Sandvik AB (publ)

Hello everyone and a warm welcome to Sandvik's presentation of the fourth quarter and year-end results 2021. I am Louise Cheddar, Head of Investor Relations here at Sandvik and beside me I have as usual our CEO Stefan Widing. Today we're also joined by Cecilia Felton, Acting CFO and Head of Group Control here at Sandvik. Stefan and Cecilia will soon take you through the quarterly and year-end highlights. And after that, we will take your questions. And you can ask your questions either in written, online or on the conference call. Without further ado, it's time for the presentation. And over to you, Stefan.

Thank you, Louise. And also, I would like to welcome you to this fourth quarter report 2021 from Sandvik. If we would summarize the fourth quarter in one word, it would be growth. We had strong organic and acquisitive growth in the quarter. We saw a broad-based demand, positive development in all business areas and more or less all regions and segments. We'll come to a little bit more details on that later. The order intake growth in the quarter was up 23%. All business areas reported double-digit organic growth. We also saw solid contribution from our acquisitions, and the total order intake growth in the quarter at fixed currency was 36%. I'm also pleased with that we have, in a successful way, navigated through some of the supply chain challenges that's been present in the quarter. So organic revenues grew by 14%, and total revenues grew by 26%. We also had a number of other events that contributed to us feeling that we finished the year strongly. We have seen a high interest in our automation and digital offerings. And in particular, our mining automation solution recorded a record high order in the quarter for the world's largest copper mine. We also signed another six acquisitions in the quarter, bringing the total to 14 for the full year. And at the end of the year, we also signed up for the science-based targets initiative to further advance our sustainability agenda. We saw improved earnings and we ended the year with a solid financial position as well. Adjusted EBITDA increased by 16% and came in at 18.4%. Adjusted profit for the period improved by 14% to 3.8 billion. We ended the year with a gearing of 0.35, so well within our financial targets, and we saw a good cash flow generation of 4.6 billion. Combined all of this, the board have felt that we can now recommend to the AGM a dividend of 4.75 for the year. We continue to push forward and accelerate our digital shift. Obviously, a highlight in the quarter was the announcement that we have signed an agreement to acquire Desvik. the leading and fastest growing company in the world when it comes to mine design and mine planning. They have over 10,000 licenses spread among key customers across the world, really high rates from customers in terms of satisfaction, and strong, solid, profitable growth. Deswick will complement our existing offering in automation and software in a very good way, contributing to extending our lead in this area. As part of this, we also decided to establish a new division that we call Digital Mining Technologies. It will consist of three business units going forward. Our automation solution, new tracks, which, for example, contains our anti-collision awareness system. And this week when they come into the group. And this we do to put even more focus on this and accelerate the execution of our strategic priority to lead the development in this area. Electrification, automation, digitalization, and end-to-end optimization of the mine. Then we always also emphasize innovation in the quarter. This time we have chosen to highlight the 2022 version of Givscam. Givscam is a portfolio company that came in through the Cambrio acquisition. GIVSCAM has a specific differentiation in the market in that they support a very broad array of CNC machines, including a lot of older and legacy machines. For us, this is really good and positive because we have a really wide footprint with our cutting tools. So having then a software offering that can address a wide part of this market is really important for us too. So good to see also continued innovation from them in this front. Now going into the market development, if we start with our three main regions, you can see positive development in Europe up 17%, really positive in North America up 47%. This is driven really by strong performance across the board, but notably the mining and infrastructure businesses as well as SMT had very strong growth in North America in the quarter. Also SMM was very strong, but not at the 47% level. In Asia, we are minus two. Here, SMM in particular is slightly positive at plus three in the quarter. And then you have the other regions driven by very strong growth in mining. If you look at the segment view, super strong demand in mining. Still, some of the arrows show flat simply because we go up against very high comparison in some regions. General engineering has been strong, double-digit growth across the board in the quarter. Automotive shows down, and that's simply a year-over-year compare. Q4 of last year and Q1 of last year in automotive was strong. Automotive was in the recovery phase, and then the component shortages hit. So it's down year over year, but it's flat sequentially. So from Q3 to Q4, automotive held up in a good way, we think, if you compare to the underlying automotive production. Energy, infrastructure, and aerospace are all strong. In particular, energy and aerospace continue with strong double-digit growth recovery from before. So overall, I would say, with the exception of automotive, which we are all aware of the dynamics around that, very strong development across the board. Order intake then, to summarize, up 23% organically, 36% total growth. Organic revenues up 14%, 26% in total. And you can see, if you look at the bar graphs here for Q4, that Q4 was a fantastic ending of the year, with absolute numbers higher than we have ever reported in the past. If we then look at the profit development, we had an adjusted EBIT of 5.1 billion, margin of 17.5, EBITDA margin of 18.4. And as we have said, this is the number we will focus most on going forward, the adjusted EBITDA, so we don't get the PPA sort of confusing the operational performance. This was a leverage of 14%. It is on the weaker side, definitely, and we'll come to some of the dynamics there. One thing to note is that we had M&A transactional costs that diluted the quarter of 60 basis points and 80 basis points if you take a bridge effect from the prior year. And we'll come to also the savings development and so on later in the presentation. Going then into mining and rock solutions, orders all-time high for the fourth quarter in a row. The organic increase was 30%. Total growth of 52% on the organic side. And the aftermarket recorded the highest order intake level that we have seen. We announced two major orders in the quarter. One large one in tunneling infrastructure of a billion. But more strategically, we want to highlight the one for our auto mine solution. Total order of 400 million, of which 250 were related to automation solutions. And that's the highest order we have seen. across the industry for automation solutions so far. So very positive there. If you look at the margins, a solid underlying margin as well, 21.1% impacted negatively by 190 basis points from DSI as pretty much expected and communicated. Positive contribution from margins offset by reversals of temporary savings and M&A transaction costs. Should also say that they have specifically some freight costs that are related to moving from boat to air, especially for spare parts that are also impacting the volume leverage that they have in the quarter. Otherwise, of course, the highlight was the desk week announcement, which we have already talked about. Rock processing solutions, also strong development. Organic order intake up 18%, revenues up 15%. Here we see a strong development in equipment of 51%, but that is against the softer compare. The aftermarket on the other side saw flattish development, but that is against a stronger compare. So I wouldn't read too much into the differences here. It's more related to the comparables. Overall, strong development. Also positive is that despite some rather significant supply chain challenges to move this equipment out, they did record high revenue. So at the end of the day, they sold it, but it came at the price. They were impacted in the quarter by higher freight costs. So the margin of 15.9 positively contributed to from higher volumes. but negatively offset by cost inflation items. Freight in particular, but also a little bit of energy. They have their biggest operation in southern Sweden, and those of you that follow the dynamic around that in Sweden in Q4 knows that there's been some exceptional energy levels in southern Sweden in the quarter. They also have reversal of savings, and they also have an impact from a restructuring charge. We are doing a consolidation in China, They are hit by about 18 million SEC from charges that we cannot take against the provision we have for restructuring charges in the quarter. But that is now done and the site has moved. Going then into SMM, I would say strong development in the quarter. Order intake up 11%, revenues up 12% organically. We see, as I've said, continued positive momentum in general engineering across the board. Significant step up in aerospace, double digit organic growth, particularly pleasing considering that has been one of the factors that have lagged versus the general market recovery. So happy with that. We also see very solid contribution from our acquisitions. Total order intake growth in the quarter was 23%. If we look at the dailies, we saw a Continued positive development throughout the quarter. We had a strong ending in December. And the January start has been on par with that. So similar as December, slightly better than the average for Q4 as a whole. My usual caveat always is it's early days, few days. So we'll see how it develops going forward. But at least positive start so far. The margin, 20.7%. Here we had a positive impact, of course, by higher volumes. It was offset by reversal of savings, and you can see it below there. It's a relatively significant impact of over 100 million SEK from that. They had M&A transaction costs of around 100 million. Here we also had some more, let's say, temporary adjustments or costs in the quarter. They are part of running the business. I mentioned some examples like various accruals, but we want to highlight them since we know things like price and cost inflation is high on the agenda. SMM did compensate for cost inflation with price in the quarter, but there were some other various temporary items that hit them in the quarter. Very positive in the quarter as well was the signing of GWS tools, fairly significant acquisition around a billion second revenues, strengthen our position in round tools and strengthen our position in the North American market, both which are strategic priorities for us. And then we also signed another two smaller but important software acquisitions in industrial metrology and simulation and verification. SMT also very strong demand, up 40% on order growth organically, really across all segments and regions. The trend in oil and gas continue to be positive. Umbilicals orders in the quarter of 265 million. It takes their total order intake for the year to a level which means they are quite comfortable going into 2022. We are still way off from peak levels, but it's a solid business now and positive development going forward. Considering that they had much lower invoicing from oil and gas in the quarter, we believe they delivered a good margin. So it's a weaker mix, but still a margin underlying of 9.2%. SMT was also hit by energy prices. Even though we had 75%, When they are as elevated as they were in Q4, the remaining 25% still comes through in the result. There are also other input materials such as gas used for energy generation that have elevated cost levels. SMT is taking action around this. That is fairly exceptional. One thing is that they are adding energy surcharges to some contracts going forward to mitigate some of this volatility that we see in the market. Also positive, SMT signed a small but important acquisition in Girling in the quarter. Girling is a tube engineering company with competence and technology around tubes for hydrogen, which is a key growth area for SMT going forward. So positive development from SMT. With that, I hand over to you, Cecilia.

Thank you very much. Stefan, and let's go straight into the numbers then. And let's start with the box on the top right corner. As Stefan mentioned, organic growth was very strong in the quarter. Currency had a positive effect of 2%. Structure contributed with 13% and alloys 1%. So all in all, that gives total order growth of 40% and revenue growth of 30%. Net financial items came in positive, 108 million, and I will go into the reasons for that in a few minutes and also why the tax rate came in relatively high at 26.3%. Networking capital landed at 22.3%, well below our informal target of 25%. Cash flow, as Stefan mentioned, 4.6 billion. returns at 18.9 and the adjusted EPS grew year on year driven by higher earnings. So let's look at the bridge then, and let's start with the organic column. And here you can see that revenues increased by 3.1 billion, 14%. And that gave an EBITDA of 419 million, which then translate into a leverage of 14%, which, like Stefan mentioned, is a bit on the low side for the reasons that he also commented on. Currency had a positive impact, both on revenues and adjusted EBITDA, and an accretive impact of 0.7 percentage points. The metal price effect in SMT, there we had a positive bridge effect from alloys on top line of plus 300. The metal price effect on EBITDA, here the bridge effect is minus one, as we had metal price effects of 129 million, both in Q4 this year and in Q4 last year. Structure had... dilutive effect of 1.7 percentage points, and that also includes the M&A transaction costs that Stefan mentioned. So all in all, that brings us to an EBITDA margin of 18.4% compared to 20.5% last year. Moving on to the savings then, and starting with the permanent savings at the top here. You can see that we have a bridge effect of 230 million. We had 35 million of savings in Q4 last year. So that gives a total in quarter effect of 265 million, which corresponds to a run rate of 1.1 billion. Now, we've previously announced that we are targeting a run rate of 1.3 million in annualized run rate savings. We've revised that downwards somewhat to 1.2 billion. And the reason for that is that some of the structural initiatives within SMT are no longer considered necessary. So all in all, we've then delivered 90 percent of the permanent plan savings. And we have a small tail coming into 2022. If we then continue with the temporary savings, you can see here that we've pretty much reversed all of the work time reductions. When it comes to the other temporary savings, we had savings of 500 million in Q4 last year. We've reversed 195 of those. And that means that we still have 60% of the savings remaining. Now, as we mentioned previously, this will be the last quarter now where we will show the temporary savings. And the reason for that is, as you know, we are comparing to a spend level pre-COVID, which we don't think we will return to. Instead, we will continue to managed discretionary spend as part of the ordinary business. If we continue then with the net financials and starting with the first line, the interest net, which is the most interesting to look at here, you can see that it's declined year over year to 87 million. And that is because we have replaced some of the old quite expensive debt with new debt with lower yield costs. You can also see on the line here other financial income and costs, a big positive, and that includes a capital gain of 173 million from divestment that we made in the quarter of our financial holding. And then the last line here in the table, FX and other asset classes. As you know, this includes the temporary revaluation effects of our hedges. These will eventually net out to zero. It's a big positive here in the quarter that's driven by the electricity hedges and currency hedges. If we continue then with the tax rate, reported tax rate was 26.6%. If we adjust for items affecting comparability, it's somewhat lower at 26.3%. Now, that is quite high, as I mentioned at the start, and the reason for that is that we've made a correction to the internal profit elimination from the Q3 result. So if we adjust for that, the normalized tax rate is 23%, so in line with the guidance for 2021. If we then move on to the balance sheet and starting with net working capital, You can see on the graph on the left hand side that total net working capital continue to increase in the fourth quarter for the group, mainly driven by higher inventory levels. In relative terms, though, as I mentioned at the start, you can see we are well below our target of 25 percent. On the graph on the right hand side, you can see the development for the business areas and in relative terms, all business areas had a lower networking capital in Q4 as opposed to Q3. And that's also in line with normal seasonality. Free operating cash flow. If we start also here with the graph on the left hand side, you can see that earnings, the blue line continues to overtake the orange line, which is free operating cash flow. And that is because we are investing in inventory as we are growing the business. You can also see this translated into to the table on the right hand side where you can see that earnings increased year on year. But this year, as we've been Increasing networking capital in the fourth quarter that has a negative impact on cash flow. The opposite was true for last year. And CapEx was somewhat lower than last year. And then that brings us to a free operating cash flow of 4.6 billion for the quarter. Net debt. Financial net debt increased from 7.4 billion in Q3 to 16.8 billion in Q4. And here we've increased interest-bearing debt by 12.6 billion. We made payments for the acquisitions in the quarter of about 10.5 billion. And then we have the positive cash flow from operations. Adding on the capitalized leases and the pension liability, we end up at a net debt of 26.9 billion and a gearing of 0.35. Comparing the outcome then for the fourth quarter compared to guidance, underlying currency effects of transaction and translation came out at 76 compared to the guided 150. The total currency effect was 131. Metal prices in the quarter, as I mentioned, came in at 129 million. We guided 50. And CapEx, interest net, and the normalized tax rate came in in line with the guidance for the full year. The dividend proposal, as Stefan mentioned at the start, is 475, and that corresponds to an adjusted payout ratio of 42%. Looking into 2022 then, both the first quarter and full year guidance, CAPEX, the guidance is to be below 5 billion for 2022. And as you know, we previously said that the normalized CAPEX level is about 4 billion. So this is a bit higher and there are two reasons for that. The first one is the structural effect from the acquisitions. And the second part is higher investments, higher spend on digital investments and capacity increases. And that then lances as a guidance below 5 billion. Currency effects based on the end rates of December are expected to be positive 400 million for the first quarter and the metal price effects plus 80. interest net and the tax rate, we've left the guidance unchanged. And with that, I will hand back over to you, Stefan.

Thank you, Cecilia. Yeah, if we conclude 2021, we believe this has been a very successful year for Sandvik. We have shifted to growth with strong margins. The organic order intake is up 24% for the full year. Total is up 30%. From a revenue perspective, we are up 12% for the full year organically and 18% in total. So we are also building backlog for growth going forward. We have done this with improved earnings and a solid EBITDA margin level of 19.1% for the full year. We also launched new strategic objectives in the beginning of the year, and we have achieved most of the key results we set out to achieve for 2021. We have added over 10 billion SEC in annual revenues from hand-picked strategic acquisitions. I want to emphasize this because we have had a very active acquisition year, and it's not because we have been trying to buy everything that moves. We have, in most of these cases, initiated the process because we wanted to fill a gap in our portfolio or add to our core business. In a few cases, we have been lucky companies have been for sale in areas that we wanted to get into. We have also broadened our offering in digital solutions and increased our ability to address our customers' productivity in a broader part of their value chain. We have also seen good progress in our people and sustainability targets, which I think is important because they are key to also our long-term financial success. We have continued a solid foundation also to continue to execute on this strategy going forward. We have again this year proven our agility. I think it's clear to me that we have dedicated employees with a very strong passion to win company culture. And this can be crucial and a deciding factor in some situations. We have financial stability and a strong cash flow generation. And finally, we now exit this year with stronger digital capabilities and higher growth potential than we had when we entered this year. So we are really proud of the achievements that we have done in 2021. Thank you. And I hand over to Louise and we go into Q&A.

Thank you, Stefan. Thank you, Cecilia. We will open up for questions before we do. Just a humble request to please try to keep your questions to a couple each, so everyone has the possibility to ask their questions. So with this, operator, we can take the first question, please. Thank you.

And the first question comes from the line of Claes Berling from Citi. Please go ahead.

Yes, thank you. Hi, Stefan and Cecilia, Claes at Citi. So a couple of questions, please. First on SMM, great to see the stronger growth through the quarter. But just on the margin, it's down quite a bit on EBITDA quarter on quarter. And when I add back the transaction cost, I get the drop through to less than 10%. And I get that you have the savings reversals, but the bottom line impact from M&A was lower than I thought. So if you could talk through margins here, Stefan, and the trajectory ahead. And if you could quantify those one-offs you talked about in SMM, that would be very helpful.

Yeah, I mean, if we look at the, let's call it the underlying leverage, it was at a good level. It was well above 50%. Then you add back the reversals of the temporary savings and so on, and you get a little bit below 50%. But that's, I think, what we have expected during this recovery phase. Then, as I said, when it comes to cost inflation in general, it's being offset by pricing. So that's not really where you should look when we talk about the temporary items. I mean, these are things that are part of running the business, so we're not looking for excuses here. I'm just wanted to emphasize that it's not a cost inflation problem. What we have are things like I just take a few examples, you know, last year was a COVID year, bonus releases across the board. This year, great year, fully providing for that instead. And these things, depending on how you have managed it across the year and so on, can have a quite significant impact. So if we add these things of that type of nature, it's over 100 million SEC. So it's over 100 basis points in impact from those kind of things.

okay very good but the mna impact was a little bit lower at the bottom line and i'm talking ebta and then add back transaction cost is that is that the level that you that you anticipate that that the deal should should run that going forward or if you could talk a little bit about that now in general i would agree if you look at the structure dilution it's higher than what the normal run rate should be we have some impacts in

If you take a company like CG Tech, they are still going through deferred revenue haircuts in this quarter, as an example, which we'll get out of gradually. So there are some of these effects. I agree with you that that structural component should decrease going forward. I don't want to quantify it, but.

Okay, that's good. My second one is on automotive stable quarter on quarter down year of year, which was expected. Could you help us a little bit how much the auto business was down year of year, please? It still seems like you're outperforming global production weighted per your geographical exposure. Otherwise, the other businesses would be up quite a bit against 11% total.

yeah automotive is down uh in the low double digits in the quarter year over year okay very good thank you thank you and the next question comes from the line of magnus cobra from ubs please go ahead hi stefan cecilia louise man is from ubs a couple of for me as well i'll continue the same

Line of inquiry that class had about switching to SRP. Could you comment a little bit about the cost levels you have there on supply chain and logistics and restructuring that you talked about and to what extent those are sticking with us at least into the early part of next year, please?

Yeah. The structural thing, 18 million, it's done. So it's also a temporary thing. Or a one-off, if you want to call it that. They have good price increases coming through, actually over 5%. But all of that goes towards compensating for raw material prices, more or less. So they are hit by fate as well as energy. And that's a fairly significant impact for them. It's not a super big business, so to say. The net impact, if you take price as a positive and then you take away raw material, freight and energy, they lose ballpark 200 basis points from that dynamic. New price increases are coming through. It's a matter of catching up. Energy was not expected. Freight... We thought that things would have improved by now, to be quite frank. Clearly, that's not the case. We need now to take another aim at compensating for that. So I think we will struggle a little bit for them on that point with freight also in Q1. I think they will gradually recover throughout the year as the price increases. Got it. Thanks a lot.

That's brilliant. Thank you so much, Stefan. That's very... Very good color on that one. And that is my final one. How do you see customer inventory levels at the moment in SMS? Has restocking been contributing to the growth this quarter? I mean, I see both European and US IP growth numbers implying lower growth in new printing. So it's a very good performance. Is there any drivers there from restocking?

It's difficult for us to say, quite honestly. I mean, if you look at the things that are driving very positive from aerospace energy, we think that's its underlying recovery. Production levels are going up. Investments are going up. General engineering as well. I mean, it's generally strong. Whether there is also an element of securing your supply chain in this environment, maybe a little bit. I cannot, we don't have a, a really good view on that. But overall, we don't see it as a concern.

Perfect. Thank you so much, Stefan. Thanks.

The next question comes from the line of Andrew Wilson from JP Morgan. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my questions. I've just got two. I just want to try and clear up a little bit on the savings in 2022 and then the costs returning. Obviously, you talked about some of the temporary savings basically are sort of still remaining. Is that they're expected to remain or should we expect those to continue to come back into the business? I guess I'm just trying to understand sort of the cost savings versus cost coming back has been quite a big swing factor as we've gone through this year. And I'm just trying to get it even a very high level number for 22 versus 21.

Yeah. I think, I mean, what we, as Cecilia said, we will take away this notion now of that being a temporary savings bridge. And it's a little bit of mindset thing. As long as we highlight the temporary saving, it's sort of okay that it comes back. So now we shift focus and say this is the level we are running the business at. We understand that there are still less travel than the normal situation, as an example, but it's more going to be have to be motivated by normal cost increase means, so to say. So it's more a change of perspective. So, yes, more will come back, but we don't want or expect everything to come back. And I think this is a better way of looking at it now going forward that, OK, let's see what additional cost increases we need. And the reason we are not sort of giving a number is because we don't really know either. I mean, we have ambitions and targets how much we will reduce travel and so on. But at the end of the day, we don't know because at the end of the day, first, we're going to take care of the business, so to say. And we will do our best to keep the remaining increase away as much as possible.

That's helpful. just same question i guess completely different in a bit maybe a little bit sort of bigger bigger picture just on the m&a you've obviously made a lot of progress um through the year in terms of the number of acquisitions and in a number of different areas as well should we should we expect that rate to continue or to slow some or are we just going to see a period where you're trying to sort of focus on the integration and the guest development of the assets that you have and just trying to get a sense of kind of how far through that process you feel like and whether the business can handle, you know, adding more businesses at this kind of rate.

Yeah, about 2021 was an exceptional year and for several reasons, integration, ability, capacity, as well as, you know, balance sheet funding. We cannot continue at the 2021 rate going forward. I expect going forward it will now let's call it, it was a boost when we got started and there were low hanging fruit and we had a lot of ideas and gaps we wanted to fill and get into some new areas as rapidly as possible. Now we're going to go into phase where we will look again, okay, where do we want to add a bit or a piece here and there? So going forward, it will continue to be part of our agenda to do both on M&A, complimentary M&A, but not at the pace you saw in 2021.

Very clear. Thank you, Stefan.

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

Thank you. Just my first question was around the mining market. And I guess if you look at your business and the levels where where orders are even excluding the large orders, you must be pretty close to previous peaks. So I was just wondering, is there anything kind of in the mining market that concerns you in terms of sustaining this level through 2022? Is there kind of any risk of us seeing a sort of air pocket in demand for maybe before some of these larger projects come through? So just anything that kind of worries you in that market given we're we're at quite high levels, whether it's customer conversations or should we just think of actually this is a high level, but it should be sustainable?

I mean, I had to correct myself here in the past because a year or when we reported Q1, we said this is not sustainable and then we have just improved from there. So clearly we were not sort of in the beginning anticipating this. Now I would say, I mean, we we believe we will continue to see a strong demand. Now, of course, now we're going to face a really tough compare on the order side versus 2021. So I think our focus in the organization now will be, you know, let's try to stay here at least, and then we'll see what we can do. But continued good demand is what we expect. From sort of a risk and worry perspective, At the moment, I wouldn't say we see any specific clouds on the horizon. I mean, the metal prices are high. I think there is more and more debate around the amount of some of these minerals that will be needed in the electrification of the world. There is maybe from a longer horizon perspective, If there are bigger new investments coming online, it will take a while to get there because of the lead times. But meanwhile, as of now, we feel positive and confident on where the market is right now.

Okay, thank you. And just a quick follow-up is more of a housekeeping on the sort of central group activities line. So if we're talking about EBITDA, it was 710 million negative this year, which was up from sort of 461. So maybe just as housekeeping, would you be able to help us on how maybe that line could evolve, should evolve in 2022? Is the sort of 710 a decent representation or was there anything in that that we should be aware of?

No, I think the overall is a quite decent representation. And if you look historically past work time reductions and so on in COVID, that's a reasonable number. I will say, though, that the dynamics is probably going to be a bit different. We saw relatively high costs in Q4 while we had a lot of more temporary savings in place earlier in 2021. But on the average level, I think it's a reasonable level. The reason we saw unusually high costs in Q4 are mainly of some of these temporary natures we've been talking about. We took some of the M&A costs, roughly $30 million at group because they are related to the legal structure, as an example, and that is owned by group. So stamp duties related to legal structure, as an example, is taken at group level. We also have things coming in like our share of the loss in Varel that we still own a minority part in. It was a tough year for them in oil and gas. And we don't expect that going forward. They have done restructurings and they should be positive. We also had some losses in our internal insurance business and so on. So nothing we expect going forward, but it waited a bit on the fourth quarter.

Okay, understood. Thank you very much.

The next question comes from the line of Gail Debray from Deutsche Bank. Please go ahead.

Hi. Good morning, everybody. The first question is on the M&A. One year ago, you had commented that the group needed to improve its acquisition processes and integration capabilities. also become less risk adverse regarding M&A. So clearly the spree of M&A activity last year suggests that the organization is not risk adverse anymore. But could you elaborate on the quality of the due diligencies on the progress regarding the integration processes and is there anything better or worse than you would have expected? So this is question number one. Question number two for Cecilia, perhaps. Could you, you know, to a degree, your exposure to energy and freight costs, respectively, as a percentage of sales for the group and if possible for the divisions that have been particularly impacted by that in the quarter?

Okay. Yeah, on M&A, no, I agree with your comment. I'm no longer concerned with our ability to execute on M&A. The problem was never that we were not good in doing the diligence. I think if anything, I felt before that we were maybe too thorough in everything we were going into with small acquisitions, which means it takes lot of time and maybe you focus on on sort of how should i phrase it legal slash financial risks that and the grand scheme of things are very minor versus focusing on the business case because my experience is a poor acquisition is very rarely that you miss the cost it is that the actual business case is not being delivered on in terms of synergies or strategic fix So shifting the focus a little bit to that, to the business aspects of the diligence, has made us more ability to move faster. Then you can see, if you look at our M&A transactional costs, to be quite frank, I think they are too high for what we're doing. But it is because we are still very, very thorough and have a lot of people involved and external advisors involved, which in a way is, of course, protecting the company, but I think as we get used to this, we can do more of this ourselves and we can be more selective on how much it costs to do a transaction in terms of advisors and so on. But I'm pleased with the progress. If anything, we have said that, okay, if we need to take on some additional transactional costs, let's do it if it enables the deal to happen. And then we can learn more as we go forward. And now, yes, now we go more into integration and so on. I think here we will continue to have more things to learn. But we are taking an approach where rather than to go in full, rather go in light, do what's necessary in terms of compliance, financial reporting and a few other things, cybersecurity. and then gradually work with the companies as we get to know each other and do the rest of the integration. So I think that approach is so much more. It's a more low risk approach when it comes to not disrupting the companies we acquire. Do you want to take the one?

Yes. If we start with the energy costs, then we have seen the biggest impact in SMT and also an impact within SRP. And as Stefan mentioned before, we hedge 75% of the energy consumption, so the part that comes through is the 25% that's not hedged. With freight costs, we had an impact in SMR, driven primarily from the change of from shipping by boat to air freight. Whereas for SRP, we also had higher freight costs more due to inflation. I don't know if you want to add anything there, Stefan.

No. I don't know if it answered your question.

Is there any way you could help us understand the magnitude of your energy cost and freight cost for these divisions? How much it is as a percentage of revenue?

Okay, I think we can come back with a group number overall.

Yes.

Okay, thanks very much.

The next question comes from the line of last person from Parkways. Please go ahead.

Hi, good morning. Stephanie, if I could just follow up on the earlier question with regards to operating leverage in SMM. these temporary costs you talk about. Are they confined to Q4? Not clear to me whether some of these bonus releases you talk about accruals are sort of a seasonal effect or whether we should expect more of those in the first quarter. Maybe just more generally in terms of operating leverage in 2022 for SMM, should we think of that as returning back to sort of that 50% plus level And within that, I wonder whether you could help us a little bit with how to think about wage inflation for our EBIT bridge divisionally this year. That would be helpful. That would be my first question. Thank you.

If we look at the full year 2022, we expect SMM to be at normal leverage levels. There are still a few of these temporary things. I mean, we will see some cost increases for sure. Let's say the contribution margin as pure leverage, there will be some additional costs. Specific quarters, I mean, they are now pushing through new price increases again. There are always timing effects that can impact the beginning of the year. But overall, we are, let's say, confident and positive around the overall development in SMM going forward.

What would be a good number to think about in terms of wage inflation this year versus last? Oh, wage.

I mean, we have quite a few, you know, reasonably high portion of our operations in countries like Sweden, Finland, Germany, and so on, which is in this aspect quite good because they are controlled by longer-term agreements and so on. So not overly worried there, but let's see what the various negotiations lead to. But not overly worried. It's probably more in areas like the U.S. where you have more dynamics coming in short term, where we can probably expect higher wage inflation. I don't have a specific number, but definitely. I mean, we look at the inflationary rates in the U.S. Clearly, it will also come through on the wage.

Understood. Secondly, can I just ask to pricing? It's quite rare that you talk about pricing. And I wonder whether you could help us with a little more detail here. So at a gross price level, what sort of price realization did you achieve in SMM? I guess particularly for the core tools and any business and on a net pricing level wonder whether you can help us a little bit the impact on gross margins from a price cost standpoint in tooling for the quarter they the pricing is okay it's a it's around two percent overall for them and gross profit is protected by pricing if you take material and wage and temporary cost inflation items can I ask just briefly before I let you go sequentially the better development in December January for SMM I gather North America obviously saw an acceleration in the quarter is that what you sort of continue to see or is there a a bit of an inflection perhaps positively in your Chinese business as well as you got into the back in a quarter into the start of this year?

China was a little bit stronger in December than the quarter as a whole it was. It's difficult to read too much into that I think. China is always difficult during these months. Now we have in Q1 the the winter Olympics where we know they are planning for production shutdowns and so on. So maybe that also could have contributed positively. We don't know. It was stronger in December than in Q4 as a whole at least.

That's helpful.

Thank you. Thank you.

The next question comes from the line of James Moore from Redburn. Please go ahead.

Yes, morning everyone. Hi Stefan, thanks. My two questions are on SMM. Firstly, I guess some of the margin pressure is also coming from more and more dilution as you grow your new high growth SMS business. And I'm trying to think about what margin dilution from that could look like now and going forward. I wondered if you might be able to quantify what the dilution was from that new-ish units in the quarter. And could you help us with the overall SMF margin for the year in 21 and how you see it developing in 22 as the new acquisitions land? I don't know if they take the margin up or down. That's my first question, really.

Yeah. And I will not give you the numbers you asked for because we will eventually come to that. where we will separate out SMF. That's our ambition. We have said it clearly. But we want them to have the ability now to get in shape, so to say, in terms of do the investments they need and all of these things. It's a very, very noisy quarter like last quarter with basically tripling or quadrupling the business in a quarter through acquisitions. But I will say this. the margin dilution in Q4 versus the same period of last year is really no difference. So it's pretty much the same.

That's helpful. Thank you. And the second question on SMM is, we're seeing a shift from inserts to round tools, and you've talked about the shift from three axis to five axis. And I wondered if you could just say roughly, what is the percentage of sales last year from round tools? Has it changed a lot on a 5, 10, 20 year basis? And how do you see that moving?

Oh, the long term question we have to get back to, I don't have that view from the top of my head in terms of the long term development. In general, we have about 30% market share in inserts. We have around 10% market share in round tools. um of course this is one of the reasons why we want to grow round tools and also one of the reasons for why we did the gws acquisition in q4 so we expect significantly higher growth from that going forward including then also the structural component of course if i could just squeeze one last one in on smm is it possible to quantify

the aerospace growth you said double digit but are we talking low double digit 25 just trying to scale what that looks like yeah more the latter great uh thank you very much thank you and the next question comes from the line of risk maybe from jeffries please go ahead yes hi good morning thanks for taking the question so um

first one is on the savings that we should assume for 2022 so your 1.2 billion savings program is coming to an end there's clearly more cost inflation energy cost etc i'm just wondering um is there anything and any more sort of more permanent savings to come or be announced on how what should be the normal sort of productivity that you would achieve any any given year uh yeah so

You're right. I mean, we are coming towards the end of that program, and I think we should always have these things going on. So I don't have any news or timing or ambition levels for you now, but we are looking into what to do next for sure. We'll come back on that.

Okay, thanks. The second one is just more of an update on the materials tech listing. I don't know if you have any sort of more updates for us, whether you're thinking about more Q2 or Q3 sort of listing here.

We have no news today. All I can say is that it's proceeding according to plan. And Q4 was the first quarter where they actually fully operated as a standalone entity, organization-wise, legal-wise, all of that. Q1 now is the same, but it's a quarter where also external auditors are involved. But we'll come back on more specific news around that later.

Okay. Thank you. And the next question comes from the line of Andreas Koski from Exxon. Please go ahead.

Good morning, thank you. I'm sorry to come back to S&M and the operating leverage, which was quite low in the quarter. I just want to understand now, when you have made a lot of acquisitions, you are saying that you expect organic drop-through to be normalized in the coming quarters. Have that view changed on what the normalized margin dropped through it with all the acquisitions? Or do the acquisitions also have a very vertically integrated and high operating leverage business?

It's a mixed picture in that if you take Mastercam and Cambrio software companies, they have very high gross margins. If you take the SMS round tools companies, it's more like SMS in general. If you take DW Fritz, slightly lower, it's more of a hardware company. But that's not a big part of it, of course. But what I'm saying is it's a little bit of a mix. I don't think you should expect any material difference compared to the before.

If you average it out, it should be between 40-50%. Would you agree with that?

Yeah.

And then just on your comments that January and December were stronger than Q4 as a whole. Are you then referring to order rates or sales rates? And can you say in what segments we saw the strongest sequential improvement throughout the fourth quarter?

We generally refer to orders in this. I'm not sure it was a big difference in this case, but in general we talk about order intake. I think general engineering as well as aerospace, as I say, may be surprised a little bit on the upside. And then we had also factored in, you know, what will happen with automotive, but it held up, which was also in a way positive from that perspective.

But you did see a sequential improvement in automotive throughout the fourth quarter, did you?

No, I would say it was pretty flattish across. That's great.

Thank you very much.

Thank you.

Thank you, Andreas. And this will conclude this hour. And we thank you. And we thank you all for calling in. And we wish you, of course, a very nice rest of the day. Thank you.