Sandvik AB (publ)

Hello everyone and a warm welcome to Sandvik's presentation of the fourth quarter results 2020. My name is Louise Cheddar, new head of investor relations and beside me we have our CEO Stefan Widing and our CFO Thomas Eliasson. We will as usual start with the presentation where Stefan and Thomas will take you through the quarterly highlights and after that we will open up for questions and those you can ask either via online or via the conference call. So with this said, I hand over the word to you, 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 of plus 3%, excluding major orders since quarter one of 2019. We had 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 the 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 then around mid-year. 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 result or the annual result, so to say, came in at 17.1%, excluding metal prices, which is how we have defined then 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 920 million of savings that we delivered. This also means that we continue to strengthen our balance sheet. We had a cash flow in the period of 5.9 billion SEC, 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 CG Tech, 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 4.5 SEC. as well as an additional dividend of two SEC for this year. Last quarter, I showed you our SMRT AutoMine 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 their revenue. So substantial financial impact for the group as a whole. Launching a completely new generation. Here we have new coating technology. 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 we can compare the quarters instead. And as you can see on the regional development, all regions are up sequentially. If we look at the segment view, mining, engineering and automotive are up sequentially, while energy construction aerospace, we continue to really see no 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 UK 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 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 recovery in 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 then by, for example, automotive and general engineering. So the negative number in China is driven by projects in SMT and SMRT. So not a factor in the underlying 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 an automation order in South America. then excluding the the big order in smt in december last year revenues trailing a bit at minus six percent despite revenues being at minus six we deliver an ebit of 4.5 billion sec or a margin of 20.1 percent versus 19.1 last year this would have been 19 and a half versus 18.4 then excluding the metal price effect so you can see that the improvements is 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 we normalize for currency, the EBIT would have been the same. In fact, the organic EBIT development was positive. in the quarter. That's why the group leverage is not applicable since we have a drop in top line and improvement in EBIT. Going into the business areas, Sandvik Mining & 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 Q4 of last year. So we are happy to see that number actually a little bit better than we had expected ourselves. They also deliver 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 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. It's actually one of the largest acquisitions in Sandvik's history, the second or third largest depending on how we rank SECO in that context. We expect this deal to close around mid-year, a little bit dependent on how the regulatory processes evolve here going forward. Then we have Sandvik Manufacturing and Machining Solutions down minus 7% then on the organic side. I think I've talked about most of the regional development already. We note as well that in December the order intake were down single digits and now in January it has 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 wave 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 a higher demand of products going forward. And this is also one of the reasons why we have the differential here between order intake and revenues, because they book orders and they will deliver them 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 half a billion sec of savings in the quarter alone. They also closed two acquisitions in the quarter, then Miranda Tools, a round tools company in India, as well as a software company, CG Tech. We also took a minority stake, as you have seen, in a manufacturing technology company called Octon based out of the US. And then if we take SMT, a big drop in the orders of 31% in the period, excluding for the major order, this would have been minus 7%. And actually the underlying volume is minus four if we also take away the alloy surcharges we have 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. And I think that's important to note. We do see continued weakness in oil and gas and aerospace, of course. And we do, however, note in a positive sense, some very strong development in some of the short cycle business. Medical, industrial heating and consumer are all up in the double digits. And those are early cycle businesses in SMT, so that's positive. Also, SMT delivers strong margins in the context of their top line of 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 margins. delivery from SMT in this quarter. And of course you know early in the quarter we also announced the intention to continue with the separation process of SMT. With that, I'll hand over to you, Thomas, 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 2 for revenues and minus 6 for orders. Oh, sorry, the other way around, minus 2 for orders and minus 6 for revenues. Currency is a headwind, of course, for us now, both on the top line and in the earnings. Minus 9 for both orders and revenues. And structure was minus 2. Structure is mainly the divestment of Varel oil and gas, which happened at the end of the first quarter in 2020. So we'll have that effect for another quarter before it turns around. Total was minus 12 and minus 16. If we then walk down the income statement, the earnings came in at 4.5 billion compared to 5.1 a year ago, minus 11. But currency had a 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. Net financials, we'll come to a specification on that as well in just a little bit. Underlying tax rate came in at 24.1, full year 22.8. Cash flow was really good, and the full year cash flow, free operating cash flow, was 15.4 billion compared to 17 billion a year ago. A really good cash flow year. 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 percent, sorry, the minus 6 percent on revenues is corresponding to 1.5 billion on the top line. But as you can see here in the bridge, basically no impact at all on earnings, actually a little plus, plus 35 billion. And, of course, if you lose 1.5 billion on the top line and the profit stays the same, it has a massive accretive effect on the margins of 130 bps up. This is of course very much a result of all the savings initiatives and efficiency initiatives that we have launched and executed on during 2020. Currency minus 2 billion on the top line, half a billion on the EBIT line, 20 bps dilution, metal prices 0.1 dilution, structure plus 0.1. 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, and especially not in the fourth quarter. Let's then move to the savings programs. And you're familiar with this slide here. have on the first line the program that we kicked off mid-2019. The full impact is 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 180 million in the fourth quarter. The next line is the work time reduction program. This is part of the temporary savings. 200 or 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, 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 traveling normally again. At the fourth line here, we will start to see now effects from the 2020 program, and we see effects from the 2020 program starting to sort of trickle in here a little bit. This would mainly have an effect on 2021 and then into 2022 and onwards, but there are some of these initiatives that are now already now in the income statement 35 million all in all so the full impact of all these four programs for the fourth quarter was 920 million if you recall q2 and q3 we had 1.5 in in q2 we have 1.4 in q3 we have 900 million now in in this quarter so this is 3.8 billion for for the full year which of course has helped. I mean, if you take off 3.8 billion from the 15 billion in earnings we had, I mean, 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 give 1.3 billion annualized, the new one, How is the spread between the business areas? And you can see here that half of it is in SMM, 125 in SMRT and the remainder mainly in SMT, sorry SMRT, 125 SMT, half a billion. So if we then move forward into what's below the operating earnings, net financials, the interest net came in just below 100 million, 96 million. That's 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, 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 percent. We'll come back to the guidance for 2021 in just a little bit here. Into the balance sheet now, working capital, very strong finish of the year, below 25%. And you can see on the right-hand side, all three business areas are delivering very well. The cash flow is strong in the fourth quarter. If you look at the right-hand side, you can see that we, of course, we have a bit of a reduction in earnings, but we still have good releases from working capital. We are careful with CapEx, so 5.9 billion compared to 6.5 a year ago. We're 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 0.04%. The financial net cash position is 8.8 billion. The total net debt is a little bit over 2 billion SEC. Of course, as Stefan mentioned here now, in these numbers, we have three acquisitions that we paid for, but we still managed to improve the situation, the net debt situation for the group. So a very healthy and strong balance sheet. Let's look at some of the guidance that we had. We said 350 million on negative currency effects underlying that translation transaction effects. We came in at 536. Swedish krona continues to strengthen. The total currency effect was 494. Metal prices 129 plus instead of plus 50. Cap ex 1.1 interest that we've talked about 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 650. It's one decision, one dividend, 650, but it should be seen. as an ordinary dividend of 450 and then an extra or additional of two krona. 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 are around $4 billion. It came down to $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 $4 billion, but something below or just below $4 billion. So that's our new guidance for 2021. Currency has a negative impact on the earnings. $500 million in the fourth quarter, and we expect $750 million, quite a big number, for the first quarter 2021. Metal prices, we believe, will be plus 60 in quarter for the first quarter, and the interest net, as I mentioned, we believe will be $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 a 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, Czechia, 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 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 of course it will also be dependent on how the pandemic is handled and 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 and 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 the 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 Thomas. 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 risk my day at jeffries and relates to smrt and what have we seen in terms of have we seen a catch-up on smrt as reapers 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-up, 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.

Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel. So that is 01 to register for a question. Our first question comes from the line of Magnus Krupe from UBS. Please go ahead. Your line is open.

Hi, Stefan, Thomas, Louise. A couple of questions from me, starting with the what organic growth rate did you see on the automotive business in the quarter? I think in Q3 you mentioned low teens decline, slightly below car production numbers. How did you compare that there in Q4?

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

Perfect. Thank you so much. 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 but we really don't know at this point we haven't really seen anything as of now perfect thank you so much and just the final one i think you saw the incremental margins adjusted for savings take a slight step down in q4 and sms compared to the prior three quarters you help us a bit with the reason for that and what we should expect into 21 that would be very helpful you know 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 yeah i i don't really have a good answer to that other than that yeah i mean when

When we lose sales, we lose gross contribution, you lose absorption, et cetera, et cetera. 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 next year, what do you see there? Similar level to this year or?

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

Yeah, on the incremental margins for 2021, should we expect it to remain on a similar level as 2020?

I mean, we don't give guidance going forward, but of course it would be disappointing meeting a corona trough year if we couldn't improve margins in SMS this year.

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

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 these 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.

Our next question comes from the line of Max Yates from Credit Suisse. Please go ahead.

Thank you, Thomas. 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 3 billion tailwind into sort of the major buckets of temporary savings and potentially how much they were for 3 billion so it 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 3.8 billion or?

The total temporary cost savings that you had this year.

Okay, now work time reduction will continue for a while, but on a much smaller scale. This recovers. 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. This is like three buckets here. We have temporary savings that will continue for a while. We have permanent savings that are coming in into 2021, the 1.3 billion program. And then the difference between all of this is the expected recovery of the economy. But of course, if that doesn't happen, we need to do other things. Stefan, maybe you want to comment on that?

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 business growth. So overall protecting the margins. That's I think is the generic answer. And then Thomas 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.

I guess, or maybe Thomas, of that 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 500? 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, of course, being one of the biggest cost components and where the majority of the discretionary spend is, really. But we don't have a breakup of that, not really. Okay. Yeah.

Maybe just a 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 remaining drill rigs business? How those two businesses perform relative to each other and whether one was disproportionately stronger within the quarter?

You will get, before the next report, a full restated report. 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 on the surface drilling part has been stronger, relatively speaking, than the rock processing part.

And also the case in Q4, I see.

Yeah, it's been, yeah, since the pandemic hit.

Okay, thank you very much.

Our next question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead.

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 and you've progressed a lot, but now the orders are also going up significantly as we look forward. 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 needs to match the recovery there? And then the third point, if you can comment on pricing outlook, I guess sort of there's been this bit of reflation going across many raw materials and components, but there's also growth recovering as you've mentioned. How shall 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 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. 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 you know, to keep networking capital below 25 percent. And that we aim to continue. But then if we grow, of course, it will still be more. more money in absolute terms. 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.

Our next question comes from the line of Lars Bruggen from Barclays. Please go ahead.

Thank you. Good morning, Stephen. Thomas, if I can stay with the topic of ramping up, Stephen, I'm just curious as to your more general comments around potential and indeed the broader supply chain after what has been a very challenging year last year. Do you see any obvious 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 as 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 planned the activities to handle this crisis that we will already planned 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 any major issues and you mentioned wolfram for example they uh they they are ready for higher volumes as well as an example so of course here the the high vertical integration of sms is coming back in our favor uh 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 uptake, driving that slightly underwhelming growth? Is that primarily a function of the exposure to larger, more global accounts via your Coromant brand and less mid-margin form of promise?

...giving the growth.

And then... that is more export arguments, they are still lagging behind.

So there are no end markets that stand out for you that are particularly challenged. It's more a matter of having a bigger exposure to the global accounts.

Yeah, and of course the global accounts are typically related in this case then to some end markets like aerospace, which is still... Understood. Thank you.

Thanks. Our next question comes from the line of Gaël Dubré from Deutsche Bank. Please go ahead.

Oh, thanks very much. 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 now likely existed, do you still expect to make a profit coming back to perhaps nearing zero in 2021 before they recover in 2022?

So 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. We have backlog that basically 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 bit. business in oil and gas or umbilical. We're 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 Qatar with industrial heating and medical.

It's an important... ...as we were then, and then we... So SMT is in much, much better shape with a better cost base.

Okay. Thanks very much.

From the line of Maddy Singh from Bank of America. Please go ahead.

Yes, hi. Thank you for the call. Two questions. Firstly, on SMS side, if you could give details looking and and how the trending if you could MP outlook given you know big chunk of you know the beat does come from the metal pricing side so if you were to you know and you know given that this is going to be set for divestment as well also the orders within the SMT are looking quite quite weak still um and so i'm just wondering you know uh what do you think uh you know smt order outlook is looking like is uh is there a good chance of you know let's say maintaining the uh absolute level of orders or revenues base uh for the coming year um because the concern is that you know if we don't get orders coming back soon then you know maybe the uh the base

So there are no major orders from oil and gas.

Businesses have started to improve. So overall, it's not sustainable. It's rather to start to wait for

you know, uh, the revenue base compared to, you know, the order and rate.

Yeah. On the revenue side, of course, uh, year over year, uh,

And on SMS, 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, you know, just from like a roughly, if you were to think about that, would you think that growth would look a lot better? 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?

Yeah. And you have to increase. For SMS, aerospace is more around 15%. 15%.

It's still around 15%.

Fair point. 2019, it's around 15%. We will have to get back to that. That's a fair point. Thank you.

Our next question comes from the line of Alistair Leslie from Societe Generale. Please go ahead. Your line is open.

Hi, good morning. It was a follow-up on autos within SMS, and you called out more positive sentiment in North American autos. I was just kind of wondering how much that had already been... ...accounting for Canavero and...

On the auto side, we are back on par with prior year, while in North America, 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 if I could have a follow-up question, please, just on SMT. It looks like the separation costs there have been really on the declining trend since the first quarter of 2020. 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 next steps and maybe the timeline ahead of the spin in 2022. And a sort of final question, if I can. I suppose as part of the separation of SMT, I was just wondering whether you also maybe 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.

you want to comment on the cost i can comment on the cost yes of course i mean the the costs uh i mean up until we were done with the internal separation uh mid 2020 of course we we had some costs but then after that uh we've sort of uh hibernated the project 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 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 a 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, we don't have a more firm timeline than we have said 2022 or later if for some reason that would not be possible. But the project is planned so that we should be able to take the decision at AGM in April. Then if for some reason we decide 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're 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 a 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. Okay.

Thank you very much.

Thanks.

Our next question comes from the line of Andreas Koski from Nordea. Please go ahead.

Thank you. Most of my questions have already been answered, but I have one question on the strong aftermarket growth in SMRT of 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's aftermarket business?

i've learned not to comment on market share questions until all cards are on the table so um no i think it's it's it's um but to be frank i don't think that's the 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.

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 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 percent of the discretionary savings because you will do more digital meetings when we are back to normal thank you

thematic word we have learned how in some areas with let's say within administration well as much and spend as much money as we did before but but biggest cost it's and we need to meet our customers exhibitions we need we need to go to trade fairs etc etc we need we need to do that to keep the business running it's just just a fact to send around technicians and and what have you uh i wouldn't think that 100 of that saving would 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's a pent-up demand to meet. And then I think it will go back to a long-term improvement trend as we take the learnings and so on. So counting on that much improvement. beyond this, let's call it, pandemic phase.

Sorry if I missed it, but do you have the organic growth number for SMS in North America in the beginning of January? Double-digit declines in North America in the beginning of January. I don't have that. Okay, thank you very much.

Thank you. We take a final question from online. Johan Sjöberg from Danske Bank. Can you comment?

Yes, I can do that. changes is, I mean, what your production units for. 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 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 that in Q4 2019, where we had a 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, yeah, there is 100 basis points for SMM and 40-50 for the full group. But in quarter, if I use that word, it's zero, if that answer is... Yeah, sufficient.

Thank you. We thereby close the Q&A session. Should you have any more questions later on, please do not hesitate to contact IR, Emelie Alm or myself at any time. And with this, we thank you for calling in and wish you a very nice day.