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Earnings Transcript for SAND.ST - Q4 Fiscal Year 2024

Louise Tjeder: Hello, everyone, and a warm welcome to Sandvik's presentation of the Fourth Quarter Result 2024. My name is Louise Tjeder, Head of Investor Relations, here at Sandvik. And with me, of course, I have our CEO, Stefan Widing; our CFO, Cecilia Felton. We will start this webcast with a presentation. Stefan and Cecilia will take you through the highlights of this quarter. And after that, we will move on to the Q&A session. With this, I hand over the word to you, Stefan.
Stefan Widing: Thank you, Louise. And also from my side, a warm welcome to the fourth quarter report of 2024. To summarize the quarter, we continue to see good momentum in the mining business. We also have a strong order intake growth in infrastructure while a challenging industrial activity led to subdued demand, particularly in Europe and the automotive segment. Total order intake increased by 5% and of that, organic growth was 4%. Revenues increased by 1% and organically by a positive 0. We have overall a stable financial performance in the quarter, adjusted EBITA improved by 1%. This corresponds to a margin of 19.6% versus 19.5% in the previous year. A rolling 12 months, we are at 19.2% versus 20% a year ago. The savings from our restructuring programs are yielding good results in the quarter. Total savings of SEK419 million with a bridge effect of SEK324 million. Adjusted profit for the period SEK4.1 billion versus SEK4.0 billion last year and a strong free operating cash flow of SEK6.5 billion versus SEK5.5 billion last year. And we also continue to execute on our strategic priorities, one of them being to grow in the surface mining business. And here, we saw an important deal in Peru this quarter, which was for both the rotary drill rigs and surface boom drills. It didn't quite make it to the threshold of a major order, but it was close. And most importantly, a very strategic win in terms of penetrating the surface market in Peru. We also see a strong momentum in our screening business. I'll come back to that. And also, we are very happy to see that the recent acquisition we did of Suzhou Ahno, which is an important player in the local premium market in China, showed good growth in the quarter with high-single digit growth. This is, of course, still reported in the structure column not organic just to be clear on that. The innovation of the quarter we want to highlight is our upgraded large 800 series cone crusher with new automation features. This crusher enables us not only to crush higher volumes, but more importantly to crush to finer particles. This is a key initiatives to ensure that you can crush more and grind less. This is good not only in saving costs for our customers, it reduces also the energy consumption substantially, and this is one of our key strategic growth initiatives in the crushing division. Looking then at the year-over-year market development, if we start just with a geographical view, Europe minus 2%, but weak cutting tool markets down around 10%. North America up 5% a little bit better, but still declining on cutting tool size with a negative mid single-digits performance. Asia minus 6%, here China cutting tools organically it was negative high single-digits, while the Suzhou Ahno grew high-single-digits in the structure column. The remaining markets are related to mining and they are all growing double digits. We continue to show mining as stable at a high level. We see very strong momentum in the aftermarket business as we have said also now, good momentum, I would say, recovering a bit in the – on the equipment side, I'll come back to more details there. General engineering, however weak, driven in particular by Europe. Overall, general engineering is down high single-digits, Europe is down low double-digits, North America, a bit better also here with mid-single-digit decline, while China is also better with just a slight decline in general engineering. Infrastructure, stable. The main change here, I would say, is that we now see early signs of an improved sentiment in North America, which we want to highlight. We also had some larger orders in the quarter. So overall, a solid order intake, although on low comparison in the infrastructure segment in the quarter. Automotive is the main weakness in the quarter. Overall, down low double-digits, driven by Europe, down low double-digits, especially then out of the key auto markets in Europe, especially Germany and Italy. North America, doing a bit better down mid-single, China down double-digits, but better if we include Suzhou Ahno in the overall. Aerospace continued strong momentum with improvements, however, still down slightly overall, driven by a weak performance in North America, which was down high, low double-digits but this was driven by the strike at Boeing. Production resumed in December, so it became more or less a lost quarter. We have good hopes for momentum to come back now in North America in 2025. In Europe, aerospace was positive, up mid single-digits, and also Asia was down but in China, it was up low single-digits. The other segments also negative, down mid single-digits overall. Europe down mid-single, North America down high-single, and Asia or China then also slightly down, but Asia overall a bit more stable. So that summarizes the overall market view from a industrial point of view on mining. This then concludes into an order intake of about SEK31.5 billion, revenues SEK32.15 billion, book-to-bill slightly below 100%, which is normal in this season. We are still encouraged by the order intake which bodes positively going into this year. We can see here that we now have had positive organic order intake three quarters in a row, which, of course, is positive as we enter the new year. The revenues has been basically flattish now for the full year. So here, we have more work to do to improve the sales. EBITA positive 1%, as we said, margin 19.6% slight improvement versus prior year in absolute terms, about SEK6.3 billion. A good performance here, lower volumes were offset by price realization – good price realization, good cost control, and execution of our structural savings. We also in this have managed to offset both currency dilution and slight dilution from our acquisitions. As I said, rolling 12 months, 19.2%. Going into the business areas, Mining and Rock Solutions, solid demand, positive momentum in the aftermarket with double-digit growth. Equipment orders were stable year-on-year, but since we did not book any major orders, if we exclude the major orders, equipment orders were up 26% and the business area in total was up 15%. We should say that, of course, the definition of a major order is arbitrary at SEK200 million in this quarter. We have maybe more orders coming in just below that, but we still believe this shows a good underlying momentum and a little bit of a catch up from a slightly weaker Q3. Some more positive sentiment, I would say, in the market now. Total order intake increased by 5%, of which, organic was 6%. Then of course, very strong margin, 21.5% up from 20.6%. Here we have, of course, volume growth, but then on top of that, good pricing, offsetting inflation and then positive impact from the savings. Here, we had a neutral impact from exchange rates. We have taken some important orders in the quarter, even though they were not classified as major, I already mentioned the one in Peru. We also have an important order in Chile, which is overall a major order, but we have only booked SEK60 million in the quarter, but it's automation – an automation order and load and haul order that's been very important to catch. We also completed the acquisition of Universal Field Robots, which, as you know, will strengthen our automation offering further. Rock Processing, here we had good underlying demand in mining, which remains stable as well. And then, as we said, an improved sentiment in the infrastructure in particular then in the U.S. We also are seeing the inventory levels coming down a bit in Europe, but that has not translated to improved business climate as of now. Total order intake increased by 22%, and of that, organic was also 22%, so a strong performance. We had some major orders, but that we also had last year. So also including major orders, we increased by 23%. But overall, we should say it was a low compare. So, that is part the reason for the high order growth in the quarter, just to moderate expectations a little bit going forward. Margin came in on the weaker side with 14.6% versus 15.7%. Here, we do see some price pressure from infrastructure, especially with dealers, due to the fact that the market is still tough even though we see some improved sentiment. We also had an inventory obsolescence provision that impacted the margins negatively in the quarter. Savings are coming through from initiatives, savings initiatives here as well, but then also here, a slightly negative impact from currency of 30 basis points. I already mentioned the large crusher. We actually saw a doubling of the order intake for this product category in the year, which is encouraging. And also a very good performance from our screening business. This comes in – majority of this comes from the acquisition of Schenck that we did two years ago. During this period, they have delivered strong growth, strong margins and also good synergy realizations with our crushing division. So overall, a very strong performance from this new Screening Solutions Division which we are very happy to see in our Rock Processing. Manufacturing and Machining Solutions, finally, as we said, weaker demand in cutting tools, particularly driven by Europe and automotive. We had solid order intake in the powder business at a solid high double-digits also this partly driven by weak comps. And I also mentioned that the local premium segment in China grew high single-digits, which is encouraging. Software demand was mixed. It was solid in the U.S., but we were negatively impacted, especially by automotive in Europe, where the demand has been muted. Total order intake still grew by 1%, but organic decline was 3%. If we look at the beginning of this year, we see a stable demand situation if we take into account normal seasonality. Margin came in at 19.4% versus 20.2%. I think we should highlight here that organically they fully offset the volume decline. So, a good price realization, strong cost control and execution of the restructuring initiatives fully offset the volume decline in Q4. Then we had a negative impact from currency and a dilution from structure of 40 basis points and that overall then took down the margin. This dilution from structure, a material part of that is from the fact that we have, together with Suzhou Ahno, invested in a new greenfield inserts factory in China that was brought online beginning of the quarter, but it’s still just began to ramp up. So, right now, we have all the costs, but very little revenue coming out of that factory. But it's an important growth initiative for us in China, both from a growth perspective and from a regionalization perspective. And that will take some quarters for that to ramp up. Then, we also completed the acquisition of a CAM reseller for Mastercam in the quarter. So with that, I'll come back for conclusions and then Q&A. But now I hand over to you, Cecilia.
Cecilia Felton: Thank you, Stefan. All right, so let's take a closer look at the numbers then together. And as usual, we start with the growth bridge here on the right-hand side, and there, you can see that organically, orders increased by 4% while revenues were flat. Structure contributed with 2% on order intake and 1% on revenue whilst currency was neutral. And that brought total order intake growth to 5%, and total revenue growth to 1%. As Stefan mentioned, both adjusted EBITA and the margin improved slightly year-over-year, so very pleased to see that. Net financial items came down year-over-year, mainly driven by a lower interest net. Tax rate, excluding items affecting comparability and also on a normalized basis was 24%, so right in the middle of our guided range. And net working capital on a 12-month rolling basis was 29.9% and we had a very strong cash flow in the quarter, SEK6.5 billion corresponding to a cash conversion of 109%. Returns at 13.4% and 14.8%, excluding PPA. And adjusted EPS improved slightly as you can see in the table to SEK3.25. If we then continue with the EBITA bridge and starting with the organic column here, you can see that revenues improved or grew by SEK49 million and EBITA by SEK115 million. And that gives a very high positive leverage of above 200%, but as you can see, calculated then on very small numbers here. Nevertheless, an accretion to the margin of 0.3 percentage points whilst currency and structure were slightly dilutive. And that brings us from a margin of 19.5% last year to 19.6% this year. Both of our restructuring programs are being delivered according to plan, as you can see here now for the 2022 program that we have realized 90% of the annualized run rate savings by the end of the year, and for the 2024 program, we are now at 78%. If we then continue down in the P&L, looking at the finance net, you can see it came down from SEK630 million last year to SEK364 million this year. And this is mainly driven by a lower interest net and that's a result of both lower borrowed volumes and also you can see here at the bottom of the table a lower yield cost. Tax rate on a reported basis was 20.1% but then, as I said, excluding items affecting comparability and also on a normalized basis, it was 24%. So right in the middle of the guided range. If we then continue with the balance sheet, you can see here in the graph on the left-hand side that 12 months rolling net working capital came in at 20.9%. If you look at the dotted line, though, you can see that in the quarter, relative net working capital was 28.4%, and this is 0.9 percentage points lower than last year. Then if you look at the bars, you can see the development throughout the year. It looks fairly flat, however, in terms of volume, we worked very hard with improving our inventory levels and they came down by SEK1.2 billion. But that's more than offset then by a negative currency impact and also some structure. Cash flow, as I said, very strong in the quarter, SEK6.5 billion with a cash conversion of 109%. And on a 12-month rolling basis, it was 95%. And then looking at the year-over-year development, you can see that earnings adjusted for non-cash improved. CapEx was a little bit lower and net working capital was a little bit better. Then financial net debt came down sequentially to SEK32 billion, driven by the positive cash flow, and both the pension liability and capitalized leases were largely unchanged, sorry, and this brought net debt down to SEK41 billion and financial net debt to EBITDA of 1.2. Then if you look at the outcome versus guidance, currency came in at SEK71 million, CapEx for the year, SEK4.8 billion, normalized tax rate, 24% and the interest net SEK1.5 billion. Looking ahead, then after Q1 and the full year for 2025, the estimated currency effect is SEK300 million for the first quarter. CapEx guidance for 2025 is around SEK5 billion. Whilst the interest net, we expect to come down to SEK0.8 billion. And the tax rate we have left the guidance unchanged at 23% to 25%. And with that, I will hand over to you, Stefan.
Stefan Widing: Thank you. Let’s do the conclusion. Yes, I think we ended the year with a very good fourth quarter ended on the positive note with good organic order intake, stable revenues and improved profitability. If you look at the full year, we also had a stable top line with revenues decreasing by 1% then a slightly positive order intake. Margin were 19.2% which we believe given the volume declines is on the resilient level and that will also now be supported further by the execution that we have had on our restructuring initiatives. Free operating cash flow was in 2024 strong at SEK21.2 billion, cash conversion of 95% and that took down then our financial net debt to EBITDA to 1.2, which is well within our target. And we continue to build Sandvik stronger. We can see that we have strengthened our resilience with an increased share of recurring revenues and value based solutions, which is why I think that we can show a much more stable top line in this downturn. And we also did good progress towards our targets on the digital side. In 2024, we ended with software and digital revenues above SEK5 billion. We are on track to achieve our target for 2025 of almost or around 5% of turnover being software and digital, which, of course, is a massive transformation for a company the size of Sandvik. Also mentioned the positive investment we are doing now to have local production capacity for inserts in China, which we think will help our market position in China quite significantly going forward. We have focused on maintaining our leading positions through these times and execute on our strategic priorities. Stringent cost control and good price execution puts us in a very good position to build from as the market improves going forward. Thank you. Let’s go into the Q&A.
Louise Tjeder: Indeed. Thank you, Stefan and Cecilia. It’s time for the Q&A session. So I hand over the word to the operator to open up for the first question, please.
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of James Moore from Redburn Atlantic. Please go ahead.
James Moore: Good morning, everybody, and thanks for the time. I’ve got three, if I could. And Stefan, I wondered if we could start with the daily trends in China towards the end of the year, if you exclude your good local acquisition, could you talk about whether you’re seeing any signs of positive inflection? Shall we go one at a time?
Stefan Widing: I cannot say that we saw any specific trends within the quarter in China in that regard, not anything that I have picked up, at least.
James Moore: Okay, thanks. And you mentioned software mix. I wondered if you could step back and just give us an update on the software business for the whole of last year and any flavor on how the margin progressed compared to the year before and whether you feel you’re on track for the target on the profitability?
Stefan Widing: Yes, absolutely. And I mean, the number we gave here over SEK5 billion is, of course, for the total group. And if we start on the mining side, it’s been very solid growth. The software grew double-digits, good profitability, even though they have actually gone through a transition from perpetual license to SaaS, which tends to have a little bit, give a bit of a trough on the financials. They have executed that really well and now gone to a full SaaS model and that’s something we will benefit from now going forward. On the manufacturing side, the market overall for the full year has grown, or I’ll say, our business has grown around mid-single digits. We believe looking at peer reports that up until including Q3 that we have been slightly outgrowing the market. Up until including Q3, we had high-single digits growth. Now, we saw a bit of a weakness in Q4, as I said, driven in particular by automotive. We can see the software companies exposed to automotive in Europe has a tougher time. Margin wise, software and manufacturing is accretive to SMM, so I would say that’s in a solid place right now. We are, of course, driving towards the target we have communicated to be at 22% by the end of this year.
James Moore: Well, that’s great. And just lastly, if I could, on SRP, it looks like your orders in North America grew a massive 40%. I mean, the business has some lumpiness. How sustainable is that? And when we look at Trump’s announcement yesterday, where I think there’s some stopping of EVs and renewables, it looks as if sort of core infrastructure bridges and the like, roads and the like is very much going to continue. Do you think there’s been a kind of pause and a wait and see for presidential decision-making that can now unlock that market?
Stefan Widing: Yes, the strong order growth in the U.S. is to be fair partly driven by weak compares. So we should put that in perspective. It was, I think, Q4 last year was really all-time low and then it's been improving a bit. But I think now, it was much more solid this quarter, but it gives a very big positive number in the compare. But as we say, it's also driven by what we see early signs of an improved sentiment. I cannot say whether that's sort of Trump driven or not. I – we believe at least it's election driven, meaning maybe some uncertainties as has gone away, I don't know. But we did see a sentiment shift post the elections in the more positive direction. Then if it will continue, I guess, it depends on whatever other announcements might come. So, but so far so good is maybe the conclusion.
James Moore: Good. Good. Thanks. Thanks very much.
Operator: The next question comes from the line of Bergelind, Klas from Citigroup. Please go ahead.
Klas Bergelind: Thank you. Hi, Stefan, Cecilia and Louise. Klas of Citi, I have three questions, please. The first one is on powder. Fourth quarter is typically a weak quarter for the powder business, but it's now growing high double-digit. And I was just wondering, Stefan, powder grow like this in a weak quarter and without being sort of an early indicator of cutting tool demand, it sounds quite positive when we look ahead into the first half. Obviously, you're saying that cutting tool demand for the first two weeks were stable. But I'm just curious if you agree that there's a big increase in powder in the typically weak quarter is a positive sign, sort of a green shoots, if you like. I'll start there.
Stefan Widing: Yes, we have been debating that, actually. I think our conclusion is a – there is also here a weak comp we have to, but as you say, that's typically the case in Q4, maybe also some timing. We are hesitant to state that it is early lead it – powder is an early indicator, but we are hesitant yet to say that this quarter is proof that it is on – it's a turnaround – indication of a turnaround. I think we would like to see Q1 as well to be able to make that statement more firmly.
Klas Bergelind: Understood. Interesting nevertheless. My second one is on SMM and the cutting tool segment. General engineering in Europe still down low double-digit like last quarter, auto also down low double-digit. That's despite by the production date, I think S&P and the likes revised up the production numbers several times through the quarter. Was there anything special going on there in terms of supply chain, yearend destocking, etcetera in automotive, Stefan?
Stefan Widing: Not something to call out, but this is a common theme. We usually have this discussion when the momentum in automotive is shifting that, I mean, it's not that we see it. I mean, there is a time lag. So if there is an improved production level, it usually takes at least, I mean, we are usually about a quarter off has been the, what we have seen in history so to say. And, of course, there might – because there might be also some inventory levels in the supply chain and so on. So I – there is no specific dynamics I would call out other than that it's not a one-for-one in real time between the…
Klas Bergelind: Yes.
Stefan Widing: …ultimate production levels and the production of the components, which is what we are sort of supplying into.
Klas Bergelind: Yeah, no, that's clear. My final one is on mining. So sentiment seems to have improved towards the end of the quarter. Was that both in equipment and in the aftermarket and did you also see it in deliveries that the miners that previously sort of hesitated on projects are coming back a bit? There is obviously typically better [ph] momentum at year end on the execution of the backlog, i.e. sort of a seasonal effect. I'm trying to understand if this was an underlying improvement.
Stefan Widing: Yes. If we start with aftermarket, it's more that it's continued with very strong momentum. I think we closed the full year basically with double-digit growth. So that's very healthy to see, driven by a bigger fleet based on historical growth, more advanced solutions and an aging fleet. Those are maybe the three main drivers for aftermarket growth being so strong. On the equipment side, yes, I mean, we said that we saw some hesitation in Q3, not that this or that orders went away, but they were pushed out. So some slowness in the order flow. I would say that was sort of released a bit in Q4. So, we felt that the momentum shifted in a positive direction, which we also see then despite a big – no major orders booked in this quarter, we still have a very strong sort of small, medium-sized order intake. Then on the delivery side, as you say, it is always strong seasonally, but we should highlight that this was actually the strongest quarter ever from a revenue point of view for SMR. So, it's a strong execution towards the end of the year after maybe some slowness on that side earlier in the year, so that was good to see.
Klas Bergelind: Thank you.
Stefan Widing: Thank you.
Operator: The next question is from Edward Hussey from UBS. Please go ahead.
Edward Hussey: Hi there. Thank you for taking my question. I guess just a quick follow-up on mining to begin with, I just got two questions. The first one is, I mean, clearly a very strong performance given the performance in both SMR and SRP. But you have said that the underlying market development is flat, so I’m just wondering how you can – I mean, does this mean that you’re taking market share or how should we think about your strong performance relative to market?
Stefan Widing: Yes. I think – yes, we have said for a while that it’s stable at high levels and that statement has incorporated still a slightly weaker – a few slightly weaker quarters a couple of times. And now maybe it also incorporates a slightly stronger quarter. It’s not, I mean, for us to put that arrow up, we feel that should be an even stronger momentum shift for us to really state that now. Now, we feel we are going to take this to the next level, so to say. So that’s why we may be a bit hesitant to not shift the wording here from stable. But slightly more positive, that’s what we’re saying.
Edward Hussey: Okay. Thank you for the color. And then just a second question on SMM margins. So if I remove the quarterly savings achieved in SMM, I calculate it as roughly an 80% organic drop through on the organic revenue growth. So, I think the comment you gave is that pricing and pricing offset volume declines. Could you just talk me through why it is that you’ve had an 80% organic drop through?
Cecilia Felton: For the SMM margin, when we look at the organic development, it’s, of course, we have the negative volume reduction. Price versus inflation was slightly accretive. This is more a timing when we do price increases and when we see inflation and sort of pressure come through, and then we have the savings programs. In terms of organic leverage on SMM, it was minus 22% in the quarter. And then we have the negative impact from currency and structure.
Stefan Widing: And of course, the drop through will be more negative if you take out the savings programs. That’s a given, that’s why we do the savings programs. We have to do that in the current market dynamics.
Edward Hussey: Okay. Thank you.
Operator: The next question comes from Harleaux, Michael from Morgan Stanley. Please go ahead.
Michael Harleaux: Hello. Thank you for the presentation and thank you for taking questions. Just one on the market for electrified mining equipment. If you could comment on how things are evolving, both in terms of your offering, what competitors are doing and what miners are ready to spend on electrified mining equipment, that would be great. Thank you.
Stefan Widing: Yes, I would say 2024 has been a year of, let’s say, a reflection in terms of electrified mining equipment. Interest is still very high, a lot of conversations, smaller repeat orders being placed, but we haven’t seen, as we did in both 2022 and 2023, a big fleet orders for BEVs. We had a couple of big fleet orders prior to that. Those orders are now being delivered. So in Q4, for example, we had record-high revenues from BEVs around 10% of load and haul sales were BEVs, but that’s on the back of strong order intake in prior years. Order intake this year has more been in the mid-single digits. So it clearly shows a more muted demand this year. We feel that industry is a little bit in a wait and see when it comes to placing these bigger orders to see how the big fleets now being deployed are going to perform. And when that is proven, we think there’s a bigger chance that we’re not only going to see the early adopters going here, but also sort of more followers will go into electrification. The trend is there, there is still a momentum, but a little bit of a, let’s say, pause in terms of the bigger fleet deployments this year.
Michael Harleaux: Thank you. That was very helpful. And can I ask a follow up on the M&A strategy, what are the priorities? If you could update us on that, that would be great.
Stefan Widing: Yes. I mean, the priorities overall hasn’t changed, but in Rock Processing if you start there, we’re still interested in pursuing acquisitions that will contribute to building out our overall solution in the comminution step. So niche products in crushing and screening, et cetera. On the cutting tool side, it’s to continue the journey towards round tools. I think now, we are with Suzhou Ahno in place very close to be able to claim a number one position in round tools, not quite there yet, but very close. So that’s going to be a continued priority. That also includes growth segments like medical, aerospace and the like. Geographical, sort of expansion outside of Europe as we have seen with acquisitions in the U.S., India and China recently or lately. And then on the digital side, we feel that we have very much built the platform we need on the manufacturing side. We're going to continue like we did now with resellers and bolt-on, smaller bolt-ons, but it's going to be more of a focus towards now using this platform for organic growth as well. So, that's roughly the priorities going forward.
Michael Harleaux: Thank you. That was very helpful.
Operator: The next question comes from the line of Costa Daniela from Goldman Sachs. Please ahead.
Daniela Costa: Hi. Good morning. It's Daniela from Goldman. Just two questions from my side. I'll ask them also one at a time. The first one on pricing across actually the various divisions if you can give us a little bit of color of what you expect to do this year, especially on infra, where you talk – on SRP, where you were talking about sort of the better sentiment on infra, has that filtered through better pricing on the orders? And then what you're planning to do on SMM and SMR this year?
Stefan Widing: Do you want to take that?
Cecilia Felton: Yes, I can start. Yes, so when it comes to pricing, we've successfully managed to mitigate inflation over the last couple of years here when we've had the higher inflationary pressure. And that's, of course, also our ambition going forward. And as you said, we've seen some increased pressure in infrastructure, especially on wear parts versus stock levels have been a little bit higher also, not only for us, but also our competitors. But our ambition is to continue, of course, to work with mitigating inflation with price also for the infrastructure segment.
Daniela Costa: Okay. Thank you. And then with just regarding the China investment you're doing in inserts, if you can talk through a little bit like the motivation of or the timing right now, was it sort of a view on end market acceleration, or was it because you were importing inserts into China with the competitive landscape change? Can you talk through a little bit of sort of the timing there?
Stefan Widing: For sure. Yeah, I mean, if you go back, we have, throughout the years historically always imported our inserts into China. So all our premium divisions have imported inserts and sold them in the local market. We been successful in premium in China and that's been a good business. The problem has been that the growth in the Chinese market has been in a segment that we call local premium, so slightly above the mid-market but below what we can call international premium. And we have had no, no position there at all. That requires, for example, local production. With the acquisition of Suzhou Ahno, which is primarily a round tools company, they had already initiated plans because they also had a smaller inserts business to invest in a greenfield quite ambitious production capacity in China. And as we now have done the acquisition, we have supported them in that with knowledge and know-how to make sure that we can build sort of a state of the art local premium factory in China. This will give us ample capacity to grow our business in China in the local premium segment. And of course, it also makes us less depend on importing inserts into China, even though we will still have to continue importing the very premium ones which we do not produce, we'll not produce locally. But this is a key growth initiative for us to not only stop losing market share in China, but we actually believe when this is fully up, we should be able to start gaining market share in China. That's our ambition at least.
Daniela Costa: Actually, a follow up on this, was Suzhou Ahno a number one in China and what do they export? Are there any Chinese round tool relevant exporters?
Stefan Widing: They are in the top five in China, not the leading one. The leading one is a state-owned company. But of the top five, there were two that are privately-owned, Suzhou Ahno were one of them that we now acquired. But it's a very – they have a very solid position, and I mean, the numbers you can see in the press release when we completed the acquisition. They have very little export outside of China is very much in China, for China, of course, there is also some when they have followed some of their Chinese customers abroad, but they have very much focus on China and that will continue.
Daniela Costa: Got it. Thank you very much.
Stefan Widing: Thank you.
Cecilia Felton: Thank you.
Operator: The next question comes from the line of Wilson, Andrew from JPMorgan. Please go ahead.
Andrew Wilson: Hi. Good morning. Thanks for taking my questions. I've got two, I'll ask them together because they're quick. The – just to refer to Daniela's question on the investment in China, the impact that we saw come through the structure line as a result, would we expect that to, I guess, repeat for a number of quarters and apologies if I've kind of got the timelines mixed up, would we expect a similar headwind in the coming quarters? And secondly, just on the Americas, specifically around cutting tools. I imagine some of the reason it was down in the period was as a result of aero being down as a result of the strikes and but [ph] can you talk about the underlying development and also if you saw an improvement as you went through the quarter in North America specifically? Thank you.
Cecilia Felton: I can start on the margin development and structure for SMM. And there, as Stefan said, I mean, we invested in this new factory now. And we will slowly start to ramp up production, but we will see some headwind during the first half of 2025.
Stefan Widing: Yes, until it starts to cover its costs. With cutting tools in the U.S., yes, of course, I mean, Boeing strike, basically a loss quarter from that point of view. Aerospace down low double-digits, while in other regions, Europe, China, it was positive. There is no underlying reason to assume that aerospace shouldn’t be the same in the U.S. now when – as they get started again. There might, of course, be a lag if they have had the excessive inventory, if they produced into the strike, so to say, but that should normalize. So that should be positive. We have been, in general, otherwise, specifically asking the business, do you see any sort of post-election effect or pre-tariff buying or anything like that. We haven’t seen anything in particular that we would highlight at this point. So other than that, I would say it’s been fairly, let’s say, stable throughout the quarter. There is a dynamic also around the working days in December where mathematically we had more working days in December. But in practice, those were around Christmas. So in practice, we believe it’s – it did not have that positive impact. So that’s also maybe something to take into account.
Andrew Wilson: Thank you very much. Appreciate it.
Stefan Widing: Thanks.
Operator: The next question comes from Kuenne, Sebastian from RBC Capital. Please go ahead.
Sebastian Kuenne: Hi. Thank you for taking my questions. I just have two brief ones. In SRP, you had mentioned some obsolescence provisions that you had to take and that impacted the adjusted margin. I was wondering if you see risk that in Europe, we will see more provisions in that regard, whether – because you have higher inventory levels still. And then on the tooling side, and apologies if I have to ask that question again like the other analysts. I would like to have a bit more detail on the pricing development, because we had now several quarters of negative volume. And, usually, that does mean there’s more competitive pressure in the market. So, can you assure us that you really can compensate for inflation going forward also here in the tooling side? Thank you.
Cecilia Felton: Yeah. On SRP, as you said, we had some negative impact from OSMI [ph], also some higher legal costs impacting the margin negatively in this quarter. It’s more of a one-off, as we see it. We are continuously working also with normalizing the inventory levels also in the Rock Processing. And part of the volume reduction that we see at group level is also driven by SRP. So here, we will continue to focus. So I’m not saying it’s not – I mean, I cannot guarantee that we will not have any other OSMI provisions coming in 2025, but not a high risk as we see it.
Stefan Widing: I think we are quite well provided. And it can also turn to the positive if we actually get more momentum in the business. But it’s sort of a give and take. So I would say it’s – the average is probably quite neutral, I would say. Maybe on the pricing dynamic going forward, I can take that, you asked about SMM in particular. As Cecilia said, our ambition and plans are to continue to offset the inflation through pricing. We see no reason for why we should not be able to continue doing that. Cutting tools is and always has been a cyclical business, and we have always been able to offset price in upturns and downturns. I think here it comes – it’s a value-based model, very disciplined approach. And we are also price leaders as being market leaders. So we will do our part, so to say, to make sure that the pricing is good in the market. So that’s our ambition also going forward.
Sebastian Kuenne: Understood. Thank you very much.
Operator: The next question comes from the line of Kim, John from Deutsche Bank. Please go ahead.
John Kim: Hi. Good morning. It's John from Deutsche. A couple of questions, if I may. Could you give us a bit of color on the outlook this year for the aftermarket and SMR? What kind of growth do you see in the space? And any change in ordering momentum, I suppose your customer activities in major mineral categories?
Stefan Widing: Yes. I mean, momentum has been very strong this year on the back of maybe slightly weaker momentum in 2023. So I think we’re back at the long-term trend line, which is high single-digit growth and that we have had for a long time. And we see no reason for why that trend line should not be able to continue given, again, that we’re continuing to grow the fleet size right now after some successful years in surface. We have continued to build the surface fleet, which is now also continuing or starting to come through in – on the aftermarket side. Automation, solutions, more advanced machines ties the customer more to our parts and services and then what is still a very old fleet in the historical perspective, which is also driving rebuilds more service, more spare parts. So, yes, we see no reason today why the historical trend line should not be able to continue also going forward.
John Kim: Thanks, that's very helpful. Can you give us any color on cadence for equipment deliveries this year? Was 2024 a bit of an anomaly or should we expect it somewhat better?
Stefan Widing: Yes. Thanks for asking. We see a normal year this year, I would say. Of course, Q1 is always seasonally weak. I want to emphasize that because Australia for example, is on holiday in January and it's an important market for us. So Q1 is seasonally weak but in line with normal historical patterns. Last year, we have maybe an even weaker Q1 than normal. That is our expectations in terms of the revenue profile.
John Kim: That's fantastic. Last one, a quick one. On SRP, when we look at the Americas order intake, is that more a function of restocking on the customer side? I know you have a weak compare but if you can give us a sense of stocking destocking levels that'd be helpful?
Stefan Widing: We have seen in some parts of our infrastructure business in the U.S. inventory levels have come down a bit and thus also now starting to reorder. And a year ago, they were sitting on high inventory levels, hence the weak comp. So yes, weak comp – but then driven by some restocking happening now in terms of order placing in Q4. This is not, I want to emphasize, these are early signs, it's not that we see a broad across the board recovery in the infrastructure, but in some product categories and segments, we are seeing these signs and that's had a positive impact done in the quarter.
John Kim: Great. Thanks very much.
Stefan Widing: Thank you.
Operator: The next question comes from the line of Koski, Andreas from BNP Paribas. Please go ahead.
Andreas Koski: Thank you very much and good morning. I have a couple of follow ups on the – on China cutting tools. I think that when you said during your presentation that China cutting tools were down high single-digit in the quarter while Suzhou Ahno grew high single-digit. What do you think explains the differences? Are the local players taking market share or...
Stefan Widing: Yes, I mean, that's the dynamic we have seen for the past, yes, I don't know how far back I should go, but for a long time. I think all Western suppliers have gradually lost some market share in China for the past decade. And it's not been that we have, I mean, our business has grown in premium, but the main growth has been in this local premium segment and the local premium segment, the players in China, they are also winning against local Chinese mid-market as the market becomes more mature. So, we have seen this segment as very important for us to get a foothold in, to not only stop this trend, but actually, we think with the right execution, we can turn it around into a positive because now we are the only non-Chinese with a foothold in the local premium market. And we see competitors like Japanese and South Korean mid-market players are being hurt by this dynamic, and we hope to be able to now turn this into being on the winning side. And Q4 and I mean, this is a typical – it's not an unexpected dynamic if we're seeing how they have been growing in the past years versus us in China. And we can also see, for example, they are growing, PCD tools which is auto aluminum, which is EVs in a way where we basically have no presence in China before. Its early days but the early days are promising when it comes to turning this trend around.
Andreas Koski: Yes, I think the H2 run rate for Suzhou Ahno implied annual revenue of around SEK1.6 billion. And that can be compared to SEK1.2 billion in 2023 and it sounds like the current investments that you're doing in China will close to double the revenue capacity for Suzhou Ahno. So it's fair to expect continued strong growth of this business, but at the moment it operates at single-digit margins. What kind of margins do you think we should expect longer term for this business?
Stefan Widing: I would say we should expect mid-teens margins to begin with.
Andreas Koski: Yes.
Stefan Widing: That's where we want to be initially, and from that position, we would focus – we would rather grow more than improve the margin further. But we have seen that we can make good margins in China as well when we have the right offering and the right volumes. There are also advanced, very advanced customers in China but that's the starting point for us.
Andreas Koski: Yes. And then lastly, what would you say are the main technological differences between local premium in China and international premium? And are you going to export Suzhou Ahno to Europe and North America to follow Chinese companies when they expand their manufacturing footprint globally?
Stefan Widing: On the technology side, without going into materials and coating details, which I'm not really qualified to fully answer, but it is, you could say that they are one to two generations behind in terms of product quality, which means that in most applications, they are good enough for a cost conscious buyer, but still high – and sufficiently high quality. You need the international premiums deal if you want to go into complex parts, complex materials in markets like aerospace and so on. But for a big part of the market, they are becoming good enough, which is why they are gaining market share. And there is also no reasons to go mid-market because they are still sort of a good value for money. So, our approach from a technology point of view here is to help Suzhou Ahno now to sort of have the best local premium offering, but not at the level of our own international premium to still create a differentiation.
Andreas Koski: And on global expansion?
Stefan Widing: We will initially have them focus on China because we think there is such an untapped potential. But of course, we will not stop them from following a Chinese customer internationally.
Andreas Koski: Understood. Thank you very much.
Louise Tjeder: Thank you. So...
Operator: The next question comes from the line...
Louise Tjeder: Go on.
Operator: The next question comes from the line of Sergievskii Vlad from Barclays. Please go ahead.
Vlad Sergievskii: Yes, good morning. Thanks very much for taking my questions. I will start with the mining demand, maybe going through your key commodities. Gold is your single biggest commodity exposure and profitability in the gold sector right now is the fact [ph] is a bid. We also saw some promising CapEx forecast for 2025. Is there any reason this arising OpEx and CapEx from gold companies will not benefit Sandvik in 2025?
Stefan Widing: No, no specific reasons. I mean, of course, the high commodity prices where gold is maybe at the top is a reason for why we continue to see, in general, positive momentum and could, of course, be a reason for why we see this also even more positive now in Q4. But as you say, I mean, we are market leaders in gold and it's a big part of our exposure and the high gold prices are good for our business, that's no doubt.
Vlad Sergievskii: That's very good. If I can ask about copper, where you have very sizable exposure as well. There is a good pipeline of larger brownfield and greenfield projects in Latin America. Is there any chance this pipeline will start converting into projects in 2025 or those main ones are not yet fully mature and this is a story of 2026 onwards based on your customer conversations?
Stefan Widing: Very difficult to answer. I mean, these greenfields, from our point of view, it's always uncertain until we are close to actual RFQs and so on. I know there is a number of greenfields in, for example, Argentina, but they are not expected from our point of view, to generate revenues in this year. It will take a while before they come online. So, I think it's a difficult question to answer the timing of this when that will lead the business for us.
Louise Tjeder: All right.
Vlad Sergievskii: Makes sense. And my final one.
Louise Tjeder: A quick one.
Vlad Sergievskii: For the SRP margins, please. A very quick one, I promise. So, if you look at inventory situation by divisions, the SRP is still standing out as a very high inventory relative to historical levels with either a more normal. This process of normalizing this inventory, how quickly do you expect it to happen? And are there any margin risks related to this process, either from write downs or underutilization or anything like that?
Cecilia Felton: Here, I mean, as I said before, also SRP, they have made progress during the year in bringing inventory levels down and also improving days in inventory. Then we have currency also going against us when we look at the reported net working capital numbers, and that's the case for all of our business areas including Rock Processing. For SME, we will continue throughout 2025 on normalizing inventory levels in SRP. And we also have some work to do also in our other business areas. In terms of margin risk, like we said before, we think this in Q4 was more of a one-off is not the start. We don't see any indications that this would be a sort of a new trend or anything like that. I'm not saying that we could potentially have some obsolescence, but we could also have some upsides in 2025 if we managed to sell some of this inventory because it's not scrap is just provided for in the books as obsolete or slow moving.
Vlad Sergievskii: Thank you very much.
Louise Tjeder: All right. Thank you, Stefan and Cecilia and also thanks to you for calling in and good questions. And with this, we end this webcast and wish you a good rest of the day. Thank you.