number of activities during the quarter.

We managed to close the sales of the Welding Wire business to [indiscernible] and we believe that we have found a good home for that business. We have also made a decision to invest SEK200 million in new powder plant for titanium, for our 3D printing business, which is growing and a very profitable part of the SMT business.

So this picture looks pretty much like the one we showed during Q4. You can see strong demand in all our segments as well as in the regions.

Starting with the regions, you see 0% in North America, but that is, the underlying there, is actually 8% positive. We had a large umbilical order that were booked during the first quarter.

So the underlying is still strong in North America. Europe is up 6%; continuing in Asia, 90%; and out of that, 27% in China.

So China continue to be very, very strong. We see we had a leveling out mining arrow, that means that, that market continue to be very strong and in line with what we have seen during previous quarter.

So very strong market, mainly driven by replacement, but we also see a number of new project, we had one in Sweden, for instance, starting up with mines. So they are popping up a number of these projects going forward and also extension of existing mines.

So very strong market there. Also good contribution, as I mentioned, from all three of our business areas.

So on the orders and revenues, we had this quarter a book-to-bill ratio of 1.07, that means that our orders are higher than the revenues and we continue to build up orders on hand. We see 7% growth and that is also we have, I would say, that is a strong number.

And the revenues is increasing, which it should do, because we start delivering more out, at least, in the Mining business. EBITDA development of 22%.

That is then if we then exclude the currency effects of SEK250 million and the SEK100 million metal effect. And also, structure changes of SEK56 million, which we have last year coming from the Process Systems, which is a solid business, it's actually 31% improvement of the profitability, which we think is a very, very strong number.

This SEK4.2 billion is also the strongest number that we had in the company's history. So 18% profit margin.

The one who knows me will say that the company should deliver all but 15% profit margin to be a strong company. This quarter it's at 18%, and it's a strong 18% because underlying 19%.

So looking at our three business areas. How have we seen the development?

Sticking out as we have seen also during previous quarter is Machining Solutions that have so high growth at 8%, and you know that, that is amazing. We also see leverage here that continues to be in a very high level, 55%, and reaching a profit margin of 26%.

Probably one of the highest, if not the highest, we've had for that business. The good thing is also that the cash conversion is close to 100% there, which means that we are delivering a very strong cash flow also from that business.

Only some building up of inventory for it to be able to meet the demand that we have from our customers. You probably remember that we said that we are struggling with too low working capital during the previous quarter to be able to have full delivery capacity, but that has worked well during this quarter.

Then Sandvik Mining and Rock Technology. Also there, we are happy to see orders up 4%, and that actually it surprised me a little bit because we had such huge orders during 2017.

So we are glad that, that demand continues to be in good. I talked before about the SEK250 million FX for the group.

All of that is actually coming, SEK250 million, on the Mining side. And comes the question, why is it coming there?

Yes, we are producing more or less, the most of our equipment and spare parts within the euro land. So the euro against the dollar has not developed that well as we have seen with the weak kroner for the rest of our business.

So that actually affects our EBIT margin with 2 percentage points [to 15] so if we take away the currency part, it's actually 17%. And that's a leverage of 35%, which is in line with expectations.

Even though you know that we have big expectations for the Mining business and with big ambitions for improving the margins going forward, so we are going to be focusing even more here on efficiency improvements and to try to drive the profitability even somewhat further. Also very happy that we've seen growth, as I mentioned, 4% here.

On the aftermarket, we were actually over 10%, close to 15%, on the service and spare part business. So that's a good contribution and it's very important also for the future performance of that business area.

SMT, very strong orders. It's up 13% here.

But if you actually put back the underlying here because we had, as I maybe remember, I said SEK430 million umbilical order last year from North America, if you put that back, it's actually 31% up. So very strong orders intake here.

We see a profit margin of 9.9%, but in that, we also have the metal price effect, which, if you remove that, it moves down to 7.2%. But I think that's well in line with the development that we are expecting to be able to reach the 10% margin 2019.

So that's good to see. Tomas, how's the numbers?

Yes, Björn, how's the numbers? Let's jump straight into the financial overview, hence start with the top line.

As you heard, order received, 7% organically, and revenues 14% organically. Currency was minus two for both orders and revenues.

And then structure, minus three for orders and two for revenues. And that is mainly the Process Systems divestment.

So total reported plus two and plus nine. The EBIT margin, 18%, and we'll get back to the bridge in a second.

Working capital, you heard from Björn here, the percentage is down, but sequentially, the value is up, and we'll get back to that as well. And of course, this had an impact on the cash flow, but cash flow is still positive, and the net debt continues to go down.

Finally, you see that return and earnings per share continues to improve in a very nice way. If you look at earnings per share, it was up 30%, whilst operating Project 22% but this is what you get when you have a stable at tax rate and the fatness continues to go down.

You get an overabsorption and a reduction in the finesse that. So if we jump to the next page and look at the bridge.

And see them how to go from 16.1 to 18% in EBIT margin for the quarter. On the organic side, you can see that the leverage was 39% and a good thing this quarter was that all three witness areas contributed, 55% from SMS and leverage, 35% for SMRT, antipasto table average of 5% from SMT, which is good, haven't seen that for a while.

That meant an accretion of 2.7 percentage units organically. So it takes 16.1, add 2.7 and then you get the close to 19% that Björn was alluding to.

Currency, 285 negative basically all affected SMRT. And it's a U.S.

dollar, which are tough represents more than 90% of that. Structure one-offs, and 10 dips of dilution and that takes us to 18%.

Now working capital. Of course, percentages down year-over-year, but the value is up sequentially.

It has two explanations to reasons for it, the biggest one being the buildup of inventories in SMRT. In order to deliver the order backlog for the year, which we will do.

And the other one is to restore sales stock in parts of SMS in order to defend a delivery service. You can see on the right-hand side that SMS is on a very good level we expect them to be a debt good level.

SMRT is picking up, but it will start up it's helped out during the remaining three quarters in the year. Of course, this had an impact on a cash flow but if you look at the right-hand side, you can see that earnings continues to contribute to the cash flow, SEK900 million cash contribution.

Working capital tickets part of cash flow was SEK2 billion, SEK2.1 billion, which of course, is less than a year ago, but still end up at the container to reduce the net debt, which we can see on this page here. You can see the net that now was down until SEK14.7 billion and the gearing is 0.27.

If you look back in time, you can see mid-last year you see a big jump from Q3 to Q4 that was when we got the proceeds from the Process Systems. they must not let the rest of the journey from SEK40 million down to 14.7 bone is purely operational.

And as you might have heard as well, we got a new outlook from the Standard & Poor's from BBB+ stable the trip of Willow positive. Is a recognition for what has happened with the balance sheet and the strength and a balance sheet.

Finally, a few words on the outlook and guidance. We guided for SEK250 million negative in underlying currency effect and we basically landed there for the quarter.

We guided SEK100 million in metal price effects and we we're spot on as well. For the next quarter, with the currency rates we had March 31, we expect that the currency effects would be zero but this translation and transaction effects.

Metal prices, SEK100 million for the second quarter. Full year guidance on CapEx, SEK4 billion.

We had SEK740 million in Q1. Net finance items, SEK1 billion and we we're spot on, SEK250 million in the first quarter.

If you just go back 2 years, the finesse that was at tubulin so it's been cut in half now. Tax rate, 26% to 20% and we ended Q1 on 26 print 5%.

The know it over to again, Björn.

Thank you, Tomas. So where are we now then?

Yes, I think we are in a many are the most majority of our offer operating entities, we are both stable and profitable. That means that we have a strong focus on growth and we are talking about growth, we're talking three different way of growing, one is organically that's of course developing new technologies and product and sell more and take market share.

The second part is new technologies, and at the moment, we are experiencing probably one of the most exciting times when it comes to the mining industry. There are huge amount of automation projects, I would say any serious minor around the world today are looking into the automation area.

Sandvik is in the forefront. We haven't many, many products that project that we are running at the moment, which is going to be exciting for the future of any market.

The third-way of growing that is a through acquisitions. And we have been a talking about acquisitions now for the last six months and we are getting closer to be able to present our first acquisition within soon.

We are interested to grow mainly within SMS, where we have this enormous strong position at the moment and we would like as you know, to broaden ourselves to catch up double counting process, everything from designing debt component to verifying the results of their production. So within very short, you will hear something from us on that part.

But we are also interested to see growth within other product areas that are more stable and profitable. Mining have a number of exciting project that could be but the even some part of SMT like powered are and Oconto and these areas where we see good profitability and good position in the market.

So going forward, a lot of focus on growth, but also to drive efficiency. And we have especially in two of our business areas, SMT, we will continue to drive the project to reach the 10% for 2019 also our profit margin.

And in our SMRT, I think we have more to squeeze out in the coming quarters. But Ray that I think we can add the presentation and we go over to questions.

Do have any questions in here? Yes, we do.

And we have the microphone up here. Thank you.

Andrea's I have a question on the mining business it talk a lot and you've seem very confident in the efficiency measures could you elaborate a bit on what kind of efficiency measures are refocusing on for this year or next year?

Yes. I mean, you see in this enormous volume increases that are taking place during the last 12 months or even more.

And some of our more product areas, especially when we are referring to the underground business, that is at the loading and haul and the drilling part of that business, volume for any division to drive volumes up you probably know we have been focusing a lot by using satellites to be able to add the volume but we are also shorten lead times and tried to get more through. But it also puts a lot of pressure on the subsupplier's, especially when you come into hydraulics and the certain components because we all know that it has break so there is a lot of inefficiency and supply chain to get everything in.

It's enough that you are missing a couple of components before when you put in together you had to move it by side and told to get the light so there is a lot of focus at the get good efficiency through the whole chain. But also to make sure that we are focusing on our customers in the right way that we are winning the right project going forward.

But we will be driving efficiency, making sure that we grow - we have a target of reaching 3% productivity improvement. We all for the group running at 8% today, but at such a good time we would like to see that even improve.

So that is actually being - area improvement.

And a question for Mr. Ellis on a bench and deficit, if you being down debt can you see yourself taking extra contributions et cetera just to get the pension deficit even further?

You mean the pension debt and a balance sheet right now, which ended at SEK4.3 billion? Well, there is some widely the pension debt has come down from SEK5 million down to SEK4.5 billion and SEK4.3 billion is purely technical.

It's because rates are going up really. So I mean comp rates are going up in all regions in the world.

But no, we have no plans of making an extra contributions today.

Okay. Operator, and we have a question from the conference call please?

The first one is on SMP, the drop through is 5% and pricing is now improving a bit, so it should help the drop through out to go through the year. Against this however it's a pretty tough comp on large orders [indiscernible] which is high margin.

These orders are also very short cycle when we look at deliveries orders in the year often the comp deliveries in a year, there were no larger orders this quarter have we passed a peak on the [indiscernible] side if you could talk, Bjorn about quotation activity, order scope versus 2017 please.

There are quite a lot of activities out in the market both large project as well as small projects, but of course the orders never an order before its signed and delivered. So we are working with it.

So far we have taken the majority of these umbilical orders during the last two years and we have a very strong position in that. So we continue to focus to get these orders in.

So we have on orders on hand between two and four months approximately and we hope to get some orders within in the short near future, that's how it looks but you know there are many projects but they have to be closed of course.

Okay. On mining my second question, off the market if I heard you correctly what's happening 15% year-over-year and then mining are we down slightly on the tough comp, get this to sequential flat or OV but higher off the market quarter on quarter.

So I guess the question on the equipment side, last time that SMRT when I looked back surprised positively against expectations were about one year ago when the first quarter of '17. So the question is really are we [indiscernible] on the replacement on the brownfield side or do you think increased automation can drive upside to equipment volumes thinking about whether they can shorten the lifecycle?

I wanted to what extend that what struggle to see but if you can comment on the scope for the equipment business to reaccelerate in mining, please?

It's difficult to say we'll see some large accelerate. I mean, we're very happy if we can keep it on this level.

If we're looking at SMRT, we are, last year, we had the highest orders, it was over SEK10 billion, that was absolutely the best quarter during previous year and to beat that with 4%. And, of course, I'm very happy that it's the aftermarket that is what's growing most, because that's of course, the most profitable part of our business going forward.

We don't see any weakening in the mining market and if you have heard me before, from my perspective, this is driven by metal prices. And as long as we the metal prices on this level we will continue to see good demand.

We have as you know close to 20,000 equipment out in the market which will be replaced and bought new, they have a certain life-time they will becoming - some mines will place bigger orders. We didn't have any huge orders during this quarter, probably we'll expect that in the coming quarters also to come.

So I think if we can keep this level that we are having today, we are very happy with that part gives also because we got of course the production rates up to certain now as we can drive efficiency a little bit more and you know you get the whole supply chain rolling in the way you need to do at this volume, but we don't see any weakening of the market.

One very quick one, finally, on SMS and the 55% drop through. When met last time, you said, SMS should normalize to 40% to 50% in the medium term, so it's the 40% longer term.

But how should we think about the inventory build also in the second quarter? Cost going back in, in both digital, more feet in the street?

Can we hold 50% for the year? And then we come down next?

How should we think about incremental margin for 2018?

I think, yes, 55% surprised us also a little bit. It's on a very high level.

I think long-term wise you cannot expect that we should be on these levels so we should me more on what we have communicated before. We are investing, as you know, a lot of money in new technologies, both in the software, as well as in the 3D printing.

So during this year, you are probably putting in SEK300 million, which is actually taking out of the profit and straight in. And it will take a couple of years before we can see good returns on those investments.

But we're taking the opportunity now, and that business also is delivering such a strong and good result. But 55% leverage, I doubt that we should see that many quarters going forward, even though I hope.

That would be nice, of course. That 35% to 40% is a more normalized level.

Operator can we have the next question put through please from the conference call.

Just question on pricing for [indiscernible] solutions, global pricing and what do you think about pricing going forward? And then on SMRT, on mining, kind of the same question regarding like-for-like equipment.

How is pricing is moving but more interest in understanding on let's say the amount of growth you saw in aftermarket and consumables through equipment how is that basically makes not helping you to get better operating leverage numbers into the quarter, I'm wondering. Thank you.

If we are looking at the prices yes we see an improvement during the quarter so we are approximately 1.5% up. So that is developing well and that is both on the SMS as well as on the SMRT which it should also now the demand is on a high level.

On the growth of equipment I think you said in relation to aftermarket, equipment can go a little bit up and down for quarter. The demand is still good and we have nothing else signal it has been quite time out also this quarter meeting customers around the world and it's happy customers growing customers and prepared to invest also in our equipment going forward.

So I'm not so worried about that development as long as we see the metal prices on the level that we see now. The 15% on the aftermarket is of course important for us because the aftermarket remains also in weaker time.

You know we are putting quite a lot of effort to grow the aftermarket and we know that the market is - the underlying market is not growing as high we have grown that. So we are improving in our own abilities on that market.

On the consumable side that means the drill steel and the drill bits on the part that is not growing in these - and we are only talking about couple of percent there, 1%.

Maybe a follow-up, you mentioned automation and mining, could you give us basically an indication of how your order intake is becoming more or higher content in terms of automation so maybe just compare the amount of equipment that goes into high level of automation versus the let's say traditional level of automation that you may have had over the last five years.

Still the majority of the equipment that we supply is not for automated part but we have a number of project, we have so far you know 13 installations to-date on automated mine so on different levels and we have huge amount of project that's running and it's going to be in the future. Yes, automation drives equipment also, because when you are moving into automation, you also need equipment, which are equipped with the latest technology when it comes to navigation and mechanization also on the equipment.

So yes it drives part but these project I mean that we're talking about is still minority of what you're seeing and that we will probably see more in the coming future of these projects. We have one exciting project what we talked about and that is project in [indiscernible] normally you think about the automation is taking place in the northern atmosphere in the most modern countries, but in the middle of Africa, in Mali, we first mine what we see there as we are new driving equipment's sales.

Thank you very much, Björn. Can we put through the next question, please,

A couple of questions if I may, firstly on the additive investment in SMRT, if you take sort of a group view on this, could you just repeat the amount on revenues you get from powder today and could you also please try to talk about what type of sales that plant investment eventually could drive if they were fully operating. That's my first question please.

Okay, 3D printing, as you know there are different parts, it's the part of the business which is growing faster since we have the strongest market share at the moment today. Our powder business but that includes not only for 3D printing but also metal injection molding, which is part of that is around SEK300 million in size.

But the 3D printing part of the business, which is probably growing around 20% - 25% in growth. When we are looking at 3D printing we are of course still in an early stage, it's a building up that we are running a number of project with customers they are setting up this model, they are employing a lot of people.

So it will take some time before we can see revenues actually coming out of that but we will be, the business model is set up and we will be able to service this to our customer to help them to both design in some cases also to make components. The startup has been together with SMS actually because today we are already producing a number of 3D printed components for tool holders which are very light weight and designed in a way to run for high productivity which we are really benefiting already from today.

But there are number of projects. It will take a number of years before you can even see these numbers in our total numbers but it's a big focus and we are investing heavily into this business.

But shortly on raw material I guess it's wise to take a group view there, so you managed to positive on a net of price or raw material, I guess, with 1.5% price increase, but maybe you can confirm that and lastly, as to on trading conditions, where March is weaker than January and February and how is April looking so far, I'm talking about this mess obviously?

You know I think if you're looking at March it was a little bit shorter because of the [indiscernible] of course, but if you look at the day trade we actually had the strongest one in March. So it's accelerated during the quarter.

Did you want to ask anything on the material prices?

Well we don't price based on raw material cost not really.

I guess you have a raw material content many alluded to that and [indiscernible] I find relevant, but still, could you verify that the raw material increase was less than the 1% then?

We don't have that number for that.

Okay. Trading conditions in April, Björn?

Yes, the trading condition as I said is - that if you're looking the day you're posting the SMS, the day trade was actually better in March than the previous two months. So it's accelerating in the end of the quarter.

Sorry, Björn, did you actually answer Peder on the April start?

The April start, sorry. I missed that part.

Yes, April has continued at the same level as we saw during previous quarter or in March. No change in trade there.

We will have the next question from the conference call please, operator?

I would like to start by going back to [indiscernible] question just on the margin in SMRT. So you see strong growth in aftermarket and despite that you saw the lowest margin except for Q1 but Q2, Q4 last year was much higher than it was.

So is it just [indiscernible] is there something else that's driving that so that's my first question.

Its only currency, you can say that you have compared to Q4 you have 70 million in negative currency compared to the previous quarter. So as I mentioned there is 250 million compared to last year so the underlying is 17%.

Then of course which we have been very open before you know we have eight product areas within the part some of them are performing extraordinarily good and some of them have a little bit more challenging position and that is of course how it is. You know we are everything from mechanical cutting, to crushing, to drilling as well as loading and hauling and apart.

We can't say that the underground drilling and drilling and blasting side and loading and haul is doing extremely good.

So does that also mean that [indiscernible] if the underground loading, hauling and drilling is good but the equipment overall is flattish to do the other one crushing is not is actually declining then?

Crushing is pretty flat.

My second question I'm just curious to hear if you're seeing any improvement in underlying demand on the oil and gas for umbilical's but also for [indiscernible] if you're seeing any impact from the higher oil production in the U.S. on that.

So have you seen any movement in oil and gas demand?

Yes, this follows very much the number of rig count and we're up I think [indiscernible] over 10% growth during this quarter which is good and the underlying profitability is doing well. So if you take the way PPA amortization we are running close to 10% today, so its developing in a very good way with a steady and good cash flow.

And in terms of discussions etcetera with oil and gas customers on the umbilical side, any change or still too early?

I think it's too early, I mean there are a number of projects that we are waiting for at the moment but that's the story of [indiscernible]. I've been in the company now for 2.5 year and there is a constant waiting for umbilical's.

So we will see, but we don't feel very worried about that.

Operator, can we have the next question please.

I've two questions, the first one is on machining solutions, the Chinese demand keep on surprising and I was wondering if you have visibility on the level of inventories for customers and distributors in China specifically for SMS? Thank you.

As I would say that we don't have any kind of report said that we have any inventory building up there. It's the underlying demand, which is actually driving this good development that we are seeing.

Okay. And the second question on Machining Solutions.

I mean, you're still growing in automotive, while global auto production was broadly flattish in Q1. Just what is driving with this performance?

Is it market share gains or do we see a marketing tool spending per produce I mean, what's the driver behind this outperformance of this production?

I didn't really hear that.

No, you were asking about market share gains in China in automotive?

No, no, no. It's not in China, but overall global automotive production was flat in Q1 and Machining Solutions seems to be growing in automotive.

What's driving this outperformance?

I think the underlying market, what you have, if you look at the regions there, we've seen a flat development of the sales in North America. We are growing in Europe and we are growing in China.

And I think that's pretty much follows the demand we're seeing in the market.

Just a couple of questions, please. And reading [indiscernible] with the early question, just on the inventory levels in SMS, and I guess SMRT as well.

Can just give us a sense of kind of where we are in that sort of build process, i.e. should we be expecting to see a similar inventory benefit in the Q2?

Or you're kind of closer to the levels that you feel like you need to be for the two businesses now?

I mean, for SMS, I think we've got it up to the level where we want to have it. So we are not expecting any growth in inventory during the second quarter.

Also, on SMRT, we will not have this increase during the second quarter. That's pretty clear.

So we will have a lot of deliveries during the period. You can probably see also we had huge deliveries during March.

So there's a lot of receivables in the networking capital also, which will be money coming in during the second quarter. So I'm not worried at all about the cash flow for the coming quarters.

That's very clear. And just on a slightly different question.

On the M&A opportunities, you've kind of talked about in SMS, and just taking about from the strategic perspective, you've been quite clear about the kind of businesses you're targeting and why within SMS. Can you just talk a little about whether you're seeing your competitors, the kind of traditional competitors in that market, talking about doing the same things or perhaps seeing those for the same kind of assets?

Just gives us a sense of whether you think the current SMS structure is different than what you're seeing your competitors try do?

No, it's quite amazing. We are quite alone in putting that strategy up.

But if you look back a number of years, I think Coromant and SMS has been really on the front side when it comes to digitization and introducing intelligent tools in the market, which we haven't actually seen by any of our competitors. So I think we are in the front line when we are looking at driving our business in this direction.

But I think it comes from our very strong position through Coromant, but also with our other two brands that are operating very close to our customers and helping them to become more productive. So it comes natural - for us, it comes natural that this is the direction we have.

As you also know, we made a number of acquisitions before of software companies, which has actually played out very well and added value for our customers. But that might change.

The competitors might go this way also in the future. But at the moment, we are not really seeing that.

A couple of questions, please. Could you talk a little bit about the aftermarket growth of 16%?

Where you were seeing the major benefits there? Because clearly, that has well outperformed underlying level of production.

And just, and I apologize, you may have this in the release here, but I'm actually traveling. What was the organic growth of original equipment aftermarket and consumables for mining?

We don't know that split. So sorry about that.

We are not going that too deep into our numbers. So the only thing we actually that we are telling, we are being a little bit generous when we say 15% on the aftermarket or on the parts and service business.

Why we talk about that a little bit extra is because we see that as really an enabler to both strengthen the business that we have, but also make it more agile in the downturn. So that is important.

We have the last two, three years been a lot of focus on the aftermarket. And it's actually, Tomas and I, we spent full day with the whole business area or the product area team in Amsterdam last week and looked into the new technologies that they are putting in.

And it's quite impressive what both the technology they are using to drive the business, but also the good knowledge they have of our performance with our equipment in the market. Coming also, and that is the connectivity, which I think is probably one of the most exciting side within the aftermarket is today.

We have more than 3500 customer today connected into our MySandvik, and that's the portal where you can actually order all your spare parts, you can bring up service journals, you can find all spare parts and you can even monitor your equipment if you buy that service also for the future and this is growing dramatically. And, of course, this generates revenues into the future.

So the 15% that you quoted for aftermarket, that includes consumables?

No, no. No, no.

Sorry this is the parts and service business. The consumable business is only growing 1% or something like that during the quarter.

So that is more following the output that you are getting from your operations. And I normally been explaining this is that the output from the mining companies actually it's coming to 1% to 2% per year.

That's how that is developing. So if you are in an aftermarket grow faster than that, you're actually taking market share.

And then we talking market share is of our aftermarket business, that means against what our customers are doing themselves or pirates with our equipment. So we're taking a big percentage of the service that is being done on the equipment, and that's the ambition we have.

And the original equipment order is down 4%. Can you contrast that between surface and underground?

No. I don't have that.

But, I mean, the big drive is underground, of course, in that part. And that's also where we have our strongest position in the mining side.

I don't think you have to worry about a couple of percentage down. This vary, it's a little bit between the quarters.

You might be surprised during next quarter in the other direction. I mean, this is a little bit how it goes.

It's if you get the big order in during this quarter or not. So I think it's better that you listen to the underlying demand has not changed, it had not gone down.

Then, of course, when you will take that certain orders and when you do get them into your order books, that can vary a little bit between months and quarter. So I think you have to trust us there.

The underlying demand is very strong in mining, and it's expected to be at least what in the near short future.

Okay, and my final question.

It's unusually strong.

And we are also comparing, as you probably remember, we had huge orders during the previous year as of 2017. That was over 30% growth at that time.

Fair enough. Sorry my final question is around the potential credit-rating upgrade.

So S&P moved from stable to positive. If you did go from BBB+ to A-, and remind us how much you are thinking of spending on M&A, would you get a bit of benefit from lower interest cost borrowings?

Or if you already got set lines of credit at rates determined already?

That portfolio is very long. It stretches out of the 10 to 12 years.

And basically, all of it is a long-term debt. And, of course, over time, it will have an impact, but immediately, not that much.

No. And just remind us how much you're looking to spend in terms of M&A?

I mean, we can see that we are not into, I mean, at these price levels that you can see in the market, we are not going to take any huge bite that would jeopardize Sandvik's rating or our cash flow or our net debt. So we are looking for a small to medium-sized companies, especially on the tech side, which can add both technology and products just for these areas.

And then we will utilize the group size and all our competent centers around the world to drive volumes.

And the net debt to EBITDA that you would be happy about, just remind us of the figure on that?

I mean, we said that we are happy with the BBB. I mean, that's what we have said.

We are BBB+ today, but it can also depending on how you rate our business.

Yes. But what was the question on net debt-to-EBITDA?

Well, did you have - I mean, you obviously would need to gear up if you made some acquisitions and what were you comfortable with in terms of a ceiling for net debt-to-EBITDA that wouldn't jeopardize potential credit-rating upgrade?

No, we don't have a target on that as such. We are around one right now.

That does come down quite substantially over the last two years. If you read the Standard & Poor's press release and their reports, you would see that, that when they give us the credit rating, we have an outlook, they have an assumption on like up to SEK5 billion annually on M&A spend.

But, I mean, we don't have a non-spoken target of such for ourselves. But the rating is important for us.

I had two questions. The first, and forgive me if it sound slightly pedantic, I'm trying to figure it out.

But on your market development slide at this time, your arrows, and particularly Europe stood out, have kind of flattens. So 3 of the 6 arrows had begun to sequentially sideways.

In Europe, when I look at the individual end markets, all of them, with the exception of mining, are actually heading upwards. So what I really wanted to know is, is your - is this sort of flattening into this kind of change on this slide simply to do with mining?

Or do you see anything else in the European environment or anywhere else, which is sort of incrementally more cautious? I know you mentioned a plateau in mining in your opening remarks.

I just wanted to make sure that the only comment that you're trying to make.

I mean, it's the mining that is actually driving this. There is nothing else to worry, it's strong all over.

You can see, you can actually see from last year, it's up on all of them, but sequentially, we had this, as you also know, that fourth quarter was pretty much in line with the strength that we have seen now during Q1. It was very, very strong at that moment.

So the only one where you say is that, yes, mining has probably plateaued out on a very high level.

Okay. That's very helpful.

And just second question. Briefly, on China, and I want to make sure I got the numbers right, you had 27% order growth.

I wanted to check, first of all, were there any large orders or any one-off effects in that? And for Sandvik Machining Solutions specifically, was there a kind of growth in line with that type of level?

And did it change at all during the quarter? Did we see a sequential acceleration or deceleration?

Were there anything significant either way during the period?

There was no, I mean, if you look at the 27%, there were no big orders driving that. But that's pretty much in line with what we see now during actually the last quarter also.

So that was pretty much in line. On SMS, it's about 20%, that's where they are in China, so very, very strong.

And remaining strong throughout the quarter?

Yes.

Two questions, please. The first one is, I mean, the business grew again tremendously this quarter, but the number of employees that's actually been fairly stable at year-over-year and even slightly down, I think.

And you've been talking about future efficiency opportunities. But it appears to me that you've been pretty efficient so far already.

And, I guess, my question is at what point will you need to invest more in people, in more sales on the ground, perhaps to sustain future growth there? So that's question number one.

And question number two, I was surprised by one of your earlier comments that the product of your spare parts in mining is mostly in Europe. I thought it was sort of a local business for the most part.

So is there a plan to better optimize the manufacturing footprint for the spare parts and reduce the mismatch you have between the revenue base and cost base in euros?

Okay. First on SMS efficiency programs there.

I think, first, when it comes to the people, yes, we have grown a little bit, but yes, we have been able to grow a lot the business without adding a lot of people. And a lot of this is, of course, coming from the SMS.

We closed 23 factories all around. So it's actually on the backside that we are becoming more efficient.

We are running more products through bigger factories, and that is driving efficiency. And without a doubt, the best job is done there by SMS.

In Mining, yes, they have added people on to the business. But the people they have added on is mainly related to the aftermarket and to service contract.

We've taken numerous of large service contracts around the world where you need to add people. But these people are added on the contract that means if we lose the contract, the people are connected to that.

So they are not like stuck into our books. But we monitored this very, very carefully, because we all know that in the future, it's going to change.

So we say that you have to drive efficiency all the time, and that's why we are driving the target of 3% per year. We are running at 8% today, and we'll probably going to be even higher than that.

But that's how it is when you are on a top side. There is a lot of efficiency in all our operations to be done, and we will continue to drive that also in the future.

When it comes to the mining equipment, the setup we have is that each product area is responsible for its own production. If you're looking where we have our production facilities, we have four product areas we are located in Finland.

We have in Turco, in--

Austria.

No, no. But in the field that we have four big factories there.

We have production in Austria, we have production in China and we have some small production also in Sweden. The crushing equipment, let's say, the stationary equipment is done in [indiscernible] and we are making drill steel in Sandvik.

So you can see it's pretty much brought up. But spare parts are bought from suppliers all around the world.

So it's some of them are coming from our production facilities around the world, but we also from some supplies. It can be in Germany, it can be in China, it can be all over.

But if you look at the majority of the cost, which we are generating, it's done in euro cost if you compare that part. And then we sell the most of equipment into countries in the dollar base.

Many of the Third World countries are driving most of this in dollars. So it's the euro to the dollar part.

I mean, we have no ambition to try to change that or hedge that in a way. We do believe that we can drive good profitability even when the currencies change.

And that's how we do it. If the cost goes up a lot and we have a big demand, we will also lift the prices.

This is moving all the time. And it will be also in the future decided by our product areas.

Can I just clarify a little bit here? When we talk about production in euros, we don't talk about spare parts, we talk about equipment really.

So the comment here on producing in euro land and selling to a dollar land, it's equipment. As Björn said, the spare parts, they are partially produced by ourselves, but sourced externally from all over the world.

Thank you. And I know there's probably a few questions still to be asked from the conference call, but unfortunately, we are out of time.

So please feel free to call myself or my colleague in the Investor Relations, and we're happy to help you. And with that, we will say thank you very much for joining us today, and we will see you in about a quarter's time.

Thank you.