Sandvik AB (publ)

Ann Sofie Nordh - Invsetor Relations Björn Rosengren - President and Chief Executive Officer Tomas Eliasson - Executive Vice President and Chief Financial Officer

Peder Frölén - Handelsbanken Capital Markets Markus Almerud - Kepler Cheuvreux Guillermo Peigneux - UBS Benjamin Maslen - Morgan Stanley Andrew Wilson - JP Morgan Alexander Virgo - Bank of America Merrill Lynch Lars Brorson - Barclays Capital Andreas Koski - Deutsche Bank

Good morning, everybody. I’d like to welcome you to the presentation of Sandvik’s Fourth Quarter Results 2016.

As per normal, we’re going to run through the presentation, after which we’ll open up for a Q&A session. And without further ado, I hand over to Björn and Tomas.

Please?

Thank you, Ann Sofie. If you’re getting my voice up a little bit.

So welcome to this last quarter result presentation. And starting up with the year ended in a good way.

I think more or less in all areas. First, I think the market stabilized and we saw actually orders improving in all our three business areas organically.

This – what sticking out a little bit special is the mining, which is actually up 19%, and we haven’t actually seen this big numbers in a very, very long time. Some of you who knows me and I’m normally very impressed with companies that can deliver 15% EBIT margin.

So this quarter we are just sniffing on that number a little bit, even though on the full-year we are not there, but we are heading in this direction. So in the quarter, we delivered 15% reported EBIT margin.

There is, of course, also currency in this and also some enterprise effect. So the underlying if you take those out, it’s about 12.6%, which is an improvement from previous year.

Very strong cash flow during the quarter, actually strengthening our balance sheet, also giving us gearing which is well below the target that we have on 0.8. So we are on the gearing at 0.73, which is on a good level.

If the result for the year was good, I think also the cash flow was in line with previous year, which was a record year. On basis on that, the Board have decided to propose a dividend of SEK 2.75, which is an improvement of 10%.

Looking at negative point during the quarter, that is related to mining systems, we were hoping to close that deal during the fourth quarter, which we didn’t managed. So we are at the moment negotiating with other companies interests, trying to find a solution for that business.

It is for us a non-continuous business and will be continued to be reported in that way. I mentioned that the market is stabilizing and actually there’s only one segment, which is not flat or improving, and that is the automotive industry.

The very strong market in China didn’t compensate the weaker part in North America as well as in Europe. As I mentioned before also, the mining part is actually sticking out very strong.

And this is very much related to minerals like gold, silver, and zinc, which are moving very strongly. On the copper side, which is also an important mineral for Sandvik, we see not yet any movements within those areas, and that’s mostly related to the South American market, as well as in the Central African market.

If you’re looking at the otherwise the your graphical areas sticking out this quarter is actually Asia and China. Asia is up 27%, and if we’re just looking at China, it’s actually up 48%.

So that’s very, very strong. Also, if we look at SMS, which you know is more like an aftermarket business that is actually up 29%.

So it’s a very high growth. North America, I’m sure many are looking at that number.

We report 15% up. This is very much related to the SMRT business, the Mining and Rock Technology business.

If we’re looking at the SMS business, it is a much more tougher. If you look North America, it is actually down 4%.

And if you’re just looking pure U.S. for SMS, it’s down 7%, so it is quite significant.

Europe is pretty much stable. Australia, which is a big mining market here is actually reporting minus 10%, but that’s related if you maybe remember, we took that huge construction order last year.

So if you exclude that one, it’s up 19% in Australia, which should be a number, which is in a strong mining market. Orders up 8% for the group.

And I think we’ve been waiting for this for sometime. It’s been a number of tough years for some declining volumes, and finally, we’re seeing good numbers.

And I mentioned, this is actually in all three business areas. If you look at this 12 months rolling curve, it has actually start turning up, and I think that might be a little bit of an indication of moving forward.

On the revenue side, of course, that is trailing the orders and we are on a flat 0% year-over-year. On the EBIT level, I mentioned that very strong EBIT, up 42% for the quarter, but there is a certain amount of currency, of course, also including metal price – prices, where there is.

So if you exclude the currency, I think, we end up at 27% improvement, and if you’re down also exclude the metal price, it is up 14% compared to a previous year. Starting up with Machining Solution, I think, a good quarter.

What’s important I think in this report here is that, we start seeing growth both on the orders intake, as well as on the revenues that are talking organically, that is very positive. Also a really good job done on the networking capital.

We see a networking capital reported as 23.3%, but that also includes the powder and blanks technology. If you remember that we have a new product area, which is part of that group.

If you exclude the blanks and powder technology there, it’s actually 22%. So I think it’s on a really good low level.

Results ended up at 21.6% on the EBIT. Mining and Rock Technology, the important thing is here, the orders received 19% up.

This is mainly equipment sales and a lot replacement. There is also a big order for crushing and screening in SEK 200 million, which is part of those numbers.

But important is also that the aftermarket continues to improve and we are seeing also an improvement there. I’m very happy also to see that we start seeing some movement in the networking capital actually on the mining side.

It has been on a pretty high level. And I think that our ambition should be that, we start getting the networking capital down.

And today, being close to 25%, I think, we haven’t seen those numbers before or a very long time ago if you go back in time. So that is good.

So that has, of course, also have to get a very, very strong cash flow, as well as from the SMS. So these two businesses are really delivering to strong results.

On the Material Technology, you see here that it’s just minus 4 and previously I said that we were actually positive there. But last year we had an umbilical order, which was booked during the last quarter, and if you exclude that, we actually come up to 3%.

But if you take out the currency, as well as the metal pricing effects, we end up at plus 1% on that side. And I think it’s a good number provided the tough market condition, it is also in the oil and gas industry.

On that EBIT level, underlying EBIT on 0.8%. And if you actually take out the metal prices there, I think we are in 8.1%, great.

Okay, then looking a little bit on the dividend, I mentioned that strong results, as well as good cash flow is the basis for the – our Board’s decision actually to lift the dividend to SEK 2.75, which is actually up 10%. This is pretty much in line with our strategy.

If we’re looking underlining, the – if you’re looking our underlining performance, it’s actually 50% of the net profit. Then I think, Tomas, I give the – hand it over to you to talk a little bit about the numbers.

Yes. Thank you, Björn.

Good morning. I have to excuse my voice today and try to keep it up for the next hour, otherwise you have to do all the balance sheet questions beyond.

Okay anyway, let’s start and jump straight into the financial summary. And as you heard, the top line organically was plus 8%.

The revenues are flat or minus 0.3%. If you add the positive currency on the top line, we have 5% more on the order intake and 4% on the revenues, so the totals would be then 13% for orders and 4% for revenues.

Earnings increased, as you heard, with 42% from SEK 2.3 billion to SEK 3.3 billion and there’s really three leavers here; the organic part, the currency, and the metal prices, I will go through that and bridge in a – just in a moment. The cash flow also under the working capital for us.

The working capital ended at 24.7% in the quarter, a nice improvement compared to a year ago. The cash flow SEK 4.1 billion operationally, a very nice cash conversion compared to the EBIT of SEK 3.3 billion, up 24%.

The return in the quarter was 17%, and also earnings per share increased in a nice way. Okay, let’s jump into the bridge then and it has three parts as usual; the organic part, the currency, and what we call structure and one-offs.

So let’s start from the back. Let’s start with structure and one-offs, and this is just metal lower surcharges and metal price effects on the earnings line 54 on the top line and 227 as a – in a bridge effect on the EBIT line.

So the metal prices were plus 109 in the quarter minus 118 a year ago, so the bridge effect becomes 227. Currency is 929, as you’ve heard on the top line and 416 on the EBIT line.

This is a bit more than the guidance we had on SEK 200 million, but that guidance was done in November or late October before certain happenings in the U.S. So after the strengthening of the U.S.

dollar, the currency effects increased, and majority of the currency effects are in U.S. dollars and in Australian dollars for our exports to Australia and to the U.S.

and mainly on the mining side. So that leaves us then with the organic part, a slight decline in revenues, SEK 106 million on the top line and SEK 319 positive drop through.

So, yes, really nice development. And so you can see the journey of them from a 11.1% to 15%, so 1.6% organically and 1.3% from currency, and 1% from metal prices.

So even if you take out currency and metal prices, we have a very strong drop through in the running business. Okay, let’s take the next page, move over to the balance sheet.

Working capital on the left-hand side on a very nice level below 25% in the quarter and contributing to the cash flow in a very good way. On the right-hand side, you see four business areas, including other operations and you see all of them developing very well, and we’re especially happy with Mining and Rock Technology, who are on the lowest level, I don’t know ever or at least 10, 15 years or something like that, yes, a long time ago, so it’s very, very strong.

The cash flow then, of course, developed also very well with a positive cash conversion. And on the right-hand side, you can see their drivers and the main driver is increased profits.

Working capital continue to deliver not as much as a year ago, but still very, very strong close to SEK 1 billion and the CapEx was a little bit lower than a year ago. So SEK 4.1 billion in operating cash flow.

So the sum of all this is, of course, the net debt development. And this is quite interesting.

We are now on SEK 28 billion in that. We’re on a gearing of 0.73, as Björn mentioned, 73%.

So we think we have the target of 8% within bridge, that’s for the end of 2018 and we should be able to do that. If you then look at the trend, the historical numbers, you can see that in mid-2014, we did the Varel acquisition and then the net debt jumped up from SEK 28 billion up to SEK 40 billion.

And now we have moved ourselves back to where we were pre the Varel acquisition, and there’s no structural changes in this journey here. There’s no sell-offs, no nothing, no financial progress, it’s just purely operational.

So SEK 12 billion over three years. Now, as this is a full-year, we also would like to say a few words on the full-year numbers.

In summary, if you look at the top line minus 1 and order intake minus 4 on revenues. We saw during the year that the order intake picked up very strongly at the end of the year.

And you can see here that the book-to-bill for the full-year is actually positive compared to the year ago than it was the other way around. Earnings improved from 12.3% to 13.5% EBIT margin.

The working capital for the full-year was 27%, cash flow continue to be strong around the same level as a year ago, and the earnings per share SEK 5.48 on an adjusted basis. The SEK 4.39 you see at the bottom, that includes discontinued operations as well.

So if you take the dividend proposal of SEK 2.75, it means on the reported bottom line EPS, the payout ratio is 63%. But if you take out discontinued operations just look at continued operations, the payout ratio is exactly 50% or 50.1%, which is according to our policy.

Okay. Now, let’s also take a look at the targets that we communicated in May 2016 on the Capital Markets Day.

We’re starting from the left. We have an earnings growth target of 7% on average for the period.

We did 3.1% in 2016, and even though it might sound strange to you maybe, this is according to plan, it’s evenly better than planned. We have a plan to do 9% for 2017 and for 2018.

And we are confident that we’ll reach this target 7% average for the period. The next one is the return 3 percentage units in the increased return from 14% to 17%, we did one in 2016, then the gearing is the third target 0.8.

And as you saw, we’re on 0.73 now. So if we don’t do something stupid here, we should be able to reach 0.8 at the end of 2018.

And then the payout ratio of 50%, as I mentioned, this is exactly what we do if you take away discontinued operations this year. Finally, a few words on the guidance.

I wanted to mention, the currency we said SEK 200 million, it’s ended up with SEK 416, mainly driven by the U.S. dollar and the Australian dollar and mainly in the Mining business.

Metal price effects SEK 109, a bit more than the guidance of SEK 15 million. For the first quarter 2017 with the currency rates we had a couple of days ago, it looks like SEK 400 million.

So it continues in Q1 and Q2 and then, of course, at the end of the year, it sort of fades out and becomes nothing purely mathematically, but SEK 400 for the first quarter. And metal price effect, we assume to be zero in the quarter.

For the full-year guidance and some of the key measures here, the CapEx, we did 3.7 in 2016. We do have some investments in 2017 we need to do 3.9 is the guidance that we give.

Although long-term, this volume or the investment level is going down. But we have some of our businesses, which are a little bit up and down depending on what’s happening, especially in SMT and in SMS.

So 3.9 for the full-year. The net financial items, which ended on 1.7 or just below 1.7.

We guide 1.4 to 1.5 sort of the interest that continues to go down. And the tax rate will stay at the same level as we have today between 26% and 28%, we came out with 27% for 2016, so around about the same numbers for 2017.

And that’s it. Now, I hand over to you, Björn.

Thank you, Tomas. Yes, besides that, I’m very happy of the development that we have seen during the fourth quarter.

I would also like to reflect a little bit over the year that has passed. I have now been with Sandvik a little bit more than one year, and I’m feeling that I’m getting pretty good grip of the company and the direction that we are heading.

I would say that, I think, Sandvik is a great company. As more I work and spend time out in our operating entities, yes, my viewpoint of Sandvik is that, we have many operating businesses that are world-leading in what they are doing and doing a great job.

And during the year, we have done a lot of changes in the structure. We have moved the decision-making further out in the operations actually to get closer to our customers, but also to create a little bit of this entrepreneurial spirit.

And I think our businesses have done an excellent job and they’re really taking one step forward in the work, both to improve their operations, as well as keeping their costs under control during this period. I think also, the new structure that we have is actually creating really good when it comes to these entrepreneurial drive, and we see a lot of power from the management teams out in the different operation, I think, that’s good.

But also, as you know that, we’re moving resources out from centrally into the operation, and it’s been a lot of tough situation for many of their central resources. But they’ve done a great job delivering good results, good performance, at same time as keeping the costs very much under control, which is necessary, of course, in a tough market conditions that we are operating in.

But based on what we see here today and the expectations from the market, I feel very comfortable about these targets that we have set up and we presented during the Capital Market Day. We are delivering according to them and we are all convinced that these are the levels that we need to do and that we’re going to deliver.

So I think I stop there and move. We can move over to some questions and answers.

Yes, we move over to question and answers. We’ll be taking questions here from the hall and also from the conference call and the web.

Starting here in Stockholm, we have one question please.

Yes. Good morning.

Thank you. Peder Frölén, Handelsbanken Capital Markets.

I do want to hear more about the additive manufacturing part of the Machining Solutions business. If you could explain if you have paying clients today, of course, on your know-how, but also how we should think on – in the futurist powder know-how that we want to see could it be M&A and please elaborate a bit about the additive market and the manufacturing business?

Sure. This is, of course, a really exciting part of the growth opportunity, one of these, so what we call a strategic growth area for Sandvik.

As you probably know that what we have in the group, we have the Powder business. We have a company called Osprey, which is actually a word leader when it comes to these fine powder that is being used in the 3D manufacturing.

We have during a three, four-year period worked in developing a center up in Sandviken, where we actually have learnt how the 3D printing methods is working. That in connection with our 100,000 customers globally that is the basis for what we are building out.

So at the moment, we are recruiting a management team for it for them to step up actually the strategic agenda how to go to the market. We are today supporting many customers today with these solutions, mainly on a non-cost basis, that is correct.

Even though we – that we sell the powder, which is a good business, and it’s a fast-growing business and it’s also a high profit business for us at the moment. But our ambition is also, of course, to be able to charge customers who and support them, of course, learn the method, but also to design and develop components for just 3D printing.

So we are still in an early phase and we still don’t have the management team in place, but that is being done at the moment and the business will be under SMS.

Thank you. Can we take a call – a question from the conference call please, operator.

Hi, Markus Almerud here from Kepler Cheuvreux. Can I start on North America, maybe you said engineering is still and you see strengths in mining.

But what did you see on the industrial side sequentially and throughout the quarter? And then what are you seeing from the ground?

Is it more on the year and year effect, or also sequentially you see weakening, or see – do you see any improvement at all? That’s my first question.

And then I’d like to ask on China. You see very strong growth in China.

Is this sustainable what sticks out in a specific end markets in interviews you’ve used the word brutal. So if you could elaborate on that please?

Thank you.

First, U.S., of course, and we saw that, I mentioned that we still see that market as being weak, especially for the SMS. And it’s correct that the engineering if you look year-over-year, that it’s down.

If you look at actually sequentially, it is actually flat at the moment. It’s difficult to say what we’re going to be expecting for North America going forward.

But it has been challenging for quite sometime and we still need to see some upswing there. We know, of course, the automotive industry is selling more cars than ever even though the production rate was a little bit down during the quarter.

So it’s difficult to say how that is going to develop further.

Can I just ask before you continue. Is it – what does the market shares looks like?

Could you do, is it stable, or you – do you losing share, or do you gain share or even moving along with market?

We believe that we are stable in our market share for the North American market.

Okay. Thank you.

When it comes to China, yes, it’s a very big up boom during the quarter. And it’s difficult to say if this is sustainable or not.

I personally believe that, of course, the government in China is actually turning on the valves a little bit to get a little bit of momentum in the industry, because they had a target to reach 6.7 in GDP development, and I think they were training a little bit down. So there is a push from the government side.

But also the automotive industry is very strong, and we saw this year 27 million cars are being made and that is, of course, an important segment for us. If it’s going to continue, it’s a bit difficult to say.

But I think, starting up the year as we normally say, it’s pretty much in line what we saw during the previous quarter.

And what about heavy industry and also – is it continuously weak, I would guess, steel mills and kind of business is still weak, I would assume?

Yes, I don’t think we’ve seen any big uptick there. What we have seen, of course, is in the Mining and Construction business, that’s where we see a very strong development during the quarter.

On the steel side, of course, we are in a very, very small niche with very specialized alloys market. So it’s difficult to say how that total is.

So within this segments that we are in the SMS, as well as in the mining, at least, we see a strong development.

Okay. Thank you very much.

I get back in line.

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

Thank you. Good morning.

This is Guillermo Peigneux from UBS, indeed. Just one question actually a follow-up from what you commented on China.

You said that it was a very strong and if I heard you well of fourth quarter 2016, especially in the automotive industry, and I wonder whether that is actually driven to some extent by the pre-buy head of the tax credit decreases that we will see through 2017, whether you’ve seen that already. So to just to refer to your previous sentence, you said, yes, you’re seeing the same activity level.

Is that meaning that from Q4 is stable, or that you continue to see the same growth levels in China? And that is the first question.

And then I’ll wait for the second one. Thank you.

First, I think in China, it’s not only the automotive industry. I think it’s in the most segments, which is going.

So it’s not just related to the automotive inside. I think that’s also when it comes to the general engineering market in China.

So it’s not only that. And I only said that, it’s started up in the same pace as we saw the ending of the year.

And then you have to draw your own conclusion if that is a lot up or not. But it’s started to go here before the New Year.

You’ll know that the Chinese New Year started last week saw – during that period, it’s quite and we’ll see what’s going to happen when people come back from vacation.

Thank you. And then – and second question goes to Machining Solutions and Mining and Construction together basically and maybe the calculations are incorrect.

But if I take out the currency out of revenues and if I take out the currency out of the profits, I see a rather flattish margin development for both. Is that correct?

No, there is an improvement in the SMS business. But in the mining side, it’s correct, because we – what you have seen there also is that, we have taken write-off also from some developing projects that comes from previous, which is off also hitting that market with around SEK 40 million.

Thank you.

It’s been a little of a cleaning time on that part. In their results, we – what you also see here is the Varel business or which actually is affecting a little bit more than 1% negatively for their Mining business that added on.

Thank you. Maybe a follow-up on SMS then this happen a little bit.

But again, with all the savings you’ve been targeting if my numbers are correct there is like 4 bps improvement, or maybe a little bit more than that? And I just wonder, is it really gaining from the savings, or what’s down the line trends when it comes to organic developments, are we seen a mix that is poor when it comes to SMS?

No, I think the SMS is developing according to those plans we have. So the supply chain optimization programs are moving on and there is also somewhat decreased sales and administration cost for the business.

So I think it’s pretty much in line with our expectations.

The SMS business has been living with negative top line numbers for a couple of years now and that’s been tough. It’s been very tough for us.

So having the supply chain programs and the savings progress that’s what have saved the result for us.

That is fantastic. Thank you very much.

Thank you. Do we have another question from Stockholm?

Yes, we do, please.

Thank you. It’s Antonio [ph] Société Générale.

In terms of morning systems, you mentioned you’re talking to other interested parties now. Can you confirm that Kirby Capital is out of the picture completely, and if so add any colors to the reasons for that, please?

Yes, Kirby Capital is out of the business at the moment. And the reason for it is actually related to the guarantees.

So, one of the programs that needed to be in place to be able to close the deal was to get the guarantees from the banks. But the banks did not accept Kirby.

They did not put enough capital in – to that business to be a strong enough and to give their banks their comfort feeling to accept them. So we are today looking actually with industrial bias at the moment.

Thank you. And, operator, can you please put through another question from the conference call, please?

Thank you. Good morning, Björn, Tomas, Ann Sofie.

Björn, you mentioned Varel. Can you just give a bit more color as to how that performed in the quarter?

Is it still loss-making? The rig counts getting better.

Do you see any signs of improvement going forward? That’s my first question.

Thanks.

Yes, good question. I think Varel is moving in the right direction.

And we actually saw, if you exclude the PPA taken that out of their result, it was actually a slight positive for first time in a very long time. So it is moving There are more activities on North American market, and we see the oil price on this levels is creating more and more activities at the moment.

So we are optimistic that we should continue to see an improvement during the year.

Thank you.

And actually cash contribution as well.

Correct.

Yes.

As the PPA is not on that.

Yes.

Thank you. And then coming back to the additive manufacturing in SMS, I mean, how do you plan to expand this business?

Can you do it organically? Would you need to do M&A here to kind of build out a bigger footprint.

And it sounds, I mean, it sounds from your comments like it’s either very low margin, or loss-making entity at the moment. Should we expect that to continue being a drag on SMS going forward?

Thanks.

First, I think we are in a very early stage. So we’re still waiting to have a business plan up and running.

But the additive manufacturing is important already today for Sandvik. As I mentioned, we have a company, Osprey, in Wales, which is actually a market leader in the powder.

And powder is one of the core competencies you actually need to be successful in. When it comes to selling services, we are not doing that yet.

Actually, we are not charging our customers. We are working with customers supporting them in developing different components.

But we should also know that this market for additive manufacturing is still on – in a very early stage, is mostly used for prototyping, but also for tools for molding, where you need very complicated cooling channels within the molds, which additive manufacturing is an excellent part. The potential for the business is enormous.

But we decided that we rather start it in the really early stage to be in the front. We look at growth.

Yes, of course. I believe that organically will be one important.

We will also look, of course, for opportunities to acquire companies within the businesses. At the moment, many of these companies are very expensive, because the talk about 3Ds is very hype.

So we have to, of course, value organically against acquisitions. And I think the new management team will actually have to drive that business, the whole new set up has to make these decisions.

So it is at an early stage, but we are optimistic and we think it’s a very exciting new area for Sandvik.

Thank you. And just a final one if I can on inventories, just to clarify across the different businesses, did you still reduce inventories this quarter?

It sounds like, it’s less of a drag on profits than it was last year. But in absolute terms, did you take inventory in SMS, SMT, and obviously from your graph, it’s at a low-level now relative to history that you need, how big a step up in production do you need going forward if your businesses get back to growth over coming quarters?

Thank you.

Inventories went down a lot during this last quarter and that’s one of the main reasons for the networking capital improvements that we saw during the quarter. So that is developing very well.

If we’re looking at the capacity that we have, from my perspective is that, in Sandvik, we have a lot of capacity. We have a lot of factories.

And I mentioned that before, we have – a lot of factories have been emptier [ph] during these parts. One of the reasons why we are in a lower margin in our businesses.

I do believe that we have a lot of opportunities in existing facilities. And if you’re looking at our Mining business, for instance, that is booming at the moment, it is a final assembly business, which actually buying components from sub supplies and you do just the final exam there.

Of course, when you get such a high increase in volumes, your lead times expense a little bit, but still we have good capacity within the group.

Thank you very much. Thank you.

Thank you. Do we have another question in the room here.

Yes, please, we do.

[indiscernible] On mining, you mentioned off the market growing, maybe we could shed some more light on the sequential and year-on-year development for both consumables and service, please?

Yes. Consumables and services has improved during the year apart.

And I think it’s – at the moment, it was not booming, it’s more flattish on the consumable part of that, while we saw on the spare parts business and the service that actually went up. There has been a little bit of pressure when it comes, which we mentioned before on the pricing side, on the consumable side.

But now as the volumes are going up, we do expect that we should see an improvement also on the pricing side.

Okay. And if we look at the – well, the 3D part of the manufacturing change – chain, it’s an interesting addition, but it’s still only one part and the sort of the metal cutting part is also only one part.

How should we think about this going slightly further? Are there more initiative that we could expect in the quality – entire manufacturing chain, given your sort of knowledge about this and still being very, very limited into this?

Sure. If we look at the SMS business and we know the challenges that that business has done, every insert that we put into the market is more efficient and has a longer lifetime.

We know that there’s overcapacity in the manufacturing industry, meaning, that their demand for high productivity is a little bit less. There are adjacent technologies coming in like 3D and then you have also on the automotive side the electric cars come in.

So there are a lot of things giving that market challenges both when it comes to volume and competition. So what we are doing and looking and I think, Tomas have talked about this.

We talk about the different areas – strategic growth areas. Now, one of these areas is actually on the software side.

It’s related to come manufacturing computer-aided manufacturing, where you actually analyze this CAD model and gives to all the cutting input to the machine side, that’s one of the area that we’re looking. We’re also looking at the metallurgy area, which we are interested, because that actually connects the cutting and makes it possible to automatize in the production chain.

And the third one is, as I mentioned, there is the additive manufacturing part of the business. When we talk a little bit about the additive manufacturing, that doesn’t mean that it takes away the cutting, because a part that has been 3D printed also need to be machined afterwards.

So there is still business within – those kind of products and that is still a very, very limited part, of course, of the manufacturing part of the industry. But we think that is going to grow and we want to be part of that.

So, can you confirm that, it needs more inserts to produce hybrid than a cost in engine-driven car and then, obviously, I guess quite a lot less when it comes to full electric vehicle?

I think it’s correct. I mean, if we look at a normal engine block, it’s a lot of cutting.

If you go for an hybrid, it’s actually more cutting. But of course, with electric car, there’s significantly less cutting.

Thank you.

Thank you. Operator, we move back to the conference call please for another question.

Yes, it’s actually Andrew Wilson from JPMorgan. If I can just ask a couple of questions.

Just a quick clarification on SMS in terms of the North American. And can you just talk about how sort of December volumes compared to October and whether you’ve just seen sort of a sequential improvement actually within the quarter?

I don’t think we normally talk about monthly. We normally talk about the quarterly numbers that is the quarterly numbers is down minus 7%.

So that is a little bit giving the situation where we have. You also saw that that was the same in the previous quarter.

So sequentially it’s actually not – it’s not down, but about year-over-year it is.

Okay. Thank you.

And if I can just ask on the operations and just like a very strong result, I guess, compared to what we’ve seen over the last couple of years. And if you could just sort of help us with how much of that improvement is sustainable and kind of what sort of level of margin we should be expecting going forward, and whether we can combat stuff a little bit in Q4 into – in 2017, or it’s just one-offs we need to think about?

Yes. Normally, we do not guide the future that that’s normal.

But we have, as you all know from the Capital Market Day and the group targets that we have set up, and we are committed to deliver on those targets that you have there. So that means that we need to see an improvement in our profitability going forward that can be driven, of course, of higher volumes, but also efficiency improvement in the operations.

We have said the 7% improvement in the EBIT during the three-year period and that’s what we’re committed to.

Yes, and don’t forget that the 7% is currency neutral as such. So and the – I mean, there are no enormous positive one-offs in the earnings for the fourth quarter.

It’s operational, a small steady improvements, but not so small maybe, but good steady improvements.

All right. And just in the – just finally, just in the – your other operations business units clearly that was a very good Q4.

And this is, can you just explain some of the kind of drivers of why the margin was so strong compared to what we’ve seen sort of through early in 2016? I appreciate, I mean that’s a non-core business?

Can you say again?

In the non-core business, yes. Yes, there was a good ending from both of our businesses, which are the non-core or non-operational part that is the Hyperion and SPS, both of them ended the year good.

Normally, for SPS, they have a normally very strong year fourth quarter. They had a very, very strong part of the business, but it is a good business, as I mentioned before.

So I think that’s going to help us in a good way when we are divesting that business.

That’s great. Thank you.

I think the contribution, if you put that the contribution from that businesses are around SEK 50 million improved above the expectation.

Yes, perfect. Thank you.

Thank you. We’ll have another question please, operator?

Thanks very much. Good morning, everybody.

A couple of quick ones please. Just on the Mining Systems business, given the situation with respect to the transaction and the fact that it looks like operations got weaker.

Is it fair to say that the situation with respect to the disposal process is affecting the performance? And does that therefore affect the discussions in the potential value of the business?

And then second question just coming back to that other operations margin improvement. So I know you’re doing guide, but is it fair to say that the strength of that Q4 margin is going to be, I guess, you can’t carry that through the full-year in 2017?

Thank you.

Let’s talk a little bit about the Mining System businesses there. Yes, it was a weak result and we had to take some provisions there for some bad projects.

I think this business has been suffering for a longtime, especially now when the mining market has been soft during this quite a long period. So it has taken a lot of hits in the result.

It is, of course, always unlucky when you have some of these projects that are not running according to plan. Our view point is that the operations that are running today is as strong as it was before.

But of course, we need, of course, to find a solution for this within the near future just to not to discourage that organization in the performance that they are doing. And we are doing our best to keep that atmosphere up and making sure that there will be a good future for those people.

So there’s always a risk when you are saying that you are divesting. But so far we do not feel that we have been stronger in the structure than we were before.

Then on the margin product, I don’t know if I want to comment that part. I don’t want to guide anything forward.

But I once again go back to the targets that we have set up, but we need to improve also during next year and we are aiming to do that.

Or was the – the question was another operations or…?

Yes, maybe I can just add a little comment there, if I may. I think Q4 is normally a delivery quarter for other operations and hence supporting the margin.

I think it’s fair to assume that this these level may not be reached in each and single quarter for throughout 2017. What it averages out to us, we’ll have to come back to.

But I think Q4 is a seasonally strong quarter, given that is deliveries.

Yes, and it’s mainly deliveries from Process Systems in the fourth quarter that drives the margin.

Okay, cool. Thank you.

And just a quick follow-up on the central eliminations number came in a good SEK 50 million or so better than it was expected to be as well. Is that one that we can be more happy with being sustained going forward, or is that – was that also a little bit of a one-off?

Are you referring also to the other operations, or?

No, I said that the SEK 250-odd-million, sorry, the SEK 200 million or so eliminations number in the EBIT.

Yes, is the group cost you’re referring to, which was alone minus SEK 190 million.

Yes. Okay, yes.

Well, when we guide, we guide about – we guide on the underlying, let’s say group common cost. And the guidance we have for that is around SEK 200 million to SEK 225 million, so say, let’s say around SEK 850 million, so something like that for the full-year.

Now in the group in the other, say, business, not other operations, but the other business group common, we do have other internal profit eliminations. You have some revaluations and you have kind of everything when you consolidate a group, and that can fly up and down SEK 50 million, this time it was a bit positive, but it can be a negative as well.

Okay. Björn, thank you.

Yes, very good. We’ll squeeze in another question please, operator.

Hi, thanks. Hi, Björn, Tomas, Ann Sofie, a couple of quick follow-ups from my side.

Just on the organic drop through in mining, even when I add back the impairment charge and 100 basis points year-over-year headwind in Varel, if I understood you correctly, Björn, despite obviously the sequential improvement. I was still a bit underwhelmed by the underlying improvement or rather not in the Mining and Construction business.

Can you talk a little about where you are in ramping up capacity in your factories and how we should think about a cost headwind from that as we go through 2017?

I agree with you that I think the drop through was a little bit weak during the quarter that is definitely saw from, as I mentioned before, it is a little bit of a cleaning up, also we’ve been writing off some of these developing projects that from a long time ago. When we have divisionalized the business, each of the management team suddenly we have eight management teams driving each of their PA, and of course, they are extremely careful in what is coming with them.

So there is, of course, a little bit of an up cleaning in the start of this. But I think here that is now over and that is done.

So I think moving forward, we should see improvements, of course, with the volumes. The ramping up, I think we’ve seen two quarters now with good orders, or improving orders, and that, of course, should filter through in the factories we are not needing any new factories, or any new capacity.

It’s maybe related to a number of new and employed within the production side that that’s the part. So I’m pretty optimistic about the development for the Mining business during next year, to be honest.

That’s helpful. Thanks.

If I can just be another quick follow-up on Machining Solutions in the U.S. down 7.

I mean, I appreciate you want to talk about what happened within the quarter, though it would be helpful, given we’re seeing an inflection in addition to December from some of your U.S. distributors.

I mean, you talk about not just auto being weak, but also general – highlighted general engineering and the energy segments, not quite what I would have expected for Machining Solutions. I wonder whether you could talk a little about, what happened and what you see as we do further into 2017 for the U.S.

business then?

I think it’s difficult to project what is going to have in U.S. It’s – a lot of changes taking place and how much of that will actually do an upswing in the industries still to be seen.

I think, we’ve been very clear during last year that U.S. has been a challenging part, very much driven by a weak oil and gas industry.

We had a lot of good tailwind from the automotive in the beginning of the year. And during the last quarter, it was a little bit weaker, even though sales are still up four cars.

So we’ll see how that will drive that in the future. I think it’s too many open issues actually on the U.S.

market to actually predict what is the future going to be. The only thing we are really going to be active there.

We are present in all the parts. And I think we are, as I mentioned before, we are not actually losing market share on the North American market.

So if things improved, I think, we will improve with it.

Okay, thanks.

Thank you. And of course, just all the time here.

But if we can squeeze in one more question please, operator?

Yes, good morning and thank you. I have a couple of questions on the Sandvik Machining Solutions as well actually.

So if we strip out the cost savings you had in the quarter, the drop through was actually negative. I think, we are now going to add back into positive organic growth.

And I remember, years ago or so when you were growing in Sandvik Machining Solutions by, yes, around 5% organic or even more. You had a very strong organic drop through of around 50% or so, what’s then when organic growth came back in 2013, 2014, the organic drop through was underwhelming closer to 30%.

I think that was partly because of somewhat lower price increases than you add back before the financial crisis. So I just wanted to – if you can give us a feeling of what kind of drop through we could expect if organic growth returns to the level of 3% to 5% in Sandvik Machining Solutions?

I mean, I – there’s no reason to why the drop through should change significantly from what you’ve seen historically. But I can – in the quarter, there has been some impact from that you had a little bit of a mix.

You had a little bit of a, like Tomas mentioned earlier, closure of the year items et cetera. There’s no underlying funny business that goes on in Machining Solutions.

On the contrary, they’re delivering well according to plan to the savings and structural improvements that they have set out to do.

And when you refer to the level we have seen historically that the 40%, 50% level more than the 20%, 30% level that we saw in 2013 and 2014.

I think a lot of price.

I think the 40% to 50% level is from going back into pre-financial crisis and I think that would be optimistic.

Okay. And may I also ask on pricing in Sandvik Machining Solutions, are you raising prices now going into 2017, or is that still difficult to do?

The volumes have been challenging quite sometime. And as I mentioned before, they see a big competition in there.

So on the pricing side during the quarter, we are flat. That’s where we are and that’s coming from previous quarter with a small positive.

May I want to ask, would it be positive or negative mix if automotive goes down and the other parts go in Sandvik Machining Solutions?

It’s a good question. I can’t really answer that.

But we know, of course, that the engineering side has been better margins before. So that could be, but I can’t really answer that question.

Okay. Thank you very much.

Thank you very much. And with that, we say thank you for joining us today and see you again in about quarters time.

Thank you so much.

Thank you.