Sandvik AB (publ)

Hello everyone and welcome to Samviks presentation of the first quarter results 2024. My name is Louise Cheddar, head of Invest Relations and beside me CEO Stefan Widing and CFO Cecilia Felton. We will, as we usually do, listen to Stefan and Cecilia take us through the highlights of this quarter and after that we will open up for questions. So now let's listen to the presentation and please Stefan.

Thank you Louise and also from my side welcome to the first quarter report in 2024. If we summarize this quarter we can see the typical seasonality with a positive book to bill and overall I would say the order intake levels are at a solid level in this quarter. We see a strong demand in aerospace, a bit more mixed picture in general engineering. Mining demand is on high levels while infrastructure has remained weak in the quarter. Total order intake declined by 7% of which organic decline was 5%. Revenues declined in total 6% and of that organic was 5%. And the organic decline on the revenue side of course also had an impact on our margins this quarter. Adjusted EBITDA decreased by 40% corresponding to a margin of 18.2. This leaves our rolling 12 months EBITDA margin at 19.6. So just like last year we're starting a little bit on the low side this year. We do see some of the savings starting to come through in the various restructuring programs and in this quarter it was 128 million SEC. Adjusted profit for the period came in at 3.3 billion. We also in this quarter continue to see good progress on our strategic priority areas. We're very happy to see very strong growth in our rotary drilling division which is a business we are looking to grow. We also had a repeat major order for our auto mine solutions, mine automation for what is the largest underground mining automation installation in the world. We also completed two acquisitions and we announced a third one after the close of the quarter. The innovation I want to highlight this quarter is our upgraded 800 series cone crusher. This is our flagship crusher for mining applications within ROC processing. It's an updated crusher with a new automation and connectivity system which means it comes pre-prepared to be connected to our digital solution SAM. It also has an upgraded and robust and optimized mechanical design that helps with reliability and simplicity which is key for our customers in this segment. Jumping into the market development, starting with the geographical view. We have Europe being down 9%. If we take a cutting tool look at this, we are down 6% in Europe and this is primarily driven by general engineering and weak Central Europe. North America minus 14% but more positive from a cutting tool perspective. Reported in that segment minus 4% but underlying we believe it's stable and robust. The negative number is driven by timing of order intake for larger customers in the aerospace industry which can come in March or April and this year it will come in April instead. So underlying positive or stable I should say in North America. Asia flat 0% but here we note the positive development for cutting tools in China with low double digits growth in China in the period driven in particular by a positive general engineering. For the rest of the geographies it's driven by mining and I will not comment more specifically on them. If we take mining as a segment we continue to see demand picture being stable at the high level. Orders are slightly down but we compare now to Q1 of last year which was the highest order intake quarter ever. And also for equipment if we take away the major orders it's only slightly down which shows that the activity for the smaller orders and especially replacement orders is on a high level. General engineering is down. Overall down in the mid single digits. Europe down in the low double digits and here as noted primarily driven by a weak Germany, Central Europe including Italy. North America stable in general engineering while Asia as I noted positive China up double digits. Infrastructure continues to be weak but we have here denoted North America stable. What we can say is that we are not through the destocking yet but we have seen some positive signs, some unexpected orders from some dealers indicating that they are slowly but surely working through their inventory levels. Automotive is slightly down, down in the low single digits. Europe is down mid single. It's offset by North America being up mid single. But here we could say that Europe is slightly more adverse mid single than North America is positive mid single digits so the outcome is slightly down because Asia and China was flat in the quarter. Aerospace good growth, low double digits growth in the quarter driven by Europe also China up mid single. North America as I said is actually in the figures it's down mid single digits in this quarter but it's purely driven by timing of larger framework contracts that is now coming into April instead. So we still denote it as positive development because that's the underlying market development here. The other segments are down overall mid single digits. Europe down mid single. North America is flatish. Asia is positive but China is actually a bit negative mid single digits but other markets in Asia such as India has been very positive in the quarter. This leads us to an order intake overall of close to 32 billion. We have the revenues in the quarter of 29 billion. So a positive book to bill of 110 percent. The lower revenues in the quarter has been driven partly by calendar effects in SMS driven by the shift of Easter from April into March. But maybe more importantly relatively low invoicing in SMR which is a timing effect. We see the year being back loaded meaning more sales and invoicing will happen in the remaining three quarters of the year and a slightly more adverse impact than the normal seasonality now in Q1. If we look at the order intake and revenues here from a slightly different perspective I think the main highlight is or low light maybe is that we had 12 quarters of consecutive organic revenue growth but that then came to an end now in Q1 because of the effects I just mentioned. This lower revenues also had an impact on our EBITDA. EBITDA was down 14 percent margin of 18.2 percent. Cecilia will come more into this dynamic but I think the short summary of it is very simple. We have temporary lower volumes in this quarter and it's putting pressure on our SGA SG&A cost coverage. And since this is what we believe a temporary lower volume it's also something that's very difficult to mitigate short term. We also have a currency dilution of 40 basis points and we are now sitting with a rolling 12 months EBITDA margin of 19.6 percent. Going into the business areas starting with mining and rock solutions. Resilient demand but of course facing record high comps in Q1 of last year. But you can see on the graphs that otherwise order intake is at a very stable level. As I said we saw strong growth in rotary drilling and we got the major auto mine order of about 300 million SEC. Total order intake declined by 9 percent and the organic decline was 7 percent. Aftermarket was stable while equipment was down 18 percent primarily driven then by the major orders which is mainly then or it is sitting in on the equipment side. If we digest a little bit the aftermarket number of flat development we can say that parts and services continues to have a positive development. But it is being offset by another quarter of both destocking in ground support but also the impact they have from a weaker tunneling business. We expect to be through that now if nothing unexpected happens. So we should no longer see that more negative offset from ground support in the aftermarket business going forward. If we look at the margin 18.2 percent down from 20 percent impacted then by the lower invoicing in the quarter and the same dynamic I just mentioned for the group as a whole. We have some savings coming through of 15 million and some dilution from currency of 10 basis points. No acquisitions in SMR in the quarter but happy to see that we continue to strengthen our partnership with key customers. We extended our framework agreement with one of our top three customers where they will now roll out our remote monitoring service meaning connected equipment to their entire fleet. And we have also agreed to collaborate on their BV strategy to help them reach their net zero emission targets that they have as a company. Coming down into rock processing also here stable demand in mining but infrastructure continues to be weak. Some positive signs as I said maybe in North America but we expected destocking to continue for probably another quarter there. Total order intake declined nine percent organic decline was seven percent. Here however we saw positive dynamic on the major orders with major orders totaling 169 million in the quarter. Adjusted EBITDA at 13.3 percent versus 14.5. They always have a low seasonality in Q1 but this is of course on the lower side but we still believe they show good margin resilience considering invoicing was down 15 percent organically. And this is because of good contribution from their savings and cost initiatives as well as good execution of price realization. Currency also had a dilutive impact on the margin of 50 basis points and I already mentioned the launch of the new flagship cone crusher. Manufacturing and machining solutions already mentioned the market comments here with solid demand in aerospace more mixed in general engineering and automotive slightly down overall. Primarily driven then by weakness in Europe while we have a resilient North America and some positive signs coming out of China. Software grew mid single digits cutting tools then was down mid single digits and we also saw some positive signs on the powder side. Up high single digits in the quarter which is positive given this is the quarter we get many of the frame orders for the full year. Total order intake declined by 3 percent and that was also the organic number minus 3 percent. If we look ahead or look how the April has started we see a stable development in the first two weeks and if we look ahead we can of course see leading indicators improving but it usually takes a while before we actually see that in our numbers. But the fact that PMIs on average are starting to cross 50 in most regions except maybe Central Europe that's a positive for us. Adjusted EBITDA margin 20.3 percent down from 22.4 impacted then by the negative volumes in the quarter. Good progress on implementing the savings program 87 million realized in the quarter and also here negative impact from currency of 60 basis points. We had three acquisitions coming in this quarter two completed SIMQuest CAM reseller in North America and Pro Micron a German company manufacturing developing and manufacturing tools with embedded sensors. Which is important for automation going forward and then I also announced recently ALMU which is a German manufacturer of tools for lightweight machining or aluminium machining in particular for electric vehicles. So with that I'll come back for the conclusions and Q&A but first hand over to you Cecilia.

Yes thank you Stefan. All right so let's take a closer look then at the numbers together. And as usual let's start with the growth bridge and here you can see that organically both orders and revenues were down by five percent. Structure did not have a material impact in the quarter and currency had a negative impact of two percent. And then with some rounding differences total order intake were down by seven percent and revenues were down by six percent. Adjusted EBITDA as Stefan mentioned came in at five point three billion with a margin of eighteen point two percent. And I will show you the EBITDA bridge in just a few minutes. And net financial items came down slightly year over year five hundred and six million. And the tax rate excluding items affecting comparability and also on a normalized basis was twenty four percent. So in line with guidance. Networking capital thirty point nine percent of revenues. Sequentially in volume networking capital was flat. We had a good cash flow in the quarter three point eight billion corresponding to a cash conversion of seventy seven percent. Returns six point eight percent impacted also by the restructuring charges in the quarter and adjusted EPS at two point sixty one SEC. All right. So if you continue with the bridge then and starting with the organic column here you can see that revenues were down one point six billion minus five percent. And adjusted EBITDA declined by six hundred and thirty seven million. And that gives a leverage of minus forty percent and a dilution of one point one percentage points. And as Stefan said earlier this is really driven by the temporary lower volumes that we had in the quarter which puts pressure on the .N.A. coverage. Currency was dilutive. And that brings us from a margin of nineteen point eight percent last year to eighteen point two percent this year. The restructuring programs are progressing according to plan. The program that we announced in twenty twenty two has now generated one hundred thirteen million of savings in total. The year over year bridge effect is not the same as the numbers here as we had some savings last year. And that corresponds to an annualized run rate of fifty eight percent. We've also now commenced the program that we announced in January and booked the two point four billion of restructuring charges in the quarter. And as you can see here we also have some savings from the twenty twenty four program now in this quarter corresponding to eight percent of annualized run rate savings. If we continue down the .N.L. looking at the finance net and starting with the interest net here at the top you can see that it was largely on par with last year. And here we have on the one hand higher yield cost but on the other hand lower borrowed volumes. Then at the bottom effects and other assets classes here you know that in the past we have booked temporary revaluation of currency hedges on orders not yet invoiced. From first of January now this year we are applying hedge accounting in this area which means that these revaluations will instead go via equity in the balance sheet. And then in total net financials came in at five hundred and six million. The reported tax rate was twenty six point one percent if we then exclude items affecting comparability mainly the restructuring program we came in at twenty four percent. So right in the middle of the guided range for the year. Then if we move on to the balance sheet and starting with network and capital here if you look at the bars on the left you can see a slight sequential increase in absolute terms in networking capital. This is driven by currency in the volume as I mentioned networking capital was flat sequentially. In relative terms networking capital increased to thirty point nine percent and as you can see on the graph on the right this is mainly driven by .M.R. and .R.P. With a good cash flow in the quarter three point eight billion corresponding to a cash conversion of seventy seven percent and on a twelve month rolling basis we are at eighty three percent cash conversion. Then if you look at the year over year development a bit adjusted for non cash items was lower compared to last year. But then last year we had a networking capital build up of two point one billion and CapEx was slightly higher this year versus last year. Financial net continued to gradually come down in the first quarter and to a level of thirty three point nine billion driven by the positive cash flow. Capitalized leases increased slightly sequentially whereas the pension liability came down a little bit driven by changes in the discount rates. Our balance sheet target financial net debt over over EBITDA increased a little bit sequentially from one point two to one point three. And this is driven by the restructuring charges in the quarter impacting twelve months rolling EBITDA. Then if you look at outcome versus guidance currency came in at two hundred and twelve million CapEx one point two billion interest net no point four and the tax rate as I mentioned right in the middle of the guided range. And looking ahead then for the second quarter in the full year we've left guidance unchanged for CapEx interest net and the tax rates and for the currency effect we estimate this to be plus one hundred and twenty million in the second quarter based on the currency rates at the end of March. And with that I will hand back over to you Stefan.

Thank you Cecilia. So let's conclude. I think a good way to describe it is it's a mixed picture quarter. The short cycle business is stable but it is adversely impacted by calendar effects on top of the fact that we are of course in in the down cycle in general. But stable with some positive signs. The long cycle business remains at high levels but the year is characterized by more backloaded deliveries for the remaining three quarters of the year. We see a stable to positive sentiment among our customers and a continued investment willingness. The temporary lower volumes in the quarter of course put pressure on the SG&A cost coverage also impacting the margin in the quarter. I'm happy to see that we continue to be an enabler in our customers shift. We are a trusted partner when it comes to for example implementation of large automation project and helping our customers with the BV transition. We continue to launch good innovations that helps our customers become more productive and efficient which is at the end of the day what drives our business forward. And we have strengthened our platform for growth with continued expanded offerings and capabilities through M&A in the quarter. If we look ahead we can see that the savings from the restructuring program is gradually coming through as planned. We have good price realization and good cost focus in the organization which will be important to support our full year margin target. And we have the leading indicators such as PMI and key commodities on a positive trajectory in some cases all time high levels which will support our business also going forward. So overall I would say we look forward to the rest of the year with confidence. Thank you for listening and we move into Q&A.

Yes, thank you Stefan and Cecilia indeed it's time for the Q&A session so let's jump right into it. Operator please the first question.

Certainly. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. First question comes from the line of Danielle Acosta with Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for taking my question. My question sort of mainly relates to the mining and to the backend loading that you talked about. Can you comment one exactly on what is, is this some clients have asked you to delay some projects? Is this related to your own execution? Is it something you already expected? And two, is that something that we should look to see a recovery or the offsetting movement in two queue or maybe in three queue if you give us some color behind the reasons and when do the compensatory impacts come? Thank you.

Yeah, thank you. Good question. Expected question also, I should say. Now if I start with was it expected? Yes, it was. I would say the quarter overall and including in each of the business areas came through pretty much as expected. Maybe slightly better order intake in SRP in the quarter. But the invoicing on the mining side came in in line with expectations and we have seen this basically since we really started to look at Q1 sort of during the fall time that it would be a lower invoicing quarter. What is the driver? It's not the single driver, right? That we because of course then we would have pinpointed it or been clear about it. It is when we work with our customers, we have orders, you know, we look when do you want delivery, sort of, then we plan the year and everything related to that. This is how it comes out. So it is driven by customer need, if you will. Of course, there are also things like in some cases they might want it and we cannot deliver it, but we can deliver something else and so on. So it's a mix. But it's not a specific single driver and to be very clear, it's not demand driven. You can see it on the order intake. We have an order backlog that is almost a full year. So it is more, I would call it practical dynamics of when the customers want the equipment. So when will it sort of be compensated for? Well, I would say if we look at the full year, I would say there are no surprises in when I look at it. Of course, you all have different views on the full year. So I cannot comment on what to expect overall, but if I were you, I would not change sort of your view on the year too much, but don't expect everything to come back in Q2. But throughout the year, I think we will see a decent recovery of the invoicing.

Thank you. And just to clarify also, is it concentrated into like the new products like the BEVs and the automation or is it broad based across the portfolio?

No, it's nothing specific because then that would have been sort of a reason to highlight. But of course, you have aftermarket being flat. Typically, we would go into the year with growth in aftermarket. But because we have this sort of offset now in ground support also this quarter, it leaves sort of for the equipment part to drive all of the growth or in this case, negative growth. So it's mainly equipment related. But on top of that, we have a sort of flat aftermarket this quarter.

Thank you very much.

Thank you.

Thank you. The next question comes from the line of Claes Berglund with Citi. Please go ahead.

Thank you. Hi, Stefan. First on the positives looking at SMMS, the powder business is up high single digits, which is typically, as you say, Stefan, the leading indicator. Also things like China in general engineering is seeing double the growth in orders and not only linked to easier comps this time. When you say flat in April, sequentially versus the first quarter and now without any drag here from powder, it looks to me that SMMS can start growing orders low single digits here for the second quarter. Just to hear if you back that reasoning and also if you think powder will continue to support growth or if all of the restocking there was happening in the first quarter. Thank you.

Yeah, when we say flat, we are the comment is focused on cutting tools and daily order intake. So you would add or remove any impact from powder to that comment. So if your assumption is that powder is sort of positive in in Q2, then that should that will sort of add positively to the comment of a flat start. Or stable start of the quarter. Otherwise, when it comes to powder, we are mainly talking order intake here and the order intake in Q1 is very important. Then of course, deliveries happens throughout the year. I'm not sure if that was the question you asked on powder there in the end. I didn't quite get it.

Yeah, no, that's correct. It seems like most of the restocking seems to occur in the first quarter rather than continuously. But obviously the drag that you had of I think three percentage points from the second quarter last year is obviously going away. Right? That's clear.

Yeah, for sure. The I mean, it was very tough, come tough outcome on the powder business in the prior quarters. And even if it would stay at a lower level, of course, the comps then are much easier. So the from a growth perspective, the drag. Yeah, it's almost guaranteed to go away. I would say yes.

Yeah, okay, good. My second one is on SMR. And can I just confirm that this is effectively linked to the fixed cost coverage? It's not the gross margin that is seeing incremental weakness. And obviously, I'm adjusting for the one off, of course, and also linked to this, I think you saw the maintenance at miners across nickel and zinc, which is obviously battery linked. That weakness could stay, but maybe copper will improve at some point, given what we see in terms of in terms of the copper price. The question as well, run the mining pipeline to the extent that is changing weaker battery, perhaps improving copper at some point. Thank you.

I can start with the margin question. And you're right, GP held up well for SMR. So it's mainly SG&A coverage coverage that's under pressure in the quarter. So that is a correct assumption.

Yeah, and we can also say on pricing there. Also, I mentioned it on SRP, I should have mentioned it on SMR as well, that also SMR held up well and compensated the cost inflation with the pricing. On the market dynamics, yes, there has been a little bit of demand impact, especially from nickel mines in Australia, for example, a little bit sink as well, but sink prices have recovered. So I think the worst is behind us there. Nickel is a fairly small or it's a small commodity in relation to the others, as you know. And but then of course, gold as very high levels and then copper now coming up towards very good levels as well. This is of course part of what I'm talking about that there are indicators leading indicators that should be supportive of the business going forward. Thank you. Thank you.

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

Hi, good afternoon. Thanks for taking my questions. If I can start with just a question on the aftermarket on the mining side. There's a couple of quarters now where we've been flat. And I know there's been obviously you identified some headwinds quite specific. And I think we previously talked about some of the escalation contracts, obviously as deal prices come down, kind of been a headwind as well. I mean, if we sort of look at the comps easing, particularly in the second half of the year, but even in the Q2 as well, do we expect that business to return to growth? And kind of if you could try and put some kind of, I guess, range within that, I'm just trying to understand kind of what's buying and what's been kind of one off specific headwinds. Because the last couple of quarters have been, you know, we've had quite identifiable specific headwinds rather than a comment on miners not spending.

Yeah, yes, I think you're you describe it in the right way. Underlying meaning parts and services, spare parts and service on the machines. It has continued to be positive growth. Then we have had this headwind in ground support for three to four quarters now, yes. And we expect that to improve now going forward, partly because of less destocking and also because we see some improving sentiment in the tunneling business there. So I cannot give you a guidance on specific growth numbers, but parts and services in general in normal times has typically been growing sort of high single digits. So I think something between mid and high single digits in that range is probably the underlying performance. If we take away these other sort of dynamics.

That's really helpful. Thank you. And sorry, just to clarify on on class's question just around powder and the impact. If I take the daily order intake as a comment on cutting tools and a similar level in early April versus the Q1, my understanding was that powder is seasonally good in the Q1 and then weakens as we go through the year. Obviously notwithstanding that the base effect in Q2 last year might be easier. But would that mean that actually we should expect overall SMM numbers to be ordered rather to be lower in Q2 versus Q1 if we take the first two weeks of April as the run rate? Or am I misunderstanding? I just wanted to try and clarify that.

I'm not sure I understand the question, but let me try to answer anyway. The powder business is seasonal in the sense that the absolute level of order intake is higher in Q1 because we get a lot of orders that is done for deliveries for the full year. So that's how the orders are being sort of split across the quarters in the year. So in that sense, from a seasonality point of view, you will see a step down in absolute number from Q1 and then into the other quarters of the year. Then the deliveries are smoothened out, so to say. The comment on stable start of April is completely cleaned from any dynamics of powder. It's a pure cutting tool comment. That was

a much better answer than my question. That makes perfect sense. Thank you, Devin.

Thank you. The next question comes from the line of Max Yates with Morgan Stanley. Please go ahead.

Thank you. Just my first question is around the large order pipeline in mining. I guess large orders are a bit weaker than what we saw last year. I just wanted to understand, do you see this as a reflection of we've had less project sanctioning that's triggered maybe less large orders for you? Is this just a timing effect? And obviously taking into account commodity prices are quite a bit better than maybe they were this time last year. I'm just trying to sort of reconcile, is this just a timing effect and actually a billion of large orders every quarter is a kind of realistic expectation or has something actually kind of fundamentally changed when you look at conversations with your customers?

Yeah, I think if we take this quarter, I think if we start with the positive on the order intake side in mining is that we saw it's actually quite a strong order intake for smaller orders and also replacement orders, sort of more of a flow. So that was up to 40% this quarter. It's been more down to -35% for quite some time in previous quarters. But we on the other hand then we see a slightly smaller share of greenfield and brownfield, greenfield around 15% and brownfield around 45% instead of around 50%. This can of course be an in quarter effect only, that's too early to say, but that was the dynamic we saw in the quarter, which is why we are quite happy with the order level sort of in the absence of as many major orders as we had last year. I would say in general the pipeline looks good. I think there is, we talked about the commodity prices, there is plenty of activity in the mining sort of sector even though there are a few commodities that are weaker. Then when we land major orders and not, it's inherently, I wouldn't call it random, but I don't know which word to use. It can be lumpy then, maybe is the better word. In some cases you land more in one quarter, it feels great and some quarters you land a few less. Yes, I don't think there is any structural change in this regard. But it's clear that for a couple, I would say this, we had three quarters Q1, Q4 and Q3 of 22 that were exceptionally good in that sense. So we have been facing three quarters in a row now with very tough comps. And in that regard I would say it's more of a maybe normalized level, but still at a very good level. Then hopefully in the future we'll continue to see a nice flow of large orders as well. But I cannot say exactly how it will look at from a quarter to quarter perspective, so to say.

That made sense. Maybe a quick follow up on your M&A strategy. Obviously we've seen you focusing on software and metrology. I think there's been some discussion in the market about Renishaw and we've had a couple of A-large industrial companies rule themselves out of bidding for that. I guess the question I would have for you is, are you very happy with the acquisition strategy that you've been pursuing so far, which has been building up towards that $6 billion level in Sandvik manufacturing via more bolt-on M&A? Or do you think there may be the opportunity going forward to do some larger M&A to really accelerate your positioning in that market and make you more of a large metrology player?

Thanks. I would say we are happy with the strategy we are pursuing, which A, importantly, we are typically not as part of the strategy going after more transformational, from a financial point of view, transformational acquisitions. We prefer bolt-on and when we talk large acquisitions or medium sized, it's more like a shank or a DSI or things like that in terms of size. We also have a focus and we talked a bit about this at our CMD that Sandvik manufacturing solution has really has a focus more on software business and digital business. And because we think that's where there will be more structural growth, I think there is more value that will come out of that long term. So and the company you mentioned here is more of a, let's say, traditional hardware player. So yeah, I'm happy with the strategy we are pursuing to step by step gradually build our position, but then more on the digital and software side of the of this business.

Okay, that's very clear. Thank you very much. Thank

you. The next question comes from the line of Vlad Sergeyevsky with Barclays. Please go ahead.

Yes, good afternoon. Thank you very much for taking my two questions. I'll start with the follow up on backend loading in SMR. Is it actually production that is backend loaded or delivery set up backend loaded? When I look at the inventory, they were materially up in Q1, which would indicate that production levels were actually decent. And how do you see those production rates developing through the rest of the year?

Yeah, I mean, the production levels, we are sort of we are balancing the production for the long term demand picture, so to say, as much as we can. Since it's difficult to ramp up or down too much within the year. So when we talk about this, the profile of the invoicing this year, it's not production driven. There are, of course, certain machines, certain types that might be more in high demand, so to say, where there is more of a bottleneck. But and then there are others that we have capacity for. But as a general comment, no, this was not driven by production. It's more, as I said in the beginning, when our customers have said they want delivery of equipment.

That's very clear, Stefan. Thanks very much. And my last one would be, could you discuss what what what impact do you expect from recent increase in main commodity prices, mainly copper and gold on both equipment and aftermarket orders in, let's say, the next two, three, four quarters compared to what you sent you on?

Yeah, I guess we can say in general, we expect it to be a positive dynamic because it means that our customers are are making money. And some of them has been a little bit more under cost under pressure from cost inflation and so on. And when they make money and the more they make per ounce or per ton, the more they want to maximize their production. So there might be many reasons for why that is being sort of held back or limited. But one is, of course, the availability or the use of of our equipment. So the better the commodity prices, the better for for us in terms of both aftermarket, which is going up if they operate the machines at sort of peak peak levels, but also additional equipment sales. So I don't have a figure to give you in that regard, just that there is a positive correlation.

Is there any specific lag for all of this lag is different when you see the reaction on high commodity prices in both new equipment and aftermarket is aftermarket early to react and new equipment is a bit later. And what those historical lags could be?

I don't have an answer to that. Actually, it's a good question. We can look into it. I would just spontaneously say, of course, aftermarket, I mean, you have the machines you have if you want if you if you have a few machines parked or if you increase the increase the utilization rate of what you have that you can do immediately. That would help with aftermarket. But also equipment can it can be noticed quicker if we have, you know, we have also sales stock, meaning equipment ready to be sold already out in the market areas. And that can also be a first indicator if the market turns more upward. But how this historically have correlated in a situation like this, I cannot really say. We will have to look into that. Thanks very much for that. Thank you.

Thank you. We now have a question from the line of Gayle Debray with Deutsche Bank. Please go ahead.

So thank you very much. Hi, everyone. I have two questions, please. I guess the first one is for you, Stefan. Why is the software business growing only mid single digits? I mean, what's missing for for software to grow high single digits or low teams like most other software companies these days? And then the second question is on the on the margin side. Obviously, we are seeing good progress on the cost cutting programs. But if I exclude the savings this quarter, the negative drop through was around 80 percent for SMM and around 60 percent for SMR. So it looks pretty high. How do you explain these fairly high negative decrementals this quarter? And in relation to that, what's your level of confidence that the group margin will be back in the range for the full year?

Yeah, I'll start with the first one. So mid single digits grows on the software business this quarter. I think that's fairly aligned with now. We haven't seen the report of some of the peers this quarter yet, but it's it's it's it's been in line with the growth we have seen of some key peers prior years or prior quarters. So they have been in line when you say high single digit double digits. That's not what we have seen from industrial software peers in the space we are in. If I can comment specifically on the business, we see in general good traction, but we have we saw some softening from license sales into the automotive sector in the quarter. But other than that, I would say it was overall good traction.

Yeah, I can comment on on the margin and the drop through of the lower volumes. I think if we start with machining solutions, which was very much impacted by the timing of Easter. So Easter falling into Q1 as opposed to Q2, such a temporary volume drop is difficult to mitigate through cost activities. I think for the underlying volume declines that we've seen in some some segments, we've handled well both in the third quarter fourth quarter of last year and also into Q1 this year. So in that sense, part of the volume reduction in Q1 becomes unmitigated. And it's a similar picture for SMR where, as we mentioned, it's a more back and loaded year. So it's a bit of facing of deliveries between the quarters. So also in that sense, in Q1, the volume drop becomes unmitigated for for that part. Then in terms of when we look ahead for the full year, we see good or stable sentiment amongst our customers. We have so far managed to offset inflation with price and we're continuously actively working with price and also have a very strong cost focus across the organization, which together should support our margin delivery for for the year.

And I can just emphasize this this dynamic where we mean, as I also said in the beginning, this the invoicing levels this quarter was not a surprise to us, which also means we have had time to to look into what kind of mitigating factors can we take. And we have, of course, mitigated as much as we can. But at the end of the day, we also see we don't want to do things that will negatively impact our ability to capture the growth in the rest of the year. And then in the very short term, all costs are fixed, so to say, unless we do again things that could hurt the business midterm. So that's why we decided to go for this, even though we understand we understood that we will get these kind of questions. But you have seen in previous quarters that when it's a more generic volume decline that is sort of more economical cycle driven, we can take down costs and adjust to that in a good way. But this is a different dynamic this quarter, I would say.

Very helpful. Thanks. Thanks very much.

Thank you. We have the next question from the line of Congress, Daniel with Bernstein, S.G. Please go ahead.

Hi there. Thanks. Thanks for taking my questions, Daniel. Hi, Daniel. Thank you for coming. I'm Daniel from Bernstein, S.G. Just clarifying on this quarter's backloaded deliveries and timing comments, is it that you're saying that the delivery delays that you've seen and sort of leading to loss of revenues will be reversed over the course of the year? And what gives you that confidence that customers will no longer be delaying? Yeah, because what it sounds like that they're actually going to speed up deliveries in order to sort of compensate for the delays that we've seen in Q1. Just sort of really clarifying that issue. Thank you.

Yeah, I wouldn't use the word delay myself. Delay I would have used if we expected much more and then it was delayed or pushed out and we would have been standing here surprised. As I said, when we have planned the deliveries, this is the plan we had and it's not that the customers have changed their minds. Whether they had another view 18 months ago and it's delayed in relation to that, I cannot really say. But it's not any kind of late minute push out or that they like, no, we don't want it. It's the plan we have had for some time. So based on that, I also have no reason to say question when we look at the rest of the delivery schedule. And then we can see that it is a different yearly pattern than it was maybe last year and the years before in terms of the progression between the different quarters.

OK, clear. Thanks very much.

Thank you. We have the next question from the line of Andres Koski with CNP Kaiba. Please go ahead.

Thank you and good afternoon. I hope you can hear me. I would also like to ask about the profitability in the quarter, but in a slightly different way. So I can see that your underlying cost margin is relatively stable at 41.5 percent. And that the just the day by day margin weakness came from elevated cost or or cost coverage, as you call it. So when I exclude your restructuring charges, it looks like your FGNA cost is up by 12 percent year over year. So what drives that increase? And is that kind of increase what we should also expect for the coming quarters?

Thank you.

The 12 percent I don't recognize, so we will need to to look into that. I think exactly what we

can ignore the exact numbers. But if I just look at the selling administration, R&D and other lines, all lines are up quite significantly on a year of year basis. And when I exclude the five hundred and sixty five million that you have been restructuring cost on those lines, it looks like we are up by a digit. So even though it's 12, 8, 9, why is the FGNA up so much? And should we expect a strong increase in your FGNA costs also in the coming quarters?

Should I start? I need to answer this one. No, because I don't recognize it all. And the fundamental question then becomes a little bit not so relevant because if you add FGNA and other EBIT, it should be an absolute decline year over year. We have a slight absolute increase in FGNA. If I don't recall, I think it's less than two percent, which if you take inflation into account, means that the activity levels are actually down year over year. And then in other EBIT, we have a positive bridge effect because you might recall we had some FX hedge issues in the same quarter last year. So the combined two rows are down in percentage or in absolute terms year over year. And it just reinforces the message that even though that is the fact, we get the margin impact because the volume drop is quite significant. You want to add anything? No,

no.

So maybe we can come back, Andrea, maybe we'll we're clearly looking at some different numbers. But let's circle back with Louise and we'll try to sort it out.

Yeah, that's great. And then the second question is on your position in surface drilling. Do you think you had the global market share of around 15 percent in 2023 in surface drilling overall, not only in Rotary, and that you target a 30 percent market share? And can you give us an indication of how much of SMR is surface drilling?

Yeah, the split between surface and underground is about 20 80. So 20 percent surface, 80 percent underground. I think is what we. Yeah, that might change a few percent here and there. But but that's roughly the split. I think I don't have a specific comment on the market share percentages. But what we are what we can say is that we believe we have significantly higher share than that now on the boom drills. But maybe on the Rotary side, it's approximately or in the ballpark of the figures you mentioned. But the overall share on surface should be higher than that. Or is higher than that.

Yeah. Thank

you very much.

Thank you, Andreas. It's now time to wrap up. And with this, we thank you all for calling in and for your questions. And we wish you a good rest of the day.