Sandvik AB (publ)

Good afternoon everyone and welcome to Sandvik's presentation of the first quarter results 2023. I am Louise Tjeder, Head of Investor Relations here at Sandvik and beside me I have our CEO Stefan Widing and CFO Cecilia Felton. We will do as usual, we start with the presentation where Stefan and Cecilia will take you through the highlights of the quarter and after that we open up for the Q&A. With this I hand over the word to you Stefan.

Thank you, Louise. And also from my side, welcome to the first quarter report in 2023. If we summarize the quarter, it was a quarter where we saw continued robust performance from the group. We have good momentum. We saw solid execution and strong revenue growth and order levels at a record level. On the order side, we had order growth of 6% at fixed exchange rates, and of that, 2% was organic. Revenues up 18% at fixed exchange rates and 13% organic. If we exclude the impact from Russia, organic orders and revenues grew 5% and 16%, respectively. And happy to say it's the last quarter we should have to make that comment since we will have rushed out of our compares going forward. We also see a healthy underlying margin and happy to say that we can now say that all our business areas are fully offsetting cost inflation by their own pricing, including them at group level. The adjusted EBITDA increased by 21%. This corresponds to a margin of 19.8% versus 20.2% last year. This, of course, we are not fully happy with. We want to be within our target range. It has a very specific explanation. We'll come back to that later on the call. The adjusted profit improved by 13% to 3.9 billion SEK. If we focus on our shift to growth priorities, we had a number of highlights in the quarter. First of all, of course, the very strong both organic and acquisitive growth in the quarter. Very pleased to see. We also see very positive momentum in some of our focus areas, such as our automation solutions and battery electric vehicle solutions on the mining side. We also completed two acquisitions. I will come back to those as well later in this presentation. But I always start with a slide on our latest innovations. This time I've selected an innovation from Sandvik Coromant called Y-axis turning. Turning is typically a relatively static process, so to say, but with this method we can use multi-axis machines and take advantage of their capabilities to also do turning. This gives the possibility to do several machining steps with one tool. It reduces tool change times, and there are also various aspects to the cutting process and the stability of the process that gives additional productivity improvements and also reduced wear time. Explaining exactly what it is is very technical, so there I refer you to our website. Another interesting aspect with this innovation is that this is a fairly novel machining method, which means that operators typically don't have the experience to program it. It can be complex, so you need software support. So here Coromant has worked with our GibbsCAM Sandvik CAM solution to ensure support for this machining method in the latest version of GibbsCAM. So this gives, it facilitates faster market uptake from Sandvik Coromant and it gives GIBSCAM a unique feature and a differentiator in the market or at least an early mover advantage. So it's a good synergy between our cutting tool divisions and our software offerings. Going into then the market development, and if I start with a geographical perspective, Europe up 21%. We can say more or less across the board that Europe has surprised on the upside in the quarter. The only segment where we see more negative development is in infrastructure, and that we have said for a couple of quarters already. North America, more stable development. Basically, aerospace being the segment we would highlight as up. If you look at our reported order figures for North America in SMM, you might see it as slightly negative. We want to emphasize that we don't see that as an indication of the underlying market. We have in general engineering and aerospace some timing issues or timing impacts of orders being placed either in Q4 or that will come in Q2 instead, related to large distributors and also some key accounts on the aerospace side. So the underlying market development in North America for SMM we would consider to be stable. Asia, a bit weaker, minus 6%. Here, we definitely see an impact from a weaker China in January and February, while on the machining side, we did see a good uptick in China in March. March was positive in China, and that has also continued into the second quarter, into April. Other parts of Asia, such as India, has been positive in the quarter. Then we have the mining markets following and generally positive. Australia, you see down. Not too much to read into that. It's related to timing and some big orders that they took in the same period of last year. If I go through this from a segment point of view as well a little bit, mining, we see continued very robust and good demand at a high level. The fact that some markets are up and some down, I wouldn't read too much into it. It's more related to when we get specific orders in specific regions. So underlying very positive sentiment, I would say. General engineering, from an underlying volume point of view, more flattish, but with a strong Europe. Europe is up in the double digits and also up in volume. More stable North America and then more of a decline in Asia, driven then by the slow start in China that I mentioned. We see very similar development in automotive, as we saw in general engineering, but maybe slightly more negative in China, but otherwise similar in the other regions. Energy is positive across the board, maybe slightly more flattish in North America. Infrastructure, we could say, has maybe weakened a little bit more. We used to more comment on a weak Europe. Now we also see that in Asia, while North America is still on a more stable level. But overall, we indicate that as a softening market in infrastructure. Aerospace, strong, double-digit growth, strong across the board, and still not back to pre-COVID levels, we should say. I think they are about 20% below where they were in 2019. So there is more to get in aerospace as well in the future. you look at that order intake and revenues overall we have an order intake of 34.4 billion revenues of 31 billion so a positive book to bill which is really good to see and in particular good to see this order intake in the light of the high compare we had in the same period of last year so that we can continue to grow the order intake in relation to that compare we think is very positive and it sets us up in a good way also for the rest of the year. Looking at this from a slightly different take, looking at the growth organically and through structure, we can see, if we look at the revenue graph, that it's actually our eighth consecutive quarter of double digit revenue growth at fixed exchange rate, which we think is a good achievement and a testament to the execution of our shift to growth strategy. Coming then to the EBITDA development, we see an absolute EBITDA of 6.1 billion, up from 5 billion last year. It's an uptick of 21%. The margin at 19.8 versus 20.2, as I said, it's not where we want to be. Let's be clear on that. We expect ourselves to deliver a better margin than that. But we did see an impact from revaluation of unhedged balance sheet items that had 100 basis points negative impact in the quarter. This is related to currencies, and Cecilia will explain that a little bit more going forward. On the leverage side, as I said, price is now fully mitigating cost inflation in all BAs. So that's also very positive as we go forward. Going then deeper into each business area, starting with mining and rock solutions. What can we say on the top line? Fantastic achievements, all time high order intake level. Particularly strong growth in load and haul, in parts and services, and in our digital mining business, which is really good to see. Total order growth at fixed exchanges was 2%, organic 1%. If we exclude Russia, it's up 6%, which we think is a solid number given the compare we were working against. A margin of 20%, it's decent. It could have been better if we didn't have the 150 basis point dilution done from these balance sheet items. We should say that it's in quarter, it's 120 basis point impact, so slightly less than the bridge effect. And for the first quarter, we can also say that SMR is fully offsetting cost inflation with pricing also, so they have now caught up with that. On our shift to growth priorities, you have seen the press releases, two new major orders on our BEV equipment, one to Rana Gruber in Norway and one to Torex in Mexico, which we are, of course, really happy to see. We closed the Polymation acquisition and we also announced the acquisition of DESWIC Brazil. This was a joint venture that came with DESWIC where we had a minority stake. We have now acquired that full entity, which means that we now have a platform for expanding our mining software business into the Latin American market. So not a big acquisition, but a highly strategic one for the future. If you look at the EBITDA development in the graph as well, you can see the very seasonal nature of the EBITDA development in SMR, where we tend to start low in Q1 and it grows throughout the year. It's been like that for the past four quarters. Going into SRP, here we see strong contribution from acquisitions, 25% on the growth side, on the order side. We also see positive aftermarket development. If you look at the order intake at fixed exchange rates, it's up 15%, but it's an organic decline of 9%. Excluding Russia, it's an organic decline of 6%, and this is driven by a decline on the equipment side by negative 16%, while the aftermarket is up 5%. We see strong revenue growth, up 43%, both in the organic growth, but also the addition of the Schenck business. If you look at these numbers, I hope you appreciate the enormous task it is for SRP to do this integration of Schenck. It basically grows their business by 25%. On the margin side, 14.5 versus 59. Clearly below normal expectations for them, but then impacted quite significantly by integration and carve-out costs for Schenck of 120 basis points. This was not a surprise. This is something that is aligned with our plans. In hindsight, we should probably have been better at explaining this when we closed the acquisition. We expect for the full year a cost of 110 million for the integration of Schenck, about 30 million then in Q1, 30 million in Q2, and then around 25 per quarter in the second half of the year. Quite high cost, but it relates to the fact that shank mining is a carve-out, so we basically need to rebuild a number of systems that we currently get as a service from the selling entity. Also, SRP had some impact from these hedge revaluations, but not as big as SMR. Another highlight for SRP was that they, for the first time in a long time, they launched a new range of hammers in the attachment tools business at Conexpo in the US this quarter. A successful launch with good innovative products that are also more efficient to produce for us in the smaller hammer range. So that was very positive. Then going into manufacturing and machining solutions, I have to say a really good quarter from them in Q1. We see positive development in all customer segments, really, and especially driven by very solid demand in Europe. Overall, we see double-digit growth in both aerospace and energy. At fixed exchange rate, the growth was 9%. Organically, it was 5%. And then if we exclude Russia from the organic order intake, we grew by 7%. In the first two weeks of April, we see daily order intake being slightly up compared to the average of the first quarter. This is in particular driven by China. As I've said, we saw a slow start in Q1 from China. We saw an uptick in March. That uptick has continued into April, so we expect China to be a positive contributor then into Q2 and going forward. Margin 22.4%, up from 22. We see solid leverage for our cutting tool divisions due to both pricing and good cost control. And on the acquisitive front, those were neutral to the margin. We also did an acquisition here, Seco Tools, that acquired Premier Machine Tools on Ireland. A small acquisition, but strategically very relevant. They give us a capability to deliver more full solutions on the machining side for medical applications, which is a strategic growth area for us and something we expect to be able to scale globally. With that, I will hand over to Cecilia and then we'll come back with the Q&A.

Thank you, Stefan. So let's take a closer look at the numbers then. And as you can see here in the main table, also as Stefan mentioned, order intake was higher than revenues in absolute terms, meaning a positive book-to-bill ratio. If we then look at the box on the top right-hand corner, you can see that order intake grew organically by 2% and revenues by 13%. Our acquisitions contributed with 4% growth and currency by 7% and 6%. So in total, orders grew by 13% and revenues by 24%. Earnings were up 21%, reaching 6.1 billion. Margin 19.8, and we will look at the bridge in a couple of minutes. Net financial items increased year over year, driven by the higher interest net. Tax rate 24.5%, in line with guidance. Networking capital 27.8%, also an increase compared to last year. driven by the higher inventory volumes. And free operating cash flow at 3.7 billion, corresponding to a cash conversion of 63% in the quarter. Returns 16.6% and adjusted EPS increased to 3.07 SEC. If we look at the bridge then and start with the organic column, here you can see that revenues grew by 3.2 billion, 13%, and that gave an EBITDA of 234 million, corresponding then to a leverage of 7% and a dilution of 1.5 percentage points. And here, as Stefan mentioned, we had a negative currency effect coming from revaluations of hedges and accounts receivables and accounts payables. This was unexpected, and we had too many open position or a mismatch in terms of timing of our hedges due to the complexity that we are seeing on the logistics side. And that in combination with movements in the currency rates then gave this negative effect. And in terms of dilution, it was minus 100 bps and the in quarter effect was minus 90. Currency still accretive, 1.1 percentage point. And our acquisitions contributed with 1 billion of revenue, and they were almost margin neutral this quarter, slightly dilutive. And all in all, that brings us from a margin last year of 20.2% to 19.8% this year. If we continue down the P&L, then looking at the finance net and starting with the first row, the interest net, you can see the increase year over year here, and that's due to both higher borrowed volumes, but also higher interest rates. Then at the bottom you have FX and other asset classes minus 74 million and that's due to temporary revaluations over electricity hedges as sequentially energy prices have come down. The reported tax rate came in at 24.6%. If we exclude items affecting comparability related to M&A costs, we're at 24.5%. And then we had a transfer price adjustment related to a prior year. And if we exclude that, the normalized tax rate was 23.6%, so in line with guidance for the year. Looking then at networking capital and starting with a graph on the left hand side, you can see that both absolute and relative networking capital increased year over year and also sequentially, mainly driven by the higher inventory levels. On the right hand side, you can see the development by business area and compared to a year ago, all business areas are at higher levels. Sequentially, SMR and SRP increased, whereas SMM came down slightly. If we continue then with cash flow and starting with the table on the right hand side, you can see that earnings were up compared to last year. The net working capital build up of around 2 billion was slightly lower than what we had last year and investment levels were higher. And that gives us then a free operating cash flow of 3.7 billion. And as I mentioned, that corresponds to a cash conversion ratio of 63%. In the graph on the left-hand side, if you look at the orange trend line, you can see that our 12-month rolling cash conversion is at 57%. Financial net debt decreased slightly sequentially to 36.2 billion. And our balance sheet target financial net debt over 12 months rolling EBITDA came in at 1.3. So below our target of 1.5. Capitalized leases were largely unchanged in the quarter. The pension liability decreased a little bit, driven by higher discount rates. And that gives us a net debt of 43.4 billion. Then looking at outcome versus guidance, the currency effect came out at 660 million. Here we guided 600. And capex levels were at 1.2 billion, interest net 0.4 and the normalized tax rate also in line with guidance. And if we look ahead then the coming quarter and for the full year, we've left the CapEx guidance unchanged at 4.5 billion. We still expect positive currency effects of 200 million for the second quarter. And we've also left the guidance for the interest net and tax rate unchanged at 1.7 billion and 23 to 25%. And with that, I will hand over back to you, Stefan, for summary and conclusions.

Thanks, Isi. So if we conclude, as I mentioned, we saw the eighth consecutive quarter with double-digit revenue growth, which we are really happy with, and it's a great achievement. We see continued good momentum, favorable demand, and also solid price execution. We continue to see strong contribution from our acquisitions. And with a positive book to build again, we have strong backlogs in the long cycle business and a robust development in the short cycle business, which is a good way of continuing into 2023. We are also continuing to execute on our shift to growth strategy. We see high growth in strategic priority areas. We see really good traction in mining automation and mining battery electric vehicles as examples. And as you might have noticed, we have also announced that we are increasing production capacity for BEVs, not only in our main factory in Turku, but we are also building a completely new plant in Malaysia that will initially focus solely on BEV and battery pack production to meet the market demand. Also a couple of smaller but strategic acquisitions in the quarter related to mining software in Latin America and the medical machining segments. That's good to add to the business. And going forward, we'll continue to leverage on our strong and leading global positions. We see that we are leading the way in many of the strategic focus areas that we have with our good offerings. We're going to continue to strengthen our value chain positions through acquisitions in the selected areas. And with the price leadership we have shown in this quarter as well, we are enabling all our business areas to compensate for cost inflation in a very good way. So thank you for listening and let's go into some Q&A.

Yes, now to the part that you're eagerly waiting for, to ask your questions to Stefan and Cecilia. Just a gentle reminder, please keep your questions to a couple each, so everyone has the possibility to ask their questions. Operator, we can take the first question, please.

The first question from Taliesin comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you so much for taking my questions. I have two. I'll ask them one at a time. The first one, and they're somewhat related, but the first one sort of regarding operating leverage across many divisions. sort of we're a bit below from where Sandvik used to be. Is it just sort of the M&A, the dilution of like heavy M&A over the last few years? Do you expect a recovery of that? How soon can we get back to the older operational leverage? And maybe actually my question was very similar on cash conversion. My second question, if you can address sort of like a sort of 60% is still relatively low compared to what you did over the past. Do we have an uptick near term?

Yeah. All right. So if I start first with the sort of longer term leverage question, here I think it's important to remember that what's considered good leverage is different for price driven growth versus volume driven growth. When we have price driven growth, the ambition is to offset cost inflation. So being no accretion or dilution in terms of margin. Whereas where we have volume growth, we of course expect that to be accretive to the margin. So I think that long term, when we will come back to the old leverage levels, that's partly impacted by the timing of how long we will be in this higher inflationary environment with a very high component of price driven growth. Then if I continue with the second question, so the cash conversion rate. In this quarter, as I said, we were at 63%. We are seeing supply chain and also the logistics challenges slowly easing up. We think that will continue for the rest of this year and potentially also into next year until we are back to our more informal network and capital target of 25%. But for this year, we are expecting a better cash conversion compared to what we had last year.

Thank you.

Just to add one thing to that on the leverage side, and if you talk SMS in particular, which historically has had very high leverage levels, sometimes 60-70%, we should know that we have been working hard or they have been working hard for the past two, three years to actually reduce that leverage. It might sound negative, why wouldn't you want the high leverage, but leverage goes both ways. And we prefer them to be at the stable margin level or more stable margin level in ups, ups and downs than the more margin volatility. So they have been working on cost flexibility, which in a way will dampen a little bit the leverage also on volume growth. But on the other hand, will make them more resilient in a downturn. So that's something you should expect to see going forward as well.

And maybe Cecilia mentioned pricing sort of has the dominant this period, and that's why also we didn't have much leverage. But can you clarify then inside your growth how much is pricing this quarter versus volume? Yeah, sorry.

Yeah, we don't comment on that. Both at group level and all business areas, price offset inflation and also for the core cutting tools within SMM leverage was 27%.

And that you can say, if you look at the organic growth in SMM, excluding Russia, around 7%, there is an element of volume in that, but most of it is price. So in relation to that, I think the leverage is where it should be for the cutting tool divisions.

Understood. Thank you so much.

The next question comes from the line of Claes Berjellin with Citi. Please go ahead.

Thank you. Hi Stefan and Cecilia. So the first one I had is on SMM and the growth, obviously very solid in Europe across all verticals. But Stefan, can you please help us as you normally do with roughly how much each vertical grew in Europe, but also in total machining solutions and also the comment of April being a bit higher than the average of the first quarter, whether something became stronger versus maybe something getting weaker? It would be really helpful just to get some ranges. I'll start here.

Sure. I mean, if you start with Europe, I mean, stronger than I had expected when the quarter started, to be frank. So really good to see. For SMM, I mean, we see double digit growth across the board in Europe. Aerospace and energy in the high teens, automotive in the mid-teens, and automotive in the low teens. So really solid growth, and that also means good volume growth in Europe. If you look at the more total picture, aerospace and energy continues to be positive with double-digit growth, as we mentioned, also on a global level. While general engineering is more in the high single-digit, automotive more in the mid single-digit. As I said, we saw a slow start of the year. The first two months were weak, I would say. Uptick in March to positive numbers, but overall the quarter still was negative. Good development in energy, which we probably shouldn't read too much into. China Energy is not a huge business, so there can be more fluctuations. But maybe calling out a weaker automotive in China, especially at the beginning of the quarter, was definitely seen. In the commentary in April, you should read that in the light of the comment on China. So I would say excluding China, it's a stable development versus Q1. But with the uptick we saw in China in March and continuing into April, that is driving a positive momentum versus a slight uptick then versus Q1. Okay, perfect.

My second one is on revenues. You are delivering out more from the backlog this time. It looks like bottlenecks. are easing now gradually. Can we talk about the lead times in SMR? You previously said that BEV lead times are over 18 months. Is that still the case versus perhaps lead times getting shorter now outside of BEV? I'm trying to understand how far we can model out the revenues here. Thank you.

Beverly Times, I think it's still very much at an order by order, customer by customer basis, managing individual units, who can get what and so on. Some of the orders we have taken now, they have deliveries in this year. But it's very much a juggling. We're trying to meet demand. We're really leading that new factory in Malaysia to come online to fully resolve the BV capacity bottlenecks we have. Overall, I wouldn't say lead times have come down for SMR. We continue to have a positive book to build in in Q1. But you can also see revenues are ramping up. So I think we're catching up. And I think we should, during this year, be able to normalize lead time. At least that's the ambition.

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

Hi, good afternoon. Thank you for the time. I've got two. They're different, so I'll take them one by one. On the comments on China, very helpfully in terms of Q2 versus Q1, and apologies for diving into this again. I'm interested in terms of whether you think this is a catch-up on a slow start to the year, or you think it's genuine underlying strength. I appreciate lead times are only so far, and there's lots of different markets and customers, but could you get a sense of the confidence around that continuing in China, at least from the customer indications you've got at the moment?

The indications I've got is not that we talk about a catch up. It's more of a reopening, meaning, I mean, last year was it was up and down, but average is was not good. And we came in Q4 was not good with lockdowns first and then sick leaves and so on. And then that slowness continued into over the Chinese New Year, January and February. So, you know, continued at a low level simply. And now we see more in March and going for more of a reopening. So it's not that we see a boom in any way, which could sort of could indicate a catch up. Like, for example, we saw in China during 2020 after the lockdown in February and there was sort of a boom in March, April. It's more of a reopening. So in that sense, it should be more sustainable as well.

Thank you. That's very helpful. And then secondly, just on the aftermarket, on the mining side, I mean, it feels like every quarter it's just a very, very good number. And again, it was in the Q1 here, particularly in SMR, I guess. I guess the same question that you've probably had a lot of recent quarters is, To what degree do you think we can be sustaining those kinds of growth rates? Is there a little bit of seasonality in terms of the ordering? Is there a little bit of concern around customers having built big inventories potentially through last year? I mean, I know previously the commentary has still been pretty positive around aftermarket, but just some help around how to think about that and if there's any signs at all that the levels that we've seen could either slow or, I guess, to be fair, accelerate even further.

I'm happy you asked the question. I didn't think I had any credibility left in answering that question, because I can tell you we continue to be sometimes surprised as well when we see the figures coming in every month. But to give you an answer, I think there are, first of all, let's be clear, there is a price component in this, of course. but there is also volume growth. We do see, first of all, just strong what we can call over-the-counter sales, so smaller parts across the board, which indicates that our customers really want to keep the machines running, which makes sense to have a maximum output considering the current mineral prices. We also see stronger demand on refurbs, midlife upgrades, extensions and so on, which of course could be related then to lead times on new equipment, which means you extend the life of the equipment you have. So then you get that into the aftermarket sales instead. So those are the two main points that we see. So it's driven by maximum output from our customers and extending the life of some of the equipment they have.

Thank you, Stefan. Appreciate it.

The next question comes from the line of Mattias Holdmer with GMB. Please go ahead.

Thank you. I'm going to follow up a bit on Daniela's question here and sorry to dwell on this topic. But when I look at the bridge for SMM and then consider the comment you made here that there was 27% operating leverage for the cutting tools, it seemingly implies that the manufacturing solutions business must have been quite dilutive in order for the numbers basically to add up for the division. So can you please comment or clarify on what's going on here?

SMF was slightly dilutive. SMM also had some impact on the revaluation of unhedged balance sheet items. A dilution of 40 bps and an in-quarter effect of around 50 bps.

And then, sorry, just to add to that as well, we also have a powder, the 27% is the core cutting tools leverage. We also have a powder business with a lower leverage. So if you take that out, I think it's more like 20%. So if you look at the reported figures, you will see a different number.

And just to follow up, are you happy with where the sort of CAD and CAM business profitability is at this point?

yes those are performing at a good level bear in mind that they are still small in relation to the overall smm business so they have relatively limited impact on on the reported profits obviously understood thank you the next question comes from max yates with morgan stanley please go ahead

Mr. Yates, maybe your line is muted. We cannot hear you. We will move, if it's fine, to the next question coming from the line of Gaël Debray with Deutsche Bank. Please go ahead.

Thanks very much. Good afternoon, everybody. Can I start with the bridge again and the impact from the revaluation of unhinged items on the balance sheet. Just checking, you know, the bridge you show on page 24 that this negative impact is indeed taken in the organic column. And shall we see this as sort of a one-off this quarter, or do you still have lots of open positions with mismatches which could play out negatively in Q2 or in the next quarters?

Yes. So starting with your first question. So this impact is in the organic column. We changed that a couple of years ago. And in terms of whether this effect could reoccur, I would say that we always have some effects every quarter. Sometimes it's slightly positive, sometimes it's slightly negative. This quarter, the effect was unusually large. We had a similar effect back in the first quarter in 2020, for instance, where we also had too many open positions. And we are, of course, always working very hard not to be in a position like we were in this quarter.

Okay, understood. And I have a second question about the SP mining acquisition. I mean, obviously, we saw very high integration costs this quarter, and this will apparently remain pretty high in the next few quarters as well. But it also appears that the Q1 revenue was somewhat disappointing, at least, you know, versus my own expectations and at least relative to the trend that we saw in Q4. So can you comment a little bit about, you know, what's going on there? Thanks very much.

Yeah, absolutely. No, you're right. And they have a quite significant seasonal effect. They have a large portion of their business in Australia. Australia is basically on holiday in January. So very low revenues in January or the start of the year. So sequentially versus Q4, yes, you will see a decline, but it's like a number of our SMR business, they start weaker and grow throughout the year. So from an SP mining point of view, Q1 was according to plan. And I guess we also are learning a little bit that impact. So we will just have to get used to that normalizing during the first year. But that's the reason.

Okay, that's great. Thanks very much for this. Maybe a very final one, just to make sure I understand or I interpret correctly what you're saying regarding the daily order intake in April for SMM. I mean, do you actually adjust for Russia into this? I mean, does that mean that the organic order growth in the first couple of weeks in April was basically a bit above 7%?

Yes to the question, have we adjusted for Russia? Yeah, we don't compare with any sales in Russia in Q1 of last year. Commons are completely clean of Russian business.

Okay, thanks very much.

Thank you.

The next question comes from Sebastian Kuhne with RBC. Please go ahead.

Yeah, hi, everyone. First question is on SRP, where you had very strong revenue growth and where you say that, like in the other divisions, you caught up with the cost development, so pricing caught up with costs. But if I run the numbers and I look at the 14.5% margin and I adjust for the 120 bps from SP and the 40 bps revaluation, I still only get to 16.1% margin. Last year, you had 15.9. So that looks fine. But then this is supported by 230 bits currency. So to me, it seems that you caught up with cost, but only with the help of currency. Is that correct? Or am I missing something here? That would be question number one.

Yes, we also have some larger ongoing projects within the SRP business, mainly on the IT side, so changing both ERP systems and CRM systems, so that also impacts the leverage.

it's higher costs basically and just to just answer specifically your question no we are not counting on the fx impact the positive fx impact when we say that price has compensated for inflation those are two completely separate things so you then can expect an improvement in the coming quarters or

I mean, as, as we said, the integration costs will continue to run during the year. And also these bigger IT projects are also longer term projects that will impact the leverage also the coming quarters.

Okay. The second question is on the BEV, on the electric machinery. You now have a couple of follow-up orders and deliveries. Can you give us an idea whether the equipment is running at a similar margin to your IC equipment? And then if the battery-as-a-service business will give us a similar margin than conventional service business. So I just want to get an understanding of of the marginal impact longer term from BEV.

Thank you. Currently, the BEV business is dilutive to SMR. We don't have the same margin on the BEV equipment as the combustion engine business. We expect that to be corrected eventually, but today, primarily because of volume, the production line is not at sort of an industrialized level in the way that the ice equipment is. And on top of that, it's new equipment and it tends to take a little while before we can do cost downs and efficiency is as well in the actual product design. The priority has been at this stage to expand the offering and capture the market with good innovations. But over time, we don't see any reason why it shouldn't be at least as good. because it's a machine that provides more value and in a way is a little bit simpler to build. Battery as a service margins I will pass on for now. I think that requires a bit more elaboration and probably is more of a capital markets day answer or question.

Understood. Thank you very much.

The next question comes from the line of Andreas Koski with BNP Paribas Exxon. Please go ahead.

Thank you and good afternoon. So I have two questions. The first one is on organic growth in North America for Sunwick Manufacturing and Machining Solutions. So we saw a significant slowdown in year-over-year growth rates during the quarter. I know you touched on it briefly, but could you elaborate a bit more if you have seen A change in the demand pattern in North America during the first quarter or a sequential decline month by month during the quarter or something like that?

Yeah, I think the answer is no. It's stable if we look at what we feel is the underlying market. So the main drivers is, as I mentioned, that on the aerospace side, we have some very big customers where order timing can impact depending on when they place orders for the year. And also actually we had some of the major distributors that have changed order pattern in a way as they also a little bit adopt their ordering behavior at the moment. But we have talked to them specifically and also they say no underlying change in their customer demand. It's more how they decide to place their orders from their side.

Okay, very clear. And then the second question is on your comment that your price increases are now compensating for cost inflation. Does that comment relate to the absolute EBITDA or is it relating to the margins you perform? And if it is the latter, which I thought it had been when we have talked about this previously, I have a bit... It's difficult for me to reconcile that because we saw an organic dilution to margins in Q1 last year and we continue to see an organic dilution to margins in this quarter. So what explains that margin dilution on the organic side?

Yes, so when we are talking about price offsetting inflation, we are talking margin and we're doing offsetting both at group level and also all of our business areas. In terms of the leverage, I think we touched upon the unhedged balance sheet items. We talked a bit around the SMM leverage and the SRP leverage. On SMR, what's impacting their leverage is also some inefficiencies in production driven by supply chain and logistics challenges. There's also a negative mix impact with a higher share of equipment revenue. And then we're also investing in R&D for future growth. So those are the key components.

And also then a reminder of why, yeah, I agree. We had a challenge last year in Q1 as well. That was more related to that compared to Q1 of 21. In Q1 of 21, we were all sitting at home. We had no travel, no marketing costs, et cetera. So we had a very high, I would say an inflated margin in Q1 of 21. And that was a challenge last year. So that was a completely different dynamic.

Understood. Thank you very much.

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

Good afternoon, everyone. Stefan, Cecilia, thank you very much. I've got two questions. Firstly, can we talk a bit about price-cost conceptually? You've come back to neutral. Well done. But given your market share in the cutting tool industry and the mining equipment industry, one could argue for positive net pricing power across the cycle. With the current inflation levels that you see and the pricing actions you have done and plan to do in the near term, do you see the potential for price costs to turn positive at all during this year or next year, given your current plans? That's the first question. Maybe you go one at a time.

Should I take that? I think we have to differentiate here between what we can maybe do with the pricing power and what is wise to do if you run a long-term business. I think we could dial up prices more and we could get it through. I don't think it's the right thing to do if we think about the long-term health of the business and also growing the business. Because customers will remember and they will react to that and they will seek alternative suppliers if they feel we are taking advantage of the situation or overdoing it. So my view is, our task here is to offset the cost inflation, but not take advantage of the situation. We have such healthy margins to begin with. And I can tell you sitting in front of customers, raising prices when they have different margins than we have, it's hard enough in that sense.

Well, that's very helpful. Thanks. And on the mining side, great order dynamics. A couple of points I'd like to try and understand. Greenfield versus brownfield and large versus small customers. I guess we're in a world of a higher cost of capital, which is probably squeezing out juniors and explorers. Yet the world has massive need over the next five to 10 years. And yet projects are taking a very long time. To what degree do you think that there is a shift in the mix of your book of business as we move away from a classic capex cycle to one where growth may have to come from sweating the existing fleet harder?

Yeah, if we start with the first one, we have seen for a number of quarters a split roughly 50% brownfield, 20% greenfield and 30% replacements. In this quarter, we saw greenfields increasing slightly with a couple of percentage points. I think it's too early to say whether that was just a coincidence or timing or not. It's too early to say if it's a trend, but at least that's the split we saw. When it comes to large versus small customers, I actually don't have that data, or I don't think we cut the data in that way. Over time though, if you take a couple of years, our top 10 customers has increased as share of revenue. Both because we have one market share or bigger part of their business and potentially, but that I don't know for a fact that you say that the bigger might sort of getting bigger, at least What we can see on the M&A front, as I'm sure you follow as well, there is quite a lot of activity with, in particular, the bigger ones buying up, especially, for example, copper assets. Because they have been quite clear, some of them, that they believe that the current copper prices are not reflective of the future demand shortage, which means if you believe that, obviously, then it's a good time to buy a copper asset today.

That's very interesting. Thank you, Stefan.

All right, we can take the next question.

The next question comes from the line of Edward Hesse with Credit Suisse. Please go ahead.

Hi there. Good afternoon, everyone. Yeah, just a couple of quick questions for me on SMR. So first of all, you framed China and China reopening for SMM. But just on SMR, I mean, clearly the largest commodity importer in the world. I mean, can we expect strong aftermarket acceleration in Q2?

You mean our SMR sales in China or just as a general demand question? I didn't quite get it. No, just a general demand question really. It's a good question. I think in general, I would say it's of course positive we're opening in China, especially if you look at, for example, iron ore demand. Not that that's our biggest exposure, but it provides some stability to the overall market. So I think it's positive. I cannot answer to if it will have any direct impact on our customers. I would say at the moment they feel pretty much that they're going for maximum capacity sort of already before China reopens. So if anything, it could of course provide some stability to the current mineral prices, which would indicate that the trend can continue. But I don't think it will have a short-term impact on the positive side either.

Okay, brilliant. That's very helpful. And then just quickly, just on sort of comments around commodities specifically. I mean, were there any commodities that particularly stood out which were driving the, you know, with particularly strong production driving aftermarket?

No, not in that sense, I wouldn't say. But what we have seen over a little bit of time is that our share of exposure to copper has increased slightly versus, for example, gold and others. But it's not that one commodity is driving more aftermarket than the other. Not what I have seen, at least.

Brilliant. Thank you very much.

Thank you. We'll take one question more, please.

The next question comes from Max Yates with Morgan Stanley. Please go ahead.

Hi, Stefan. Can you hear me now? Yes. Yeah, excellent. Just the question I wanted to ask was around the aftermarket growth as well. So 15%, and I think when we look at a lot of the mining companies themselves, they are missing production targets. So what I'm trying to understand is how do we bridge the gap between low single digit kind of mine production volumes versus the kind of orders that you have been generating? Is a lot of it price? Is there... aftermarket projects that are coming back, maybe more rebuilding? Are you taking some share? Is there anything outside of just the underlying sort of mine production that you would highlight that you're doing better now versus the past that is resulting in these sort of outsized growth rates that we're seeing versus underlying production?

As I mentioned, we are seeing an uptick in things like rebuilds and mid-life upgrades. The main interpretation of that is long lead times for new equipment, so you extend the lifetime of what you have. We are also having a... This has gone on for a number of years now, and it continues. We are gradually increasing the share of aftermarket on our own equipment. And it increases by a few percentage points per year, and we are steadily progressing on that. So we're getting better and better as full service agreements. You might have seen we have announced orders on remote monitoring service, for example, it's been now publicly announced that Barrick, I think it's the second largest gold producer now in the world, is going all out with Sandvik remote monitoring service on their underground equipment fleet. The order value for that order itself is very small, but what typically it means when we go into that engagement, we also get pretty much a full service contract because we help the customer with productivity improvements but as part of that they also go with Sandvik parts and Sandvik services and so on. So we are inching upwards also in terms of the market share with these kind of agreements and work.

Yeah, go ahead. Maybe just a very quick follow-up on the new president of Samwick Manufacturing kind of announced this morning. I mean, obviously, kind of the strategy, you've made the strategy quite clear of kind of what you're trying to do with this business. But in terms of kind of what his priorities would be for that business, have you sort of, I mean, are you pushing kind of, do you want to see more acquisitions? Do you want to see the margins go up? Would you like to see the growth accelerate, kind of what have you sort of communicated and worked together that you would really like to see happen with that business? Or is it, would you say it's more of the same to what we've seen in the last two to three years?

I would phrase it like this. The strategy isn't changing, meaning his task is to continue to execute on the strategy as defined. But I wouldn't call it more of the same, because what we have done in the past years is we have acquired quite a few entities. The focus is on integration. We are investing in some of the businesses as well. So the ambition is to achieve the targets we have set out, which is some additional revenue growth, The majority of that being organic, some of it additional acquisitions, and then to get them up to the margin target, where, as we have said, they are currently dilutive to SMM. The goal is that they should be around 20% as a first step. And that's going to be his task.

All right.

Well, we have already seen a good step in those margins this year, Stefan. Are we kind of making, I think they were at 10.4. Are we kind of moving in the right direction already?

You will not see 20% this year. In terms of how we see that progressing, we expect to give you a much better view at the CMD in November.

All right. Max, you were cheating. Three questions, long questions, and typical Stefan, long, good answers. But now it's time to end this webcast. Thank you, everyone, for calling in.

Thank you.