Sandvik AB (publ)

Hello everyone and a warm welcome to Sandvik's Presentation of the Fourth Quarter Results 2020. My name is Louise Tjeder, new Head of Investor Relations.

And beside me, we have our CEO, Stefan Widing; and our CFO, Tomas Eliasson. We will as usual start with a presentation where Stefan and Tomas will take you through the quarterly highlights.

And after that, we will open up for questions and those who can ask either via online or via the conference call. So with this said, I hand over the word to Stefan, please.

Thank you, Louise. And also I would like to welcome you to this fourth quarter result in 2020 for Sandvik.

I think it's clear when we summarize the quarter that we are now gradually shifting back to growth. This was actually the first quarter that we saw a positive order intake at plus 3% excluding major orders since quarter one of 2019.

We had a record order intake in SMRT. We saw a good sequential improvement in SMM especially driven by automotive.

We also had good development in several of SMT segments, such as medical, industrial heating and consumer-related segments. And, of course, we also saw the announcement that we intend to acquire DSI Underground by the end of the quarter, something that we expect to close down around midyear.

We also saw margins at record levels. The adjusted operating profit came in at 20.1% versus 19.1% last year.

And this is the first time at least in modern times that we are able to deliver a margin of over 20% in a quarter. Also, the rolling 12 month results or the annual results, so to say, came in at 17.1%, excluding metal prices, which is how we have defined on our financial target.

This is well above our trough margin target of 16%. And I think you agree with me that 2020 was definitely a trough year.

This is, of course, driven partly by the recovery in the business, but also by very strong savings that we continue to deliver in the quarter. This quarter we had SEK 920 million of savings that we delivered.

This also means that we continue to strengthen our balance sheet. We have the cash flow in the period of SEK 5.9 billion, which drove our gearing down to a low 0.04.

This includes then three acquisitions also that we closed in the quarter and paid for, not to forget then the strategic one of CGTech, which also had the biggest financial impact from that perspective. Based on this and looking at where we are with the balance sheet and our business, the board has decided to recommend to the AGM in April to give a dividend of SEK 4.5, as well as an additional dividend of SEK 2 for this year.

Last quarter, I showed you our SMRT auto mine concept loader, fully automated, fully electric. This quarter I would like to show a smaller product, but that will have maybe a much greater financial impact in the next couple of years.

This is Coromant that have launched a completely new generation of their steel turning grades, the GC4425 and the GC4415. As you know, Coromant is the market leader, the market leading brand in the tooling industry and also by far the biggest brand we have in our portfolio.

They are clear market leaders in turning and it's about 50% of the revenue, so substantial financial impact for the group as a whole. Launching a completely new generation that we have been working on for quite a few years is therefore a big deal.

Here we have new coating technology and new substrates and the new post-treatment procedure that overall enhances the product in a way that the overall tool life is increasing by an average of 25%. This is exactly what we have done for decades and that we will continue doing to ensure we can continue to be market leaders and price leaders in this industry.

And turning is really big in automotive. So the fact that we launched this in October, just when automotive were recovering and also looking for productivity improvements, was very good timing for us.

If we look at the market development overall, we have now - if you look at the arrows to the bottom and to the right, we have now gone back to showing the sequential development as this quarter versus prior quarter and not the in-quarter development. This is a good sign.

It means that the volatility is not as big anymore, so we can compare the quarters instead. And as you can see on the regional development, all regions are up sequentially.

If you look at the segment view, mining, engineering and automotive are up sequentially, while energy, construction, and aerospace we continue to really see no improving development at all. If we look at the year-over-year performance instead, and take it from a regional perspective, we see Europe being at minus two.

Here it's notable that general engineering and automotive are flat, meaning they are back to the levels they were in the prior year. Of course, aerospace continues to be down, which is hitting, for example, France and the U.K., in particular, in Europe, North America down 23%.

This is where we had the major order in SMT last year. So if you take that out, it's down to minus six, so less dramatic than it might look here.

Here also automotive is flat, so back to the same levels as last year, while general engineering is still down. So the recovering general engineering is lagging a bit in North America compared to Europe.

Also here we should remember that oil and gas and aerospace is a higher portion of our revenues compared to Europe. So the fact that they are down of course also contributes negatively for North America as a whole.

If you look at Asia, we are up 4%, China is actually down 3%, but SMS in China is up 6%, driven in particular than by for example automotive and general engineering. So the negative number in China is driven by projects in SMT and SMRT, so not a factoring down the line development there.

Then you can see high growth in Africa, Middle East and South America and that is of course driven by good mid-sized order intake in SMRT. In particular happy with the automation order in South America of over SEK 100 million.

So if we summarize this, the order intake is minus two plus three then excluding the big order in SMT in December last year, revenues trailing a bit at minus 6%. Despite revenues being at minus six, we deliver an EBIT of SEK 4.5 billion, or a margin of 20.1% versus 19.1% last year.

This would have been 19.5% versus 18.4% than excluding the metal price effect. So you can see that the improvement is basically the same regardless if we look at metal prices or not.

It's also worth noting that the decline of 11% in the absolute EBIT figure is essentially entirely driven by currency. It's a little bit of structure as well but entirely driven by currency, so if you normalize for currency, the EBIT would have been - was positive in the quarter, that's why the group leverage is not applicable since we have a drop in topline and improvement in EBIT.

Going into the business areas, Sandvik Mining and Rock Technology again plus 15% order intake, an all-time high driven by equipment orders up 23%, aftermarket up 8%, so strong performance in both areas there. Revenues minus one.

This is against very, very high comparison in Q4 of last year, so we are happy to see that number, actually a little bit better than we had expected ourselves. They also delivered a record margin, 21.7% in the quarter, 10 basis points higher than last year.

We note here that we have also taken the cost now for the DSI acquisition, but there were other positive year-end effects that offset that. So it doesn't impact the margin, but it could just be good to know that we have put that behind us as well.

Of course, the acquisition of DSI was a big event for SMRT in Q4. DSI is being the world's leader in safety solutions for underground mining and the tunneling industries, a very good complement for the SMR business going forward.

This is actually one of the largest acquisitions in Sandvik's history. The second or third largest depending on how we rank sequel in that context.

We expect this deal to close around mid-year, little bit dependent on how the regulatory processes evolve here going forward. Then we have Sandvik Manufacturing and Machining Solutions down minus 7%, down on the organic side, I think I've talked about most of the regional development already.

We notice well that in December, the order intake were down in the negative mid-single digits, and now in January it started in the negative low single digits. I want to urge you again though to be very careful in how you interpret them the first couple of weeks, especially now in January with a lot of holiday days and so on.

So we continue to see the recovery, but we are in the middle of the second way of the pandemic. So we will have to see how things continue to evolve now in quarter one.

Positive to note as well is the strong order development in our tungsten powder business Wolfram. This is typically a leading indicator, which means that companies are stocking up on powder, because they expect the higher demand of products going forward.

And this is also one of the reasons why we have the differential here between order intakes in revenues. Because they book order and they will deliver that now going into this year.

Despite being down 11% on the top line, SMM is delivering a better margin than last year 21.4% versus 20.3% in prior year. This is of course driven both by the savings as well as the recovery in the business, but over SEK 0.5 billion savings in the quarter alone.

They also closed two acquisitions in the quarter, then Miranda Tools, around Tools Company in India, as well as a software company CGTech. We also took a minority stake as you have seen in manufacturing Technology Company called octagon based out of the U.S.

And then if we take SMT, big drop in the orders of 31% in the period, excluding for the major order, this would have been minus seven. And actually, the underlying volume is minus four if it also take away the alloy surcharges in that number.

Now, of course, we cannot for a full-year continue to exclude the material orders, because it's supposed to be excluded because it's supposed to be a timing effect. But if we don't have them for a full-year, then of course it will impact the business.

But the minus seven or minus four is really how the underlying short cycle business is doing I think that's important to note. We do see continued weakness in oil and gas and aerospace, of course, we do; however, note in the positive sense, some very strong development in some of the short cycle business.

Medical, industrial heating and consumer all up in the double-digits. And also early cycle businesses in SMT, so that's positive.

Also, SMT delivers strong margins in the context of their top line on minus 10, an underlying margin of 11.6% versus 12.1 last year, so they basically keep their margin level despite double-digit decline on the top line. So very strong delivery from SMT and this quarter.

And of course, earlier in the quarter, we also announced the intention to continue with the separation process of SMT. With that I'll hand over to Tomas to take us deeper into the numbers.

Thank you, Stefan. And let's move into the numbers now and start with the financial summary as we always do, and let's start with the top line in the upper right hand corner.

The organic growth as you heard was minus two for revenues, and minus six for orders. All sorted out around minus two for orders, and minus six for revenues.

Currency is a headwind of course for us now both on the top line and in the earnings minus nine for both orders and revenues and structure was minus two. Structure is mainly the divestment of Varel Oil and Gas, which happened at the end of the first quarter in 2020s will have that effect for another quarter before it turns around.

Total was minus 12 and minus 16. If we then walked down the income statement, the earnings came in at SEK 4.5 billion, compared to SEK 5.1 billion a year ago, minus 11.

But currency had major impact on this one, and I'll get back to the bridge in just a little bit here now. Margin 20.1 versus 19.1.

So 100 bps in margin accretion, that financials will come to a specification on that as well in just a little bit. Underlying tax rate came in at 24.1, fully at 22.8.

Cash flow was really good, and the full-year cash flow free operating cash flow was SEK 15.4 billion, compared to SEK 17 billion a year ago. Really good cash flow here.

So if we move to the bridge then and look at the margin development here, 19.1 to 20.1. And start with the organic part.

The minus 9% in sort of the minus 6% on revenues is corresponding to SEK 1.5 billion on the top line. But as you can see here in the bridge, basically no impact at all an earnings actually little plus SEK 35 billion.

And of course, if you lose SEK 1.5 billion on the top line, and the profit stays the same, it has a massive creative effect on the margin. So 130 bps up, this is of course very much result of all the savings initiatives and efficiency initiatives that we have launched and executed on during 2020.

Currency, minus SEK 2 billion on the top line, SEK 0.5 billion on the EBIT line, 20 bps dilution metal prices, point one dilution structure, plus point one so all-in-all, 100 bps up during the fourth quarter, 21% in the fourth quarter is really, really strong. We've never been on that level before especially not in the fourth quarter.

Let's then move to the savings programs. And you're familiar with this slide here.

On the first line, the program that we kicked off mid-2019. The full impact is SEK 1.7 billion annualized and we finished deliveries on this program mid-2020, but as this is a bridge analysis, we still have sort of tail of this program in Q3, Q4, and we will also have a little bit in Q1 next year as well, so SEK 180 million in the fourth quarter.

The next line is the work time reduction program. This is part of the temporary savings SEK 200 million or SEK 205 million in the fourth quarter.

And this is coming down now, it's now less than half of what it was when it started. This will continue a little bit into 2021 as well.

But eventually it will go away. The third line here is the discretionary spend or other temporary savings, flying, exhibitions, meetings and what have you.

The majority of us are still working from home, or working at the sites where we are. So of course that gives a profound impact on the income statement on the cost levels SEK 500 million in the fourth quarter in savings.

This will continue at what level we can't say today. But it will have a decent impact in the first quarter as well until we can start travelling normally again.

At the fourth line here, we will start to see now effects from a 2020 program, and we see effects from the 2020 program and starting to sort of trickle in here a little bit. This will mainly have an effect on 2021 and then into 2022 and onwards.

But there are some of these initiatives that are already now in the income statement SEK 35 million all-in-all. So the full impact of all these four program for the fourth quarter was SEK 920 million.

If you recall, Q2 and Q3, we had 1.5 in Q2, we have 1.4 in Q3. We have SEK 900 million now in this course has helped.

And if you take off SEK 3.8 billion from SEK 15 billion in earnings, we would have had a completely different operating margin in the group. At the very bottom, we have also just repeated the information that you saw in the press release from December the savings program that will be SEK 1.3 billion annualized the new one.

How is the spread between the business areas and you can see here that the half of it is in SMM, 125 in SMRT, and the remainder is mainly in SMRT, 125 SMT SEK 0.5 billion. So if we then move forward - what is below the operating earnings, net financials the interest net came in just below SEK 100 million, SEK 96 million, SEK 400 million full-year 2020, and we'll come to the guidance later here now, but we believe that this will be around the same level in 2021 SEK 400 million.

Tax rates, the reported tax rate 22.7, but it was impacted by one-offs and items affecting comparability, so the real underlying tax rate was 24.1. The full-year underlying tax rate was 22.8.

So just below the range of 23% to 25%. We'll come back to the guidance for 2021 in just a little bit here - areas are delivering very well.

The cash flow - but we still have good releases from working capital, we are careful with CapEx, so SEK 5.9 billion, compared to SEK 6.5 billion year ago, very happy with these results, and that of course has a good impact on the balance sheet, you can see that the gearing now is down to 0.4. The financial net cash position is SEK 8.8 billion, the total net debt is a little bit of a SEK 2 billion.

Of course, as Stefan mentioned here, now in these numbers we have three acquisitions that we paid for. But we still managed to improve in that situation for the group.

So very healthy and strong balance sheet. Let's look at some of the guidance that we had.

We said SEK 350 million on negative currency effects underlying that's translation, transaction effects we came in at SEK 536 million continues to strengthen. The total currency effect was SEK 494 million.

Metal prices SEK 129 million plus instead of plus SEK 50 million. CapEx SEK 1.1 billion, interest net, we've talked about, SEK 96 million and tax rate 24.1%.

So to finish, sorry not to finish off, let's look at the dividend proposal here as well. We, as you have read in the report, have a proposal from the board to give a total dividend of SEK 6.50.

Its one decision, one dividend SEK 6.50, but it should be seen as an ordinary dividend of SEK 4.50 and then an extra or additional of SEK 2. That would mean an adjusted payout ratio of 75% going forward.

The target remains that over time over a business cycle we intend to have a payout ratio of 50% on adjusted earnings per share or adjusted net income. So to finish off with the guidance for 2021, New Year, new guidance.

CapEx, CapEx came down in 2020. We normally have - or around SEK 4 billion, came down to SEK 3.2 billion for the full year 2020.

But as we are in a gradual recovery, we will see CapEx coming back now, maybe not to SEK 4 billion, but something below or just below SEK 4 billion. So that's our new guidance for 2021.

Currency has a negative impact on the earnings. SEK 500 million in the fourth quarter, and we expect SEK 750 million, quite a big number, for the first quarter 2021.

Metal prices, we believe, will be plus SEK 60 million in quarter - for the first quarter. And the interest net, as I mentioned, we believe will be SEK 400 million for the full year 2021.

Now tax rate, we have taken down the guidance for the tax rate gradually over the last five, six years, starting on 27% or in the neighborhood. We have had up until now guidance of 23% to 25%.

We ended the year on 22.8%, so just below that range. We will now take down the guidance to 22% to 24%.

And this is driven by the fact that in the countries where we are big, the tax rates tend to sort of consolidate around 20% right now. Like in India, Czech, Finland, Sweden, the United States, and of course if we have that kind of tax rate in the countries where we are big and have big earnings, of course it takes the tax rate down.

And then there are always a bunch of adjustments, of course, non-deductible expenses, et cetera, et cetera which picks it up, but 22% to 24% we believe is a sustainable level on the tax rate, not just for 2021, we believe that will stay for the next like two or three years going forward. And with that, I'll hand back to you again, Stefan for conclusions and summary.

Thank you, Tomas. So as we said in the beginning, we are now moving into a phase where we are gradually shifting back to growth.

We see a continued recovery, and we are able to deliver record margins in this quarter. The recovery is driven by solid demand in mining and a sequential recovery in the short cycle business such as automotive.

If we look ahead, we believe in a continued recovery. But we are cautious and with the fact that we are in the middle of the second wave of the pandemic.

We have seen in the past that there are delays from underlying demand to our business so, whether we will be impacted by the second wave or not, that remains to be seen. A little bit mid to long-term, we also are optimistic, but we're optimistic.

But of course, it will also be dependent on how the pandemic is handled various economic policy decisions. We will focus on the things we can impact.

So right now we have a strong focus on this shift from temporary to permanent savings that have already started, been planned for quite some time and that we will now gradually see in this year. It's also important to say that as we have sort of defined our strategy for handling this pandemic in 2020.

We always had top of mind that we also need to quickly be able to ramp up when the economy recovers and that we have done. So now it will also be a focus on ramping back up and capturing the organic growth opportunities that will come with this recovery.

We closed three acquisitions in the quarter. We announced a significant acquisition of DSI and thanks to our good strong balance sheet.

We will continue to have an active M&A agenda also going forward. Thank you for listening.

So now let's move into the Q&A. Louise.

Yes, thank you, Stefan and Tomas. It's now time to open up the Q&A session.

Before we open up for questions on telephone, we will have two questions from online and that's from Rizk Maidi at Jeffries and related to SMRT. And what have we seen in terms of have we seen a catch up on SMRT as repairs has been pushed out from Q3?

Sorry, what did you say as?

As repairs?

Repairs?

Yes.

I don't think we are, we would say we are seeing any catch ups in that sense. Maybe there are here and there.

But we don't think that's an underlying driver for the development in the quarter.

Okay. And for SMM, can you comment anything about the distributors inventory levels?

We often get that question it’s very difficult to answer. There might be some catch ups some restocking.

But it's not something we have seen as material either driving anything in the quarter.

Okay, thank you. So we open up for questions on the telephone, please, operator.

Hi Stefan, Tomas there is a couple of questions from me starting with the SMS. What organic growth rate did you see on the automotive business in the quarter I think in Q3, you mentioned low teens declined slightly below co-production numbers how did you fair that - there in Q4?

Overall, it was slightly up so let's say growth in the low single-digits.

Perfect, thank you so much. And then, on continuing with SMS have you seen an impact so far in the automotive from bottlenecks in the automotive supply chain in the first quarter?

No, I should say but at the same time this goes back to my comment that we have seen in 2020 there is a lag in the supply chain up to a month, maybe six weeks sometimes. So that's why I think we should be cautious with outlook for Q1, it might still come.

But we really don't know at this point, we haven't really seen anything as of now.

Perfect, thank you so much. And yes the final one, I think you saw the incremental margins adjusted for savings take a slight step down in Q4 in SMS compared to the prior three quarters could you help us a bit with the reason for that and what we should expect into 2021 that will be very helpful?

From my perspective, I don't really look at how the business is performing without savings, because we are doing the savings for the reason to maintain the margins. So yes, I don't really have a good answer to that other than that.

Okay.

Yes I mean, when we lose sales, we lose gross contribution, you lose absorption, et cetera, et cetera. So and we do things to compensate for that efficiency, various parts of savings programs.

So for us, that's not an important KPI to adjust the incremental margin for savings.

Okay, got it. But into the next year, what do you see - there, similar level to this year or?

Sorry, what was the fundamental question what about next year?

Yes on incremental margins for 2021 should we expect it to remain on similar level as 2020 or?

I mean, we don't give guidance going forward. But of course, it would be disappointing meeting Corona half year, if we couldn't improve margins in SMS this year.

Okay, I was just thinking what the incremental margin the drop through not absolute margins, but the incremental margins from the growth?

No, I think on drop through and leverage, we have seen a very good leverage going down now, because we have done the savings. Of course, some of the savings are temporary.

So we should also we have to count on that some of these temporary savings will be reversed which will initially also means a lower leverage going up until we're sort of back on a normal level. Then if we have growth beyond that, then we can see sort of the normal, strong leverage that we usually see in SMS.

Thank you so much.

Thank you.

Thank you. Tomas, I just wanted to ask if you could help us a little bit with the temporary cost savings.

And you've talked about kind of a number of impacts so travel discretionary savings. But is it possible to put the SEK 3 billion tailwind into sort of the major buckets of temporary savings?

And potentially how much they were for SEK 3 billion so they can kind of help us assess going into next year? What might be more sustainable and what may come back into the business as things open up?

Is there any way to do that?

Three, you mean the total of SEK 3.8 billion or?

The total temporary cost savings that you had this year?

Yes okay, now work time reduction will continue for a while, but on a much smaller scale into 2021 depends on how the business recovers. Discretionary spend has been around - SEK 0.5 billion every quarter.

We believe this to a great extent will continue into the first quarter. But as soon as we sort of get back to normal, that will also start to fade off.

If this is like - three buckets here we have temporary savings that will continue for a while. We have permanent savings that are coming into 2021, the SEK 1.3 billion program.

And then the difference between all of this is the expected recovery of the economy. But that of course, if that doesn't happen, we need to do other things.

Stefan, maybe you want to comment on?

No, I think the way we have seen it and the way I think you should think about it is that we have done the permanent activities that we are now starting to implement to a level where we - to offset the temporary savings we would have needed otherwise. And the delta there should be this growth so overall protecting the margins.

That's I think, is the generic answer. And then Tomas says these temporary savings they will be there as long as we are in this situation in the world helping us, but of course it's the negative will come on the top line instead.

So it's all connected, moving pieces. So I think that's how you need to see it.

Okay I guess or maybe Tomas you could, if that SEK 500 million discretionary? How much of that came from travel, for example?

Because I guess there - are things that going forward, everyone will do a bit differently. So was travel, kind of half more than half of that SEK 500 million just trying to understand how big a component that was?

We don't have that breakup as such. But of course, the biggest part of discretionary spend saving comes from the sales cost.

Of course, sales cost was being one of the biggest cost components. And where majority of the discretionary spend is really, but we don't have a breakup for that not really.

Okay.

Yes.

Maybe just quick follow-up, would you be able to comment on the different performance between what will become the Rock Processing division within mining, and then the sort of remaining drill rigs business. How those two businesses perform relative to each other, and whether one was disproportionately stronger within the quarter?

I mean, you will get before the next report a full restated yes results view of that. But in general, we can say that the Rock Processing part, which has a higher exposure to construction, has had a tougher year than what will be Rock mining and Rock technology.

So that's how you can see it so it’s the underground and surface drilling part has been stronger relatively speaking than the Rock Processing part.

And also in the case in Q4 I see?

Yes it's been yes throughout the - since the pandemic hit.

Okay, thank you very much.

Hi, good morning, Happy New Year. I have three quick questions please first I wanted to ask regarding your mining margins, which are already at a very high level when you progressed a lot.

But now the orders are also going up significantly as we look forward what - how shall we think about those margins? Is there further potential upside there or we've kind of reached a peak there?

And the second question relates to your comment on ramp up that you've mentioned now, sort of we're on a ramp up phase and into recovery. How should we think about working capital for 2021 and sort of your need both to match the recovery there?

And then the third full point, if you can comment on pricing outlook, guess sort of there's been a bit of inflation going across many raw materials and components, but there's also growth recovering, as you've mentioned. So how should we think about pricing?

Thank you.

On SMRT or SMR going forward I mean, we are never happy, we will always work trying to improve margins, especially if we grow the business. However of course, they have also had short-term savings this - in 2020.

So they need some growth to offset that, as that comes back SMRT has basically had very, very little temporary savings in Q4 though, that they went back, already back at the end of Q3. We should also note that as they grow in the way they do with orders.

On the equipment side, there's a negative mix impact from higher equipment sales versus aftermarket. The gap is smaller than it maybe has been in the past, but there's still an element of a negative mix impact there.

Working capital yes, we expect to need - to add some money back into working capital this year, as we now would expect to grow. So, we don't have a specific guidance on that.

But we have, let's say an informal target, as to keep net working capital below 25%. And that we aim to continue, but then if we grow of course, it will still be more money in absolute terms.

Pricing, pricing has been positive in Q4. We don't really have an outlook or any guidance going forward on that.

But there is no change in the strategy we have we will continue to work actively with pricing.

Thank you.

Thanks.

Thank you. Good morning Stefan and Tomas if I can stay with the topic of ramping up, Stefan.

I'm just curious as to your more general comments around potential constraints or challenges in scaling up your organization. And indeed the broader supply chain after what has been a very challenging year last year?

Do you see any obvious bottlenecks obviously the question already on SMM on the auto side related to I think semiconductor shortages with regards to auto production but more broadly across the business? Do you see areas in SMM upstream for example in Wolfram or in SMRT around ramping up your foundries on the Rock tool side?

Any obvious things that you're concerned about if you look into this year on ramping up?

No, not really. I mean, it doesn't mean that the organization is not sort of will have to do a lot of hard work.

But as I said in the presentation this time, compared to maybe during the financial crisis 10 years ago, we have been very deliberate already back in March, when we plan the activities to handle this crisis, that we will already plan for how to ramp back up and done it in a way so that we should be able to do that quickly. So we don't lose business opportunity and market share on the upswing again.

So, I think it's going to be tough for the organization, but I don't really see any major issues. And you mentioned Wolfram for example they are ready for higher volumes, as well as an example.

So of course here the high vertical integration of SMS is coming back in our favor tends to be good, coming back up and tough for us coming down so.

Indeed perhaps the possible converse on SMRT, but thank you that’s a helpful answer. Can I secondly just ask to SMS in China I appreciate you flagging plus 6% organic growth in the fourth quarter, still looks a little bit underwhelming to me, given the broader momentum, not least in automotive, and of course, your Chinese business for SMS doesn't have the drag, particularly on aerospace that the North American business does?

Can you help us understand a little bit better, what sort of - at least in my uptick driving that slightly underwhelming growth is that primarily a function of the exposure to larger, more global accounts by your common brand and less mid-market into almost comet or is there anything you can point to from end market standpoint or region in China that seems to be dragging down growth there?

No domestic market in China is what is driving the growth and then there are –we have global accounts that is more export oriented and especially in some segments they are still lagging behind.

So there is no - there are no end market it’s a standout for you that are particularly challenged, it's more a matter of having a bigger exposure to global accounts?

Yes and of course, the global accounts are typically related in this case than to some end markets like aerospace, which is still down.

Good morning and Happy New Year, everybody. I'd like to better understand the dynamics for SMT going into 2021 now.

I mean firstly, is it fair to say that the oil and gas business accounted for the vast majority of profit in 2020. And then as the backlog for umbilicals in particular is now likely existed, do you still expect to make a profit in oil and gas this year?

And overall I mean would it make sense to see margins coming back to perhaps nearing zero in 2021 before they recover in 2022?

We expect SMT to definitely be profitable in 2021 even if we also expect it to be a very tough year for oil and gas. I mean - we have backlog that basically were - we were delivering from until the end of last year, and a little bit now into Q1.

Now we need also new orders to have things to deliver in 2021. We expect orders typically maybe of smaller nature than the big ones.

But that is now also required to have a business in oil and gas or umbilicals in 2021. We are not talking about profit and margins per segment in that way.

But it's not like all profits in SMT are coming from oil and gas we have. Now, I would say a well performing business also for example in Kanthal with industrial heating and medical as an example.

So it’s an important, it’s a very important the most important profit driver in SMT but it’s not all.

I mean we must look at SMT now as being a very different company compared to the previous drop which was like mid 2017 we are now on the same levels as we were then and then we lost money we don’t do that now. So SMT is in much, much better shape with a better cost base.

Yes hi, thank you for the call. Two questions firstly on SMS side if you could, give details around given how much pressure has been seen on the aerospace side?

If you were to look at SMS orders excluding aerospace then how was it looking and how is it trending if you could give some color on that that will be very helpful? And secondly on the SMT outlook given a big chunk of the order you see does comes from the metal pricing side?

So if you were to and given that this is going to be set for type wind as well also the orders within SMT are looking quite weak still and so I'm just wondering, what do you think, SMT order outlook is looking like, is there a good chance of, let's say, maintaining the absolute level of orders or revenues base for the coming year? Because the concern is that if we don't get orders coming back soon then, maybe the base we have for 2021 is actually quite high?

If I start with the last one SMT I mean - currently what we see in the reported order figures there are no major orders from oil and gas. So from that perspective and again the short cycle businesses have started to improve.

So overall, I would say I don’t really see that the current baseline is not sustainable, it’s rather to start to wait for an uptick going forward that would be my general comment.

Sorry I meant was, the revenue base?

Yes on the revenue side of course in 2020, we have delivered from backlog. So we’re going to be continued, we’re going to be challenged in 2021 year-over-year simply because in 2020 we had sort the backlog delivered.

Yes.

Then on SMS we don’t really have the figures reported in a way where we exclude a certain segment like aerospace, like that. So I don't dare answer that question.

But from a, just from like a roughly if you were to think about that, would you think that growth would look a lot better if aerospace were to be excluded from the mix because that one segment seems to be lagging and continue to lag for some time?

Absolutely orders would definitely be better without aerospace. It's the biggest anchor we have in that order figure.

And so the number which is reported for fourth quarter aerospace contribution of around 5% at the group level, right?

Yes, you have to increase, for SMS aerospace is more around 15%.

15% is it still around 15% or now it is?

Okay fair point. In 2019 it's around 15%.

Yes, we will have to get back to that that's a fair point.

Okay.

Yes.

Yes okay. Thank you.

There was a follow-up on also it’s - within SMS and you called out more positive sentiment in North American autos. I was just kind of wondering how much that already benefited, if any in Q4 so headline order decline of minus 17% for North America in SMS so still stands out.

It is - it’s really quite weak, even accounting for kind of aero and energy weakness? So I was just wondering if the autos and maybe even general engineering as well in North America is one area that's supporting that further sequential improvement that you've seen between December and the start of January and into Q1 that's my first question?

Thank you.

On the auto side, there is not a big difference between North America and Europe. The main difference is general engineering, where in Europe, we are back on par with prior year while in North America it still - it’s lagging the recovery is lagging in general engineering.

So that's one big factor. And then the other one is simply the higher mix of aerospace and oil and gas in North America.

Okay, and kind of a follow- up question please just on SMT it looks like the separation costs there have been really on a declining trend since the first quarter of 2020. And should we expect those costs really to be negligible in 2021?

And then maybe at the same time, if you could also update us on the on the next steps just and maybe the timeline how will it spin in 2022? And sort of final question if I can I suppose as part of the separation of SMT, I was just wondering whether you also may use that as a kind of an opportunity to untangle elements of SMS and SMRT, as well from each other, perhaps giving you a bit more strategic flexibility going forward?

Thank you.

Do you want to comment on the cost?

Well, I can comment on the cost. Yes of course.

I mean the costs I mean, up until we were down with the internal separation mid 2020. Of course, we had some costs, but then after that, we've sort of hibernated approach a little bit now, but after the decision to continue with the separation here now, as the Board took some time ago.

We are sort of ramping up the project again. And what you will see during 2021 is an increase in costs for SMT.

Firstly a little bit careful, but more and more as we go through the year because to be listed, to get a listing contract with NASDAQ, you need to have a stand up period first before you get a listing contract. So, we are aiming to move SMT into stand up situation here towards the end of the year that's the plan.

So the costs will go up, especially towards the end of the year, but we don't have a number for you for that, but they will increase again now.

And on the timeline set 2022 or later if for some reason that will not be possible, but the project is planned so that we should be able to take the decision at the AGM in April. Then if for some reason we decided to delay it, we can also do that but that is sort of how the project is executing.

That’s the timeline they are working against. But we will have to come back obviously with a final timeline when we are a little bit closer and know more.

Your third question, I guess the answer is no, not really. I mean, we have done now the split of SMRT into two natural parts.

We have done this segment split between machining and manufacturing solutions. I don't really foresee any more sort of untangling in that sense, but things evolve.

So we will see.

Thank you. Most of my questions have already been answered.

But I have one question on the strong after-market growth in SMRT you have 8%. Do you think that is mainly driven by an underlying market growth or do you feel that you are gaining market shares and that we can expect continued strong growth rate for the coming years for SMRT software market business?

I have learnt not to comment on market share, questions until all the cards are on the table?

Okay.

So no, I think it's but to be frank, I don't think that's the reason in that sense, I think we have a well performing aftermarket team. And we are sort of taking our fair share of what we should have there.

And if we continue to drive equipment, sales and increased equipment volumes, that should also help the aftermarket, of course.

Yes, thanks, can I also try on the temporary savings, and especially on the discretionary savings, because it sounds like you expect all of the temporary workforce reduction savings to come back in H1 or so. But if we - or let's say, when we are back to a normal situation, do you think that you can still keep around 50% of the discretionary savings because you will do more digital meetings et cetera?

Or do you think all of the discretionary things will come back when we are back to normal? Thank you.

Well if I start, of course, we have learned a lot of things during - this a different period to use a diplomatic word. We have learned how to do things in a more efficient way we have learned to use digital meetings and work remote and et cetera.

We don't believe that we will in some areas let's say, within administration, within finance, within HR, those functions we will not travel as much and spend as much money as we did before. But I mustn't forget that the biggest cost area or the biggest cost bucket here is actually sales and we need to meet our customers.

We need to travel and see our customers. We need to be present on exhibitions.

We need to go to trade fairs, et cetera et cetera. We need to do that to keep the business running.

It's just a fact to send around technicians and what have you. I wouldn't think that 100% of that saving would come back, let's say to cost.

But I mean, we don't have a number for it. But the bulk of it will for sure come back I think without giving too much guidance.

Stefan?

No, I agree and I think - this is going to be a learning as well. I think when things open up again, there might even be a surge, initially as everyone is sort of there is pent up demand to meet.

But and then I think it will go back to a long-term improvement trend as we take the learnings and so on. So, we are not really counting on that much improvement.

Beyond this, let's call it pandemic phase, but there will be breakthrough.

Very helpful, and sorry if I missed the bucket do you have the organic growth number for SMS in North America in the beginning of January? Is that also single-digit now or obviously that double-digit declines in North America in the beginning of January?

I don't have that figure sorry. We only have this.

I know, okay thank you very much.

Thanks.

Thank you. We take a final question from online [Johan] from Danske Bank?

Can you comment Tomas on how much inventory changes has impacted the margins for 2020 and if not for full year than maybe on the Q4 please?

Yes, I can do that. Inventory changes is, I mean what really impact the margin is over and under absorption in production rates depends.

So if your production rate is according to what you have set up your production, your production units for in the fourth quarter production rates were not let's say off track. They were as we had planned then of course the demand was a little bit stronger than expected.

So that's why the inventory it came down a bit. But the production rates were as we had planned, so we had no under absorption to speak of in the fourth quarter.

But we did have we did have that in Q4 2019, where we had an urgent need to take down inventories where we closed some of our major manufacturing units during the fourth quarter for one or two weeks. So, that gave an under absorption which we don't have today so, from a technical point of view in a bridge from Q4, 2019 to Q4, 2020.

Yes there is 100 basis points for SMM and 40, 50 for the full group, but in quarter if I use that word its zero if that answer is sufficient.

Yes, thank you. We thereby close the Q&A session.

Should you have any more questions later on please do not hesitate to contact IR Emily Alm or myself at any time. And with this we thank you for calling in and wish you a very nice day.