Earnings Transcript for SAND.ST - Q1 Fiscal Year 2024

Operator: Hello everyone and welcome to Sandvik's presentation of the First Quarter Results 2024. My name is Louise Tjeder, Head of Investor 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.

Stefan Widing: 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 the solid level in this quarter. We see a strong demand in aerospace a bit more, a mixed picture in general engineering and 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 EBITA decreased by 14% corresponding to margin of 18.2%. This leaves our rolling 12 months EBITA margin at 19.6%. So just like last year where starting a little bit on the lower 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 SEK 128 million. Adjusted profit for the period came in at SEK 3.3 billion. We also on this quarter continued to see good progress on our strategic priority areas. I was 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 AutoMine solutions, mine automation for what is the largest underground mining automation installation in the world. We also completed two acquisitions and we announced the 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 the mining, for mining applications within rock 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 solutions. It also has an upgraded robust and optimized mechanical design that helps with reliability on simplicity which is key for our customers in this segment. Jumping into the market development, starting with a 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 a weak Central Europe. And 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 in -- 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-digit 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 the 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-digit. So the outcome is, is slightly down because Asia and China was flat in the quarter. Aerospace, good growth, low-double-digit 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 do note 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 flattish. 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 SEK 32 billion. We have, though revenues in the quarter of SEK 29 billion. So a positive book-to-bill of 110%. 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 the 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 lowlight maybe is that we had the 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 the impact on our EBITA. EBITA was down 14%, margin of 18.2%. 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 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 EBITA margin of 19.6%. Going into the business area, starting with mining a rock solutions, resilient demand, but of course facing a 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 AutoMine order of about SEK 300 million. Total order intake declined by 9% and the organic decline was 7%. Aftermarket was stable while equipment was down 18%, primarily driven then by the major orders, which is mainly done or it is sitting in on the equipment side. If we digest a little bit the -- 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%, down from 20% impacted 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 SEK 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 BEV 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 expect destocking to continue for probably another quarter there. Total order intake declined 9%. Organic decline was 7%. Here however, we saw positive dynamic on the major orders with major orders totaling SEK 169 million in the quarter. Adjusted EBITA at 13.3% 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% 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 they 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, that was down mid-single-digits. And we also saw some positive signs on the powder side, up mid -- sorry 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% and that was also the organic number, minus 3%. 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 EBITA margin 20.3%, down from 22.4% impacted then by the negative volumes in the quarter. Good progress on implementing the savings program, SEK 87 million realized in the quarter. And also here, a negative impact from currency of 60 basis points. We had three acquisitions coming in this quarter, two completed Cimquest, CAM reseller in North America. And pro-micron, German Company Manufacturing -- Developing and manufacturing tools with embedded sensors, which is important for automation going forward. And then they also announced recently Almü, which is a German manufacturer of tools for lightweight machining or aluminum 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.

Cecilia Felton: 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 5%. Structure did not have a material impact in the quarter. And currency had a negative impact of 2%. And then with some rounding differences, total order intake were down by 7% and revenues were down by 6%. Adjusted EBITDA, as Stefan mentioned, came in at SEK 5.3 billion with a margin of 18.2%. And I will show you the EBITA bridge in just a few minutes. Net financial items came down slightly year-over-year SEK 506 million. And the tax rate excluding items affecting comparability and also on a normalized basis was 24%. So in line with guidance. Net working capital, 30.9% of revenues sequentially in volume. Net working capital was flat. We had a good cash flow in the quarter, SEK 3.8 billion corresponding to a cash conversion of 77%, returns 6.8% impacted also by the restructuring charges in the quarter. And adjusted EPS at SEK 2.61. All right. So if we continue with the bridge then and starting with the organic column, here you can see that revenues were down SEK 1.6 billion, -5%. And adjusted EBITDA declined by a SEK 637 million. And that gives a leverage of -40% and a dilution of 1.1 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 SG&A coverage. Currency was dilutive in 0.4 percentage points whilst structure was neutral on the margin. And that brings us from a margin of 19.8% last year to 18.2% this year. The restructuring programs are progressing according to plan. The program that we announced in 2022 has now generated SEK 113 million of savings in total. The year-over-year bridge effect, it's not the same as the numbers here as we had some savings last year. And that corresponds to an annualized run rate of 58%. We've also now commenced the program that we announced in January and the books are SEK 2.4 billion of restructuring charges in the quarter. And as you can see here, we also have some savings from the 2024 program now in this quarter, corresponding to 8% of annualized run rate savings. If we continue down the P&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 costs, but on the other hand, lower borrowed volumes. Then at the bottom, FX and other asset classes here that in the past we have booked temporary revaluation of currency hedges on what is not yet invoiced. From 1st 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 SEK 506 million. The reported tax rate was 26.1%. If we then exclude items affecting comparability, mainly the restructuring program, we came in at 24%. So right in the middle of the guided range for the year. Then if we move on to the balance sheet and starting with net working capital. Here, if you look at the bars on the left, you can see a slight sequential increase in absolute terms in net working capital. This is driven by currency in the volume, as I mentioned, net working capital was flat sequentially. In relative terms, net working capital increased to 30.9%. And as you can see on the graph on the right, this is mainly driven by SMR and SRP. We had a good cash flow in the quarter, SEK 3.8 billion, corresponding to a cash conversion of 77%. And on a 12-month rolling basis, we are at 83% cash conversion. And then if you look at the year-over-year development, EBITDA adjusted for noncash items was lower compared to last year. But then last year, we had our net working capital buildup of SEK 2.1 billion and CapEx was slightly higher this year versus last year. Financial net debt continued to gradually come down in the first quarter to a level of SEK 33.9 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 targets financial net debt over EBITDA increased a little bit sequentially from 1.2 to 1.3 and this is driven by the restructuring charges in the quarter impacting 12 months rolling EBITDA. Then if you look at outcome versus guidance, currency came in at SEK 212 million. CapEx SEK 1.2 billion, interest net is 0.4. And the tax rate, as I mentioned, that right in the middle of the guided range. And looking ahead then for the second quarter and the full-year, we've left the guidance unchanged for CapEx interest net and the tax rates. And for the currency effect, we estimate this to be plus SEK 120 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.

Stefan Widing: Thank you, Cecilia. So let's conclude. I think it's a good way to describe it is, it's a mixed picture quarter. The short cycle business is stable, but at this adversely impacted by calendar effects on top of the fact that we are of course in a 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. And we are a trusted partner when it comes to, for example, implementation of large automation project and helping our customers with a BEV 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.

Louise Tjeder: 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.

Operator: Certainly. [Operator Instructions]. First question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.

Daniela Costa: Hi. Good morning. Thank you for taking my question. My question sort of mainly relates to the mining and to the back end loading that you talked about. Can you comment one exactly on what is -- it was it -- is this some clients have asked you to delay some projects. Is this related to your own execution? Is it something already expected? And two, is that something that we should look to see a recovery or the offsetting movement in 2Q or maybe in 3Q, if you give us some color behind the reasons, and when do the compensatory impacts come? Thank you.

Stefan Widing: Yes. Thank you. And good question. The expected question [indiscernible] I should say. Now, if I start with was it expected? Yes, it was. I would say the quarter overall in 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. 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 that we -- because of course then we would have pinpoint that it or being clear about it. It's, it is when we work with our customers, we have orders, we look when do you want delivery sort of, and 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 without this, almost a full year. So it is more, I would call it practical dynamics. So 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 will not -- 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 it's -- don't expect everything to come back in Q2. But throughout the year I think we will see a decent recovery of the invoicing.

Daniela Costa: 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?

Stefan Widing: No, it's nothing specific because down 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, to drive all of the growth or in this case, a negative growth. So it's mainly equipment-related, but on top of that, we have a sort of flat aftermarket this quarter.

Daniela Costa: Got it. Thank you very much.

Stefan Widing: Thank you.

Operator: Thank you. The next question comes from the line of Klas Bergelind with Citi. Please go ahead.

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

Stefan Widing: Yes, when we say flat we are, the comment is focused on cutting tools and daily order intake. So you would add or remove and the 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 with stable start of the -- of the quarter. Otherwise when it comes to powder, we are mainly, I mean we are 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. And then I didn't quite get it.

Klas Bergelind: Yes, no, that's correct. Fair. But 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.

Stefan Widing: Yes, for sure. The -- I mean, it was a very tough comp or a tough outcome on the powder business in the prior quarters. And even if it would stay at the lower level, of course, the comps then are much easier. So from a growth perspective, the drag, yes is almost guaranteed to go away, I would say yes.

Klas Bergelind: Yes. Okay, good. My second one is on SMR. Can you 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-offs, of course. And also linked to this, I think you sort of maintenance at miners across nickel and zinc, which is obviously battery linked that, 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, a question as well are on the mining pipeline, to the extent that is changing, weaker battery, perhaps improving copper at some point. Thank you.

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

Stefan Widing: Yes. And we can also say on pricing there also I mentioned it on SRP, I should have mentioned it in SMR as well that also SMR held up well and compensated the cost inflation with the good pricing. On the market dynamics, yes, there has been a little bit of demand the impact especially from nickel mines in Australia, for example, a little bit zinc as well, but zinc 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 has a 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.

Klas Bergelind: Thank you.

Stefan Widing: Thank you.

Operator: Thank you. The next question comes from the line of Andrew Wilson with JPMorgan. Please go ahead.

Andrew Wilson: Hi, good afternoon. Thanks for taking my questions. If I can start with just a question on the aftermarket on the mining side, 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 steel 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, to understand kind of what's underlying and what's been kind of one-off specific headwinds because it feels of the last couple of quarters have been, you know we've had quite identifiable specific headwinds rather than a comment on miners not spending.

Stefan Widing: 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 or -- 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 the parts and services in general in a 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 this other sort of dynamics.

Andrew Wilson: That's very helpful. Thank you. And sorry, just to clarify on Klas question just around powder and the impact. If I take the daily order intake as a comment on cutting tools on 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 the base effect in Q2 last year might be easier, but would that mean that actually we should 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? And I just wanted to try and clarify that.

Stefan Widing: 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 smooth, smoothen out, so to say. The comment on stable start of April is completely cleaned from any dynamics of powder. It's pure cutting tool comment. Do that make sense?

Andrew Wilson: That was a much -- that was a much better answer than my question. And it makes perfect sense. Thank you, Stefan.

Stefan Widing: Thank you.

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

Max Yates: Thank you. Just my first question is around the large order pipeline in mining. I guess larger orders are a bit weaker kind of than what we saw last year. And I just wanted to understand, I mean, 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 then obviously, taking into account commodity prices are quite a bit better than maybe they were this time last year. 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?

Stefan Widing: Yes, I think if we take this quarter, I think if we start with 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 to that was up to 40% this quarter. It's been more down to 30%, 35% previous -- 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, I mean, 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 than maybe is the better word. Some -- in some cases, you land more in one quarter, it feels great and some quarters you land a few less. I don't think there is any structural change in this regard, but it's clear that for a cup 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 the 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, although I cannot say exactly how it will look at from a quarter-to-quarter perspective, so to say.

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

Stefan Widing: Yes, thanks. No, 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 in terms of finance -- from a financial point of view of transformational acquisitions, we prefer bolt-on. And when we talk large acquisitions or medium sized, it's more like a Schenck or 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 the -- there would 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 yes, 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 this business.

Max Yates: Okay. That's very clear. Thank you very much.

Stefan Widing: Thanks.

Operator: Thank you. The next question comes from the line of Vlad Sergievskii with Barclays. Please go ahead.

Vlad Sergievskii: 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 deliveries that are backend loaded? When I look at the inventories, they were materially up in Q1, which would indicate that production levels were actually decent. And how would you see those products today developing through the rest of the year?

Stefan Widing: Yes, 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 some 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.

Vlad Sergievskii: That's very clear stuff. And thanks very much. And my last one would be, could you discuss what impact do you expect from a 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 saw in Q1?

Stefan Widing: Yes, I guess we can say in general, we expect it to be a positive dynamic, because it means that our customers are making money and some of them has been a little bit more on the costs or under pressure from cost inflation and so on. And when they make money and the more they make per ounce or per tonne, the more they want to maximize their production. There might be many reasons for why that is being sort of held back or limited about one is, of course, the availability or the use of our equipment. So the better the commodity prices, the better for us in terms of both aftermarket, which is going up if they operate the machines at sort of 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.

Vlad Sergievskii: Is there any specific like for, or this like it's different when you see the reaction on high commodity prices in both new equipment and aftermarket. Is aftermarket, they are related to react and new equipment is a bit later. And what those historical levels could be?

Stefan Widing: 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 utilization rate of what you have that you can do immediately, that would help with aftermarket, but also equipment it can be noticed quicker if we have, we have also the sale stock meaning equipment ready to be sold already out in the market. There are some 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.

Vlad Sergievskii: Thanks so much for that.

Stefan Widing: Thank you.

Operator: Thank you. We now have a question from the line of Gael De-Bray with Deutsche Bank. Please go ahead.

Gael De-Bray: 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 software to grow high-single digits or low teens 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% for SMM and around 60% 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?

Stefan Widing: Yes, I'll start with the first one. So mid-single digit growth 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 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-digit growth, that's not what we have seen from industrial software peers in this 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.

Cecilia Felton: Yes, I can comment 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 segments, we've handled well both in the third quarter and 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 end loaded year. So it's a bit of phasing of deliveries between the quarters. So also in that sense, in Q1, the volume drop becomes unmitigated 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 are continuously actively working with price and also have a very strong cost focus across the organization, which together should support our margin delivery for the year.

Stefan Widing: Yes. And I can just emphasize this dynamic where we -- I mean, as I also said in the beginning, this invoicing levels this quarter was not a surprise to us, which also means we have had time to look into what kind of mitigating factors can we take. And we have, of course, mitigate that 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 sort of in the very short-term, all costs are fixed. So to say, unless we do again, things that could hurt the business mid-term. So that's why we decided to go for this, even though we understand, we understood that we will get this kind of questions. But you have seen in previous quarters that the one 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.

Gael De-Bray: Very helpful. Thanks very much.

Operator: Thank you. We have the next question from the line of Cunliffe Daniel with Bernstein SG. Please go ahead.

Cunliffe Daniel: Hi there. Thanks for taking my questions. Daniel Cunliffe from Bernstein SG. 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 lost revenues will be reversed over the course of the year? And what gives you that confidence that that customers will no longer be delaying? Because what it sounds like that's a -- that they 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.

Stefan Widing: Yes, 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, they cannot really say about it's not done the kind of late minute push out or that they're like, no, don't -- we don't want it. It's the plan we have had for some time. So based on that, they also have no reason to. That's a 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.

Cunliffe Daniel: Okay. Clear. Thanks very much.

Stefan Widing: Thanks.

Operator: Thank you. We have the next question from the line of Andreas Koski with BNP Paribas. Please go ahead.

Andreas Koski: Thank you and good afternoon, all. 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 gross margin is relatively stable at 41.5% and the adjusted EBITA margin weakness came from an elevated SG&A cost or cost coverage, as you call it. So when I exclude your restructuring charges, it looks like your SG&A cost is up by 12% 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.

Cecilia Felton: The 12% I don't recognize. So we will need to look into that. I think exactly what...

Andreas Koski: Okay. But 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-over-year basis, and when I exclude the SEK 565 million that you have in restructuring cost on those lines, it looks like we are [indiscernible]. Even though it's 12, 8, 9, like why is the SG&A up so much and is should we expect a strong increase in your SG&A costs also in the coming quarters?

Stefan Widing: Should I start?

Cecilia Felton: Yes.

Stefan Widing: I'm need to answer this one. No, because I don't recognize that all the fundamental question then becomes a little bit not so relevant, because if you add SG&A and other EBIT, it should be an absolute decline year-over-year. We have a slight absolute increase in SG&A, if I don't recall. I think it's less than 2%, 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 this just reinforces the message that even though that is the fact we get the margin impact because the volume drop is quite significant. Do you want to add anything?

Cecilia Felton: No, no.

Stefan Widing: So -- but maybe we can come back on that. 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.

Andreas Koski: Yes, 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% in 2023 in surface drilling overall, not only rotary and that your target 30% market share? And can you give us an indication of how much of SMR is surface drilling?

Stefan Widing: Yes, the split between surface and underground is about 20

Andreas Koski: Okay.

Stefan Widing: Yes.

Andreas Koski: Thank you very much.

Operator: 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.

Stefan Widing: Thank you.